The elements of Treasury Secretary James A. Baker III's initiative to enable debt-ridden developing nations to resume economic growth are "gradually falling into place," a top Treasury official testified yesterday.
David C. Mulford, the assistant secretary of the Treasury for international affairs, said that major debtor countries such as Mexico, Argentina and Brazil are undertaking major economic changes and that commercial banks in nearly all major industrial nations have indicated a willingness to make new loans to the debtor nations.
Mulford, testifying before the House Banking Committee's subcommittee on international development institutions, said that the Baker initiative never was meant to spark dramatic developments, but rather to support a shift from austerity to sustainable economic growth in debtor countries.
"It is a delicate exercise; a long, drawn-out process with many small pieces to fall into place," Mulford said.
The Baker plan envisions a $20 billion increase in commercial bank lending during the next three years and a $9 billion increase in lending by development institutions such as the World Bank and the Inter-American Development Bank. The initiative also calls on the debtor nations themselves to change economic policies that inhibit their economic growth.
Mulford said that political pressures in the debtor nations make it unrealistic for their governments to "come forward and endorse" the portions of the Baker initiative that call for economic changes. However, many major debtors already are undertaking the kinds of changes envisioned by the Baker plan, he said.
Brazil, the developing world's biggest debtor, with $102 billion in foreign loans, made a major move to fight inflation three weeks ago, including ending a long-standing system of indexation that linked all prices and wages to increases in the price level.
Mexico, whose debts total about $95 billion, is changing laws that make it difficult for foreigners to invest in the country, while Argentina has announced plans to sell state companies and is encouraging foreign companies to explore for oil.
In response to a question from subcommittee Chairman Stan Lundine (D-N.Y.), Mulford said that countries falling under the Baker initiative will do so slowly. The Treasury said that one "full treatment" debtor -- one that requires an agreement with the International Monetary Fund, and loans from the World Bank and commercial banks -- will negotiate a plan with the IMF to help it adjust its overall economic policies so that it hoards enough dollars to pay its foreign debts.
At the same time, the country will negotiate loans with the World Bank that will support steps to liberalize one or another sectors of the economy. By their nature, the conditions on such sectoral or adjustment loans are longer-term in nature and harder to measure than the conditions the IMF attaches to its programs, Mulford said.