Stalemate: US political paralysis and damage to economic global governance

Bruno De Marco Lopes

Summary

Reforms at the International Monetary Fund (IMF) were approved at a critical moment for the world economy. These reforms aimed to increase the resources available to the institution and enhance the representation of large emerging market economies such as China and India (Weiss 2013). However, if they were so vital for the recovery of the world economy and the engagement of rising economic powers in the IMF, why then have such reforms not yet been enacted?

In 2010 the G20 assembled in Seoul, South Korea, to discuss and eventually approve reforms to the IMF. Despite the agreement on reforms, the United States congress has failed to pass the legislation required for this new architecture. This paper analyses the reasons why the US executive that was one of the main proponents for these reforms remains unable to persuade the Congress to pass these IMF reforms.

 

Political Paralysis

The political paralysis that has gripped the US Congress appears to be the result of partisan polarization (Peak, Krutz and Hughes 2012). The IMF reforms are related to the Bretton Woods Act and according to the Bretton Woods Agreements Acts, “Unless Congress by law authorizes such action, neither the President nor any person or agency shall on behalf of the United States (a) request or consent to any change in the quota of the United States under article III, section 2(a), of the Articles of Agreement of the Fund” (SEC. 5.9 [22 U.S.C. 286c]). As a result, IMF reforms fall into the category of executive agreements. The ratification of treaties, which require two-thirds support from voting senators, and the approval of executive agreements, which requires majority senate approval, have been held up by the partisan divide in the US Congress.

The US government led the negotiations on the IMF’s quota reform in the G20 and its delegation also worked hard to convince European countries to give away part of their quota share and also two chairs (Belgium and Austria; Edwards 2013) in the Directive Board of the institution (Cooper and Thakur 2013). The American delegation also hammered out an agreement that was thought would pass easily in the US congress. Despite these efforts, three years after this agreement was signed, the reform has not been implemented because of the failure of the US congress to approve the reforms.

Throughout the paper I argue that rather than a strategy to forestall the reform, the delay in the ratification of the reform seems to be the fruit of a political mismanagement and damaged US leadership in the IMF. According to Treasury Secretary Jacob Lew, “We have a veto in the IMF, we have a controlling voice when we need to, we have leverage so that the United States can influence the economic decisions around the world, and it is something that our international leadership depends on” (Wroughton, 2013). This delay is having negative effects over the efforts for the recovery of the world economy as well as international governance.

The delay in the ratification of the IMF’s reform has three main implications:
the lack of reform of the IMF may render the IMF incapable of dealing with economic crises and other challenges;
the failure to bring emerging economies within the architecture of the IMF may encourage these countries to create or look for solutions for global economic governance outside the IMF; and
US leadership in the IMF may suffer.

 

Obama’s Politics over International Agreements

Analyzing President Barack Obama’s policy on international agreements, Peak, Krutz and Hughes (2012) cast light on Obama’s preference for executive agreements rather than treaties, demonstrating the hypothesis that “increased polarization in the Senate will decrease the number of treaties transmitted by the president” (p. 1301). During the president’s first term, his rate of executive agreements was similar to his predecessors but in regard to international treaties the rate dropped severely and this trend continues during his second term.

According to Peak Krutz and Hughs (2012), “Since the end of World War II, the number of treaties concluded has remained relatively stable, averaging about 32 treaties per two-year Congress from 1947 to 2008, whereas the number of executive agreements has exploded to an astonishing average of 524 per Congress” (p.1298). Obama so far has averaged eight treaties transmittals to the Senate for each two-year Congress (Peak 2013).

Analysts of domestic politics of international agreements (Krutz and Peak 2009; Peak 2013) and analysts of American domestic politics (Ornstein 2011; Binder 2011; Klein 2012) agree that the political paralysis that has been caused by partisan polarization and the ideological divide are limiting this government’s ability to face domestic and international challenges. The tense climate in Congress in tandem with the economic and social challenges that the country faces are causing this Administration to focus on domestic challenges rather than on the enactment of IMF reform, notwithstanding the Administration’s support for the latter.

