Rep. Jack Kemp (D-N.Y.) said yesterday he is now able to support supplemental appropriations for the international lending banks after receiving assurances from Treasury Secretary James A. Baker III that the Reagan administration will press these institutions and the International Monetary Fund to give "special attention" to "private-sector-oriented growth."
Baker told Kemp in a letter dated last Wednesday that American representatives at the World Bank and IMF would encourage private activity, and "discourage, where appropriate, direct government activity in the economy" of the borrowing countries.
Kemp had blocked $237 million in supplemental funds for the World Bank and other multilateral development banks (MDBs), charging that they did not take into account supply-side measures such as cuts in high marginal tax rates, as well as more general emphasis on the private sector, in making loans to Third World nations.
In addition, Kemp had earlier told Baker that "our approach to the MDBs is politically and strategically naive," resulting, for example, in a leftward move by Peru and Jamaica, "and political violence in the other infant democracies in Central and South America."
Democrats on a House Foreign Affairs subcommittee, led by Rep. Dave Obey (D-Wis.), had refused to vote for the supplemental appropriation in the subcommittee in the absence of Republican support for the administration proposal, and threatened to block, as well, $1.3 billion in MDB money for fiscal 1986.
Baker's letter to Kemp said that the World Bank and IMF "might need to modify their programs" if a factual examination shows that the institutions are not paying adequate attention to factors cited by Kemp: tax policies to encourage local savings and investment, removal of import restrictions, pricing policies reflecting market forces and measures to facilitate foreign investment in the borrowing nations.
Baker ordered Assistant Secretary David C. Mulford to write a memorandum to the U.S. executive directors at the World Bank and the IMF emphasizing that the areas Kemp is interested in "merit special attention," and directing them to gather the facts on World Bank and IMF operations by Aug. 30.
In addition, the Mulford memorandum revealed that a U.S. government interagency committee is working on a "policy analysis which, when completed, will be the basis of U.S. policy in the multilateral development banks to encourage privatization in member countries."
The Mulford memo said that tax policies to encourage savings and investment "could encompass" reductions in taxes or high marginal rates, indexation and changes in tax deductions or credits. In the foreign trade area, measures could include reduction of export taxes, deregulation of foreign exchange controls and establishment of free trade zones.
Similar memos are being sent to the Inter-American Development Bank and the Asian Development Bank.
Baker had testified before the Obey subcommittee Thursday, strongly supporting the supplemental and the fiscal 1986 appropriations for the MDBs. (At this stage, funds for the IMF are not involved.) But when Baker told Obey that he couldn't promise that a majority of House Republicans would support the MDBs, Obey and other Democrats predicted that the appropriations would fail to pass on the House floor.
As a result of the Baker-Kemp agreement, the full House Foreign Affairs Committee could restore the $237 million in a meeting scheduled for this afternoon, Republican sources said. A spokesman said Obey's position is unchanged: Democratic support is conditioned on majority Republican support.
Baker noted in his letter to Kemp that the World Bank and IMF look at a "broad range of economic measures" . . . However, there are limits as to how many of these policy options a country can effectively implement at any one time. Trade-offs eventually emerge through a process of negotiation between the institution and the borrowing country."
Kemp is nonetheless understood to be satisfied that Baker has now set up a regular process that will force the MDBs and the IMF to take Kemp's objections more seriously.