Losing at the IMF
The Obama administration set out to reform the international financial system, but now finds itself on the defensive. What went wrong?
TOKYO – For the first time in recent memory, this week’s big annual meeting of the International Monetary Fund will not be about saving the world from imminent financial collapse. With the most acute phase of the European crisis either behind or ahead of us (depending on your view) and the U.S. "fiscal cliff" still looming several months away, the major takeways from these Tokyo-based meetings will be more strategic and nuanced than in recent years. But, while the issues are more subtle, they are no less crucial. In fact, the IMF is more important to the global economy than ever, and this week’s meetings may represent a more important directional step than is widely recognized. More importantly, the United States’ influence at the fund is at risk of even greater decline than is generally believed. Here’s why:
IMF governance: IMF governance issues are tedious, complicated and pedantic — even to seasoned fund watchers. And generally, it isn’t worth the effort to consider the implications of a shift in 0.02 percent voting power at an organization that most often takes decisions on the basis of consensus. But this year, governance issues are actually significant. And, that’s too bad, because the United States doesn’t come out looking very good.
These issues, colloquially known as "shares and chairs," involve the composition of the executive board of the fund, which manages the institution day to day, and the voting rights of the fund’s 188 members. The IMF, created in the shadow of World War II, has been slow to recognize the global shifts that have taken place over the past decades and is seen by many as being too wedded to the past. In particular, even before the euro crisis dominated the fund’s recent focus, Europeans held disproportionate sway, with between eight and 10 of the board’s 24 chairs and, by tradition, the managing director position. Emerging markets, in particular the BRICs, are woefully underrepresented both at the board and in voting ("quota") shares — and they’re not happy about it.
To address this, and to take on charges that the fund was an institution looking to protect status quo interests, the Obama administration led an effort in 2010 for sweeping governance reform of IMF board representation and voting, with the specific goal of reducing European influence, including an explicit commitment by advanced European countries to reduce their board representation and to increase the voice and vote of emerging markets.
These hard-fought reforms gained the United States no friends in Europe, which had repeatedly promised to voluntarily reduce its influence over time, but had failed to do so. But they were seen as a sincere attempt to benefit non-European emerging markets without any direct benefit to the United States in terms of voice or vote. The idea was to gain political goodwill for taking the lead in redressing an unfair structure that undermined the credibility and legitimacy of the IMF — an institution that the United States rightly saw as a positive benefit to itself and the world.
But, in spite of the U.S. success in forcing though governance reform at the board and engendering the ill will of our European allies, the effort looks likely to backfire. Not only did the Europeans cleverly find a way to propose a two-seat board reduction that actually increases their overall influence, but the United States itself has now become the impediment to implementing the broader reforms, as they cannot be finalized without U.S. approval and the administration has yet to even propose them to Congress — the crucial missing step to overall ratification.
So, at the annual meetings this year, which Managing Director Christine Lagarde has themed "Keeping Promises," it is America that will be blamed for the most glaring promise not kept — our failure to make long-fought for reforms a reality, thereby incurring not only the ire of the Europeans, but also the finger-pointing of the BRICs and other emerging countries — precisely those countries we sought to benefit for broader strategic purposes.
IMF financial resources: The U.S. failure to embrace the governance reforms we ourselves championed represents a missed opportunity. On its own, this failure might do little to reduce U.S. influence around the world or even at an institution, which is, after all, housed only a few blocks up the street from the White House and the Treasury. But dropping the ball on governance reforms, when combined with U.S. unwillingness to participate in the bolstering of the fund’s financial resources earlier this year, leads to the rise of an unhealthy narrative that the United States is simply not committed to the IMF itself.
In January 2012, Lagarde publicly warned of the enormity of the risks to the global economy and pleaded that the fund’s then-current resources were inadequate to address them. She then embarked on a high-profile fundraising effort across the globe, seeking to reinforce the IMF’s financial resources to ensure that, should the worst case develop, the fund would be adequately prepared to stand between teetering nations and global economic Armageddon.
But, perhaps deferring to a skeptical Congress that was seen as more likely to withdraw existing commitments rather than pony up additional ones, the United States argued that while Europe’s problems were big, they were not too big for wealthy Europe to handle by itself, and the administration made it clear that it would not be participating in any new fundraising effort. While this analysis was undoubtedly correct on its face, it missed the broader strategic argument that a continuing role for the IMF would enable the United States to indirectly, but meaningfully, retain influence over the direction and outcomes of Europe’s crisis response. Given the strategic, political, trade, and financial interlinkages between Europe and the United States, and the strong, built-in financial protections over IMF member finances, this might well have been a trade worth making.
So when Largarde announced in April that 30 countries had committed to more than $450 billion in new resources for the IMF, America was glaringly absent. Perhaps as important, the United States ensured that this new infusion of cash didn’t buy those countries any increased "shares and chairs" at the fund.
While some might argue that this was a deft move by the United States — "leading from behind," if you will — that is not likely to be the case. While the United States will undoubtedly retain its de jure veto over official decisions, it is likely that increasing de facto influence will be exerted by contributor countries who naturally expect to have their voices heard, in spite of stalled governance reform and a dominant shareholder that contributed not a penny to the latest round of financing.
As in any large complicated institution, influence can be felt and exerted through a variety of means, and not simply in the board room. With an outdated governance and operating structure, U.S. failures mean that U.S. influence may be significantly diminished and that more IMF policy influence and decision making will take place outside of the established governance structure. That’s not good for the United States.
