March 25, 2014, 5:09 PM ET
Everything You Ever Wanted to Know About Washington’s Battle Over the IMF
ByIan Talley
- International Monetary Fund Managing Director Christine Lagarde Reuters
What’s the simple version? World leaders agreed to a major restructuring of the IMF in 2010 during the global financial crisis. The U.S. is the largest IMF member and the only one with veto power over major overhauls of its rules or governance. So those changes can’t move forward until Congress ratifies the deal. House Republicans have blocked legislation to approve the accord. Some are standing on principle, others see it as a valuable bargaining chip to win concessions from Democrats on other matters.
Hold up. What’s the IMF? It’s the lender of last resort for the world, created in the aftermath of World War II. It includes 188 member countries – almost all nations except a handful like North Korea — and serves as a leading economic adviser to its members. Remember when you ran up that $1,000 credit-card tab in college and your dad bailed you out, even though he warned you about spending your pay check before you got it? The IMF’s your dad.
So what are the changes exactly? The 2010 deal, the one awaiting congressional approval, is designed to double the IMF’s general resources to ensure the emergency lender has enough firepower. It would update the governing structure – how the IMF’s voting power is distributed among members — to reflect a global economy in which emerging markets are now major growth drivers and some European countries have lost their economic might.
Does the IMF need more money? It depends on who you ask. The IMF leadership, backed by the political leaders in its member nations, says it needs a bigger war chest to meet the growing needs of the global economy. “Liquidity needs can be so large, and movement of financial flows so rapid, that even stronger economies can be affected by a breakdown in global confidence,” IMF Managing Director Christine Lagarde wrote in a Wall Street Journal op-ed Tuesday.
Some conservatives say the fund already has enough firepower. “The justification for enlarging the IMF has now disappeared,” said American Enterprise Institute economist Desmond Lachman, who frequently testifies before Congress on the IMF. As the global economy recovers and Europe builds its own bailout reserves, the IMF doesn’t need more cash, he said.
Many Republicans argue that more money increases the risk of “moral hazard,” when governments increasingly rely on emergency backstops rather than budget discipline. (That’s like relying on your dad’s bailout because you know he’s got you covered.) Some also question the effectiveness of the European bailouts, including the record-setting Greek program.
Where would the money come from? The IMF gets its money through funds committed by its members, either directly or through credit lines. The fund already has resources in its emergency account (a kitty called New Arrangements to Borrow). But that pool of resources requires special approval and extreme circumstances to access. The IMF changes would shift those funds from the emergency account to the IMF’s regular lending account.
The emergency pool of money must be renewed every six months, effectively giving the U.S. authority to block access to it. Some Republicans worry the U.S. would lose that veto power – an extra layer of protection for U.S. taxpayers — if those resources are shifted into the general account. Proponents say the IMF’s lending procedures have sufficient protections to prevent losses that would fall on the U.S. and other members.
So how much bailout money does the IMF actually have? Right now, it’s about $1.4 trillion. That’s from three pools of money: 1) $370 billion in the IMF’s general account. 2) $570 billion from emergency resources it raised late in the financial crisis in 2009. 3) And $460 billion the IMF collected from some of the world’s largest economies by passing the hat around again in 2012 when it was worried about the threat of the euro-zone crisis metastasizing. (The U.S. didn’t contribute anything to that 2012 fund-raising round.) The $1.4 trillion total amounts to almost 2% of gross world product, a level that’s a bit higher than historical levels.
Would the changes cost U.S. taxpayers anything? Yes. The Obama administration plans to shift about $63 billion it loaned to the IMF in 2009 into the IMF’s general account to meet the U.S. obligation to double its normal contributions. The Congressional Budget Office puts the price of the shift at around $300 million. That’s not money paid out directly from taxpayer funds; it’s effectively a budgeting exercise to account for potential risk from the lending.
Proponents of the IMF changes say it’s money well spent because for every dollar the U.S. contributes, it leverages several times that amount in U.S.-guided economic and foreign policy. It also costs far less than direct U.S. bailouts. The U.S. has never lost money at the IMF. In fact, it receives interest for the cash it loans.
Why would the U.S. want to give other economies more power at the IMF? The Obama administration says giving emerging economies more power at the IMF would encourage greater responsibility and promote global economic stability. The IMF is governed by its 188 member countries, where each country’s “quota” (effectively its equity in the organization) is supposed to be determined largely by the size of its economy. But quotas haven’t kept up to date. While countries such as India, China and Brazil have grown rapidly over the last two decades, their equity hasn’t increased in tandem. The opposite is true of a host of European countries: While their economic might has shrunk, they still maintain IMF power allocated decades ago.
All of that has undermined the IMF’s legitimacy among emerging-market shareholders, who’ve long accused the fund of a western bias. If the fund’s credibility erodes, member countries are less likely to heed the IMF’s economic policy guidance or seek financing help. “The vital role played by the IMF in stabilizing the world economy and financial system is in serious jeopardy,” said Ted Truman, a former senior U.S. Treasury and Federal Reserve official now at the Peterson Institute for International Economics. The governance changes would begin to address that disparity, both in voting equity and the number of seats on the executive board.
How much power would the IMF restructuring transfer to emerging markets? Including the governance changes since 2006, the deal would shift 5.3 percentage points of IMF voting power from advanced economies to emerging-market and developing countries. Most of that comes out of European countries. The largest emerging markets—Brazil, Russia, India, China and South Africa—would see their power increase by 4.5 percentage points to a total of 14.3% of total IMF voting power. (The U.S. now has 16.7% of the voting shares; that would fall to 16.5%.)
