Congress this week is set to vote on a bill that will determine whether President Obama can fulfill his pledge to help countries hit by the economic crisis. A provision in the proposed military spending bill would boost the U.S. contribution to the International Monetary Fund. At the London G-20 Summit in April, Obama said the United States would commit up to $108 billion toward the IMF's expanded lending capability.
IMF supporters say it has a key role to play in bringing the global economy back to health and in preventing a recurrence of the current financial crisis. Congress, however, is suffering from bailout fatigue, and the vote on the IMF contribution could be close.
Global Leadership
The $100 billion commitment from the U.S. — along with commitments from Japan, Europe and other countries — would mean the IMF could triple the amount of money it could lend to needy countries, from $250 billion to $750 billion. The traditional IMF role has been to bail out governments that have spent themselves into a hole, but IMF supporters say the financial crisis has presented the fund with a new opportunity for global leadership.
"The IMF looked as if it was losing relevance a couple of years ago, when very few countries were coming to it for balance of payments financing," says Randall Henning, a political science professor at American University and a visiting fellow at the Peterson Institute for International Economics. "Now, the IMF is very much in demand, and if it responds well, its position will be greatly strengthened."
Part of the new IMF role is to encourage governments to implement stimulus spending to promote economic recovery. But it may also be able to help prevent a future financial crisis.
The current problems came about in part because too many governments, especially the emerging economies, were earning so much money from exports that they literally did not know what to do with it. Many lent their export dollars to the United States, where the money was put into shaky investments. One key to avoiding a repeat of the crisis is to convince those emerging-market countries that everyone will be better off from here on if they spend their export earnings at home.
Some of these countries, however, don't dare spend their export savings, for understandable reasons.
Eswar Prasad, a former IMF economist now at the Brookings Institution, says the IMF as it is currently funded would be unable to help the biggest emerging-market countries, should they be hit by another global financial crisis.
"If a large emerging-market country like [South] Korea or Brazil would start having financing difficulties, the IMF would simply run out of money very quickly," Prasad says. Given that situation, Prasad argues, those countries now feel compelled to "self-insure" against the prospect of another crisis by building up large stocks of their own financial reserves.
But such a development, Prasad says, would create more global imbalances of the kind many economists identify as a root cause of the current economic crisis.
"If you have a lot of emerging-market countries that see trade surpluses as a necessary part of their growth strategy and for building up foreign exchange reserves, then somebody has to be running a deficit on the other side in order to take in all those exports," Prasad says. "You're almost setting the whole system up for a fall."
If countries like China, Brazil, India and South Korea see that the IMF is well-financed, however, they may feel less need to build up their own exchange reserves. "Having a very large pool of [IMF] resources allows these emerging-market economies to have some additional confidence," Prasad says.
Congress' Take
Part of the IMF mission in this regard would be to persuade governments to change their economic growth policies in order to focus less on the export sector and more on domestic demand. A deeper IMF loan capability would help, but the fund would also need more political clout. Some of the new economies don't take the fund all that seriously because they see it as dominated by the United States and other Western nations.
The Obama administration therefore has two goals: to get the IMF more money and to support reforms that would give the emerging economies more voting rights within the fund. Countries like China and Brazil are currently unrepresented in IMF decision-making. Implementation of the reforms would require an agreement from Western European nations to give up some of their voting representation in the fund. One argument for the proposed funding increase is that it would better position the United States to broker an IMF reorganization.
"The United States is neither going to win a lot [nor] lose a lot of votes within the International Monetary Fund [as a result of political reforms] but it will be central to an agreement to redistribute from the Europeans to the Asians and other emerging markets," Henning says. "So the United States needs to support the institution in order to be able to play that role."
But Congress will have to go along, and there is significant opposition on Capitol Hill to any increase in U.S. support for the IMF.
"I just think under this environment — the down economy, the suffering that's going on in our own country — for us to just quickly approve another $100 billion for international bailouts makes no sense," says Sen. Jim DeMint (R-SC). "At some point, we have to say we can't do all the good deeds around the world that we want to do."
Henning, however, says the United States owes it to the world to beef up the IMF right now, given that the global economic crisis was brought about in part by U.S. overspending.
"Having contributed to the crisis in this way," he argues, "if the U.S. doesn't support the IMF's attempts to deal with the collateral damage, the United States loses credibility and international standing greatly."
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