Academic journal article Federal Reserve Bulletin

U.S. Policy on the Problems of International Debt

Academic journal article Federal Reserve Bulletin

U.S. Policy on the Problems of International Debt

Article excerpt

U.S. Policy on the Problems of International Debt The international debt problems of developing countries in the 1980s have been serious and complex. It is tempting, nevertheless, to seek simple, universal solutions to those problems. I believe that we must resist that temptation, for several reasons.

First, international debt problems are sufficiently complex, and the developing countries are sufficiently different, that it is inappropriate to speak of a single policy.

Second, U.S. policy in this area has been evolutionary. Even for an individual borrowing country, tomorrow's policy approach may well differ from today's, just as today's approach differs from yesterday's--or from the one last year or in 1982.

Third, U.S. policy on international debt is a responsibility that is shared within the U.S. government: the Treasury Department, the State Department, the White House, the Congress, and the Federal Reserve are all involved in the formulation of various aspects of that policy, and its implementation involves an even longer list of institutions. Moreover, the United States cannot dictate policies in this area because the problems of international debt are global in scope, affecting the interests of many developed countries around the world as well as many developing countries.

For all these reasons, this article does not attempt to present the definitive statement about U.S. policy on these problems. Rather, I offer some perspective on where we have been, where we are, and where we might be going. I make three basic points.

First, developing countries, the governments of creditor countries, the international commercial banks, and the international financial institutions have a substantial common interest in seeking cooperative, constructive, and innovative approaches to handling the debt problems of the developing countries. The benefits associated with cooperative approaches are overwhelming; they extend beyond the direct benefits for the countries and their lenders to benefits that can only be shared--a prosperous world economy and a stable financial system. Government has the responsibility to emphasize that common interest and to nurture cooperative approaches.

Second, though it has been uneven and disappointing, significant progress has been made over the past seven years in dealing with international debt problems and the associated economic and financial problems of the developing countries. In my view, insufficient attention has been paid to, and insufficient credit has been given for, this progress.

Third, U.S. policy in this area will continue to be evolutionary. Secretary of the Treasury Nicholas F. Brady put forward some "ideas and suggestions" on March 10, 1989; these ideas were refined during the international meetings at the beginning of April and were embodied in guidelines approved by the Executive Boards of the International Monetary Fund and World Bank in May and June; they are in the process of being exploited by Mexico and the Philippines; and they will continue to be refined. Moreover, even if Secretary Brady's initiative galvanizes progress beyond our wildest dreams, I suspect that the problems of international debt, and the implications of those problems as they unfolded in the 1980s, will still be with us at the end of this century. Indeed, it is fair to say that such problems have been with us since the first international loans were made many centuries ago.

WHERE HAVE WE BEEN?

It is precisely because international debt problems are and always have been with us, as well as because U.S. policies with respect to them have been evolutionary, that it is useful to look back briefly at how these problems have evolved over the 1980s and what the responses to them have been.

I believe that the proximate cause of the international debt problems of the 1980s lies in the changes in the environment of international lending in the early 1980s: recession in the industrial countries, deterioration in the terms of trade of the borrowing countries, and increases in nominal and real interest rates. …

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