A Christmas miracle: Obama finds a way to save IMF reform

December 18, 2015
House Rules Committee Chairman Pete Sessions, left, with Rep. Virginia Foxx, right, confers with staff as the panel examines the $1.1 trillion spending bill to fund the government for the 2016 budget year and extend $680 billion in tax cuts for businesses and individuals, at the Capitol in Washington, Dec. 16, 2015. (AP Photo/J. Scott Applewh)

It was the kind of thing one has to see with one’s own eyes. There were messages of congratulations on social media, saluting the US Treasury Department for convincing Republican leaders in Congress to ratify IMF governance changes after five years of trying. Reports by reputable news agencies confirmed the development. That wasn’t enough for me. After typing thousands of words on this subject (this, this, this, and this are only some of the examples), I needed to read the legalese myself. And there it was, starting on page 1,459 of the 2,009-page Consolidated Appropriations Act, 2016, the legislative language that would force people like me to find new ways to demonstrate the decline of the American Empire.

There still was time for things to go wrong, but the consensus view in Washington was that the omnibus $1.1-trillion (US) spending bill would pass before Christmas. The resignation of former House speaker John Boehner, and his replacement by Paul Ryan, a favourite of Tea Party hardliners, appears to have shifted the politics of Washington enough to bring about a compromise. There were so many political baubles, trinkets and goodies written into the legislation, that few seemed to care that the Republicans had ended its blockade of an international initiative to boost the IMF’s capital and enhance the voice of emerging powers.

The administration of President Barack Obama pushed for the 2010 IMF reforms, which were agreed at the G20 Summit in Seoul, a fitting backdrop for measures that were meant to give countries such as China and Brazil more heft around the fund’s decision table. The world still was basking in the glory of Obama’s historic win in the 2008 presidential election. His predecessor, George W. Bush, had convened an emergency meeting of the leaders of the G20 in Washington in the autumn of 2008, but it was Obama who hosted the first scheduled G20 summit the following years. He said the financial crisis showed that the era of the US-led G7 was over; the global economy had become too big for the United States to manage on its own. Internationalists predicted better days. Obama’s leadership in forcing European nations to take smaller roles at the IMF to make way for emerging powers seemed to support that enthusiasm.

In retrospect, that optimism was naive. Two weeks before the Seoul summit, Obama’s Democratic Party had been trounced in midterm congressional elections. The president famously called it a “shellacking.” Republicans retook control of the House of Representatives and reduced the Democratic majority in the Senate. Democratic lawmakers had mastered the art of obstruction towards the end of Bush’s presidency. Republicans gave new life to the politics of gridlock. If the president was for it, the Republicans were against it. Obama’s agenda was reduced to the measures he could implement by executive order; changes to the terms of the US’s IMF membership required Congress’s approval. The IMF and the G20 repeatedly called on Washington to approve the reforms. Republicans were unmoved, and the White House was unwilling to do what it would have taken to move them. An important change in international governance was left in limbo because nothing major gets done at the IMF without US support. It holds about 17 percent of votes and the 2010 reforms required 85 percent approval.   

There were rumblings at the IMF's annual meeting in Lima that the Treasury was close to a breakthrough with Congress. It’s unclear if anyone deserves credit for the achievement. Edwin Truman, a former Treasury official and an informed commentator on the IMF, said his champagne class only was half full. Truman maintained that irreparable damage to the US’s reputation already had been done. China was emboldened to proceed with its own international development bank, which the UK and other US allies rushed to join, ignoring Washington’s misgivings about the Asian Infrastructure Investment Bank. Truman also noted that the legislation would give Congress the right to determine whether the United States would continue to participate in the IMF's New Arrangements to Borrow, or the NAB, after 2022. “This is a high price to pay if it leads to US withdrawal from the NAB,” Truman wrote in a commentary for the Peterson Institute for International Economics, the Washington-based think tank where he is a non-resident senior fellow. “It would undercut the financial capacity of the IMF and US leadership in that institution.”

The Obama administration also surrendered some of the executive’s autonomy in managing the US’s dealings with the IMF. The legislation would require the American director at the executive board to pursue the repeal of the “systemic risk exemption,” which is what allowed the IMF to lend to Greece even though the country’s debt burden normally would have disqualified it from receiving aid. The Treasury would have to report to Congress a week in advance of any vote at the executive board on an “exceptional loan,” unless the secretary determined that the creditor country was facing an emergency. (In that event, the secretary would have to explain himself in a written report to Congress within two business days of the vote.) The Treasury also would be on the hook for annual reviews of the IMF’s lending through 2025, and, within 180 days of the bill becoming law, the Treasury would have to submit a report on “ways to improve the effectiveness, and mitigate the risks, of United States participation in the International Monetary Fund” that would be required to include, among other things, an analysis of the fund’s performance during the European debt crisis.

That’s a lot of paper, which likely would be ignored, but also could be used to make mischief. (I neglected to mention the review of the US’s exposure to IMF lending that the Congressional Budget Office would be ordered to write next year.) Still, all those reports represent a tradeoff worth making. Obama had a moral responsibility to break Congress’s restraint on the will of the global community to move forward. He should have done so long before now. The United States still holds an effective veto over the IMF’s affairs, but its ability to lead the institution has been permanently compromised.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Author

Kevin Carmichael is a senior fellow at CIGI and the national business columnist at the Financial Post.