The Multinational Monitor

July/August 1987 - VOLUME 8 - NUMBERS 7 & 8

P O R T F O L I O   P O L I T I C S

Portfolio Politics

Reagan Encourages the Regional
Banks to Tow the Line

The Reagan administration is using its political and financial clout to strong-arm the regional multilateral development banks to attach tougher policy conditions to their loans.

Two of the regional banks are currently seeking large increases in lending capital, and the Reagan administration is insisting that economic policy strings be attached to expanded lending programs, something the banks are unwilling to accept. A bitter political battle over just how much control the United States should have is raging at the Latin American lending bank, and the conflict could stall a proposed increase in concessional lending by the African Development Bank (AfDB).

With only one year left of Washington's much vaunted "initiative" to restore growth and reduce debt in the developing world, administration officials say they are disappointed that the regional development banks - where donor nations do not hold majority votes to dictate policy - have not held up their end of the 1985 plan.

The plan, announced by Treasury Secretary James Baker, called on the multilateral development institutions to double their lending flows to the Third World, while at the same time aggressively promoting economic policy reform.

The regional replenishment talks come at a critical time for the developing world, with commercial lending - another pillar of the BakerPlan -continuing to dwindle and debt burdens at an alltime high.

According to the International Monetary Fund (IMF), commercial bank disbursements to the developing world dropped by $10 billion between 1985 and 1986, to $72 billion.

Continued commercial lending to the Third World was brought further into question in May 1987 when major Western banks increased reserves to protect themselves against default by Third World debtors.

The move, triggered by Brazil's suspension of interest payments, has raised fears among many observers, including some Reagan administration officials, that the banks will be increasingly reluctant to lend now that they are better insured against default. Much of the incentive to lend now comes from the need by the banks to get repaid.

At the same time, however, the bank's decision constituted a de-facto recognition that many debtor nations are severely hardpressed and may not be able to repay all of their external debts.

The Third World now owes about $1 trillion in foreign debt, about $400 billion of this due from Latin America alone.

Despite a critical. need for new money, the Reagan administration has resisted boosting the regional banks' resources. According to a senior U.S. Treasury Department official, Washington's complaint is that "if we just go down the road of resource transfers irrespective of policy content, all we're going to do is aggravate the debt problem" in the developing world.

The Reagan administration would like to see the amount of money that the regional banks loan out for projects to the public sector limited and the amount of money going to fund projects that help to privatize or liberalize borrowing countries' economies bolstered.

"We cannot go to our Congress and get resources for banks where people feel they are not really getting effective use of the resources," an official said.

Over the last couple of years, many developing country leaders, notably in Africa, have stated they want to move away from the centrally-planned economic policies they pursued throughout much of the late 1960s and 1970s and open up their economics to trade and investment.

This trend has been heralded by Reagan administration officials as a major victory for Western-style capitalism in the developing world.

But what is cloaked primarily as the administration's desire to see marketplace efficiency in place at the regional development banks has often sparked explosive political tensions by debtors who view Washington's insistence on conditionality as an infringement of their sovereignty.

The United States, the biggest non-regional donor to each of the three regional lending institutions and the largest donor to the World Bank and IMF, has been the most outspoken and forceful of the donor nations in urging the banks to condition use of their funds upon borrowers' willingness to enact fundamental economic policy changes.

Following the launching of the U.S. initiative, the World Bank and the IMF stressed the importance of economic reform among developing nations.

At the World Bank, "Structural Adjustment" or broad, policybased lending last year consumed one-third of the $14 billion in loans, up about 15 percent from the year before.

And the IMF, the world's premier monetary policy watchdog, last year launched a new, three-year "Structural Adjustment Facility" (SAF) to help finance economic policy reform among the poorest nations. (Ironically, proposed expansion of this facility is also being questioned by the Reagan administration on the grounds that it may be too "soft" in its lending program.)

While the World Bank has significantly increased its emphasis on policy reform, similar trends are not evident at the regional lenders, much to the chagrin of the Reagan administration.

The United States and its industrial allies hold majority shareholder power at the IMF and the World Bank, but policy at the regional banks is dominated by their borrowers.

Washington would like greater political support from the regional lenders for the kind of policy changes it is seeking.

"The regional multilateral development banks can wade into policy areas" where bilateral donors or the World Bank cannot, one official explained.

"In certain cases," particularly issues of foreign investment and exchange rates, "a regional bank may be in the best position to enact reforms," because it is not seen by borrowers to be imposing these from the outside, he said.

In reality, U.S. critics complain, the borrowers' power has led to loans being granted for primarily political, not economic, reasons. And, they say, money is being loaned to richer countries for unnecessary or extravagant projects.

"The questions at center stage of the issue with these [regional] development banks is whether they're prepared to play a more independent role" as advocates of policy reform, a senior U.S. official said.

Are "they going to be real independent, honest players, or just institutions that reflect the interest of their borrowers," the official said.

Washington has similar concerns about the Asian Development Bank (ADB), where the administration has led a barrage of donor complaints over the bank's lending performance.

The uproar is loudest at the Inter-American Development Bank (IDB), where a massive, $20 billion increase in lending power is being stalled by Washington's demand for greater veto power over loans.

The Reagan administration fought hard against the Latin Americans' complaint that Washington's policy demands were stripping the bank of its regional identity and earlier this year appeared to have won an increase in U.S. voting power in exchange for pledges of new money.

But talks have since deadlocked, and Washington appears to have given up trying to find a compromise, at least for the time being.

In a recent report, the conservative Heritage Foundation argues that the IDB "has failed in its fundamental mission of promoting growth and financial stability in the region."

According to the report, the S34 billion Latin American lender "has allowed itself to become part of an extensive system of Latin American patronage. It funds parochial projects, as well as former government officials themselves."

Moreover, Heritage charges, the $9 billion IDB concessional affiliate in 1986 provided just over half its loans to 12 countries with per capita gross domestic product (GDP) well above the World Bank's cut-off point for the poorest borrowers.

Loans to Brazil, Colombia and Mexico alone have absorbed some 20 percent of total lending between 1982 and 1986, according to the report.

And the report mentions a third major reason for Washington to oppose increased funding for the IDB - one which many Latin American officials view as a primary reason not to yield to the administration's demand for more voting power.

"Not only have [IDB-affiliated] loans gone to countries that do not merit them, they also have worked against U.S. political and strategic interests" in the region, the report states, noting that Nicaragua has received considerable funding from the IDB.

The administration has now turned its policy guns toward Africa, where some 28 governments have agreed to IMF-backed austerity programs.

Monetary officials say a tripling of the lending strength of the IMF's concessionary facility for the poorest nations - most of which are in Africa - is necessary to enable the fund to put more money into these economies than it is currently taking out in repayments, but the Reagan administration has been reluctant to take action.

Although the administration has backed a proposed tripling in the resources of the African Development Bank, it is weighing opposition to an increase in the bank's concessional fund because of "major questions" about the AfDB's ability to act as a spur for economic policy reform in Africa, according to the senior U.S. official.

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