The Baker Plan was announced by U.S. Treasury Secretary James A. Baker III at the joint IMF–World Bank annual meetings in Seoul in October 1985. It was a response to the Latin American debt crisis that had erupted after Mexico's August 1982 default, and it marked a shift away from the earlier emphasis on pure austerity toward an emphasis on growth-oriented adjustment.
The plan targeted 15 heavily indebted middle-income countries (the "Baker 15"), most of them in Latin America, including Argentina, Brazil, Mexico, Venezuela, Chile, the Philippines, Nigeria, and Yugoslavia. Its core elements were:
- $20 billion in net new lending from commercial banks to the targeted debtors over three years.
- $9 billion in additional lending from multilateral institutions, principally the World Bank and the Inter-American Development Bank.
- Structural reforms in debtor countries: trade liberalization, privatization of state enterprises, tax reform, and reduced fiscal deficits, monitored in coordination with the IMF.
The Baker Plan treated the crisis as one of liquidity rather than solvency, assuming debtor economies could grow their way out if given fresh capital and market-friendly reforms. In practice, commercial banks were reluctant to extend the promised new loans, capital flight continued, and debtor economies stagnated through what Latin Americans came to call the década perdida (lost decade). Per-capita GDP in the region remained below 1980 levels for most of the decade.
By 1987–88 it was widely viewed as insufficient. Citicorp's May 1987 decision to set aside $3 billion in loan-loss reserves signaled that banks themselves no longer believed full repayment was likely. The plan was effectively superseded in March 1989 by the Brady Plan, announced by Baker's successor Nicholas Brady, which for the first time endorsed actual debt reduction through the exchange of bank loans for collateralized "Brady bonds." The Baker Plan is therefore remembered as a transitional, ultimately unsuccessful, attempt to resolve the 1980s sovereign debt crisis without writing down principal.
Example
In October 1985, at the IMF–World Bank meetings in Seoul, James Baker unveiled the plan urging commercial banks to extend $20 billion in new loans to countries like Mexico, Brazil, and Argentina.
Frequently asked questions
Commercial banks did not deliver the promised volume of new lending, debtor economies kept stagnating, and the plan refused to acknowledge that much of the debt was uncollectible. By 1987 banks were openly provisioning for losses.
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