• Sunday, July 21, 2024
businessday logo


America’s neglected financial children


This week, the US Congress again failed to approve a modest appropriation that would have shored up financing for the International Monetary Fund and given China and other emerging economies greater responsibility there. Support for the IMF may seem arcane, but it has important implications for America’s global role – and the signs are not good.

Indeed, if there was ever a moment for Congressional approval of the IMF reform package, this was it: the measure would have greatly increased the IMF’s ability to support Ukraine, a key American objective, at a much lower cost than the alternative of a US bilateral credit guarantee.

The failed measure involved only a transfer of previous US commitments from a supplementary account to the IMF’s core funding source, at virtually no cost to taxpayers. Congressional approval would have implemented a deal, concluded at the G-20’s Seoul Summit in 2010, to double the Fund’s lending capacity.

Under the agreement, which US President Barack Obama’s administration shepherded through tough negotiations, America would remain the IMF’s largest single shareholder, retaining its veto over major decisions. But, fearing a backlash, the Obama administration tried to gain Congressional backing only at the last minute – and as quietly as possible.

A few years ago, the US displayed a similar lack of commitment to another US-dominated international institution: the World Bank. After the global financial crisis, the Bank lacked enough capital to boost lending beyond pre-crisis levels.

But the US was not particularly interested in a larger World Bank; instead of using its considerable influence – reflected in its power to appoint the Bank’s president – to create a stronger institution capable of responding to new demands, it went along with what became a modest Bank recapitalization. In fact, the US and its European allies are rumored to have rejected several major emerging economies’ quiet offers to provide additional funding, possibly to avoid diluting their own capital.

This contrasts sharply with the experience of two large regional multilateral lenders: the Inter-American Development Bank and the African Development Bank. Whereas wealthy countries hold the most World Bank shares, borrowing countries hold a slight majority of the shares (and the presidency) at the regional banks. Their leaders pressed hard – and successfully – for substantial capital increases.

America’s recent failure to champion the international financial institutions represents a reversal of its approach during the latter half of the twentieth century, when it invested heavily in securing and maintaining their effectiveness. US leaders understood that these institutions enabled America to pursue its own foreign-policy preferences and commercial interests in a more open and stable global economy.

The end of the Cold War undercut the foreign-policy logic behind America’s backing, as increasing globalization of trade and investment made economic support for developing countries seem less necessary as a way to expand markets. Moreover, the terrorist attacks of September 11, 2001, made non-state actors and so-called “failing” states with troubling sectarian and ethnic conflicts a new security concern. In those settings, the US, reasonably enough, did not view traditional investment support from the IMF and World Bank as a high priority.

Finally, the global financial crisis put considerable strain on the US economy, intensifying pressure on lawmakers to undertake policies aimed at boosting domestic GDP growth and creating jobs. To this end, the White House is investing enormous effort and political capital in two major trade deals – the Trans-Atlantic Trade and Investment Partnership and the Trans-Pacific Partnership – despite domestic opposition.

But, while America’s economic woes and hyper-polarized political climate have undoubtedly contributed to the decision to favor controversial trade deals over international financial institutions that the US created and nurtured, what is really driving the policy shift are fundamental geopolitical changes. In short, an internationally diminished US is loath to relinquish its dominance of global institutions, yet unwilling to shoulder the associated financial and political costs.

By contrast, the US market’s enduring weight amplifies America’s bargaining power in plurilateral trade agreements, which also serve the country’s immediate commercial interests. Indeed, such deals offer the promise of new export markets, “good” jobs, and rules that lock in US competitive advantages. At the same time, they can help to contain China’s economic power and strategic influence in Asia.

As the issuer of the world’s dominant reserve currency, the US can manage without the IMF in the short run, using the Federal Reserve to provide liquidity to countries where it has core political interests, as it did after the 2008 crisis. And World Bank lending is helping the middle-income countries that are increasingly competing with the US in global trade, while boosting demand for private – that is, American – capital.

The US is like an aging parent; it is no longer willing to invest much in the family business, but remains averse to ceding control to its increasingly mature children. Resentful and restless, the children are seeking opportunities elsewhere – to the detriment of the family firm. China has nearly two dozen currency-swap arrangements, which serve as an alternative to IMF liquidity support. India just signed a $50 billion swap deal with Japan. Over time, these arrangements will erode the US dollar’s role as the world’s leading reserve currency.

Furthermore, the major emerging economies – Brazil, Russia, India, China, and South Africa – plan to establish their own development bank, and many African countries now count on China to fund infrastructure investments. In Latin America, the Andean Development Bank lends more to its members for infrastructure projects than the World Bank – at higher cost, but with less hassle. The World Bank’s diminished role will ultimately undermine America’s ability to advance its view that development is a function of open markets and democratic accountability.

Strong and effective global financial institutions are still very much in America’s interest. But, without US leadership, the global role of the IMF and the World Bank will erode gradually – as will their usefulness to the US.