IMF reform and isolationism in the US Congress

Author: Jeffrey Frankel, Harvard University

A long-awaited reform of the International Monetary Fund has now been carelessly blocked by the US Congress. This decision is just the latest in a series of self-inflicted blows since the turn of the century that have needlessly undermined the claim of the United States to global leadership.

The IMF reform would have been an important step in updating the allocations of quotas among member countries. From the negative congressional reaction, one might infer that the US was being asked either to contribute more money or to give up some voting power. (Quotas allocations in the IMF determine both monetary contributions of the member states and their voting power.) But one would then be wrong. The agreement among the IMF members had been to allocate greater shares to China, India, Brazil and other emerging market countries, coming primarily at the expense of European countries. The United States was neither to pay a higher budget share nor to lose its voting weight, which has always given it a unique veto power in the institution.

The change in IMF quotas is a partial and overdue adjustment in response to the rising economic weight of the newcomers and the outdated dominance of Europe. Voting share in the IMF is supposed to be in proportion to economic weight, not equal per capita or per country. This acknowledgement of reality, the principle of matching the representation to the taxation, is sometimes known as the Golden Rule: ‘He who has the gold, rules’. The principle is probably one of the reasons why the IMF has usually been a more effective organisation than others such as the UN General Assembly.

It’s not that President Obama hasn’t tried to exercise global leadership, as just about any US president would. He pushed for this agreement to reform the IMF at the G20 summit in Seoul in November 2010 (the first meeting of the group of leaders to have been hosted by a non-G7 country). He prevailed despite understandable European reluctance to cede ground.

Some American congressmen may not be aware of the extent to which the IMF reform agreement represented the successful efforts of the US executive to determine the course of the international negotiations. But then the rejection by the US Congress of an international agreement that the president had painstakingly persuaded the rest of the world to accept is not a new pattern. It goes back a century, to the inability of President Woodrow Wilson to persuade a myopically isolationist US Congress to approve the League of Nations (1919). Examples over the last century also include the International Trade Organization (1948), SALT II (1979), and the Kyoto Protocol (1997), among others.

A past history of trying to re-open international negotiations that the executive has already concluded is also the reason why Congress has to give President Obama trade promotion authority (that is, the usual commitment to fast-track congressional votes on trade agreements), or else Washington’s trading partners will not negotiate seriously. This would impede ongoing talks in the Pacific, with Europe, and globally (in the venues, respectively, of the Trans-Pacific Partnership, Trans-Atlantic Trade and Investment Partnership, and the World Trade Organization).

Commentators have been warning since the 1980s that the US may lose global hegemony for economic reasons, as an effect of budget deficits, a declining share of global GDP, and the switch from net international creditor to net debtor. One version is the historical hypothesis of imperial overstretch.

But the main problem seems to be a lack of will rather than a lack of wallet. Or perhaps it would be more accurate to describe the problem with US domestic politics as wild swings of the pendulum between excessive isolationism and excessive foreign intervention in reaction to short-term events, untempered by any longer term historical perspective.

After the United States lost 18 rangers in Somalia in October 1993 (Black Hawk Down), Congress became highly resistant to just about any foreign intervention, no matter how big the ‘bang for the buck’. Then, after 11 September 2001, it was prepared to follow President George W. Bush into just about any military intervention, no matter how dubious the benefit or how high the cost. The total cost of the wars in Iraq and Afghanistan has recently been estimated at US$4 trillion by Linda Bilmes. (It’s not just that the wars lasted for 10 years; the biggest costs of such wars come subsequently, particularly for medical care that veterans need for the rest of their lives.) These days, the pendulum has apparently swung back to the isolationist direction once again.

One had hoped that myopic congressmen had been made aware that among the costs of the foolish US government shutdown three months ago was damage to the country’s global credibility and leadership. Most visibly, to deal with the shutdown, the White House in October had to cancel its participation at the leaders’ summit of APEC in Bali and thereby stymie progress on the US-led Trans-Pacific Partnership. It was widely reported that the Asian countries drew from Obama’s absence the conclusion that they should play ball with China instead.

The increasing power of China and other major emerging market countries is a reality. It is precisely what makes it important that the United States support a greater role for these countries in international institutions such as the IMF, the G20, and APEC.

The rise of China could go well or badly for international relations. It depends in part on whether the status quo powers make room for the newcomer. This historical pattern famously goes back to Thucydides’ description of the rising power of ancient Athens and the resulting war with Sparta (History of the Peloponnesian War). Examples of the consequences of failing to accommodate the new arrival include the role of Germany’s rise in the origins of World War I 100 years ago.

The new Chinese President, Xi Jinping, has used the phrase ‘New Type of Great Power Relationship’. It sounds anodyne but may carry greater significance. The phrase apparently demonstrates awareness of the historical ‘Thucydides trap’. It signals China’s openness to working with other countries to avoid the tragedies of 460 BCE and 1914 CE. It is only sensible to take him up on his offer and smooth international relations into the future.

The potential for US leadership has survived remarkably well the loss of national status as an international creditor. This has partly been a matter of luck. In Asia, historical and territorial frictions among Japan, Korea and China, have kept US participation far more welcome in the Pacific than it would otherwise be. Meanwhile, in Europe, fiscal follies have been even more egregious than America’s.

Asians are aware that the IMF has stretched the rules to lend into the euro crisis on a greater scale than it did during the Asian crisis of 1997–98. They understandably feel entitled to a greater say in the running of the Fund. But the emerging market countries have been so disunited, for example, that no two of them could come together in 2011 to support a common candidate for IMF Managing Director, notwithstanding that the three previous incumbents were European men who flamed out before completing their terms in office. (The result was a European woman, Christine Lagarde. She has done a good job rather than kowtowing to Europe; but that is beside the point.)

The latent demand around the globe for enlightened US leadership, which first appeared at the end of World War I, is still there. It can survive budgetary constraints (and apparently can survive misguided military interventions). But it cannot survive an abdication of interest on the part of the US Congress.

Jeffrey Frankel is the Harpel Professor of Capital Formation and Growth at the Kennedy School of Government, Harvard University, and is the Director of Program in International Finance and Macroeconomics at the National Bureau of Economic Research, USA.

This article is an extended version of the article ‘Absent America’ that was first published on Project Syndicate. The author would like to thank Joe Nye and Ted Truman for comments.

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