CANCELLOR OF THE EXCHEQUER'S SPEECH TO ALL PARTY PARLIAMENTARY GROUP ON OVERSEAS DEVELOPMENT, 22 JULY
The debt problem has been with us for almost five years now. While there is no magic solution, some useful progress has been made, and more is in prospect. Today, I want to look ahead at what the next steps should be, and what action should be taken by governments, by the commercial banks, and by the debtor countries themselves.
When the crisis broke in the autumn of 1982, the immediate need was to buy time, so that the banks could strengthen their capital base, and the debtor countries could begin the process of putting their economies on a better footing. This has been done successfully. Earlier fears about a systemic threat to the world banking system have receded. Many debtor countries have implemented long overdue reform policies. And the world economy generally is in better shape than it was five years ago.
With the worst of the crisis behind us, the job is to look forward to what needs to be done to enable the debtor countries, in time, to bring their debt burdens down to more manageable and sustainable levels. And, as I shall argue, the solution is not necessarily the same for the different groups of debtors.
Most of the discussion about the debt problem has understandably been focussed on the so-called middle income debtors, notably in Latin America. Certainly, these countries have the greatest overseas indebtedness at the end of 1985, Brazil owed no less
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than $105 billion and Mexico $95 billion. But at the same time they are for the most part rich in natural resources, and have a fairly well developed industrial structure. In short, they are in a position to pull their economies round and to reduce their debt burdens, by their own actions.
The first requirement for these countries is therefore to put the right economic policies in place. This means, first and foremost, allowing markets to work more freely. It means, in many cases, cutting back a bloated State sector. And it means keeping interest
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