Overlooked in the circus of national politics this past week was a small victory for U.S. global leadership and common sense — in the bipartisan agreement to restore full U.S. support for the International Monetary Fund.
This move, part of what’s known as “quota reform” of the IMF, should have been a no-brainer when it was proposed five years ago. The modernization plan will expand the voting power of emerging economies such as China and India in the IMF and modestly reduce that of European countries. It will double the IMF’s capital available to assist troubled economies.
It was the United States that drafted this formula for broadening and updating the global financial architecture after the 2008 meltdown. The idea was to give a greater voice to the rising economies and to increase the IMF’s ability to rescue weak ones. A broader, stronger IMF will bolster the system that has kept the world economy solvent, more or less, since 1945. It will also reinforce U.S. leadership of global finance.
But this sensible IMF reform, first discussed during the presidency of George W. Bush, got caught on the barbed-wire fence of U.S. politics. Congressional conservatives saw it as a symbol of imaginary “black helicopters” of global governance and refused to vote for the necessary funding. To many foreign leaders, this blockage was a worrying sign of how domestic infighting was enfeebling the United States and impeding its traditional role of global leadership.
The basic question was whether the United States still had the “right stuff” to lead. As Treasury Secretary Jack Lew explained in an interview Monday: “If the U.S. didn’t follow through at the IMF, how could the system as we built it remain strong?”
China pounced on U.S. indecision and launched the Asian Infrastructure Investment Bank as an alternative to the U.S.-led IMF and World Bank. As long as Congress was blocking the United States’ own plan for IMF reform, Beijing’s pitch was hard to resist. “What was driving countries to look for a new mechanism was a question of whether the U.S. was prepared to work with the old mechanism,” Lew said.
The Ukraine crisis offered a dramatic example of why the IMF is important. As Russia tried to squeeze Kiev financially after it invaded Crimea, Ukraine’s only practical source of financial support was an IMF loan. That should have made the case for the IMF’s importance, but not to congressional right-wingers.
Lew said he’s had hundreds of conversations with congressional leaders about funding the IMF since he became treasury secretary two years ago. The necessary legislation was attached to a half-dozen bills, only to collapse because it was deemed “too controversial.” Finally, on Friday, the logjam broke and the IMF funding was approved as a rider to a broader spending bill. The heroes in this story, in addition to Lew, are the House and Senate Republican leaders, Rep. Paul Ryan (Wis.) and Sen. Mitch McConnell (Ky.).
“Promise made, promise delivered,” said a relieved IMF Managing Director Christine Lagarde in a telephone interview Monday. She said that by ratifying the IMF reforms and helping to double its capital, the United States has given the fund the “big bazooka” it needs to help ailing economies at a time when “the economic horizon is not exactly rosy.” Just as important, she said, the move is “a reaffirmation of U.S. leadership” of the institutions that foster a rules-based global order.
Now that the IMF has a new lease on life, I hope Lew and Lagarde will think more about what got the fund in political trouble in the first place. The black helicopter crowd aside, there is a deep mistrust in the United States about whether the global financial system really serves the average American taxpayer. It’s one of the elite institutions that, like Goldman Sachs or the World Economic Forum, easily becomes part of a conspiracy theory.
Lagarde said she understands that many Americans mistrust financial institutions as “out there” and fear that “their destiny is out of their hands.” She plans to focus on the “small boats” in the system, not just the big yachts. She cited IMF research that rising inequality is hurting growth. “The benefits of higher income are trickling up, not down,” she said in a speech in June.
Congress made a reasonable demand in funding the IMF that the organization re-examine its policy of “systemic exemption” for debtor countries that may not be able to pay back their loans. Lagarde told me she agreed. That’s the right start for a renewed financial partnership that’s good for the United States and the world.
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