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

241. Memorandum From Secretary of State Shultz and Secretary of the Treasury Baker to President Reagan¹

Washington, undated

SUBJECT

• The Toronto Economic Summit

I. YOUR OBJECTIVES

1. To obtain Summit support for U.S. approaches to major international economic issues, including specifically:

— affirming that international economic policy coordination is working well to preserve and enhance economic growth, further the reduction of external imbalances and promote exchange rate stability;

— focusing public attention on the vital importance of structural reform to complement macroeconomic policies so that Summit countries can sustain or increase their economic growth;

— ensuring significant progress by the midterm review of the Uruguay Round, particularly in agriculture, services, intellectual property and the functioning of the GATT system;

— reaffirming support for the current case-by-case debt strategy, including further development of the “menu” of financing options, and opposing generalized debt forgiveness schemes that transfer risks from the private sector to the international institutions or creditor governments.

2. Strengthen cooperation among Summit countries in meeting the challenges of the future through reliance on open markets and free societies, with a particular emphasis on the evolving East-West relations, the common fight against narcotics and terrorism, and shared responsibilities for economic and security leadership.

[Omitted here is a description of the setting of the Toronto Summit and discussion of other economic issues.]

D. Problems of Debt and Development

The Summit will return to the related topics of debt and aid to the poorest. There are likely to be several proposals for new assistance or debt relief programs, particularly for the poorest countries (primarily Sub-Saharan Africa).² We will want to maintain a clear distinction between our approach to the poorest countries and the heavily indebted middle income countries.

For the middle income debtors, we should be able to achieve Summit reaffirmation of the current market-based, cooperative debt strategy and support for continued development of the “menu approach” to commercial bank financing. However, the Japanese may suggest the need for debt relief backed by greater assurance of debt service payments for commercial banks.³

While we support voluntary agreements between commercial banks and debtor governments to restructure debt, we want the Summit to oppose generalized approaches to debt relief that would transfer the risk on commercial bank debt to the international financial institutions or creditor governments. We also believe that World Bank guarantees or other enhancements involving World Bank exposure should not be used on a general basis to induce new commercial bank loans.

President Mitterrand can be expected to seek debt forgiveness for the poorest countries, while the U.K. will seek Summit approval for Chancellor Lawson’s proposal that the Paris Club provide concessional interest rates for the rescheduled debt of the poorest nations. For legal and budgetary reasons, such a plan would not be viable in the United States. However, we have recently indicated that the United States could support a differentiated approach in the Paris Club for this group of countries. This would permit those creditor countries that can do so to provide concessional interest rates in exchange for shorter repayments of their rescheduled debts (i.e., over 10 years). Those countries not able to provide concessional rates (such as the United States) would continue to reschedule the poorest countries’ debts on longer terms (i.e., up to 20 years).

The Summit should stress that the key to resolution of the debt problem is domestic economic reforms in the debtor countries, encouraging private investment flows, and opening markets—both in the LDC’s and in the major developed countries. Presently, GATT rules encourage LDC’s to erect protective barriers that work against their long-term economic interests. At Toronto, we should challenge the notion that protectionism is an acceptable means of economic development.

[Omitted here is discussion of the political issues for the Toronto Summit.]

1. Source: Department of State, Bureau of Economic Affairs, Office of Economical and Agricultural Affairs Files, Official Economic Summit Files, 1975–1991, Lot 93D490: Background Book, The Economic Summit Toronto Canada, June 19–20, 1988. Secret.
2. See Document 242.
3. See Document 242.