 

IMF Reform

When the American delegation started discussing the reform package with the representatives of other countries, they apparently believed that the agreement would not face any difficulties being passed by the Senate. They made sure that the reform package would neither represent a new financial burden to the United States nor damage its leadership. The agreement makes permanent a $63 billion U.S contribution originally allocated to the New Arrangements to Borrow (NAB). This new legislation will maintain the share of American quotas in the IMF, maintaining thus its leadership through its voting power (16.75%). It involves basically shifting the contribution from a temporary status to a permanent one.

There are two arguments for and against the IMF quota reform in the US. First, those in favor of reforms argue that US participation reduces the effects of economic crises in other countries and promotes development in world markets. Those opposing the reforms suggest that US tax payers’ money may be used to help irresponsible governments and point out that the IMF is highly unpopular in countries that receive its assistance.

The bill relating to IMF reform is particularly sensitive at this moment because the American government has been obliged to make a series of cuts in its budget. Some lawmakers, for instance, argue that the US money for the IMF should go for domestic programs that are being cut (Wroughton, 2013). After the reform package was approved by the IMF Board of Governors in December of 2010, the IMF legislation was caught up in American domestic politics.

In 2012, President Barack Obama decided to postpone the request for approval because it was an electoral year. On March 2013, Obama sent the IMF funding request to a Republican dominated House of Representatives. It was rejected. The Administration hoped that a Democratic majority in the Senate would put the IMF reforms in Senate’s version of the funding bill. However, it was also voted down by the Senate Appropriations Committee. The Committee argued that it would be “too politically sensitive” (Wroughton and Lawder, 2013).

The delay in the ratification of the IMF reforms has raised reactions both within the United States and in the countries that would benefit most from the reform such as Brazil, Russia, India and China (the BRICs countries). In the US, scholars and policy makers sent a letter to the president of the Senate, informing him of the importance of the reform legislation for the maintenance of American influence in the IMF and to avoid the emerging economies from the exiting the IMF in frustration. In the international arena, one of the main demands of the BRICs countries has been the reform of the IMF. Since 2008’s economic downturn, this group of countries has been active in the fight against the effects of the downturn and has also emphasized the importance of strengthening international financial institutions, or IFIs in order to make them more representative and enhance their legitimacy and it is hoped their effectiveness.

The failure of reform appears to have lost a valuable window of opportunity to increase BRIC clout in the IMF. A round of meetings to discuss a new review of quotas is scheduled to January of 2014. Since the US has not approved the reform package of 2010, it is improbable that any new agreement will be reached. Nonetheless, this new round of meetings will possibly start in a tense mood. Even if the reform is approved eventually, it is not clear if the BRICS will manage to maintain focus on the institution. The rhythm of growth of their economies is slowing, and these countries seem to be shifting their attention on domestics needs, such as sustained growth and avoiding political and social turmoil.

 

Conclusions

When the IMF’s quota reform was agreed on, the global economy was within the worst moments of the economic crisis. The BRICs countries, unlike the G7 economies, were in a moral and economic position that enabled these countries to speak with a louder voice and to demand more room in the architecture of the international financial system.

Simply put, the causes for the delay in the approval of the IMF legislation come down to two reasons: The Obama Administration’s decision to put off the request for IMF reform approval in 2012 due to his presidential election and the political stalemate in the American Congress driven by partisan conflict. Periods of election can be very sensitive political moments, upsetting majorities and changing congressional preferences on topics (Bang, 2011). The increase in partisan polarization has left the Administration with little appetite to respond to both domestic and international challenges.
The consequences of this reform failure ranges from the erosion of American leadership in the IMF to the gradual decrease in the legitimacy of the IMF in dealing with global challenges. Whether a deliberate strategy or not, by not approving this reform package could complicate future US participation in the management of economic crises. The non-adaptability of international financial institutions (IFIs) to new world economic circumstances is one of the factors behind the BRICS countries’ move toward the creation of their own development bank, which can be viewed in part as a reaction against the failure at increasing these countries’ participation in global economic governance.

 

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