BRETTON WOODS COMMITTEE MARCH 10, 1989 TALKING POINTS WE MEET IN AN ATMOSPHERE OF EXPECTANCY - AS THE EXISTING CONSENSUS ON DEBT IS REVIEWED BY POPULAR DEMAND. !T,S ALL ON THE TABLE, AND MANY POLITICAL AND ECONOMIC DIAGNOSTICIANS ARE CALLING FOR MAJOR SURGERY. LET,S NOT CUT THE HEART OUT OF THE BAKER PLAN, BECAUSE 3 OF ITS VITAL PARTS - POLICY REFORM, ECONOMIC GROWTH AND LONG-TERM INVESTMENT - ARE STILL NEEDED TO KEEP THE PATIENT ALIVE. LETS KEEP THESE THREE ITEMS ON THE TABLE, WHATEVER ELSE WE DO. - 2 - THE WORLD BANK HAS BEEN HEAVILY INVOLVED IN DEBT. IT WOULD BE STRANGE IF WE DIDN'T HAVE VIEWS ABOUT POSSIBLE DEBT PROPOSALS. WE ARE GRATEFUL SECRETARY BRADY IS TAKING TODAY'S INITIATIVE, JUST AS WE ARE GRATEFUL TO OUR LONG-TIME ALLIES, THE BRETTON WOODS COMMITTEE, FOR PROVIDING SUCH A KNOWLEDGEABLE FORUM. HERE ARE THE ELEMENTS WE BELIEVE MUST BE INCLUDED IN A SUSTAINABLE DEBT PLAN: 1. IT MUST DIFFERENTIATE ON THE BASIS OF PERFORMANCE. THIS IS ANOTHER WAY OF SAYING IT MUST ENCOURAGE DEVELOPING COUNTRIES TO ENTER - 3 - AND SUSTAIN ECONOMIC REFORM PROGRAMS FOR GROWTH. DEBT REFORM BASED ON THE SAME OLD DEBTOR COUNTRY POLICIES IS A WASTE OF TIME. To CANCEL ALL THE DEBT IN THE WORLD, BUT NOT TO CHANGE THE POLICIES WHICH CREATED IT, WOULD BE RISK WITHOUT REWARD. 2. IT MUST BE EVEN HANDED - NOT IN THAT IT IS AVAILABLE TO ALL - BUT IN BEING AVAILABLE TO ALL WHO ACCEPT THE OBLIGATIONS OF SELF HELP, SOUND MANAGEMENT AND THE FINANCIAL RESPONSIBILITY WHICH WILL MAKE IT SAFE AND EFFECTIVE. - 4 - 3. IT MUST BE DESIGNED TO ACCELERATE THE RETURN TO CREDITWORTHINESS. THAT SHOULD BE ITS GOAL, BECAUSE DEVELOPMENT REQUIRES A LOT OF INVESTMENT, RATHER THAN A DRYING-UP OF NEW MONEY FROM THE INTERNATIONAL COMMUNITY. IF YOU ABOLISHED DEBT BUT LOST THE BATTLE AGAINST POVERTY YOU WOULD HAVE A PYRRHIC VICTORY. 4. IT MUST BE FLEXIBLE ENOUGH TO BE ADAPTABLE TO A DIVERSITY OF DEVELOPING COUNTRIES SO GREAT THAT AFTER TWO YEARS IN MY PRESENT POST I AM - 5 - STILL CONSTANTLY ASTONISHED AT HOW DIFFERENT COUNTRIES CAN BE - EVEN NEIGHBORS. IT MUST ALSO BE BIG ENOUGH TO MAKE A REAL DIFFERENCE IN THE YEARLY BURDEN OF DEBT SERVICE. 5. IT MUST BE WISELY IMPLEMENTED BY KNOWLEDGEABLE PEOPLE, WHO DON 1 T SEND THE WRONG MESSAGES OR CREATE THE WRONG PRECEDENTS. THE BEST CHANCES FOR SUCCESS MUST BE TAKEN FIRST, TO MAXIMIZE THE OPPORTUNITIES FOR A HAPPY LEARNING PROCESS. - 6 - 6. IT MUST NOT BANKRUPT THE COMMERCIAL BANKS OR THE MULTILATERAL LENDING INSTITUTIONS, OR DISSIPATE UNNECESSARILY CAPITAL THEY NEED FOR THEIR OTHER RESPONSIBILITIES. IT MUST HAVE THE EFFECT OF EXPANDING, NOT SHRINKING, THE GLOBAL ECONOMY. I MAINTAIN A GOOD PLACE TO START WOULD BE WITH MEXICO. MEXICO HAS INDICATED A WILLINGNESS TO ENGAGE IN MAJOR REFORM, IT HAS SUBSTANTIAL PROSPECTS BUT SUBSTANTIAL DEBT, AND IT HAS LIVED UP TO ITS OBLIGATIONS. - 7 - IN RETURN FOR MAINTAINING AND DEEPENING THE CHANGES IN ECONOMIC POLICY AND STRUCTURAL CHANGE MEXICO HAS PUT IN PLACE IN THE LAST 5 YEARS. THE INTERNATIONAL FINANCIAL COMMUNITY SHOULD OFFER MEXICO A WIDER THAN TRADITIONAL RANGE OF OPTIONS TO FINANCE ITS REQUIREMENTS OVER THE NEXT SEVERAL YEARS. SUCH OPTIONS MIGHT INCLUDE: 1. SIGNIFICANT DEBT REDUCTION, SWAPPING CURRENT LOANS FOR LONG-TERM BONDS AT A DISCOUNT (MEXICO DID THIS LAST YEAR ON A MINOR SCALE). - 8 - 2. EXIT BONDS AT BELOW MARKET INTEREST RATES WITH WHATEVER ADDED ATTRACTIONS WILL MAKE THEM ENTICING. 3. A DEBT EQUITY SWAP PROGRAM. 4. STRONG SUPPORT FROM MULTILATERAL AGENCIES OF A TRADITIONAL ADJUSTMENT NATURE. - 9 - 5. COMMITMENT BY GOVERNMENTS TO FACILITATE REGULATORY, TAX AND TRADE IMPROVEMENTS, AND TO ENCOURAGE THE PRIVATE SECTOR INVESTMENT WHICH CAN GIVE THE MEXICAN ECONOMY NEW POTENTIAL FOR GROWTH. ONE CAVEAT: NEW MONEY WILL BE NEEDED IN MEXICO,S CASE EVEN AFTER SIGNIFICANT DEBT REDUCTION. FINANCING GAPS CANNOT BE FILLED BY MAGIC AND ADJUSTMENT NEEDS SUPPORT. THE WORLD BANK WILL DO ITS SHARE IN THIS AND OTHER CASES. BuT IT CANNOT DO IT ALONE. - 10 - IF THIS DOES NOT SOUND ADEQUATELY IDEALISTIC ON OUR PART, I WOULD REMIND YOU OF TWO CHARACTERISTICS OF IDEALISM: BILL BuCKLEY SAID: 'IDEALISM IS FINE, BUT AS IT APPROACHES REALITY THE COST BECOMES PROHIBITIVE.' JOHN GALSWORTHY SAID: 'IDEALISM INCREASES IN DIRECT PROPORTION TO ONE,S DISTANCE FROM THE PROBLEM.'