The United States yesterday withdrew its plan to create a new $5.4 billion lending fund within the World Bank and International Monetary Fund to help the least developed nations, mostly in Africa.
The action raised immediate questions about the viability of a separate U.S. proposal to deal with the foreign debt problems of Latin America, which owes about $360 billion. Almost two-thirds of that debt is to private banks.
Treasury Secretary James A. Baker III's decision to introduce the new measures -- including the one pulled back yesterday -- indicated a recognition that the current method of dealing with the debt crisis, particularly in Latin America, has not been working and that a new approach was needed.
Baker formally withdrew the proposal for the new fund at a meeting of the world's Group of 10 major industrial nations. The session was a preliminary to the annual joint meeting of the World Bank and the IMF that starts Tuesday.
Sources at the meeting said the United States now plans to offer a more modest proposal for helping the underdeveloped nations. No details were available, but sources said the latest plan only involves the IMF -- with no matching money from the World Bank.
The United States had planned to ask the two international lending agencies to set up the fund, which the agencies would jointly administer, as additional help to underdeveloped nations, primarily in Africa. Commercial bank money that was to be used in the new fund would be guaranteed by the World Bank.
The U.S. plan, which first came to light two weeks ago, represented a major policy shift for the Reagan administration. But the plan ran into strong opposition from rich and poor nations alike almost from the moment Baker arrived here Saturday.
Industrial nations did not like the idea of the World Bank guaranteeing commercial loans, and the poor nations feared they might lose aid they now receive from the two international lending agencies.
Baker is to unveil the U.S. plans for dealing with both Third World development and Latin American debt when he addresses the joint meeting Tuesday.
The United States did break its silence yesterday on one important issue involving future aid to developing nations. World Bank officials said the United States had agreed to begin discussions on an increase in financial contributions to the International Development Association, the arm of the World Bank that serves as the major source of development aid to the world's poorest nations. Negotiations are expected to begin in Paris early next year and should be completed before the end of 1986.
The United States has managed to keep secret the details of its proposal for dealing with the Latin American debt situation, but highly placed sources said that a key element was to enlarge the role of the World Bank by obtaining fresh loan money from commercial banks that would be guaranteed by the international agency.
The U.S. proposal for dealing with both the Third World development problems and the Latin American debt situation was to be part of a new "integrated" debt strategy that would give a greater role to the World Bank and force a closer working relationship between the bank and the IMF.
Opposition from the underdeveloped nations to the proposed $5.4 billion loan fund appeared to center around a fear that it might jeopardize development money they already were receiving. Money for the new fund would have come equally from each agency. The poor nations also expressed concern that the two agencies would require them to meet specific conditions regarding their own economies before they could receive low-interest loans from the new fund
The richer industrial nations essentially opposed the U.S. plan because it would require the World Bank to guarantee the money put up by commercial banks. Representatives of the industrialized nations have expressed fear that such a move could jeopardize the World Bank's strong credit rating.
"The whole character of the World Bank would be in jeopardy," said one source. "But it was tough to oppose Baker, because it's quite a novelty for the U.S. to be making these suggestions -- and to Baker's great credit, he's willing to try."
Variations of these fears by the rich and poor nations appear to raise questions about any U.S. plan for Latin America. The poor nations already argue that the U.S. proposal will be inadequate, while at least some of the richer, industrial nations reject the role of the World Bank as a guarantor.
A European government official here said, "Everybody is grateful for this new willingness of the American administration to come up with new ideas, but expectations may have been raised too high."
The Interim Committee of the IMF, the agency's policy-making body, spent yesterday in somber discussions emphasizing the growing debt crisis. With one exception, however, the committee failed to take actions to deal with it. The shortage of action was attributed, at least in part, to committee members waiting to hear details of the U.S. proposals.
The one exception was the committee's decision to continue in large measure in 1986 providing the extra loans the IMF has been making available for debtor nations. Several nations, including the United States, have been urging a return to the borrowing levels that prevailed before the onset of the debt crisis in 1981. Baker did not press for a sharp reduction.
The Interim Committee rejected all other demands by the developing countries for more liberal treatment, including their regular plea for a new issue of Special Drawing Rights, the IMF's paper currency that developing nations can turn into hard cash.
The Interim Committee's communique, issued this morning, said the pace of economic recovery in the industrial nations as a whole had slowed in the first half of 1985 "by more than had been expected," exacerbating the debt problem.
Nonetheless, IMF Managing Director Jacques de Larosiere strongly defended tough IMF lending policies that had been attacked by Third World finance ministers, notably in a dramatic challenge Saturday by Brazilian Minister Dilson Funaro. De Larosiere told a press conference this morning that developing countries seeking investments will never succeed if there is "a flight of their own capital."
In his speech to the committee, Baker said that "strengthening of the case-by-case strategy" for Latin American nations is now indicated. He stressed "a continued central role for the IMF in conjunction with increased and more effective structural adjustment lending" by the World Bank and other international development banks.
He also stressed that there must be "increased lending by the private banks in support of comprehensive economic adjustment programs."
Some of the other major nations represented at the meetings here argue that if the United States wants the lending role of the World Bank expanded -- as it now suggests -- it should be done through a general capital increase. But Baker has been reluctant to back such a general increase because it would force the Reagan administration to go to Congress for additional money at a time of record budget deficits.