ANYONE who doubts the importance of the International Monetary Fund should look at Ukraine. Every Western nation is talking about helping the Ukrainians resist Vladimir Putin. In terms of immediate cash, America has come up with $1 billion of loan guarantees, while the European Union has found €1.6 billion ($2.2 billion) of budget support. The IMF, meanwhile, is discussing lending Ukraine’s government about $15 billion. It is the only outfit capable of mobilising large sums fast. That is why, for the past 70 years, the fund has been the world’s financial firefighter. And it is why Congress’s refusal to support reforms to strengthen it is shockingly shortsighted.
The reforms in question concern the IMF’s system of “quotas”. Each country’s quota determines how much it pays in, its clout in the organisation and how much it can borrow if it gets into trouble. America’s quota is the biggest, giving it veto power. But today’s system gives excessive heft to small countries in Europe and too little to emerging economies. And, at $370 billion, the total value of the quotas is modest compared with the scale of global capital flows. That is why, during the 2008-09 financial crisis, the fund’s resources were topped up with temporary credit lines from big economies. And it is why, in December 2010, at America’s instigation, the fund’s members agreed to a bolder reform that would double the quotas and raise the emerging economies’ voting power.
More than three years later, Congress has still not endorsed this reform. It failed to do so once again this week, and in a particularly galling manner. The Obama administration tried to attach quota reform to the legislation approving America’s bilateral aid to Ukraine. Both the House of Representatives and the Senate refused to include it. Just as the fund is promising billions for a country that America is desperate to support, Congress has undercut it.
This is a shameful outcome, driven largely by ignorance. The fund’s most vociferous congressional critics, mainly Republicans, misunderstand both the organisation and its reforms. They argue that the quota change would put more taxpayer money at risk and weaken America’s influence within the fund. Both claims are bogus. America will retain its veto power. The larger role for emerging economies comes at the expense of European countries. Nor does a larger quota add to America’s overall exposure, not least because its credit lines to the fund will be commensurately cut.
The real risk to Americans lies in Congress’s failure to support the reforms that its technocrats championed. This has infuriated the fund’s other member countries, making them less inclined to support America’s priorities. Big assistance packages, such as that for Ukraine, could be a casualty of their anger at America’s unwillingness to live up to its promises. And with a smaller quota and greater reliance on credit, the fund’s finances will be less secure that they should be. America’s arsenal of economic diplomacy will be the emptier for it.
Unravelling Bretton Woods, one vote at a time
Depressingly, few politicians in Washington seem to care. The sense of hegemonic responsibility that led America to create organisations like the IMF and World Bank in 1944, and to nurture them in subsequent decades, is eroding fast. Republicans, particularly the isolationist tea-party sort, deserve much of the blame. But so, too, does the White House. A few wonks within the Obama team care a lot about the IMF, but it has never been a priority for the president himself. As with trade deals, Mr Obama is loth to invest effort or political capital in supporting the IMF. It is an abdication of leadership that America will come to regret.