Beyond the Baker Initiative

BEYOND THE BAKER INITIATIVE Riordan Roett N,INETEEN EIGHTY-SIX has brought small comfort to Latin America in its efforts to deal with its external debt burden. The precipitate drop in world oil prices has exacerbated the financial and political strains in Mexico, Venezuela, and Ecuador. At the same time, lower oil prices provided relief for Brazil and other oil importers, but stagnant commodity prices and protectionism in the developed countries counterbalanced the savings on oil imports. Country after country again restructured its existing debt with the private commercial banks. Discussion continued about more radical innovations, such as a cap on interest rates, but little substantive progress has ensued. The Baker Initiative, announced at the annual meeting of the International Monetary Fund (IMF) and the World Bank in September 1985, flashed across the screen as a possible source of momentary relief, but it was quickly overtaken by events. Latin American states, meeting collectively as the Cartagena Group (Argentina, Bolivia, Brazil, Chile, Colombia, Dominican Republic, Ecuador, Mexico, Peru, Uruguay, and Venezuela), again issued dire warnings about the need to stimulate growth, but pulled back from a more confrontational stance for the moment. In the middle of 1986, we are witnessing another standoff , with Latin American nations calling for interest rate relief and the developed countries demanding internal structural reforms from the Latins prior to further lending or other forms of relief. These events contrast dramatically with those of 1985. Early in that year the perspective of the United States and its industrial allies was that Riordan Roett is professor and director of the Latin American Studies Program at The Johns Hopkins University School of Advanced International Studies (SAIS). The author wishes to acknowledge the research assistance of Sarah K. Brown in the preparation of this article. 27 28 SAIS REVIEW the debt crisis that began with the worldwide recession of 1981-82 had become routinized. The financially overextended Latin American and Caribbean countries had finally been forced to adjust their domestic economic policies and to accept IMF guidelines for austerity programs in order to receive new capital from the private commercial banks or to restructure their existing debt. The United States, supported by its more conservative allies such as West Germany and the United Kingdom, refused to acknowledge the potential of government-to-government negotiations. The debt issue was to be addressed by the individual debtor countries and the private commercial banks with the IMF as an intermediary . A rash of newspaper articles announced the end of the debt crisis and confirmed that the entire episode had been a liquidity problem, not a solvency crisis. By the end of the year this premature euphoria had disappeared. It became clear that the star of the earlier rescheduling process, Mexico, would not soon return to voluntary borrowing. The three years of apparent austerity had not worked. Moreover, the government fell out of compliance with its IMF conditionality program. The dramatic drop in oil prices and the tragic earthquake compounded the abundant evidence that Mexico was in deep trouble. Soon it was clear that Mexico had not only lost its stardom, but was now a special case that would require massive aid. President Miguel de la Madrid called for sacrifices by the commercial banks and by Mexico. Other signs from Latin America indicated a growing resistance to traditional approaches to dealing with the debt. At his inauguration inJuly 1985, President Alan Garcia of Peru announced that that country would devote only 10 percent of its export earnings to debt servicing. The new government in Brazil let it be known that it would not accept an IMF austerity program and that it was committed to growth not adjustment. At the fortieth anniversary of the United Nations, on the eve of the IMF/World Bank meeting, two Latin Americans articulated their resistance to externally imposed restrictions. Brazilian President José Sarney stated: Brazil has taken its position. . . . We have chosen to grow without recession, without submitting ourselves to those adjustments which would imply relinquishing development . Brazil will not pay its foreign debt with recession, nor with hunger. We believe that in settling this account, at such high social and economic costs, we would then have to surrender...