IMF role: As far its global influence is concerned, the IMF has taken a roller-coaster ride over the last few years from "searching for relevance" to "indispensable actor." But the fund’s future role is still evolving, and while it is likely to remain integral to the world’s economic system, the specifics of how it goes about this role are in flux. Decreased U.S. influence may not only be seen in individual policy and program decisions, but also in its ability to influence the fund’s overall direction as it seeks to define and refine a new role on the world stage.
In addition to its most familiar role, in providing troubled countries with financial assistance in return for commitments to abide by the strictures of the so-called Washington consensus or its European "troika" equivalent, in the wake of criticisms that the fund failed to spot and prevent the 2008 financial crisis, the IMF has sought to enhance its role in pre-emptive surveillance of the world’s economy. Over the past year, the IMF has taken on a series of new roles in analyzing and monitoring the global economy and in highlighting potential risks of contagion and spillovers from one country or region to others and for the financial system as a whole.
This new foray is significant. It represents a new role for the fund and one that is likely to evolve and expand over time. While complicated, it basically involves an expansion of the fund’s role from assessing individual countries’ economic policies under a fairly rigid set of criteria to one in which the IMF assesses the broader impact of a wide range of policy choices on its neighbors and on the rest of the world.
In the past, the United States stridently sought to have the IMF include a determination in its annual country assessment as to whether a country was manipulating its exchange rate to the detriment of others and global economic stability — a means to challenge China’s foreign exchange policy without doing so directly. But the United States has been far less inclined to allow the fund to assess whether a country’s domestic policies more broadly have a similar spillover impact across borders. Earlier this year, after years of contentious debate, the IMF voted to take on this new mandate, and has now embarked on a new series of multilateral surveillance projects. U.S. resistance to this effort was largely born of the potential risks to the country being accused of causing far-reaching harm, given the size and scope of the U.S. economy and financial system.
Just as China fought desperately for years to avoid having its currency being classified as being in "fundamental misalignment," America may now find itself seeking to ward off accusations that the country’s financial sector, fiscal cliff, and tax policies are not only fodder for domestic debate, but potentially international condemnation as well.
The end of the IMF-G-20 tandem? In the autumn of 2008, the G-20 rose from relative obscurity to become the premier economic and political forum in which global leaders and finance ministers grapple with the most daunting issues of the day in an organized and structured forum. The official communique at the close of the Pittsburgh G-20 summit in September 2009 declared that "the G-20 [is] to be the premier forum for our international economic cooperation." This represented a shift from the previous focus on the G-7, where China, India and other rising powers were notably absent. The United States was an early leader at the G-20, however unwieldy it may be, and embraced its newly central role.
But the G-20, while it did not lack for lofty aspiration, lacked just about everything else. It had no secretariat, staff, offices, or resources. To get anything actually done, the G-20 needed to look elsewhere for follow-up and implementation of its mandates and pronouncements. In many cases, the G-20 has looked to the IMF to effectively play these roles. Major post-financial crisis G-20 initiatives are now undertaken in large part by the IMF.
Over the past several years, the G-20 finance ministers’ meetings coincided with those of the IMF. IMF biannual meetings posed a perfect opportunity to hold virtually simultaneous gatherings, with decisions and discussions in one forum often spilling over into the other. Both entities benefitted from the overlap, as G-20 requests could be agreed, clarified, and refined in real time with its implementation arm — the IMF.
But this week’s Tokyo meetings will not include a contemporaneous G-20 meeting. This is not, to be sure, because the world’s economic problems have been solved, but rather because in 2012, Mexico held the rotating chair at head of the G-20 and, for its own domestic political reasons, accelerated the G-20’s annual leaders’ summit to June, instead of the usual November time, leaving an effective vacuum for the rest of the year. And, with a belligerent Vladimir Putin-led Russia scheduled to take over the leadership of the G-20 at the commencement of 2013, it is a safe bet that the golden days of IMF/G-20 cooperation are behind us.
In London and in Pittsburgh, the United States and the British presided over G-20 meetings that succeeded in demonstrating to the world that there was, at a time of absolute crisis, a will and a forum for the world to come together and agree a response. The IMF played a central role in both formulating and implementing that response. Now, four short years later, the G-20 has effectively lost its central role on crucial economic issues, and may, in fact, revert to virtual irrelevance. In its stead, a new, bolder IMF may seek to enhance its independent role. Not only does the IMF have financial and human resources to bring to bear, it also has legitimacy that the G-20, representing a small sub-set of the world’s countries, lacks, with all 188 members having at least some representation.
With the Tokyo meetings this week, we are likely to see the continuing evolution of the IMF at a pace and in a direction that may enhance its role in an interconnected world increasingly dominated by macroeconomic issues. At the same time, U.S. influence over the institution is at risk of broad decline.
To be clear, this decline is both of our own doing and still reversible. Promised governance reforms and requested financial commitments are in our interests. The administration’s failure to try to educate Congress as to the benefits of these initiatives may have been tactically and politically safe, but may well turn out to be a strategic error.
There are serious risks to U.S. interests emanating from what the Eurasia Group’s Ian Bremmer calls "a G-zero world" — an international system without clear leaders. In anything even approaching that world, the IMF will provide much-needed ballast. It will be a shame if the United States finds itself losing influence at an increasingly powerful institution for no good reason.