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

248. Paper Prepared by Secretary of the Treasury Brady¹

Washington, October 4, 1988

U.S. LEADERSHIP IN THE INTERNATIONAL FINANCIAL INSTITUTIONS

At the recent IMF/World Bank meetings in Berlin, I was struck by Japan’s new assertiveness in utilizing its increasing financial clout to play a more influential role in international economic policy decision making. This was especially apparent in their attempt to obtain a larger leadership role in the international financial institutions. An expanded Japanese role is inevitable (they have already become number two in the World Bank) and, if properly handled, could be desirable given its enhanced economic position. However, this needs to be achieved in a manner which does not undermine U.S. ability to utilize the IMF and World Bank to promote its interests.

This issue will confront us primarily in connection with the ongoing negotiations on a possible increase in IMF quotas (i.e., capital subscriptions). The Japanese are pressing hard for a large quota increase that will permit them to move to the second position in terms of voting power (behind the United States) from their current slot of number five (below the United Kingdom, Germany, and France). We are in the process of developing a strategy on the quota issue that will provide for an orderly and gradual increase in Japan’s voice and vote in the IMF, but does not require the United States to see its quota share diluted disproportionately. In this context, we will also need to decide on the key demands we should make on Japan in exchange for U.S. support on quotas. In particular, we want to assure that Japan utilizes its enhanced IMF position to support policies that reflect a global perspective on the role of the IMF rather than narrow Japanese economic interests.

Meanwhile, we need to move ahead promptly to refurbish U.S. credibility in the IMF. U.S. credibility has been damaged recently by our inability to participate fully in the IMF’s Enhanced Structural Adjustment Facility (ESAF) which provides concessional assistance to the poorest countries in support of economic reforms. In addition, the United States has pushed the IMF to provide financing to countries such as Sudan, Liberia, Peru, Zaire, Somalia, and Zambia where we have major foreign policy concerns but which have not implemented necessary economic reforms and are incapable of repaying their IMF loans. As a result, these countries account for virtually all of the $3 billion in overdue obligations to the IMF. These arrears threaten the financial integrity of the institution and its effectiveness in resolving the LDC debt problem.

The ESAF is a critical element in dealing with both the problem of the poorest countries and also the Fund’s arrears. Our inability to participate is hurting us with the African countries and other creditor governments. A U.S. commitment now to make a modest contribution spread over 10 years would represent a very cost effective means of refurbishing our image and improving our leverage on a key IMF issue. I recognize that the tight budget situation requires that we utilize our limited foreign assistance resources prudently. However, we need to be in a position to be as forthcoming as possible when the developing countries and the international institution take the necessary steps to put their own houses in order. Consequently, I have been considering how the United States might participate in the ESAF to support IMF efforts to promote reforms.

Moreover, while foreign policy considerations need to be taken into account in reaching our position on IMF loans, we must also consider carefully the economic basis for such loans. As I indicated in my Berlin speech, we live in a world of scarce financial resources which requires that those funds be used prudently. It is in our long-run interest that the IMF remain financially strong and that the U.S. credibility in the institution be preserved. The ability of the IMF to support U.S. allies is being damaged by the arrears problem and we must be mindful of this situation in developing our positions on future IMF lending.

1. Source: Reagan Library, Stephen Farrar Files, Chronological File, Farrar Chron October 1988; NLR–177–8–30–11–2. Confidential. Sent under an October 4 covering memorandum from Brady to Powell.