I suspect that the number of issues on which Condi Rice, Henry Kissinger, Bob Rubin, Paul Volcker, Tony Lake and James Baker all agree is small. But earlier this week, they and eight others of similar stature signed a letter to congressional leaders urging support for additional US funding for the International Monetary Fund.
These former leaders from State, Treasury, the Federal Reserve and the National Security Council argued that the severe impact of the global financial crisis on developing countries has endangered America’s own hopes for an end to the recession and that a “stronger and more responsive IMF is essential to the restoration of confidence in the global economy and financial system and thus to our own economic recovery.”
And yet, in spite of this unambiguous, high profile, bipartisan support, congressional approval remains uncertain.
Those who oppose increased IMF funding argue that it costs too much, it unfairly benefits other countries on the back of the US taxpayer and the funding process is opaque. Others simply hate the IMF.
It is important to understand the nature of the funding being sought, how it is being accounted for and the crucial role that the IMF plays in today’s fragile global economy — a role that benefits not only recipient countries to which the IMF provides financing, but also to the US.
First, in spite of arguments about how much IMF participation costs the US, in fact, we make money from our stake in the fund. According to the US Treasury, over the past five years, the direct financial benefit of US participation in the IMF to the US taxpayer has exceeded $1.5 billion. That’s because the IMF is a monetary agency – not a special interest, charity or even a development bank. As such, the US benefits directly from both the payment of interest and from increases in the valuation of its share of IMF reserve assets.
The current request before Congress calls for $108 billion in additional funding for the IMF, but this is actually misleading. Given the fact that, as noted above, these funds have proven to be more like profitable investments than traditional budgetary outlays, there is a credible argument that they should not be counted as anything more than an exchange of assets with one of the most creditworthy entities in the world.
The majority of the current funding request is for what is known as the IMF’s “New Arrangements to Borrow,” or the NAB. The NAB acts as an emergency contingency fund and is only tapped when all other IMF resources are exhausted. If the increased US commitment to the NAB is actually utilized, the US would receive an IMF issued interest bearing security in return.
That’s why the current request for over $100 billion in authorization is being ascribed a “score” of $5 billion in the budget. While critics howl that allocating $100 billion while accounting for it as only $5 billion is financial trickery and obfuscation, the reality is that even this number is probably too conservative. For the US to actually lose money on the funding, the IMF would need to default. I can’t imagine a scenario where the global financial system had been so decimated that even the IMF, backed by virtually every sovereign around the globe, could not repay its biggest lenders.
Far more important than the outright profit the US makes from the IMF or the way Congress and the OMB decide to account for it, is the very necessary role that the IMF plays in providing a safety net for developing countries. Not only does that provide security benefits to the US by lessening the risk of creating failed states, but it also provides enormous economic benefits, primarily by creating more demand for US goods. It also provides surplus countries an alternative to hoarding vast amounts of precautionary reserves.
A sustainable economic recovery depends on greater demand for US exports. The US Treasury estimates that for every one percent increase in foreign output, US GDP grows by between 0.25 and 0.35%.
Exports accounted for almost 70% of US economic growth in 2008, but as demand from the emerging world fell last autumn and the dollar strengthened, American exports have fallen steadily. First quarter real exports this year were 23% lower than the year earlier.
If exports were to remain at that depressed level over the full year, our GDP would decrease by around 2.75%. That means that even if the stimulus package passed by Congress earlier this year does everything it was intended to do and stimulates domestic demand, unless exports bounce back as well, we are not likely to see any real impact on overall economic growth and job creation here at home.
The US has been working closely with many other countries to try to coordinate our responses to the crisis and spur global demand and growth. But it has been the emerging market economies, which were previously the drivers of strongest growth in US exports, that are suffering the worst of this crisis. Last year, 51% of all merchandise exports and 65% of all farm exports from the US went to emerging markets and developing countries. Their economic health is vitally important to the US economy.
Unlike the US and other developed nations, the financial crisis that originated in the US and in Europe has dramatically limited developing countries’ ability to access traditional sources of funding needed to keep themselves afloat. It is precisely in these cases that the IMF is of crucial importance as a provider of financial stability and as the lender of last resort. It is a role that they have already played with great skill and speed in Pakistan, Hungary, Ukraine and elsewhere.
When President Obama attended his first G-20 Leaders Summit in London last month, the world’s economic picture was even more clouded than it is today. After two days of meetings, the announcement of increased funding for the IMF caused a collective sigh of relief around the world, both for its size — which was even more than many had hoped for — and for the leadership that President Obama showed in driving the effort for the IMF increase.
By that act, the president showed that he understood the global nature of the crisis and the yearning for big, bold steps on the part of the US to address the needs of those countries most at risk of failure.
While the IMF has not always been popular, or even successful in all of its previous endeavors, during this crisis, it has shown itself to be creative, flexible and forward looking. In particular, the creation of a new flexible credit line earlier this year was announced just in time to provide a boost to countries like Poland, Colombia and Mexico — before they actually needed it.
In seeking additional funds for the IMF, President Obama has shown that he recognizes its importance and the stabilizing role that it plays. It is crucial that Congress approve the IMF funding authorization. Failure to do so would send a terrible signal across the globe that the US can’t be counted on to lead in a time of crisis. It would significantly weaken President Obama’s (and the US) claim to global leadership and could well spark another round of uncertainty in emerging markets, just as they are beginning to show signs of stability. Besides, not only is funding the IMF something that even political opposites like Bob Rubin and Henry Kissinger can agree to, we might even make a profit.
— Douglas Rediker