Obama’s global-finance problem

One of President Barack Obama’s key talking points on the massive, troubled trade deal moving through the Hill this week is how important it is to U.S. standing in the world. “If we don’t write the rules, China will write the rules out in that region,” he said in his State of the Union address.

Yet for all the attention focused on the Trans-Pacific Partnership, there’s another issue stuck on the Hill that may be even more important for the U.S.’s geopolitical standing: reforms to the International Monetary Fund (IMF), agreed upon five years ago, but still waiting for approval by the US Congress.

Last Friday, the same day Obama’s failure to get his own party behind his trade deal made headlines, the IMF quietly delayed forming an alternative plan to implement reforms, hoping that more time would persuade a foot-dragging Congress to approve of them.

The reforms would give small countries a bigger voice in the IMF, and let the fund allocate money differently. There’s little sign Congress will move them soon: they need to go through the House Financial Services Committee and Senate Foreign Relations Committee, and committee aides said that neither is even considering legislation right now.

The reforms aren’t expected to cost the U.S. anything, but the delay is. The IMF involves 188 countries, far more than the TPP, and it’s already exacting a price in goodwill, infuriating our allies and undermining our credibility on the international stage.

“It’s certainly symbolic of U.S. withdrawal from the rest of the world, and the rest of the world is noticing,” said Ted Truman, a senior fellow at the Peterson Institute for International Economics and the assistant secretary of the U.S. Treasury for International Affairs from 1998 to 2001. “The symbolism counts for this stuff.”

With China on the rise in world finance, the risks of foot-dragging can be more than symbolic. China has been wooing countries to join its rival Asian Infrastructure Investment Bank, which Beijing founded last year as a counterweight to the IMF and other international economic institutions that it says are dominated by the United States. In the first half of the year, Germany, France, Italy and Britain have all joined the bank over U.S. objections. There’s no direct connection between those European nations joining the bank and U.S. dithering on the IMF reforms, but the overall picture seems clear: The more America disengages from major global institutions, the more space it allows China to move in.

Although it’s Republicans who are holding the votes up now, until recently the reforms had been off everyone’s radar — Obama ignored it as an issue for much of his presidency, before including them in his budgets starting in FY2014.

Frustratingly for the international community, the IMF reforms aren’t even especially controversial. They’d give emerging countries a larger representation on the fund’s executive board, and allow the world’s main emergency-lending authority to allocate resources more efficiently. Under the reforms, the U.S. wouldn’t need to contribute more money, but it would have to shift its contribution to a fund over which it enjoys less control. In theory, that could expose it to more losses — but the U.S. has never actually used its veto power over the current fund, and the Congressional Research Service has called the new commitments “very safe.” The changes are generally supported by economists.

There would also be a small shift in voting power, with China’s voting share rising from 4 percent to over 6 percent, making it the third largest of any shareholder, after Japan, with 6.5 percent, and bringing it more in line with a shifting global economy. Still, the U.S.’s voting share, at 17.4 percent, would continue to dwarf all other countries.

Since the 2010 G20 meeting at which it was agreed upon, the vast majority of IMF members have approved the reforms, and both await Washington’s move. Since the US holds an effective veto over major policy changes, Congress’s inaction is holding up the entire reform package.

Capitol Hill being what it is, the reform vote got caught up (and scuttled) in a fight over something else: Last year, Senate Democrats included the IMF reforms in the omnibus spending bill but they were removed in conference as Republicans tried to tie them to the delay of an IRS rule governing political activity of nonprofit groups.

In March, Treasury Secretary Jack Lew appeared before the House Financial Services committee and made the case that it’s in America’s interest to vote “yes” and move on. “The U.S. is constantly pushing to accomplish important policy objectives through the IMF — from supporting Ukraine’s financing needs to providing debt relief for countries affected by Ebola,” he said. “But, because Congress has not yet enacted reform legislation, our leadership in the IMF is being undermined.”

The IMF has grown more and more frustrated with U.S. inaction. In December, IMF managing director Christine Largarde “expressed disappointment” at the U.S. Even some of the U.S.’s closest allies, like Britain, have criticized the United States.What frustrates observers is just how easily avoidable it is — just voting on a deal that has just about no financial cost or benefit for the U.S., leaving it almost purely a reputational play.

“[The IMF reforms] would produce more international goodwill and respect for us than trade deals,” former Treasury Secretary Larry Summers said in an email. “Trade negotiations are often highly adversarial. Supporting financial backstops isn’t.”


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