US easing its `tough guy' stand on debts of developing nations
Boston — The Reagan administration is tempering its demands on the developing countries for discipline. For several years now the United States has been the ``tough guy'' in international monetary and economic gatherings. In the face of weak commodity prices and other damaging factors, the US has insisted on debtor countries making necessary ``adjustments'' to their economies to improve their payments balances. That has usually meant harsh austerity programs.
It also pushed the ``discipline of the free market'' on the world.
Now, faced with protectionist pressures at home and a persistent debtor problem abroad, the US is softening its stand a little.
``It does seem that things are moving,'' says John Williamson, an economist with the Institute for International Economics. With Donald R. Lessard, he has written a new study, ``Financial Intermediation Beyond the Debt Crisis,'' that urges a number of measures to boost capital flows to the debtor countries by $15 billion to $20 billion annually beyond what now appears likely.
One sign of US flexibility was its agreement with Britain, West Germany, France, and Japan on Sunday to work together to drive down the value of the dollar. That action succeeded dramatically the next day when the dollar recorded its largest one-day drop in the 12-year history of floating exchange rates. It plunged 4.29 percent against a basket of currencies of important trading partners of the US.
In early foreign-exchange trading Tuesday the price of the dollar stabilized.
The annual report of the International Monetary Fund, released for publication today, calls for discipline in the industrial countries to keep the economic recovery on a sound footing.
It suggests, for example, continued curbing of government spending and budget deficits. If not corrected, the report states, the US deficit threatens ``to crowd out the productive investment in the private sector that is needed to underpin longer-term growth.''
The report adds that the budget deficit, with its impact on the savings-investment balance in the US economy, was ``an element, among other factors, in the deterioration of the US current account balance.'' Higher imports dampened the expansion of domestic investment and stimulated protectionist pressures.
Spending cuts and lower government borrowing requirements would make a ``crucial contribution'' to sustaining the expansion of US output and employment over the medium term, pave the way for a sustained reduction in interest rates, and help bring about an orderly drop in the exchange rate of the dollar, the report says.
The IMF report also calls for ``structural adjustments and institutional reforms'' in the European industrial countries designed to introduce greater flexibility in the labor markets and help reduce unemployment. It criticizes unrealistic indexation of wages to inflation, minimum-wage regulations, and employment-based taxes.
At the forthcoming joint annual meetings of the IMF and the World Bank, the new US flexibility may appear in a few ways.
For example, during the early stages of the debt crisis, nations were given the right to borrow larger amounts from the IMF to help them deal with their international payments problems. Since then, IMF ``quotas,'' which regulate the amount a nation may borrow from the fund, have been greatly enlarged.
So the US and some other industrial nations have insisted that the ``enlarged access policy'' be gradually reduced. Such a reduction was accomplished last year in a compromise with the developing nations, which want to maintain large borrowing rights. The action did not really limit any nation's borrowing.
But when the finance ministers and central bankers meet in Seoul Oct. 8-11, the US is not expected to insist on a further reduction of borrowing access during 1986. This may reflect its concern that debtor nations have adequate borrowing capability in the event of another international payments crisis.
The US may also go along with the reuse of money being repaid to a special $2.7 billion trust fund. This was established in May 1976 to provide additional concessionary balance-of-payments assistance to low-income countries. About $500 million a year would be available for relending, starting in 1986.
On the other hand, the US and most other industrial countries are not expected to approve any new allocation of Special Drawing Rights (SDRs), a paper asset issued by the IMF. Considering new SDRs to be a valuable addition to their international monetary reserves which can be used in a pinch to pay trade bills, the developing countries have been pushing for the creation of more SDRs.
Nor is the US likely to approve the creation of ``target zones'' for the value of major currencies, as suggested by the developing nations. The move by the US and its major industrial allies to lower the value of the dollar, however, does indicate a greater willingness to interfere in that massive free market, the foreign-exchange market. GRAPH: Weak commodity prices Non-oil primary commodity prices in developing countries (indexes expressed in dollars; 1980 = 100)
80 100 120 1980
'85 Real commodity prices* Nominal commodity prices *Adjusted downward by the United Nations index of prices of manufactured exports of developing countries. Source: International Monetary Fund