Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

194. Memorandum From David Wigg of the National Security Council Staff to the President’s Assistant for National Security Affairs (McFarlane)¹

Washington, November 5, 1985

SUBJECT

• Trip Report: IMF/World Bank Meetings, Seoul, Korea, October 7, 1985

In spite of the fact that Baker and company made no effort to include me in any activities and generally minimized contact throughout the trip, I was able to get a fairly good picture of events and reactions, most of which I have put into an appendix (Tab I).² I will limit this cover paper to summary form.

The Treasury Proposal and Approach to the Debt Problem

My impression of the Mulford formula to “next steps” on debt is that it is an effort to squeeze existing participants (primarily the banks and IBRD) to generate enough additional funds to ward off more radical approaches to debt relief (keep the “wolf away from the door”). If you read the fine print, the emphasis on strict conditionality has actually been increased. If Treasury has secret plans unknown to NSC to ease bank regulatory requirements and improve on the “carrots” for debtors, then these initial comments are perhaps sound strategy. If what we see is what we get, then I am inclined to think the debtor-creditor environment will gradually deteriorate and lead to further polarization and hardening of positions in the near future. Elements of Treasury’s plan that increase cash flowing to LDCs are as follows:

○ Increase disbursements of World Bank loans over the next three years by three billion dollars/year (authorizations are running about $13 billion per year and the idea is to speed up the disbursement process). Total: $9 billion. (Adjustments in existing mechanisms).

○ Convince the banks that to protect their assets (outstanding loans) in LDCs they should put up 6–7 billion dollars in new money balance of payment support annually over the next three years. Total: $20 billion. (Not resolved).³

○ Form some sort of “super bank” mechanism, into which the smaller banks would put their outstanding loans, with the banks being tapped for new money periodically in the future according to their pro-rata exposure, as reschedulings take place. (The incentives for these banks to participate are not apparent). (Note attached internal report of major New York bank on Treasury’s presentation at the IIF last week at Tab II).⁴

○ Start up the Multilateral Investment Guarantee Agency (MIGA) under the IDB to provide up to $1.6 billion in initial guarantees of foreign investment in Latin America. (Long-term and uncertain benefits).

○ Put up $2.7 billion in matching World Bank funds to add to upcoming IMF Trust Fund repayments to channel to Africa—but tie the money to conditionality and structural adjustment. (Resistance from other OECD countries).

Conservative/Belt-tightening Elements of Treasury’s Plans are as follows:

○ Strict opposition to increase in global allocation of SDRs as a means of raising global liquidity.

○ Phase out enlarged access program of IMF to strengthen its financial underpinnings.

○ Not prepared to support a World Bank capital increase at this time but will study the alternatives.

○ Opposes World Bank plan to liberalize repayment terms (Treasury wants a more “rational” lending structure to stretch resources further).

○ Resists World Bank suggestion that it raise more interest-sensitive debt as a way to increase resources. Treasury wants increased borrowing done “very carefully”.

○ Wants InterAmerican Development Bank (IADB) to better justify its lending decisions, to implant more conditionality into loan approvals and to better coordinate with IBRD/IMF.

Treasury’s package from a financial micro-management standpoint appears sensible but is a very conservative outward movement from the original “5-point strategy”. It does not appear to match up well with the magnitude and nature of the problem.

As for the debtors, they uniformly grabbed the bone tossed in their direction. But the delegates I talked with (see attached memcons) have no illusions about the gravity of their internal situations and hope the Treasury plan is but a first step in what they hope will be the gradual “politicization” and “multilateralization” of the continuing “crisis”. Ironically, Baker’s remarks are seen as legitimizing the Cartegena efforts and will spur them on to keep perceived momentum (they choose to ignore the fine print).⁵ There were common threads running through their comments:

○ They have undergone a “depression” over the last three years, with absolute declines in all major indicators, including income, output, investment, public services, employment, terms of international trade (export prices over import prices), etc.

○ The longer things remain so bad, the greater likelihood for aberrant, radical solutions and the breakdown of the social order/structure and democratic gains of recent years.

○ They are far from unified on the debt issue, with nationalism, access to new money/better terms/U.S. bilateral help and differing economic circumstances all contributing to divergence of views and strategies.

○ They expect not to have to repay principal anytime soon and believe they cannot grow or develop without a significant break on interest payments and substantial infusions of new money (unrealistic at this time).

○ They have not come to accept the importance of foreign investment as a means of development (this change must happen as a precondition of their future development).

In short, in spite of destabilizing tendencies throughout the region, the forces for positive change are blocked to various degrees by a mix of long-standing cultural and ideological attitudes, the interests of existing power structures, political circumstances (democracy is a negative factor in the short run), unimaginative and unenlightened leadership and corruption. The Brazilian situation is particularly disturbing. I suspect that with public sector debt making up the bulk of the total “overhang” in the region (roughly $250 billion of a total of $350 billion), and with private sector growth leading the way out of their predicament (if there is one), the “will” to repay the public sector debt (either through higher taxes or printing money) will wither over time. This tendency will be reinforced by U.S. efforts to privatize the means of production.

Conclusions

We are entering a new phase in the debt crisis—and arguably a dangerous one, as debtors cope with the cumulative effects of several years of severe austerity and declining GNP, and if the glimmer of hope spawned by Baker’s plan leads to (as I suspect it will) Third World expectations that go unfulfilled.

○ As I have argued for the past two years, we need a proactive approach to U.S. foreign policy vis-a-vis the debtor countries. The Security Community must more actively monitor debtor economic conditions and behavior and be prepared to intervene at the margin with sensible and affordable supportive actions (not merely cash) where signs of instability reach levels of concern.

○ We should consider forming a National Security Monitoring Group (NSC, State/political, CIA and Defense) chaired jointly by our Directorate, Rod’s office and various regional staff. This group would monitor the political economy of strategic LDCs and provide periodic assessments of trends and their implications. The political instability monitoring systems of CMC [1½ lines not declassified] could serve as the basis for preventative actions by appropriate agencies, and under extreme circumstances, could form the basis for quick-turnaround Presidential decisions (NSDDs) should they be required.

1. Source: Reagan Library, David Wigg Files, Chronological File, November 1985. Secret. Sent for information. Copies were sent to Danzansky, McDaniel, Burghardt, Tillman, Hughes, and Stark.
2. Tab I, a November 5 memorandum of conversation between Wigg and representatives from Chile, Brazil, Argentina, Uruguay, and Colombia, dated October 7–9, is attached but not printed.
3. In an October 31 memorandum to Shultz, Whitehead, and Wallis, McMinn provided updates on Treasury and Federal Reserve discussions with the banking community since the Seoul meetings. McMinn detailed the banks’ support of as well as their concerns with the Baker plan proposal to channel $20 billion in new lending to key financially-troubled developing countries over the next 3 years. (Department of State, Executive Secretariat, S/S–I Records, The Executive Secretariat’s Special Caption Documents, Lot 92D630: [no folder title])
4. Tab II, an undated “interoffice memorandum” with the subject line “IIF Meeting to Discuss the Baker Plan,” is attached but not printed.
5. See footnote 2, Document 182.