"DEVELOPING COUNTRIESNEW DIRECTIONS"
Robert J. Callander President, Chemical Bank New York
Chairman: Nona Macdonald President
Robert J. Callander joined Chemical Bank in 1957 with an impressive academic background. He graduated from Dartmouth College Phi Beta Kappa, magna cum laude, and did postgraduate work at Dartmouth School of Credit and Finance and at Harvard University's Program for Management Development. Also, he collected a degree from Yale Divinity School.
By 1972, he had become a senior vice-president of the bank, and then on to the International Division to become its head. He became one of the bank's three presidents in 1983, and a director of the corporation. He is responsible for Chemical's World Banking Group, which provides a full range of services to corporations, governmental units and financial institutions in the United States and beyond. He is chairman of the Credit Policy Committee of the corporation. In addition, he is a director of the Far East American Council and the Japan Society and the Metropolitan Opera, and is a member of the Council on Foreign Relations and the Association of Reserve City Bankers.
Chemical Bank is the sixth-largest bank in assets and deposits in the United States. It has been established in Canada since 1972.
Robert J. Callander
I am deeply flattered for many reasons that The Empire Club should have asked me to speak, if only because international bankers ain't what they used to be. It may not be much-but it sure beats risk arbitrage!
It is also a pleasure to return to Toronto and to have an opportunity to visit with so many friends. We at Chemical are very proud of our strong business base here, and my guess would be that there are few, if any, here today who do not know Terry Upson, who represents us so well.
Whenever I speak on the L.D.C.'s, I think of John Maynard Keynes who wrote this in the early Thirties:
"A `sound' banker, alas! Is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.
It is necessarily part of the business of a banker to maintain appearances and to profess a conventional respectability. Lifelong practices of this kind make the most romantic and the least realistic of men."
That is one general view on my topic today, but there is another.
I try to convince my investment-banking son-in-law that the debt crisis was not caused by the greed of commercial bankers by pointing out to fiim that he drives a BMW and I drive a Fuego. But that is not an effective argument because he thinks that a Fuego is something like a Taco.
The L.D.C. issue is what I call a "slippery slope" or "banana skin" topic-easy to slip on, and yet, it is there. I thought you might be interested in a few observations.
It is ironic that I should speak about it in Toronto because it seems like only yesterday that Silva Herzog was trying to hold things together for Mexico at the Fund meetings here in 1982.
It is literally only several days ago that a New York Times poll reported that "more than half of all Mexicans believe that Mexico's economic troubles are so profound that the country will never recover." The poll "reveals a nation lacking confidence about its future, longing for political change, deeply suspicious of the government's motives, and questioning its leaders' ability to manage the country's affairs." Curiously enough, only 16 percent cited foreign debt as the country's main problem.
Having framed the L.D.C. issue in a Mexican context, which is almost inevitable these days, I should like to make the simple point that those who predicted that the debt bomb would go off (whatever that meant), those who predicted that the international financial system would collapse, those who predicted irresponsibility by the Developing Nations, have been wrong.
Having said that, let me not minimize the problem. Lefty Gomez, who pitched for and talked his way through the Yankee pitching staff in the mid-thirties, once advised a young pitcher that the best way to handle a line drive was to "run in on it before it picks up speed." Well, many of us have worn out a few gloves shagging some line drives coming out of the Developing Countries.
But if it is ironic that Toronto be the place for these remarks, it is also appropriate.
Canada is no stranger to the international economy. You live on it with 25 percent of your GNP exported. The dollar value of your exports and imports combined equal 50 percent of your GNP. Your banking system is outward-looking. Three of your leading banks have more than 50 percent of their deposits in foreign currency and more than 45 percent of their assets abroad. Your banks, like ours, are deeply involved with Latin America, and the evolution of the world economy is as important to the stability of the Canadian financial system as it is to the U.S.
You will note that I did not say how the debt issue would be resolved-I said how the world economy will evolve. For, you see, there is no static answer-no simple, fixed solution. Continuing involvement is a must.
What we do know is that one third of the world controls two thirds of its wealth and that between now and the year 2000, two billion more people will be in the Developing World.
In simple terms, we cannot live as a hemisphere that is half affluent-half poor. Having said that, there are some realities:
1. The U.S. fiscal and external debt, which may have saved the world from depression during the past several years, but for which there will have to be an accounting. Gerry Corrigan of the N.Y. Fed said several weeks ago: "To put it very directly and very bluntly, the mess in our fiscal affairs and the attendant rate at which we are accumulating external debt are fundamentally in conflict with any vision of sustaining prosperity..."
2. Not surprisingly, the commercial banks have been reducing their L.D.C. portfolios. According to the I.M.F.: "Net lending by banks to these countries declined to $3 billion in 1985, compared with $14 billion in 1984 and $51 billion in 1982."
