Originally published on the CGS blog on February 11, 2014.
The U.S. Congress is holding up a key reform of the International Monetary Fund and, in the process, is both reducing the IMF’s capacity to do business and diminishing the power and reputation of the U.S. when it comes to brokering multilateral agreements and working in international institutions. The end result is bad for the global economy, people around the world, and US economic security.
At the 2010 meeting of the G-20, the Obama administration agreed to a rebalancing of the IMF after a protracted negotiation. The IMF’s role in the global economy has shifted in recent decades to stabilizing the international financial system and acting as a lender of last resort to struggling states. However, the states who depend on the IMF’s guidance and funds, emerging economies in Latin America, Asia, and Africa, have soured on its leadership after its advice – often interpreted as demands because desperate economies are forced to accept its conditions – has sometimes exacerbated crises rather than alleviating them. This advice has often included demands to open trade and to liberalize capital markets, advice that comes from an institution dominated by advanced Western economies that pursued those policies only after nurturing their own economies behind selective protectionism.
To regain trust, the IMF reform agreed to in 2010 was designed to put just a bit more power in the hands of those emerging economies. If voices other than those who had historically held power might control some of the say in the funds’ dispersal, states might be more trusting of the Fund’s conditions when they needed its help. Further, the reform increased total funds available to soften the blow in the event of future financial crises.
Instead, three years later, that reform still hasn’t passed, despite ratification of all the other states who agreed to the reform. The holdup is that the U.S. has a de facto veto over any change in the IMF’s allocation of votes owing to the fact that constitutional change requires 85% approval and the U.S. has a 17% share. Without ratification by Congress, there is no reform.
The recent budget agreement by Congress was a fantastic opportunity to ratify the IMF agreement: the first time in recent memory that the House and Senate had come together to work out all the details of a fully funded U.S. budget, including our commitments abroad.
Instead, we’re stuck with an IMF that lacks the trust of its clients for the foreseeable future; further, the United States is losing even more credibility in the eyes of the world. While the BRICS fund proposed and being slowly developed by Brazil, Russia, India, and China, hasn’t been treated as a serious aid or development fund by observers, continued intransigence by the U.S. may spur that institution’s development not out of the vanity of its sponsors but out of the desperation of its prospective clients.
While the IMF has a spotty track record, that record will only improve with cooperation and buy-in from both those countries leading the bank and those who occasionally have to take funds in desperate times: the whole point of the IMF is that it prevent the damage in one economy from overtaking the entire global economy as it did in the Great Depression. By allowing its intransigence to translate to the world stage on yet another matter, Congress is not only embarrassing itself – it’s threatening global economic stability and by extension the welfare of the American people. If it couldn’t pass reform during the budget agreement, Congress must take the first opportunity to pass these stabilizing reforms.
