The Reagan administration came late to an understanding of how important it would be to beef up the role and the resources of the International Monetary Fund to meet the global debt crisis. Now, better late than never, the administration under the leadership of Secretary of State George Shultz and Treasury Secretary Donald Regan is doing a pretty good job.
But it has not yet summoned up the courage necessary to put the brakes on some of the free-wheeling international bankers who helped mess up the world's economy.
Less than a year ago, at meetings in Paris and Helsinki, Treasury officials were saying that perhaps the IMF didn't need any expansion of its quotas or its member deposits.
Then the Treasury, half scared out of its wits by the threat of a Mexican default that would have hit American banks particularly hard and by similar problems elsewhere in Latin America, last summer switched signals.
Coincidentally, on July 15, Shultz was confirmed as secretary of state. He is the first economist to hold that position, and the first secretary of state who not only appreciates that in today's tendentious world at least half of foreign policy is foreign economic policy, and he is in a position to do something about it.
Shultz, a believer in the interdependence of the international economic system, has few of the parochial hang-ups of the Treasury staff. Since he took office, the administration has been saying and doing more of the right things on economic issues.
It supported an increase from $7 billion to $19 billion in the emergency loan package provided by the United States and 11 other rich nations, and it accelerated the timing for a 47.5 percent increase in quotas for the IMF that boosted its total capital from $67 billion to $99 billion. That improved the IMF's lending potential at a time when its resources were getting dangerously low. That was a start, not a full solution.
After initially being denied, it has now been confirmed by Undersecretary of Commerce Lionel Olmer that the administration has also begun a study of new and dramatic ways of defusing what Shultz aptly called the international "debt bomb." This would involve consolidation of some of the $700 billion Third World debt and acknowledgment, by implication, that some of it will never be paid off by regular methods.
This is surely a sensible thing to be doing. (The Treasury has denied that such a study, as first reported by Art Pine in The Wall Street Journal, is being made. Olmer acknowledged in a question-and-answer session at a Senate Banking subcommittee Feb. 15 that it is under way.) Among the ideas being kicked around: Richer governments might take over some loans that poor countries can't pay off. Such refinancing would, of course, mean that some international banks will have to accept large losses.
For the moment, the main issue is how to get Congress to approve the administration's request for authorization of $8.4 billion for the American share of the enlarged IMF emergency funds. The way to regard this $8.4 billion, as Shultz told the Senate Foreign Relations Committee last week, is as "an investment in international financial well-being."
This is not a budget item, for it represents an exchange of cash for equivalent Special Drawing Rights on the IMF. (I am indebted to Caleb Rossiter of the Library of Congress for pointing out that there is, nevertheless, a small cost: Because the interest paid on SDRs is about 2 percentage points below Treasury-bill rates, there is a subsidy involved. If, say, $5 billion of the U.S. quota were actually drawn by the IMF, the interest cost to the United States would be about $100 million.)
What many members of Congress fail to understand, as they resist the notion of $8.4 billion for the IMF, is the degree to which the United States has become dependent on the health of smaller nations.
How many members of Congress know that of the 20 largest U.S. trading partners in 1980 (as tallied by the Overseas Development Council in its invaluable "U.S. Foreign Policy and the Third World"), 11 are developing countries?
According to Shultz's testimony, the non-OPEC Third World countries taken together buy 30 percent of U.S. exports, collectively more than either the Common Market or Japan.
"On the other side of the trade ledger, these non-OPEC countries supply about 25 percent of the goods we import for use by our consumers and factories," Shultz said. That includes virtually 100 percent of the natural rubber, cocoa, coffee and hard fibers, and more than half of the bauxite, tin and cobalt we use.
"In sum, whether looked at from the trade side or the financial side, the U.S. stake in the international system is significant--significant in terms of jobs, income and opportunities. . . .
"Beyond pure economics, however, we also have a stake that is more 'political' in character: the demonstration of the strength and viability of market-oriented economies. We should seize this moment to prove the potential of the open-market mentality that inspired the Yankee Traders," Shultz said.
A nagging question raised on the Hill is why the U.S. government, acting through the IMF, should "bail out" the banks. The administration--and the IMF--response is that it's not a "bail-out," but a "bail-in," because the IMF, in extending new loans, is requiring the commercial banks to maintain their loan flows.
There already is a question of how successful the IMF will be in this "bail-in" exercise. Shultz said flatly that private banks are reducing their lending rates and that estimates for the last of 1982 showed "a precipitous drop."
So it can't be denied that there is an element of "bail-out" in the IMF exercise, not only of the banks, but of the borrowing countries themselves--and everybody is stuck with it, as the lesser of evils. Shultz observed that a seven-fold increase in international debt to $700 billion since 1972 shows that "either banks 'over-lent' during the 1970s or countries 'over-borrowed.' "
Obviously, both things happened: The banks over-eagerly shoveled the money out, and the developing nations shoveled it in. They all bet on export growth and on loan repayments with cheaper dollars. They all expected the price of oil to go straight up and never come down. They were wrong, and the result is the crisis we're in.
Now, cool heads must prevail. Congress must heed the Reagan administration's strong pitch for added IMF funds. Shultz and Co. must follow through on debt consolidation. The IMF, even with added quotas, will be short of funds this year, and so it needs to figure out ways of borrowing in the private markets.
And Congress and the administration together should work out reasonable rules to prevent greedy bankers from getting over-extended in future foreign and domestic lending. Here, the administration's fixation with deregulation may be getting in the way of an otherwise common-sense approach.