Next week’s semi-annual meetings of the International Monetary Fund and World Bank will be unlike any other.
For the first time, the US truly will be on on the defensive, marginalized within institutions that it designed in its own image. For when officials gather in Washington, everyone will be talking about China and its Asian Infrastructure Investment Bank (AIIB), the vehicle within which the world has piled to escape from the US’s grip on international economic affairs.
“AIIB, dismissed just a few months ago by western countries as another flamboyant plan by China, is now clearly accepted as a tangible game-changing development in the multilateral financial architecture,” says Akshay Mathur, head of research at Gateway House, a think tank that focuses on international affairs and economics in Mumbai.
It is easier to list the major countries that didn’t put their hands up to be founding members of the AIIB by Beijing’s March 31 deadline: the US, Japan and Canada. Otherwise, the emerging powers of Asia and Latin America and the colonial nations of Europe are all on board. The new institution will begin with capital of $50 billion (US) to put toward the $8-trillion investment in infrastructure that the Asian Development Bank says the region needs by 2020.
A single narrative takes hold at every IMF and World Bank meeting. The media demand it. The erosion of US influence is a natural: there is tension, and it has broad appeal. (Everyone likes a story about the king of the mountain getting toppled, whoever the king might be.) The decline of the American empire has been in the air for a while. There has been much fear and loathing in recent years over the implications of the US’s refusal to ratify governance changes at the IMF that were agreed to at the Seoul G20 Summit in 2010. But the rush of the UK, Germany and Australia to sign up with China over US objections is the first tangible evidence that Washington’s grip is slipping. The deterioration of American influence has left the think tanks and gone mainstream.
“It should be amply clear to everybody that this lack of progress (on IMF reform) has been destructive with the credibility of the international governance system and it has been destructive for the credibility of the US presence and role in this governance,” American John Lipsky, the former No. 2 at the IMF, said in a speech at the Export-Import Bank of India last month.
It will be interesting to observe whether Beijing’s diplomatic win changes the behaviour of Chinese officials on the international stage. China tends to keep to itself around the IMF. But behind closed doors, close observers of the institutions note that Chinese officials have become increasingly confident and proactive in recent years. China now has a card that is nearly as good at the US’s veto over major decisions at the IMF and the World Bank: if Beijing doesn’t like the tenor of discussions in Washington, it can now legitimately say that it has other options.
And it will be equally instructive to observe how US officials respond to humiliation.
After ridiculing the UK’s decision to join the AIIB, the Obama administration has softened, saying that it looks forward to cooperating with the institution through the World Bank and other multilateral lenders. At the same time, the US Treasury looks set to impede Beijing's ambition to add the yuan to the basket of currencies that determines the value of the IMF's Special Drawing Right, or SDR. In a speech earlier this month, Jack Lew, the treasury secretary, said “further liberalization and reform are needed” before the yuan meets the SDR standard. That contradicts Christine Lagarde, the managing director of the IMF, who said last month that the yuan's inclusion in the SDR basket is a question of when, not if.
There are two ways the narrative can go next week. The best outcome would be a breakthrough on the impasse between the White House and Congress over the IMF reforms. Finance ministers from the G20 who are ideologically in tune with the Republicans who dislike the fund could join the effort as mediators. They could explain how the impasse is hurting US interests abroad. The attention being given to China and the AIIB should be enough to cause the White House and Republican leaders to give ground and find a way forward.
Alas, that is the least likely outcome. More probable is more of the same. This crop of American politicians has proven themselves incapable of compromise. The G20 might be good at fighting a fire, but it has failed as a guardian of truly global institutions. It has done little to promote the World Trade Organization over a proliferation of regional trade negotiations. G20 leaders care little about following through on their summit promises. As Lipsky noted in his speech at India’s Ex-Im bank, the G20 has completed none of the broad reform programs it launched in the aftermath of the financial crisis.
“The bottom line is straightforward: US approval of the Seoul IMF reform proposals as soon as possible would be an overdue contribution to global governance,” Lipsky said. “But in any case, it is hard today to view the G20 leaders process as representing a new period of global economic and financial relations. And I think it is hindering progress.”
With the exception of the US, the interests of every nation are best served in a multilateral institution or negotiation. That’s because the biggest player’s negotiating position is diluted with more people at the table. But instead of sticking together, the G20 is drifting apart — and into the orbit of a new king of the mountain.