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

196. Information Memorandum From the Assistant Secretary of State for Inter-American Affairs (Abrams) and the Acting Assistant Secretary of State for Economic and Business Affairs (Constable) to Secretary of State Shultz and the Deputy Secretary of State (Whitehead)¹

Washington, November 29, 1985

SUBJECT

• Secretary Baker’s Program for Sustained Growth: State Department Observations and Next Steps

Summary: We applaud Treasury’s enthusiasm in attempting to implement the Baker “Program for Sustained Growth.” Mulford’s status report is valuable background for your participation in the OAS General Assembly. Nonetheless, we disagree with portions of Mulford’s appraisal, and we think that State should be fully consulted as this process continues or we will put at risk some of our foreign policy objectives and interests.

The Mulford Status Report

David Mulford’s November 22 status report (attachment), provides background relevant to your participation in the OAS General Assembly in Cartagena.² His characterization of the reaction thus far to the Baker initiative is generally on target, although there are a few areas where we would place developments in a different perspective.

We are uneasy about his suggestion that Argentina appears to be in the best position to move ahead. There is little doubt that the drastic economic stabilization program announced by Alfonsin in mid-June has recorded some early successes. However, we share the Embassy’s assessment that it remains to be seen whether the GOA has the political will to move forward with the type of far-reaching structural adjustment measures and macroeconomic policy reforms that are the cornerstone of the Baker initiative and the justifiable prerequisite for new net lending. The GOA’s recent unsupportive attitude toward the prompt initiation of a new trade round in the GATT that would deal with, inter alia, services and agriculture, is an example. We wonder, also, how much confidence can be placed in Alfonsin’s reported willingness to have Argentina serve as “test case” for the initiative. Even with Alfonsin’s full support, early and full participation in the Baker initiative would require the broad involvement of Argentine policymakers—a commitment we see as unlikely in the short-term.

Mulford’s willingness to consider either Structural Adjustment Loans (SAL) or sectoral loans is a positive step. By their nature, however, SALs require cabinet-wide consensus and implementation—a practical difficulty in countries ruled by coalitions or governments not enjoying wide popular support. Further, unless the World Bank streamlines its procedures, the negotiation of a SAL could take 16-months or more. For these and other reasons, Colombia and Ecuador have not until now been interested in a SAL. Colombia, however, is actively pursuing a series of sectoral loans which include policy conditions. The Ecuadorean government has formally asked to be a candidate for the Baker Plan, probably because of the prospect of additional onward lending and the implied “seal of approval” for its policies.

Mulford’s upbeat readout of the degree of support for the Baker initiative among commercial banks is generally accurate. There remains broad skepticism among many banks about the ability and willingness of most major financially-troubled countries to undertake the type of reforms the Baker initiative identifies as the prerequisite for new net lending. It is for this reason that Treasury has been so anxious to produce “test cases.” A few banks may still look to the MDBs or industrialized countries to guarantee a large portion of their new net lending.

We have been working with Treasury staff to reorient two major mistakes in approach which will impede our ability to claim “successes” for the initiative. First is the unfortunate use, in commercial bank discussions, of a list of 15 eligible countries. This has allowed bankers to raise numerous irrelevant issues, and has also provoked diplomatic protests when the list became widely known. One banker told us that, since no Caribbean Basin countries were on Baker’s “list of 15,” he assumed that USG assistance to such countries would take the place of new net lending by the banks. Another banker asked, seriously, whether his bank should be considering new net lending to any non-“list of 15” countries.

We have encouraged Treasury and others to back away from any “list of 15.” We developed guidance which noted that the list is illustrative and served only to define an order of magnitude estimate of the external capital needs of major market borrowers. We emphasized that countries not on the list can and should expect new net lending by commercial banks and the MDBs provided they pursue sound economic policies. The Dominican Republic could be a case in point. Conversely, “list of 15” countries that have not made their peace with the international financial community, such as Peru and Nigeria, should have little or no expectation of new net lending within the framework of the Baker initiative.

