Four Thoughts on the U.S.-IMF Standoff

Last weekend top economic officials from around the world gathered in Washington for the IMF-World Bank Spring Meetings. High atop the list of IMF concerns was the U.S. failure to back a painstakingly-negotiated reform to the way the Fund operates. The new approach, which would offer greater voting weight to emerging countries in the developing world, is the subject of a standoff between the U.S. Congress and the White House. The Obama administration attempted to package IMF reform along with aid to Ukraine, but Congress stripped it out late last month.

Ted Truman, of the Peterson Institute, argues that the impasse has done substantial damage to the global reputation of the United States and imperils the future of the IMF. Brazilian Finance Minister Guido Mantega, expressed his frustration, arguing that, "The IMF cannot remain paralyzed and postpone its commitments to reform … Alternatives to move forward with the reforms must be found whilst the major shareholder does not solve its political problems."

So what should be made of all this?

1) It is not crazy to question the efficacy of the IMF.

Some Republican opponents of the package disapprove of the IMF’s characteristic eagerness to rush in with bailout money. The IMF counters that its money comes in the form of loans, is only disbursed after promises of reform, and only when backed by analyses showing that the money can be repaid.

The critics have a point. In the heat of the Euro crisis, the IMF formed part of the "troika" that lent money to Greece. The loan was supported, at the time, by analyses that showed Greek debt would not exceed sustainable levels. Later, the IMF acknowledged flaws in its analysis; it now appears unlikely that Greece will be able to repay its debts.

In the context of Ukraine, the IMF lent money in 2008 and 2010. In each case, per IMF custom, these were part of an agreement in which Ukraine committed to undertake reforms. Those reforms were supposed to restore viability to the Ukrainian economy. The approach did not work. The current crisis was prompted by a flailing Ukrainian economy that led the Yanukovych government to choose between succor from Europe or from Russia.

2) Congress should pass the IMF reform package.

The IMF, while fallible, is an exceedingly useful institution. Congressional critics of the IMF reform package were not generally opposed to assisting Ukraine (at least, if they were, not very loudly). In the midst of Cold War-like tensions, the IMF can play a critical role. It allows an overburdened Ukraine government to deal with a single major donor, rather than a hodgepodge. It brings political neutrality to discussions that the United States could not, were the U.S. to act on its own. And the IMF brings valuable experience and analytical expertise.

True, the Fund has had its share of failures, but the business of sorting out the politics and economics of submerging countries is a fundamentally difficult one. There is room for argument about whether the IMF takes the right stance in any given instance, but that is separate from arguing whether the institution is valuable. The IMF does what its board members command. The United States currently has a major say in IMF policies and would retain that under the reform proposal. Republicans who wish to see the IMF run differently should win elections and gain a say.

3) The standoff reflects the miserable state of relations between Congress and the White House.

Republicans have won elections. They control the House of Representatives. If Washington were functioning well, this would give Republicans some of what they want, while Democrats (controlling the White House and the Senate) would get much of what they want. Yet we have seen very little of this cooperation.

Last October, at perhaps the nadir of relations along Pennsylvania Avenue, there was a government shutdown when Republicans tried to attack the Patient Protection and Affordable Care Act (PPACA, but also known as "Obamacare") through the budget process. The White House responded that this was non-negotiable — one could not attach such riders to a time-sensitive piece of legislation and hold the process hostage (recall, though, that the PPACA was originally passed as a budget measure, through the reconciliation process in 2010). The White House demanded — and ultimately got — a clean bill.

Cut to March. The administration was eager to pass overdue IMF reform and attached it as a rider to a time-sensitive measure to aid Ukraine. Is it any wonder that Republican critics of the measure held out for a clean bill? The White House disdained Republican offers to trade IMF reform for IRS reform. They professed to be shocked that anyone should propose a tradeoff between two such distinct issues. Ultimately, House Republicans got a clean bill and the reform went unpassed.

4) The IMF reform episode foreshadows broader foreign policy problems when the White House cannot win legislative support.

On the IMF reform issue, administration officials could and should have worked the issue long since (the reform plans were first broached in 2010, when Democrats controlled both houses of Congress). They did not. Over the years, the administration assured international partners that this was a matter of domestic politics and they had it all under control. Again, they did not.

This is strikingly reminiscent of the current situation on trade. Senate Republicans offered Trade Promotion Authority (TPA) in the fall of 2011. They were told the time was not right. The Obama administration has proceeded to negotiate its major trade agreements — the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership — while assuring partners that TPA is just a matter of domestic politics and the administration has it all under control. Meanwhile, the President’s request for TPA has been opposed by Senate Majority Leader Reid (D-Nev.) and House Minority Leader Pelosi (D-Calif.).

Wielding foreign policy tools can be difficult enough when the president has full authority over their use (as with some forms of sanctions, or the positioning of military forces). But an important array of foreign policy tools (allocation of resources, IMF reform, trade policy, declaration of war) require congressional consent. The unfortunate standoff over the IMF is indicative of a further weakening of U.S. foreign policy that stems from this administration’s failure to establish a viable working relationship with Congress.