U.S. Federal Reserve statistics show that U.S. banks are withdrawing from lending in all regions of the world. In 1982 U.S. banks had L.D.C. loans and commitments of $181 billion. By 1986 this had shrunk to $145 billion.
This has been taking place at the same time the equity of the top nine U.S. banks has increased to $34 billion from $20 billion.
3. Despite the reduction in current account deficits from $73 billion in 1982 to an $8-billion surplus in 1985, growth in the key L.D.C. is what we must watch. We must monitor how well the key L.D.C. s will compete in international markets.
Paul Volcker (then Chairman of the Board of Governors of the U.S. Federal Reserve System), spoke correctly over the weekend about his concern over American competitiveness in world markets. But, with a weaker dollar and an American export push, one can quickly assess L.D.C. impacts. Who is going to be the importer?
4. There are very serious demographic and migration issues. With the U.S. having absorbed four million to eight million illegal aliens and with one third of Los Angeles consisting if Hispanics, it is ironic to see that only 2 percent of Mexicans surveyed considered overpopulation to be a problem.
It is probably this human element on the U.S. southern border that has elevated Mexico from a bank-debt issue to one of national policy-where it appropriately belongs.
But having said this, there are also some clear positives that have emerged during this four-year period.
We are seeing meaningful co-ordination of economic policy starting with the U.S.-Japanese agreement to stabilize the dollar/yen rate and to achieve more expansionary fiscal policy in Japan. In my opinion, it is only a matter of time before Germany joins in this type of co-ordination. It may just be that the German economy may not be as strong as the figures suggest.
The sharp decline in oil prices and its consequences for Mexico has obscured the equally sharp fall in interest rates over the past 18 months. Over-all, there is a positive effect on the L.D.C.'s from this decline in rates, even though that may be different in a country-specific analysis.
While it cannot be said with any degree of certainty that oil prices have stabilized, one would not be entirely mad in believing that prices might settle in the $15-$18 range. At $18, we begin to see some semblance of equilibrium as we measure the prospects for disparate countries such as Mexico and Brazil.
The steep decline in commodity prices is virtually over. Certain conditions of over-supply may carry into 1987, but the outlook is generally for moderate price increases. This means that the sharp deterioration in the terms of trade for the debtor, L.D.C.'s has ended, and some improvement can be expected.
What this all means is that we have moved away from the systemic danger to the international financial system. This has enabled us to proceed with a more individual approach to problems on the country-by-country or case-by-case basis. Growth in Latin America has been a problem, but one should not forget that Brazil will grow by almost 8 percent this year, Chile by 5 percent, Argentina by 4 percent, and Columbia by 4-5 percent. Progress, though not sufficient on inflation, has taken place throughout most of Latin America.
Venezuela and Mexico are the countries with growth problems, but again, should be treated as individual cases. The increased competitiveness of Latin American manufacturers resulting from dollar depreciation and subsequent depreciation of their currencies against the dollar should help spur their exports.
With this stabilization of some of the basic economics, it is imperative that the Latin American countries in particular continue to move as rapidly as possible with their restructuring measures. Notwithstanding the criticisms leveled at the IMF for austerity, the fact remains that these countries must continue to help themselves. There is just no substitute.
And many of the L.D.C. s are doing exactly that. The austral and cruzado programs have missed many targets and used price controls as a tool, but we should not overlook their very substantial progress.
What I am getting at should be clear. In an increasingly interdependent world, there must be a continuing convergence of all interests-the individual-country governments, the debtor-country governments, the multilateral agencies, and the international banks. Efforts in this direction have emerged-none is perfect-but they are initiatives.
The Baker Plan, first unveiled in Korea in 1985, has set a positive and outward-looking base for U.S. foreign policy. It changed the psychology from austerity to economic growth and committed the U.S. government on a case-by-case basis to work with all parties. Most importantly, it put the U.S. squarely behind the IMF and World Bank.
As you know, the economic heart of the proposal was the commitment to support $20 billion in net additional lending from the World Bank from 1986 to 1988 and strong encouragement of the private banks to match these funds. The recent agreement on Mexico is the plan's first demonstrable success.
A second plan has been put forward by former Foreign Minister Okita of Japan, who has suggested that Japan underwrite a $50-billion Marshall Plan for the L.D.C.s. What is significant is its intent-to cause Japan to recognize that its surpluses must be recycled into the world economy by increasing investment in the L.D.C.s.
What is missing from this plan is any real suggestion of L.D.C. self-discipline or conditionality. And yet, we must always be aware of underlying political tensions and sensitivities-where conditionality is construed as interference. Perhaps the Okita Plan should direct itself to the World Bank as its channel. This just might encourage even greater efforts by the U.S. and Germany along the same lines.
