US Treasury chief urges softer line on world debt. Baker also sees gold prices as tool in developing strategy for dollar

The world's major economic powers are softening their approach to the debtor nations. United States Treasury Secretary James Baker III led the way yesterday by proposing that the International Monetary Fund (IMF), in effect, be somewhat less stern in its demands for economic reforms by developing countries.

``The fund will need to adapt its policies to the changing circumstances and needs of its members,'' he told the joint annual meeting of the IMF and the World Bank.

Mr. Baker also said the US would consider using the prices of a basket of commodities, including gold, as a tool to coordinate economic policies among the major industrial nations.

Some observers interpreted this proposal as a first step to return to the gold standard that influenced international monetary affairs until the 1930s. Rep. Jack Kemp (R) of New York, among others, has proposed setting the price of currencies according to such a basket.

But William B. Dale, a former deputy managing director of the IMF, suspected the proposal was merely a tip of the hat to the ``gold bugs'' in the right-wing of the Republican Party.

In any case, it is considered highly unlikely that other nations would consider any return to the gold standard, particularly since gold's price is mostly influenced by speculation rather than its commercial uses.

Indeed, British Chancellor of the Exchequer Nigel Lawson suggested building ``a more permanent regime'' for the present system of ``managed floating'' of foreign exchange rates.

After the devaluation of the dollar in 1971 and the quadrupling of oil prices in 1974, the price of the world's major currencies in terms of dollars were established largely by supply and demand in the foreign exchange markets.

Speculators pushed up the value of the dollar so high that in September 1985, the major industrial nations decided to intervene in an organized way to drive down the value of the dollar. After the dollar declined dramatically, they decided last winter on the opposite course - to support the dollar.

This system of managing the price of the dollar and other key currencies was reaffirmed by the Group of Seven industrial nations here.

During the past year, the debtor countries found it more difficult to service their loans because of weak commodity prices and higher interest rates. Some nations, including Brazil, have stopped making interest payments on their loans. Faced with this unrest the industrial nations have moved to ease the burdens of the debtor countries.

Secretary Baker offered several proposals on the debt crisis:

The creation of a new External Financing Facility within the IMF that would take account of ``unforeseen developments'' affecting the ability of nations to carry out ``standby programs'' of the IMF.

When a nation has difficulty paying its international bills, the IMF will lend it money while the country takes domestic measures to improve its balance of payments. These standby programs often include austerity measures and economic policy reforms that have made the IMF extremely unpopular in many nations.

The IMF already has the capability through what is termed the Compensatory Financing Facility to take account of negative commodity price trends that would make it more difficult for a developing country to live up to its promises to the IMF. Baker suggests his External Contingency Facility also be used to cushion the impact of lower export volumes, natural disasters, and sustained higher interest rates.

When the IMF looks at how nations are performing in regard to their reform promises, such reviews should be conducted twice annually rather than quarterly. This, he suggests, might put more emphasis on growth as vs. speed in making necessary reforms.

Baker also urged the fund to take account of such areas as market-oriented pricing, privatization and reform of government-owned enterprises, and trade and investment liberalization when considering a nation's program performance.

Commercial banks should ``rely more on overall program quality'' when deciding whether to lend more money to a debtor nation. At present, these banks generally insist on an IMF-program being in place before they will make more loans available.

Because the IMF has become something of an ogre in some developing countries, it has become more difficult for politicians to accept an IMF-program. This, for example, is the case for Brazil, which has so far refused to enter into a program with the IMF in return for an IMF loan.

Such suggestions alter but do not overthrow the present strategy of the industrial countries for handling the developing-country debt crisis. Each nation is dealt with on a case-by-case basis. The goal is to promote economic growth at the same time as the developing nation adopts ``market-oriented policy reforms'' that enable it to eventually better service its loans. Since such reforms take time, more money will be provided by the international institutions and commercial banks.

Baker listed a number of other financial options - a ``menu approach'' to facilitate commercial bank financing. Banks have not been providing as much new money to the debtor nations as earlier hoped. They have rather been setting aside large reserves against the possibility of some of their hundreds of millions in loans to the poorer nations going into default.