Courage for the Bankers

The United States has given leadership on two important issues before the annual meeting of the World Bank and the International Monetary Fund:

--President Reagan has agreed to support a substantial increase in the capital of the bank, an essential step in addressing the grievous needs of the poor nations of the world.

--Treasury Secretary James A. Baker III has offered a surprise proposal, embracing gold as an additional and indirect economic indicator that could contribute to efforts to stabilize exchange rates.

American leadership is essential if the two great institutions are to move ahead in their central roles as primary lender to the Third World and guardian of global monetary systems. Unfortunately, the Reagan Administration recognized the importance of the IMF only at the end of its first term in office, when the Latin American debt threatened the stability of American banks. And it came to support capital expansion for the World Bank only on the eve of the annual meeting after years of trying to impose restrictions on bank programs.

An American credibility problem was evident at the annual meeting. Reagan delivered a public lecture to Japan and West Germany, prodding them to more rapid economic expansion and the assumption of a larger burden in financing emergency IMF funds for the poorest nations. But his stubborn opposition to increased taxes, and the effect of this policy on the staggering deficit in U.S. government spending, gave a hollow ring to his words. Most in the audience regard the American deficit as a far more critical issue in the current world economic malaise than any failures in Tokyo or Bonn. And they are not impressed at the “solution” that was signed into law this week--reinforcing the Gramm-Rudman-Hollings automatic budget-cutting device.

The President’s commitment to expanded capital for the World Bank and his firm opposition to trade protectionism were encouraging at a time when the world economy, only slowly recovering from the recession, is vulnerable. It is vulnerable to the spreading effect of economic stagnation in the nations of Latin America and Africa, crippled by debt obligations that are resulting in declining standards of living. And it is vulnerable to the disruptive effect of the flagrant protectionism contained, for example, in the textile bill recently passed by the U.S. House of Representatives, and in the omnibus trade bills passed by both houses and awaiting reconciliation.

As Baker said two years ago at the World Bank-IMF annual meeting in Seoul, a two-pronged policy must be pursued, matching economic reform in the Third World with an increased flow of commercial and government credit to those nations. Many of the poor nations already have met their part of the bargain, implementing major reforms of their economic structures. Now they can be reassured by the President’s commitment that, at least through the World Bank, there will be an increased flow. That will not be enough. But it may give courage to the bankers who have been hanging back, fearful of greater risk exposure but recognizing that Baker was right when he said that the debts would never get paid unless the economies of the debtors were revived.