Administration's 'program for sustained growth' would expand loan activity of development banks - James A. Baker's statement - transcript

Business America, Feb 3, 1986

Administration's 'Program for Sustained Growth' Would Expand Loan Activity of Development Banks

I am pleased to have the opportunity to appear before you this morning to discuss the annual meetings of the International Monetary Fund and the World Bank and the U.S. proposals for strengthening the international debt strategy.

For 40 years, the International Monetary Fund and the World Bank have been focal points for the international community's effort to instill soundly based growth and development in the world economy. These two international financial institutions have compiled an impressive record of accomplishment, and the United States remains firmly committed to working with other members to maintain their strength and effectiveness.

During preparations for the annual meetings, it became cleat to us that the key issue before the workd financial community was out ability to foster stronger, sustained growth in developing nations. Considerable progress had been made during the past three years in addressing the immediate debt servicing problems of the developing nations and in improving growth prospects in the industrial countries--an essential foundation for growth in the developing world.

Indeed, since 1982 the aggregate current account deficit of the developing countries has been reduced by more than hald; their growth rate has doubled; and their exports have improved dramatically. This progress is attributable to adjustment measures within the developing countries themselves, economic recovery in the industrial nations, and financial support from the commercial banks and the international financial institutions. The case-by-case international debt strategy adopted three years ago has contributed significantly to this progress and, on balance, has worked very well.

However, problems have arisen in certain areas. These include slippages in the domestic economic programs of several of the principal debtor nations, particularly with regard to their efforts to reduce inflation and to cut government budget deficits. Net new lending by the commercial banks has also declined abruptly, despite the significant improvement in current account positions, reflecting a growing reluctance by many banks to participate in new money and debt rescheduling packages. The decline in new lending to nations which are performing well is especially disturbing, since it undercuts both their ability and their resolve to pursue essential economic reforms.

These problems need to be addressed if progress is to be sustained. We must build upon, and strengthen, the current dent strategy, while continuing to tailor our approach to the particular circumstances of each individual country. Our approach must encompass greater emphasis by the debtor nations on policies which will improve growth prospects for the future, as well as enhanced policy and financial support from the international financial institutions and the banking community.

I proposed such an approach in my statement to the Joint IMF/World Bank Annual Meeting. Our three-point "Program for Sustained Growth" in the principal debtor nations constitutes, in essence, the "next phase" of the global debt strategy. It will require additional, concerted efforts to improve the prospects for growth in these nations, with long-term benefits for the entire global community.

I would like to discuss this proposal in some detail with you today.

'Program for Sustained Growth'

Our proposed "Program for Sustained Growth" in the principal debtor nations incorporates three essential and mutually reinforcing elements:

First, and foremost, the adoption by principal debtor countries of comprehensive macroeconomic and structural policies to promote growth and balance-of-payments adjustment, and to reduce inflation;

Second, a continued central role for the IMF, in conjunction with increased and more effective structural and sector adjustment lending by the multilateral development banks (MDBs); and

Third, increased lending by the private banks.

In short, we believe that there must be greater emphasis on both market-oriented economic policies to foster growthM and adequate financing to support it. Permit me to expand briefly on the actions that would be required by each participant in this three-point approach.

(1) Action by Principal Debtors

An essential prerequisite to resolving the economic difficulties of the debtor countries in their adoption of sound fiscal, monetary, and exchange rate policies to reduce both external and domestic imbalances. For those countries which have implemented measures to address these imbalances, a more comprehensive set of policies can now be put in place, including both macroeconomic policies and longer term supply-side, market-oriented policies to promote growth.

Sustained growth in these countries will depend in large measure on their ability to generate greater domestic savings, to encourage the investment of those savings at home, and to attract additional investmnet from abroad. In a number of these countries, domestic savings have been sent and held abroad rather than being used at home. In addition, restrictions on profit remittances have discouraged equity investment and increased reliance on foreign borrowing, which increases the debt service burden. And inefficient public sectors are absorbing resources which could be used more inductively in the private sector.