by C. Randall Henning, Peterson Institute for International Economics
Op-ed in Foreign Policy
June 2, 2009
© Foreign Policy
In the war to win back the global economy, the leaders of the G-20 have placed the International Monetary Fund (IMF) at the center of the battlefield, armed with $750 billion in promised funding to pull emerging economies back from the edge. Speaking in China this weekend, US Treasury Secretary Timothy Geithner praised the plan as "an insurance policy for the global financial system." The IMF, he seemed to be saying, is a white knight for an economy in the red.
That is, until the plans made their way to Capitol Hill. Just two months after leaders of the world's major economic powers made grand promises of action, those plans face resistance in the US Congress. The Senate, before leaving town for Memorial Day recess, approved legislation to meet President Barack Obama's commitments made at the G-20 summit in London. But the IMF funding didn't make the House bill. If Congress fails to include the IMF legislation in the final bill now being hashed out, it will put both the US and global recoveries at risk.
At issue is an increase in the US contribution to the IMF from about $56 billion to $64 billion, and the enlargement of an emergency line of credit from the US Treasury to the IMF from about $10 billion to $110 billion. These steps would be followed by sales of gold to raise $6.6 billion to endow an investment account to cover expenses of the IMF, and distribution and expansion of IMF-issued reserves, called Special Drawing Rights. Other members of the IMF will also contribute, but US delinquency could derail the whole reform package.
Now more than ever, the IMF matters, and not just to the flailing countries in need of funding. The global economy will continue to sputter without an international fix, and bolstering the IMF's capacity supports US exports and jobs as well as confidence in financial markets generally. Supporting the IMF does not mean throwing good money at spendthrift governments. When countries succumb to crisis owing to their domestic policy mistakes, the IMF requires changes as a condition for receiving its loans.
The IMF's multilateral response will also reinforce US foreign policy and security interests. Pakistan, Turkey, and Ukraine are among the strategic countries that have negotiated or are in various stages of negotiating programs with the IMF. (There's a reason, by the way, that Secretary Geithner was talking about the IMF during his China visit this week. Chinese officials have said they would commit perhaps $40 billion to tide the IMF over until the new package takes effect. A US failure to follow through on its own commitment would be awkward, to say the least, at a time when US-China relations are more important than ever.)
What's more, the IMF is also a bargain. US credit is matched four fold and quota contributions nearly five fold, a bargain of gigantic proportions for taxpayers weary of low-yield bank bailouts. Plus, the $100 billion line of credit and the $8 billion increase in contributions are not outright grants; they're exchanges of financial assets in which the United States receives a readily useable claim on the IMF in return. And as an investment, the IMF is as reliable as they come. The United States has not lost a penny on its contribution to the Fund over the 64-year history of the institution. On the basis of its estimate of risk, the Congressional Budget Office has scored this $108 billion commitment as just $5 billion in appropriations. There will in all likelihood be no cost to the taxpayer.
Congress must not take US influence within the IMF, or other nations' willingness to support it, for granted. Failure to support the Fund would greatly weaken US leadership and make it more difficult to veto or block Fund decisions. Congress could grin at pinching a penny now, but failing to support the IMF would cost far more in dollars later.
Originally posted at foreignpolicy.com.
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Book: A Strategy for IMF Reform February 2006
Working Paper 11-5: Integrating Reform of Financial Regulation with Reform of the International Monetary System February 2011
Policy Brief 10-29: Strengthening IMF Surveillance: A Comprehensive Proposal December 2010
Working Paper 10-14: Reform of the Global Financial Architecture October 2010
Testimony: The Role of the International Monetary Fund and Federal Reserve in the Stabilization of Europe May 20, 2010
Op-ed: How the Fund Can Help Save the World Economy March 5, 2009
Article: Economists Seek IMF Reform January 26, 2009
Policy Brief 07-1: The IMF Quota Formula: Linchpin of Fund Reform February 2007
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