World Debt: The United States Reconsiders

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It took three years of muddling through crises, near-panics in the financial markets, a million or so jobs lost in the United States, and social unrest in the developing world for the Reagan Administration to recognize the debt crisis for what it is: a long-term economic and political barrier to development that is slowly strangling world economic growth.

Ideology has, at last, given way to pragmatism. At the October 1985 annual meeting of the International Bank for Reconstruction and Development (World Bank) and the International Monetary Fund (IMF) in Seoul, Treasury Secretary James Baker announced that the United States was ready to shift gears and take a more active role in confronting the debt crisis.

Both domestic and international considerations prompted this policy shift. On the domestic front, a slowdown in the U.S. economy has exacerbated the difficulties of American agriculture and manufacturing, thereby stirring protectionist anger in Congress. Protectionism is gaining advocates even though to stem the flow of foreign goods would restrict the exports of Mexico, Brazil and other debtors, and thus prevent them from earning the foreign exchange they need to pay back their loans. The Administration is also increasingly concerned about the political impact in the debtor countries of the strict austerity programs and belt-tightening demands made by creditors.

For months, Fidel Castro has argued for a repudiation of debts, and the newly elected president of Peru, Alan García Pérez, has unilaterally announced that he will not devote more than ten percent of his country’s export receipts to service debt. In his dramatic speech to the U.N. General Assembly, he declared, "It is either debt or democracy. . . . We believe the objective must be the unity of debtor countries and a radical change of the current situation."