Challenge for A Great Persuader

By Janice Castro

A year ago, the star of James A. (for Addison) Baker III was at its zenith. Standing at Ronald Reagan's side in Tokyo, the 67th U.S. Treasury Secretary helped forge an agreement at the annual summit meeting for improved international economic cooperation. While Baker was accomplishing that feat, his aides in Washington were midwifing a tax bill in the U.S. Senate that became the basis for the most dramatic tax reform in more than 30 years.

Now the low-key, University of Texas-educated lawyer is facing some of his greatest challenges since he became Treasury Secretary in 1985. Baker, 57, is seeing many of his initiatives -- on worldwide economic growth, Third World debt and the alignment of currencies -- stymied. As a result, his aura of achievement has lost some of its luster. Says Byron Wien, chief domestic- portfolio strategist at the Morgan Stanley investment firm: "The initial enthusiasm for Baker and his initiatives has dissipated. We all hope he'll get his second wind."

Baker arrived at his Treasury assignment with a reputation as the Administration's Great Persuader, earned during four successful years as White House chief of staff. He carried on in the same vein, altering the confrontational tone of his predecessor (and successor as chief of staff) Donald Regan. On Third World debt issues, for example, Regan had preached the hard-nosed gospel of austerity for debtor nations. Baker soon changed that with his celebrated proposal for debt relief through renewed economic growth, to be fueled in part by some $20 billion in additional loans from commercial banks.

Regan had long ignored allies' complaints about the U.S. budget deficit and concerns at home about an overvalued U.S. dollar that had led to a dismal American trade deficit. Baker reversed that stance with the September 1985 Plaza accord, a five-nation cooperative attempt to hasten the dollar's decline. Baker tried to use the dollar's continuing fall as a diplomatic tool. His aim: to chivy West Germany and Japan into expanding their domestic economies, while counting on the U.S. currency's drop in value to start reversing the ugly trade figures.

Baker was disappointed in those efforts, largely because he commanded as little control over the behavior of U.S. allies as he wielded over the congressional budget process. As criticism of Baker mounted, some wondered whether he was a victim of his early success. Said Charles Schultze, a senior fellow at Washington's Brookings Institution: "In the beginning he probably got far too much credit, and now he may be getting too much blame."

Baker appeared to undergo another setback with last month's decision of major U.S. banks, led by Citicorp, to write off sizable portions of their < Third World loan portfolios. As a result of that move, many economics experts now think the so-called Baker Plan for developing economies is essentially dead. The Treasury Secretary, however, remains sanguine. He lauded Citicorp's debt write-off, for example, as a "positive" step. One reason: the approach reduces the likelihood of wholesale default by debtor nations.

Baker's domestic clout appears to be as impressive as ever. He heads the Economic Policy Council, one of only three White House bodies that set broad Administration policy. Through that group Baker has influenced Administration decisions on foreign trade, protectionism and other issues not strictly within his bailiwick. Baker remains close to President Reagan and the First Lady and enjoys easy access to the Oval Office.

The key to Baker's future success remains in that office. There the Secretary still seems to have a staunch admirer. Says White House Spokesman Marlin Fitzwater: "Everybody's happy with James A. Baker, especially the President of the U.S." As long as that remains true, no one should discount Baker's ability to pull economic rabbits out of a hat.

With reporting by Jay Branegan/Washington and Frederick Ungeheuer/New York