The International Monetary Fund (IMF) has called time on the US Congress. For years, the Obama administration has failed to convince Congress to approve a reform plan that is crucial to the Fund’s future work. On Jan. 28, the IMF’s executive board said that the Fund should give itself a June 30 deadline for finding ways to move ahead without the US’s help.
If Congress lets that deadline pass, it will be one of the most colossal cases of cutting off one’s nose to spite one’s face in American politics.
The reform, brokered by the G20 in the wake of the financial crisis in 2010, has two main planks. First, it would take two of the 24 seats on the Fund’s executive board away from old Europe and give them to emerging-market countries. About 6% of the board’s voting power would move along with those two chairs. This is in response to irritation amongst the BRICS (Brazil, Russia, India, China, and South Africa) that their rising economic power hasn’t bought them a greater say in governing the global economy. The current voting structure is an absurd anachronism: For instance, tiny Belgium has a bigger formal hand in Fund decision-making than Brazil. The IMF’s continued legitimacy hinges on fixing such inequities.
Second, the reform would double the IMF’s capital base. It would do so mainly by transferring money from a side fund, to which some 40 countries made commitments to help the IMF fight financial crises, into the IMF’s core accounts. The US earmarked $100 billion for this supplemental fund in 2010, while other countries together provided about $410 billion.
To understand why blocking this reform is a mistake, it’s worth looking at Congressional objections in detail.
Money, power, and oversight
The first thing to understand is that cost is not a serious issue. The $100 billion US contribution wasn’t a gift: It was a swap for which the US received in return a liquid, interest-bearing claim on the IMF. The immediate federal budget impact was only $5 billion to provide for the risk (almost non-existent) of an IMF default. Compared with the global damage that a meltdown in a large economy would do if the IMF didn’t have the resources to fight it, this is a good deal. And though the G20 reform calls for the IMF’s capital base to increase by about $350 billion (about $60 billion of which comes from the US), most of this will be simply transferred from the side fund—a change in accounting that would trigger only $62 million in extra budget costs for the American government, according to US officials I spoke to. In the US’s $4 trillion federal budget, that’s barely a rounding error.
Instead, Republicans and their enablers are complaining that the G20 reforms will reduce the US’s influence in the IMF. Currently, a handful of countries—the US among them—get to appoint an IMF executive board director. After the reform, all 24 directors will be elected by the whole 188 of the Fund’s member countries. US conservatives say this means the US will lose its right to choose its director.
But in practice that isn’t true. So long as a country controls at least 4.17% (i.e., one twenty-fourth) of the board’s voting power it can ensure its representative gets elected. The US currently holds 16.75% of these votes and the reform will pare this only slightly to 16.5%. So the US’s prerogative to name its IMF board member is safe.
Just as important, this deal would leave intact a de facto American veto on any major changes to the Fund’s policies on how it operates. (The G20 reform plan is itself such a change, which is why Congress can hold it up.) These amendments require 85% of the board’s voting power. With 16.5%, the US retains its check on any big decisions.
Republican critics also contend that shifting the US’s contribution from the IMF’s side fund to the institution’s main balance sheet would reduce American control over the money. In the simplest possible terms, they’re right: The US has a veto on the use of the side fund. When this money gets moved to the IMF’s core accounts, the veto disappears, since a decision to draw on these monies needs only a simple majority of the board’s votes.
But this superficial analysis misses some much bigger truths. Other countries can also come together to veto use of the side fund. Keeping resources in it rather than in the IMF’s main accounts could frustrate US interests as much as it protects them.
Even more critical, every six months, contributing countries have the option to suspend their authorization of the use of the side fund. Perpetually annoy your counterparts and eventually they may respond. If the US instead approves the reform package, it permanently locks in $290 billion of other countries’ money in a multilateral institution physically located a couple of blocks from the US Treasury, and in which the US retains the largest voting share.
Finally, Congressional Republicans have shown they’re perfectly willing to give way on the IMF reform for political ends. Last March, the Obama administration tried to force the reform through by making it a condition of the US’s $1 billion aid package to Ukraine. The Republicans said they’d support it only if in turn the administration agreed to relax certain restrictions on campaign finance. In short, opposition to IMF reform isn’t a matter of principle for Republicans at all; it’s a bargaining chip.
The rest of the world is moving on
The aid package for Ukraine shows another reason why Congressional opposition to updating the IMF is so wrong-headed. When the US committed $1 billion to the government in Kiev, the rest of the world, through the IMF, provided about $17 billion. The strings attached to that money, and the release of each tranche, remain subject to US oversight.
In other words, through the IMF, the US gets to decide how to spend other people’s money. The IMF amplifies Washington’s influence. A deal to expand the IMF further is about as close to a free lunch for America as it gets.
But now the Fund is signalling that after years of waiting, it will move ahead with or without US support. This is just the latest sign that the rest of the world isn’t waiting for America’s dysfunctional government to get its act together.
Last year, the BRICS countries agreed to create a $100 billion Contingent Reserve Arrangement (CRA) as an alternative to the IMF for crisis financing. East Asia’s major economies already have a similar $240 billion fund under their Chiang Mai Initiative. Coming at the same time as the BRICS’ announcement of a $100 billion New Development Bank, China’s launch of a $50 billion Asian Infrastructure Investment Bank, and a $40 billion Silk Road Infrastructure Fund focused on central Asia—all direct competitors to the World Bank—these initiatives mark another blow to the primacy of the Bretton Woods institutions and the United States as their largest shareholder.
Next March, the side fund that holds the money slated to double the IMF’s capital base comes up for renewal by its supporters. In the absence of any sign of a more cooperative Congress, the BRICS countries could simply decide to pull their cash and add it to any one of their new initiatives, thereby giving up on IMF reform, and weakening the Fund and the US’s influence.
Emerging markets have also discussed creating a structure parallel to the IMF—a bigger version of the BRICS’s new CRA—that excludes the US. This external fund could lend additional capital to the IMF when needed, but emerging markets would have a greater say in how it’s run. Eventually, it would probably eclipse the IMF.
In theory, there is a way to boost the IMF without Congress’s help. Some emerging markets have mooted striking a new deal to increase their contributions to the Fund while leaving the US allocation unchanged. They wouldn’t need to wait for US Congressional ratification, since no American money would be involved. However, this would likely dilute the American voting share below 15%, losing the US its veto on the IMF board. The White House would never agree to such a move.
US power gets diminished under all of these scenarios. This is why Congressional obstructionism on IMF reform isn’t just a failure of leadership: it’s a denial of an absolutely clear American self-interest.