What are the consequences for the U.S. if it doesn’t ratify the changes? The Obama administration maintains it would undermine the nation’s ability to channel influence through the IMF. “Economies may turn away from the IMF towards regionalism, bilateral arrangements or new institutions,” Daleep Singh, U.S. Treasury’s deputy assistant secretary for Europe and Eurasia, told lawmakers recently. “The U.S. will lose the leverage and influence that has built up over decades at a time when our leadership on the global stages is so critical.”
The U.S. has used its IMF power to advance its international agenda from Egypt to Ukraine, though it’s not always as effective as Washington might want. The IMF’s financing can be used to encourage economic changes that promote political stability in nations such as Tunisia, or to strengthen pro-Western governments, such as the new one in Ukraine. As the IMF’s most powerful member, the U.S. influences the institution’s economic policy discussions at every level: from the IMF’s oversight of China’s economy to its advice for the European Central Bank.
It’s not just the administration advocating the changes. A host of former senior U.S. finance, state and defense officials from both ends of the political spectrum also have urged Congress to approve the quota changes to advance American economic and security interests around the world.
Do Taiwanese animators have any views about how the U.S. spreads its influence through the IMF? Yes. Take a break to enjoy a rap video about currency policy: http://www.youtube.com/watch?v=IGYAhiMwd5E
Are there really potential alternatives to the IMF? Yes, though not nearly as powerful. Other emergency bailout institutions have evolved, most of them regional organizations structured like the IMF. The $690 billion European Stability Mechanism, for euro-zone members, is designed to offset reliance on IMF financing. After the Asian financial crisis in the late 1990s left many countries there disenchanted with the IMF’s bailout medicine, a raft of nations in the region cobbled together a regional financing facility called the Chiang Mai Initiative. Their pooling arrangement now totals $240 billion.
The big-five emerging markets also are developing a $100 billion pool called the “Contingency Reserve Arrangement.” A number of countries also could build up their foreign-currency reserves as emergency buffers, a policy that risks fueling international economic tensions.
Someone sent me a mass email saying the U.S. might lose its ability to appoint its board member, and instead its seat would be elected. http://www.heritage.org/research/reports/2014/03/aid-to-ukraine-should-not-be-held-hostage-by-imf-politics
Is that right? Yes, the seats for executive board members at the IMF would be elected. But the U.S. would be the only one voting to elect its representative. That governance change really only affects countries with smaller equity shares that need to pool their votes together to form a big enough constituency to control one of the 24 board seats.
Does the U.S. lose its sole veto power on the IMF executive board? No. The deal preserves the existing U.S. veto authority.
Is there disagreement in Congress on the governance issue? Not so much. Unlike the IMF financing, there appears to be broad support for giving emerging markets more say at the fund.
So if there’s support for the governance changes, but not the financing, why not approve one without the other? Because the 2010 agreement dealt with the two issues together, and that is what has been ratified by scores of governments around the world. If the financing isn’t ratified by the U.S., then governance changes can’t be triggered. It would essentially require a new deal to be negotiated, and then approved, by more than 150 countries that require such approvals. That process that could take several more years.
That, too, would be viewed by many economists as a blow to the fund’s—and Washington’s–credibility. By failing to approve the deal the U.S. has already done “substantial, actual damage to the U.S. reputation around the world, as the leaders of many countries called into question Washington’s ability to deliver on promises made in international economic agreements,” Mr. Truman said.
Is the clock ticking? The other members of the IMF have set an informal deadline: the IMF’s semi-annual meeting April 11-13, when finance ministers and central bankers from the fund’s 188 member countries gather to discuss the future of the global economy. They say they’ll begin looking at alternatives if the U.S. hasn’t cleared its piece of the deal by then.
Is there any other solution? As with most things in Washington, the administration could do some political bartering.
“Just cut a deal,” said Clay Lowery, vice president of Rock Creek Global Advisors and a former senior Treasury official in the Bush administration. Mr. Lowery backs the changes, but says the White House should be willing to negotiate, even if it means making a high-value sacrifice. For instance, Republicans have asked the Obama administration to delay new tax rules that govern financing for political groups. Or the White House could approve the long-delayed Keystone oil pipeline, Mr. Lowery said.
How does this directly affect Ukraine? Not much in the short run. Although the changes could give Kiev a slightly bigger short-term credit line, they wouldn’t really change the size of a large-scale IMF bailout. And it appears increasingly likely Ukraine will only ask for a large-scale program.
Wait, so why were the IMF changes even being discussed now? The U.S. has been trying to secure congressional approval of the IMF changes for some time. Other attempts have failed. In this case, the U.S. has made its own direct aid to Ukraine contingent on an IMF program. So it pushed the IMF governance changes at the same time given the larger discussion about the IMF helping Ukraine.
So what happens now? Unless Congress magically clears the IMF changes in the next three weeks, we’ll have to see how the other IMF members respond when they meet in mid-April.
Senate Democrats and the Obama administration say they’ll keep trying to win approval separately. “Despite this setback, we remain committed to providing the IMF with the resources it needs as well as updating the Fund’s governance to reflect the global economy,” Treasury spokeswoman Holly Shulman said Tuesday.
“These reforms, which require no new U.S. financial commitment to the IMF, are critical to preserving the United States’ leadership and influence at the IMF, and to strengthening the IMF’s financial and governance structures in which the United States has the largest share and veto power.”
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