From Baker to Brady: Can the new plan work?

Abstract

The Brady Plan proposes to stimulate reforms and development in countries
facing problems with their external debt through debt relief and debt servicing. However,
debt reduction is nothing new, as this was already an important component of the Brady
Plan and its “market menu” strategy. The greatest contribution of this Plan is the willingness
to support the voluntary reduction of the external debt with public resources and public
institutional reform. As the Plan is conceptually correct, the difficulty is still in the lack of
funds and public coordination. Without a greater commitment of public resources and a
stronger institutional basis for rewards and fines that can induce banks to “voluntary” losses,
the Brady Plan will only produce a modest reduction in excess external debt. Furthermore,
a partial reduction in excess debt produces mixed benefits for both debtors and creditors.

JEL Classification: F34; F38.