Congress inaction could cost U.S. clout at IMF

Though many legislators may not realize it, Congress failed to include in the massive spending deal approved last week funds to implement reforms sought for years by both Democratic and Republican presidents that would give China, India, Brazil and other large emerging nations a greater say in activities of the International Monetary Fund.

Most of the IMF’s 187 other members have agreed to the reforms since 2010 under strong lobbying from the Obama administration. The reforms were slated to be included in the $1.1 trillion spending bill given final approval Thursday by the Senate.

Most Democratic and Republican leaders on Capitol Hill last year signed off on putting the landmark reforms in the continuing resolution, which typically was so massive that most legislators had not read it nor were fully aware of all that was or was not included.

But at the last minute in drafting the bill, House Republican negotiators withheld their support for the IMF reforms in a standoff with the White House over budget provisions apparently unrelated to the IMF. Analysts said that effectively killed the best chance of getting the legislation through Congress anytime soon.

The setback for the Obama administration is likely to have ugly repercussions for the United States, international analysts said. Much of the rest of the world has been waiting for three years for Washington to put the reforms into motion.

“This is a major blow to U.S. credibility around the world, with ominous consequences” for U.S. efforts to lead the world on economic and financial matters, said Edwin M. Truman, an analyst at the Peterson Institute for International Economics. He called Congress’ failure to act a “self-inflicted wound” that will hinder the ability of the U.S. to lead at the IMF and other global forums.

“The United States will be less trusted to implement international agreements in this and other areas. Moreover, the IMF is weakened” in a way that will make it harder for the U.S. and other Western nations to influence China and other emerging nations on market-oriented policies.

Treasury Secretary Jack Lew, who made the IMF package a top priority, was met with skepticism last month when he appealed for the reforms at a House Financial Services Committee hearing.

“Many Americans question the wisdom of supporting the IMF and other multilateral financial institutions that take their hard-earned dollars and use them to bail out other countries,” committee Chairman Jeb Hensarling, Texas Republican, told the Treasury secretary.

Mr. Hensarling said he had doubts about the U.S. ability to carry out the reforms because of President Obama’s diminished clout abroad.

“An important question is whether the administration’s credibility has been compromised and has compromised our ability to reform multilateral financial institutions,” Mr. Hensarling said.

The administration can try again this year to secure approval in Congress, but analysts are not optimistic that opportunities will arise.

Mr. Lew, addressing the Council on Foreign Relations late last week, said the White House “made a full-court press to get it done and got close, but didn’t get it done this past week. We are continuing to stand by our commitment, and we will get it done.”

Mr. Truman blamed the failure to act on Congress and the administration, saying neither has given enough priority to updating the World War II-era financial institutions that have helped maintain global financial stability for decades, most recently by helping to quell the monumental debt crisis in Europe.

“The failure of the Obama administration and U.S. Congress to exercise leadership on this issue was likely driven by a lethal combination of antipathy, apathy or ignorance,” he said. “But it means that other countries may now start turning further away” from the U.S. on vital economic and financial matters.

China goes it alone?

Analysts said the long delay in U.S. approval of what amounts to a modest and incremental modernization of the IMF will only encourage China and other major emerging powers to go it alone or create alternative international forums to exercise their growing economic clout. China already extends more loans each year to developing nations in Africa, Latin America and Asia than does the World Bank, the IMF’s sister institution.

China also has suggested marshaling the sizable resources of major emerging economic powers to create an alternative lending fund, which could compete with the U.S.-dominated IMF in providing emergency lending to nations in economic straits. Such an alternative lending authority could enable China and other economic powers that are less market-oriented to exert potentially enormous influence over smaller nations in times of crisis, placing them firmly in a China-centered orbit outside the influence of the U.S. and other Western powers.

Republican leaders with jurisdiction over the IMF were prepared to agree to the reforms in the spending package, but they wanted the White House to make concessions, the analysts said. When the administration failed to so, the Republicans pointed to lingering opposition to the IMF among conservative populists, some of whom oppose any more funding or authority for the Bretton Woods institution.

“It’s no small matter,” House Appropriations Committee Chairman Harold Rogers, Kentucky Republican, told reporters about the IMF funding request. The administration was seeking to “reprogram” $63 billion in emergency lending authority that the U.S. gave the IMF during the global financial crisis. Congress approved the lending authority in 2009, but the IMF reforms required the U.S. contribution to be shifted to a permanent fund for any other global financial emergencies.

“It’s a huge monetary item, fiscally — $63 billion,” Mr. Rogers said, though supporters argued that the measure would have a relatively small impact of $314 million in the budget over the short term.

Under the reforms, most of a proposed doubling of IMF lending authority to $733 billion would be underwritten by other nations, including China, which in return would receive a modest increase in its voting power in IMF decisions, an increase that still falls far short of reflecting Beijing’s real-world economic clout.

U.S. still dominates IMF

Beyond that, U.S. supporters of the reforms said the changes would do nothing to dilute the substantial voting power of Washington on the IMF’s executive board, and would maintain the effective U.S. veto authority over IMF activities. Even if nearly every other country approves the reforms, U.S. inaction or opposition would effectively kill them.

While the 17 percent voting share for the U.S. would not be affected, small European countries such as Belgium would have to accommodate the increased share for emerging economic powers. China’s voting clout would almost double to about 6 percent, making it the third-largest voice in IMF votes.

“It is pretty big slap in the face of the IMF by the U.S. at a time when the U.S. is trying to re-establish its leadership in these global organizations,” Douglas A. Rediker, U.S. representative on the IMF board from 2010 to 2012, told the Peterson Institute.

“The U.S. reluctance to move ahead with this is causing some friction” at meetings of the Group of 20 economic powers, which includes China, India and other major emerging nations as well as European allies who reluctantly made substantial concessions by agreeing to the reforms, he said.

Officials in India, China and South Korea were among those expressing disappointment at the U.S. failure to endorse the IMF overhaul last week.

U.S. inaction undermines efforts to modernize and beef up the IMF so it can deal with the increasingly large-scale financial crises that have caused global economic turmoil in recent years, he said.

Moreover, with the administration in the midst of negotiations with the European Union and a host of other nations in the Asia-Pacific region over potentially far-reaching trade agreements, “It is probably a pretty decent slap at President Obama’s ability to go ahead with commitments” like those, he said.

IMF Managing Director Christine Lagarde, who has visited key members of Congress in an effort to prod action, said she remains hopeful. “We understand that the U.S. administration will continue to work on securing the necessary legislative authorization and we are hopeful that this will happen,” she said in a statement after the budget details were released last week.

She noted that the IMF, since the 2008 global financial crisis, has made 154 lending commitments around the world and provided technical assistance to 90 percent of its members.

“We have certainly played our part in the collective response to the crisis,” she said.