Pressure is mounting on the United States to ratify the reform of the International Monetary Fund, which the Obama administration unsuccessfully submitted for congressional approval last month. Congress should think twice before passing the reform — importantly because its thrust consists of doubling the amount the United States will owe the IMF — also known as the “quota.”
All of this comes two years after an agreement between the fund’s members to double the total amount of quotas — resources that member countries are obliged to contribute. Since the U.S. government holds a significant portion of votes within the fund, its approval is necessary for the change to take effect.The proposal would lead to a permanent and historically unprecedented increase in resources available to the IMF — and, indeed, to any international organization. The sheer magnitude is staggering. If approved, it would give the IMF access to roughly $734 billion for its lending purposes, in addition to sizable amounts it can access through other channels.
So far, most commentators have focused on how the new quotas, which also determine the voting power of countries within the organization, are going to be allocated among member countries, increasing the relative weight of emerging economies. Yet, that is just a distraction from a historically unique increase in funding for any international bureaucracy.
The Treasury Department argues that the increase will not cost the American taxpayer anything. Treasury says the $65 billion, which would go toward an increased American quota at the fund, is to be simply reallocated from another funding commitment, which the government made in 2009 at the crisis G-20 summit in London and which Congress approved shortly thereafter.
Too much lending is part of the problem.
The depiction of the quota increase as fiscally neutral is not accurate. The commitment from 2009 was made under a scheme called “New Arrangements for Borrowing,” which enables the IMF to borrow money from its members, after gaining an 85 percent approval of member countries. In contrast, the quota contributions come to the fund with no strings attached.
Even if one believes that the International Monetary Fund has an important role to play in tackling financial crises around the world, it is not clear that there is a reason for a permanent increase in resources given to the fund. In 2009, the fund’s lending capacity was tripled, from $250 billion to $750 billion. This increase was approved narrowly by Congress in June 2009, amid fears of a global financial meltdown. Four years later, one wonders, how much of a difference IMF lending has made.
A significant part of the additional funding was directed at the ailing economies in Europe. Latvia, which received an IMF loan, is cited as a success story. Indeed, the Latvian government put in place deep reforms and turned the economy around in a remarkably short period of time.
However, so did other Baltic countries, namely Estonia, which did not receive IMF funding. Throughout the Baltic region, there was a widely held determination to combat the financial crisis through a combination of deep budget cuts and bold structural reforms. The Latvian loan of $2.35 billion was relatively small, especially compared to the fund’s activities in Portugal, Greece and Ireland.
Last year, Greece received an IMF loan of $36 billion, following a series of other rescue packages provided by the European Union and the IMF. There is much less to show for the hefty price tag.
With unemployment higher than 26 percent, four consecutive years of negative growth and hardly any serious, irreversible reforms in place, it remains unclear how big a bailout Greece would need to get out of the hole in which it finds itself. While Portugal and Ireland are nowhere near the basket case that Greece is, no one has put forward a credible explanation as to what their current credit lines at the IMF — worth $33.8 billion and $29.3 billion, respectively — have bought the American taxpayer.The debt crisis in Europe, as well as the lingering effects of the global financial crisis of 2008, should serve as an opportunity to rethink the role of public policy in fostering fiscal and financial responsibility. Arguably, implicit guarantees to financial institutions and governments, and the idea of “too big to fail,” have had huge economic and social costs on both sides of the Atlantic. In that case, it may be time to start seeing the IMF and its lending activities as part of the problem, rather than the solution, to our economic woes.