Second, we are concerned that taking a high profile approach in soliciting “test cases” for the Baker initiative entails considerable risk. We are encouraging Treasury and the Fed to offer an “open door” policy to prospective participants—explaining the benefits as well as the quid pro quos of participation and inviting interested countries to take the next step. We understand that the ad hoc Group of 16 commercial banks charged with developing a public pledge of support for the Baker initiative has pressed Treasury for assurances that there will be takers should the banks, as expected, make a conditional mid-December pledge of support. However, it should be already apparent to these and other banks that countries such as Argentina, Colombia, Ecuador, Uruguay, the Dominican Republic, and others are serious in examining the initiative. Some have already moved toward adoption of appropriate structural and macroeconomic policies, a trend that could accelerate should assurances of commercial bank and other support be forthcoming.

Next Steps

While we understand that you have been fully consulted in the development and implementation of the Baker initiative, coordination among State, Treasury, and the Fed at the staff level has not always been the best. We believe that this incomplete coordination has impeded our diplomatic efforts to explain and seek support for the “Program for Sustained Growth” and other recent USG economic initiatives.

Now that the overall strategy is set, we will want to work closely with other agencies in the implementation of these initiatives to assure that foreign policy objectives and interests are fully taken into account. The early-1986 visits of Ecuadorean President Febres-Cordero and Uruguayan President Sanguinetti are two important upcoming events.³ Both these countries, because of their expressed willingness to adopt the type of structural reforms called for in the Baker initiative, are logical candidates for participation. How we approach the question of the Baker initiative in the context of these official visits will be among our concerns in the weeks ahead. In the same vein, we have already begun interagency discussions of how our effort to gain support for and implement the Baker initiative can be furthered by the upcoming Presidential visit to Mexico.⁴

1. Source: Department of State, Files of the Under Secretary of State for Economic Affairs, W. Allen Wallis, Chrons; Memo to the Secretary/Staff and Departmental/Other Agencies; Memos to the Files; White House Correspondence, 1987–1987, Lot 89D378: Chron—December 1–23 1985. Confidential. Sent through Wallis, who did not initial the memorandum. Drafted by Robert Glass (EB/EFD/OMA) on November 27; cleared in EB/IFD/OMA, EB/IFD, ARA/ECP, ARA, and E. A stamped notation reading “GPS” appears on the memorandum, indicating Shultz saw it. “Treat as original” is written in an unknown hand at the top of the memorandum. An unknown hand also wrote in the top right-hand corner of the memorandum: “GPS: ‘I agree. Would a short letter from me to Baker help? If so please draft’ per SECTO 27011.” Sent to Shultz and Whitehead under an undated covering memorandum, in which McMinn responded to this request: “We do not believe a letter to Secretary Baker is the best vehicle for conveying our concerns. As a preferable alternative, we suggest you raise your concerns at the December 6 IEPR Breakfast with Treasury.”
2. An incomplete copy of Mulford’s November 22 memorandum to Whitehead is attached. A complete copy of the memorandum is in the Department of State, Executive Secretariat, S/S–I Records, Official Correspondence of Deputy Secretary John C. Whitehead, July 1982–Jan 1989, Lot 89D139: JCW—To/From P, T, E, M, C 85. Shultz delivered a speech on Latin American debt problems on December 2 at the OAS meeting in Cartagena. Telegram 15119 from Bogota, December 3, covered the media reaction to Shultz’s participation in the meeting. (Department of State, Central Foreign Policy File, Electronic Telegrams, D850864–0379)
3. Febres-Cordero visited the United States from January 12 to 16, 1986, and Sanguinetti visited the United States from June 16 to 19, 1986.
4. Reagan met with de la Madrid in Mexico twice on January 3, 1986. The memoranda of conversation of these two meetings are scheduled for publication in Foreign Relations, 1981–1988, vol. XVII, pt. 1, Mexico; Western Caribbean.