Ceding Influence in the IMF and Hurting U.S. Interests
David Malpass, the Treasury under secretary for international affairs, stated in recent congressional testimony that the Trump administration would not support an increase in permanent financial resources to the International Monetary Fund (IMF or Fund)—what are known as “quotas.” The international community has long agreed that negotiations on quotas should reach a deal toward the end of 2019.
I believe the administration’s position is mistaken and will harm U.S. national interests.
The IMF is of tremendous value to the United States. Created by the United States to avoid a repetition of the ruinous policies of the Great Depression, the Fund has supported our national security interests from day one. It helped promote economic liberalization and reform in post-World War II Europe and Japan, backing the Marshall Plan. In the 1980s, it helped stem a Latin American debt crisis, which would have decapitalized our banking system given U.S. banks’ exposures to the region. In the 1990s, both President George H.W. Bush and President Bill Clinton placed the Fund at the forefront of international efforts to facilitate the transition of the ex-Soviet states, and later in the decade, the IMF played a crucial role in tackling the Mexican tequila crisis and Asian and emerging market crises. More recently, the Fund was at the forefront in helping emerging markets cope with the fallout of the Global Financial Crisis, lending expertise and support during the European crisis, and addressing Argentina's woes. The list of countries receiving IMF financial support and technical assistance includes many of geostrategic importance to the United States: Ukraine, Egypt, Iraq, and Afghanistan to name a few.
In undertaking these tasks, the Fund promotes a stronger U.S. economy. Our national welfare is increasingly susceptible to events overseas. The Asian and European crises in particular exacted a toll on our economy. IMF programs, by providing borrowers with a more orderly path to live within their means, lessen the hit to U.S. jobs and workers. The Fund is a great deal for the United States. For every dollar we put in, others put up four; we earn interest on our contributions. And the Fund’s “preferred creditor status” means IMF loans enjoy an unparalleled track record of repayment.
As the largest shareholder in the Fund, we exert considerable influence over IMF policies and decision-making. The IMF is also highly valued by its other 188 members. The rest of the world welcomes the influence the United States exerts in the institution. For the most part, they want the IMF to keep pace with changes in the global economy to support its engagement and influence into the future.
The Trump administration argues that the IMF now has adequate quota resources. That is true, but as the recent Argentine crisis shows, conditions can change quickly. There is no shortage of potential shocks—ranging from Brexit, to trade wars to a slowing China—with global implications. Not supporting the Fund could call into the question the IMF’s ability to handle such shocks as well as U.S. leadership and influence in the very institution the United States created to address such needs.
Any quota deal will entail boosting China’s weight in the IMF. Given the current state of U.S.-Chinese relations, why should we bother? China is a strong supporter of the IMF. But China rightly notes that its position in the Fund is woefully understated, giving it reason to drift away from the Fund toward regionalism.
China’s economic progress is often a tug-of-war between preserving the centrality of the state and advancing market reforms. Notwithstanding President Xi’s efforts to consolidate influence over the Chinese economy, China is not a monolith, and there are influential voices that continue to support reform. Sectors of China’s economy have been sheltered from competition and addicted to debt, with negative spillovers to the rest of the world. The central bank, which represents China in the IMF, is interested in pursuing market reforms, opening Chinese markets, and developing modern macroeconomic frameworks. As the world’s second-largest economy, these reforms are critical not only for China but for the global economy. Working with China through the Fund gives the United States and our allies an opportunity to help promote reform in Beijing. Quota negotiations could also serve as a vehicle to leverage reforms in Chinese policies, such as bringing much-needed transparency to the Belt and Road Initiative and to push back against China’s so-called “debt trap diplomacy.”
Malpass's testimony also did not address the future of the Fund's $250 billion backup facility—the New Arrangements to Borrow (NAB)—which can only be tapped when quota resources are running low. The United States has a 16 percent share and veto power in the NAB. As part of the last quota increase, Congress mandated that the United States withdraw from the NAB in 2022, unless it otherwise acted. U.S. withdrawal would either significantly reduce the NAB or unravel it. As essential as it is to renew the U.S. commitment to the NAB, acting on the NAB alone would not impact voting power in the Fund and thus would not be viewed as sufficient by the rest of the world.
Hence, one could possibly foresee no increase in IMF quotas and a loss of the Fund's backup reserve, slashing total Fund resources to staunch global crises and eroding our ability to support vital U.S. interests. U.S. leadership and moral authority in the institution would be seriously weakened.
Another option could be for the United States to keep its nominal quota in the Fund unchanged and allow others to boost theirs. This option would not require U.S. legislation. But it would dilute our voting power in the Fund and possibly hasten the day when the United States would lose its veto, which requires a 15 percent voting share. Plus, the optics of Chinese power going up at the expense of the United States is unjustified by economic realities and would send a harmful signal.
Even if the Fund has ample quota resources at this moment, given that the IMF is vital for advancing U.S interests, the administration should reconsider its decision and work constructively with others to find a win-win solution for the United States, the Fund, and the rest of the world.
Such a win-win could consist of the following :
- A modest overall increase in IMF quotas
- Maintaining the current U.S. position in the NAB
- A boost to China's share to put it clearly in second place well behind the United States, while keeping U.S. voting power constant
- China making concessions to bring full transparency to its overseas lending and commit to writing down its official debt when it is unsustainable, as other countries have done for years in the Paris Club
- The IMF adopting reforms to its budget and HR policies
To put America first, the Trump administration should secure a win-win deal with the IMF.
Mark Sobel is a senior adviser (non-resident) with the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C. and U.S. Chairman of OMFIF. He was deputy assistant secretary for international monetary and financial policy at the U.S. Treasury from 2000 to 2014 and subsequently U.S. representative at the IMF through early 2018.
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