The third plan being talked about most actively today is that of U.S. Senator Bill Bradley. It advocates that 9 percent of principal that debtor nations owe be eliminated over a three year period so that foreign exchange saved in debt service could be used to purchase more goods from the individual countries. It also reduces interest rates by three percentage points.
While Senator Bradley has been criticized for the parts of his program that emphasize debt relief, one should point out that a careful reading of his work shows that he too is oriented toward L.D.C. growth.
It begins to get into some muddy waters where the Senator states:
"The only alternative is debt and interest-rate relief," unless-I might add parenthetically-that he is talking about the U.S. as well. He recognizes that a workable debt-relief proposal must be country-specific, related to debtor efforts to restore investor confidence, and co-ordinated among all creditors.
Where his position breaks down is in the inadequate linkage between debt relief and debtor reforms. Once debt
relief is given, there is no assurance that debtor reforms will continue. And that is a very basic weakness in the whole plan. The other weakness is what Barber Conable of the World Bank pointed out in his speech ten days ago when he said that any program of debt relief would cause new credit for the future to dry up. I believe that, and that is where the Bradley Plan fails to follow through on its statements that growth is the key.
It also misses the point that what we have on our hands will be a continuing credit crisis for the L.D.C!s, more than a debt crisis. The slogan should not be "Forgive us thy debts as we forgive our creditors."
Lastly, the Bradley Plan does not adequately recognize the differences between nations. It does not point out that two thirds of the commercial debt in the Developing World is not owed to the U.S. and its banks. The Bradley Plan would enhance its credibility if it advocated that the U.S. government cancel repayments on its concessional and foreign military sales and Export-Import Bank loans.
Having said this, one should commend Senator Bradley for his involvement in this issue. We, as bankers, should welcome that.
However, it has always seemed to me that we should not have any illusions about the complexity of restoring balance to the world economy. The fact of the matter is that we must continue to buy the time necessary for adjustments.
The banking system has done an immense job in restructuring over $150 billion in sovereign debt since 1982 with minimum disruption to the system. The case-by-case approach has been painful, but it does work.
However, the banking system is not as cohesive or as initiative-oriented as it might be, and we at Chemical have felt for some time that process issues should be lifted to a higher level of coordination.
Problems for us as private institutions continue to exist:
1. Our obligation to our shareholders and therefore earnings streams.
2. Our responsibility to look beyond earnings and support centralist and democratic governments. Latin America is much more politically stable today than it was four years ago, and that is important.
3. Integrity in dealing with countries on a case-by-case basis. This means that we must be clear that, when countries perform to their economic targets or at conditionality levels, they will be rewarded for their efforts. If they do not perform, then they should bear responsibility for that.
4. We must be realists that linkages are inevitable and that the most favourable deal becomes a perceived benchmark-at least in the eyes of the L.D.C. s -whether we like it or not. But the individual countries should not adopt indiscriminate negotiating positions based on the perceived benchmark. They have to be realists as well.
5. If we are not able to resolve situations by negotiations with a particular country, then it is likely that our governments, in one form or another, will do it for us. That is hardly desirable, but it is certainly inevitable.
The debtor countries, for their part, will need to face the reality that a larger proportion of their investment must come from domestic savings. Domestic capital accumulation has to be fostered by effective economic programs and the formation of more sophisticated domestic capital markets.
In essence, the governments-especially in Latin America-will need to cut their domestic deficits, increase incentives for savings and investment, set realistic and adjustable exchange rates, stop capital flight, and orient their domestic tax and trade regimens to encourage competition and investment. It is most encouraging indeed to see that new regulations in foreign indebtedness and investment in Chile are causing a return of flight capital to that country. Enlightened policies do work.
Lastly, the World Bank must continue to move to an even -greater leadership role in co-ordinating the efforts of all interested parties. That is happening-perhaps too slowly-but the tone set by Mr. Conable is encouraging. The World Bank is perhaps the only entity that can co-ordinate the potential sources of new credit flows while at the same time continuing to assist in working through debt restructurings. It is oriented toward growth-oriented solutions and has the capacity to transcend differing national interests.
In conclusion, then, I see new directions emerging in our relations with the L.D.C.s as the new outlines of world development begin to form like a Polaroid print-not as fast as we would like-but steadily the form begins to appear.
The chemical mix is delicate by definition, but one does not reorder a world economy by edict or the stroke of a pen. It has not been easy, but I have never doubted for one moment that we could get the job done.
The appreciation of the meeting was expressed by Dennis Madden, . president, HDM Associates; a former Canadian Executive Director for The Inter-American Development Bank; and a Director of The Empire Club of Canada.