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

352. Letter From Secretary of the Treasury Baker to the President of the International Bank for Reconstruction and Development (Clausen)¹

Washington, January 13, 1986

Dear Tom:

I am glad we had the opportunity to discuss the upcoming replenishment for the International Development Association (IDA VIII). As you suggested in that meeting,² I have outlined below what we consider to be the necessary elements of the replenishment.

I want to emphasize again that the policy changes we are seeking are critical to the character of U.S. participation in the replenishment. Gramm-Rudman³ totally changes our budgetary environment. Competition for resources over the life of IDA VIII will be stronger than ever and it will be extremely difficult to justify funding IDA even at current levels in the absence of sharp policy changes in the program.

The specific policy changes we are seeking are:

— lending terms that move toward reducing the grant element, i.e., a reduction of maturity and grace periods and an increase in interest charges;

— a lending program that emphasizes and supports directly the private sector;

— a larger proportion of the total lending program dedicated to policy based lending—particularly in Sub-Saharan Africa; and

— a larger IDA share for Sub-Saharan Africa.

With these policy changes, I believe a replenishment in the $9 to $12 billion range may be feasible.

In addition, for any replenishment, we would insist that the funds in excess of $9 billion be earmarked for lending to Sub-Saharan Africa in conjunction with lending from the IMF Trust Fund. We also would insist that the proportion of the $9 billion base of IDA VIII that corresponds to the portion of the IDA VII replenishment dedicated to policy-based lending in Sub-Saharan Africa be earmarked through the same mechanism for Africa. The IMF Trust Fund, the IDA policy-based lending and, hopefully, the Special Facility for Sub-Saharan Africa have precisely the same objective, and logically should function in a cooperative program for these countries.

The stronger focus on Sub-Saharan Africa and close cooperation with the Fund that are embodied in this approach along with the other suggested changes would permit the U.S. to enter into IDA VIII replenishment discussions with a much stronger position domestically. A replenishment in the range of $9 billion to $12 billion would be much more likely to be achieved as a result.

As you are aware, the policy changes we are seeking in IDA and more generally the direction we wish IDA to follow are a reflection of the changes we are seeking in the World Bank. They are not mutually exclusive or separable; and they are consistent with our overall policy toward the IFIs.

With regard to the Bank we are seeking:

— a greater focus on the 15 debtor countries;⁴

— a major expansion of structural and sector adjustment lending where there is a demand from countries;

— more of the Bank’s lending program should be tranched in order to monitor performance better;

— a relaxation of the portfolio concentration guidelines for selected debtor countries;

— an improvement in the pace of internal procedures for processing loans without sacrificing loan quality;

— increased and continued coordination and cooperation with the IMF and with regional MDBs;

— a stronger push by the Bank to get major debtor countries to move toward market oriented economic policies, i.e. fair but strong conditionality which will not be compromised;

— suspension of lending for non-performance of lending conditions; and

— strengthened Bank staff for handling this type of lending.

We recognize some of these changes will not be easy; but they are essential. We also understand that some are in the process of being made; but the pace of those changes appears to be extremely measured. A failure to act much more quickly could very well jeopardize the program that we have all agreed is needed.

Beyond these immediate concerns we need to begin thinking about and developing additional concepts to buttress and extend the new debt initiative.⁵ For example, more imaginative use of devices or programs such as co-financing, integration of the IFC into the program, Bank lending to private institutions and deposit-taking by the Bank are ideas we may wish to examine.

In closing let me again emphasize the critical need for the Bank to make the changes outlined above as quickly as possible. I hope that you share this view and will continue to press for these changes.⁶

Sincerely,

James A. Baker, III⁷

1. Source: National Archives, RG 56, Executive Secretariat, Records of the Office of the Secretary of the Treasury, Correspondence Files, 1986, UD–13W, 56–89–13, Box 34, Dept and Agen s/IBRD ’86. No classification marking.
2. No record of the meeting has been found.
3. Likely a reference to the Balanced Budget and Emergency Deficit Control Act of 1985 (P.L. 99–177), also known as the Gramm-Rudman-Hollings Act, which Reagan signed into law on December 12, 1985.
4. The Baker Plan included a list of 15 debtor countries; see Document 196.
5. See the International Debt compilation of this volume.
6. In a September 26 memorandum to Dam on the round of IDA replenishment negotiations which took place from September 23 to 25 in Washington, McMinn reported that the U.S. had “achieved all of its major objectives in the negotiations.” These objectives were: “a hardening of IDA lending terms”; “a firm policy statement on agricultural lending”; and “a replenishment that will total at least $11.5 billion.” (Department of State, Executive Secretariat, S/S Files, 1986 Official Office Files, Action/Briefing/Information/Through Memoranda,/Chron Files/Memoranda to the Secretary Handled by (E) Economic Affairs Allen Wallis, Lot 89D156: Through Memoranda, September 1986) In a December 16 memorandum to Baker, Mulford reported that IDA Deputies had concluded agreement on an approximately $12.5 billion IDA VIII on December 15. According to Mulford, IDA and IBRD management credited the United States for the size of IDA VIII and praised U.S. officials for their hard work and leadership. (National Archives, RG 56, Executive Secretariat, Records of the Office of the Secretary of the Treasury, Correspondence Files, 1986, UD–13W, 56–89–13, Box 30, Memos to the Secretary, International Affairs, Nov–Dec ’86)
7. Baker signed “Jim” above his typed signature.