The Reckoning

Coming Soon: The Battle of 19th Street

Luxembourg Prime Minister Jean-Claude Juncker thanks International Monetary Fund Managing Director Christine Lagarde for keeping the IMF in the family.

Photo by Georges Gobt/AFP/Getty Images

The annual spring meeting of the International Monetary Fund—planned this year for April 20-22 at the bank’s Washington headquarters—is shaping up as a something of a Waterloo for the international financial system created (largely) by the United States. The U.S., unfortunately, is cast as Napoleon.

On Thursday the leaders of the BRIC nations fired an opening salvo—think of it as softening up the beachhead—warning that if the IMF did not move to quickly implement reforms agreed to in 2010 that would give the developing world more of a say in the IMF and World Bank’s management, the BRICs would stalk off and create their own bank.

This could be bluster, but the more serious issue is a threat to withhold funding the IMF needs to help keep the Eurozone from toppling into the abyss. Even hinting at this could restart the market jitters that still pose the most serious threat to already-sluggish global economic growth. 

Still, the BRICS have a point: Two years ago, with the world economy in turmoil thanks to the brilliant leadership of Washington and its G7 posse, emerging-market powers demanded that—in exchange for policies that maximized growth in their economies to compensate for the Great Recession in the developed world—a reordering of voting rights take place at the IMF and World Bank.

The details of the reformed distribution of IMF voting rights that resulted are typically opaque thanks to the complex “weighting” formula used to determine the share of the bank’s total votes controlled by various countries. Put simply, the U.S., Europe, and Japan—the G7 plus a few smaller “developed market” (DM) economies—would retain just over 55 percent of the votes on the IMF’s policymaking board of governors, while the BRICS and other emerging market (EM) countries (defined below)* increased their share to about 44 percent.

The net shift in power from the DM to EM would be just under 6 percent.

At the time, the EM world, led by the BRIC countries (Brazil, Russia, India, and China), swallowed hard and accepted the shift in spite of the fact that the IMF itself predicts the EM share of global output will outstrip the G7 for the first time in modern history this year, and the gap would continue to grow annually.

Two years later, however, these reforms remain an unfulfilled promise. A host of problems have arisen since then that have convinced the BRICS leaders that the old G7 cartel has no intention of following through.

The most serious obstacle, not surprisingly, involves the U.S. Congress. With a self-defeating dishonesty now routinely shrugged off by the American public, congressional Republicans are framing the IMF reforms as anti-American and a secretive, socialist plot to steal hundreds of billions in American taxpayer dollars.

Legislation necessary to enable the IMF reforms to go forward—which included an increase in the U.S. annual contribution to the fund in order to justify Washington’s continued lock on 18 percent of IMF voting rights—appears to be going nowhere in Congress. The U.S. contributes about 18 percent of the IMF’s annual budget, the largest of any single nation, and gets an 18 percent share of the executive board’s votes in return.

Far from moving to approve this arrangement, Congress has attacked it. Legislation in both the House and Senate is seeking to roll back a $108 billion U.S. credit line created during the 2009 crisis and now regarded by global markets as one of the most vital IMF tools available to fight against a sudden global crisis, including the risk of a rolling default by Europe’s ailing peripheral economies—the “PIIGS”—Portugal, Ireland, Italy, Greece, and Spain.

To hear the legislation’s Senate sponsor, Jim DeMint, R-S.C., describe it, this is nothing more than a Democratic plot to ensure that Obama’s fellow socialists in Europe can keep spending beyond their means for years to come.

Nowhere, of course, does this legislation note that the increase in the U.S. annual contribution to the fund agreed to in 2010 only maintains the U.S. contribution at about 18 percent; i.e., the increase is necessary to keep pace with increases from other countries, including the BRICs.

Nor, for that matter, do any of the 26 GOP senators co-sponsoring the bill explain how they would deal with the global financial crisis that would result if the rescinding of the IMF’s U.S. credit line panicked markets and caused, say, Spain or Italy to default. (For a good primer on the contagion risks, check out this NY Times Economix post.)

And so, back to 19th Street: Unfortunately, the IMF can’t implement the 2010 reforms until the “indispensible nation” passes legislation in “the world’s greatest deliberative body.”

GOP know-nothings are right about one thing in this: While DeMint’s idiotic legislation will go nowhere, there is precious little chance of the Obama administration stepping up right now to fight for “enabling legislation” that would allow the 2010 IMF reforms to go forward, either. Tim Geithner make a yeoman’s pitch for this before a House committee earlier this week, but he has all the pull on Capitol Hill of a Greek in Brussels, and prospects that Obama will go to the wall on this issue in an election year are about zero.

Meanwhile, G7 arrogance has exacerbated the issue, too, as both the U.S. and Europe have shown they have no plans to honor the spirit of those 2010 reforms by allowing merit, as opposed to an old boys’ club mentality, determine the leadership of the IMF and World Bank.

These institutions, which grew out of the postwar reconstruction efforts of the Marshall Fund and ultimately the newly formed United Nations, will be viewed as an example of exactly how America was different when it “ruled the world.” That they have been dominated by the U.S. and Europe by fiat since World War II is understandable—while it’s written down nowhere, the U.S. got to run the World Bank and Europe the IMF back when they represented the majority of global output, the largest share of contributions to the fund, and the source of most global macroeconomic expertise.

But that simply is not the world we now live in, folks. As I noted last week, Obama made a big mistake in choosing to extend this increasingly untenable claim to special treatment by nominating Dartmouth’s president, Jim Yong Kim, as the World Bank’s next president. Yes, Europe’s claim to the IMF is even more tenuous. But isn’t that part of the point? Wasn’t the “American Century” supposed to be different from the imperialist one that preceded it?

As a result, a nasty fight looms during the April IMF meetings at a time when finding some consensus on global macroeconomic and development policies should be the priority. And so America’s political malaise, which already has turned its own government into a paralyzed shell of its former self, now threatens to do the same to the most important institution in the global economy.

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