The Corner

The White House Is Using the Ukraine Crisis to Rush Through a Massive Increase in the U.S. Contribution to the IMF

A March 4 “fact sheet” from the White House called “International Support for Ukraine” seems to imply that, if we want to help the citizens of Ukraine, Congress has to agree to significant increases in the U.S.’s contributions to the International Monetary Fund:

As part of this international effort, the United States has developed a package of bilateral assistance focused on meeting Ukraine’s most pressing needs and helping Ukraine to enact the reforms needed to make its IMF program a success. We are working with Congress to approve the 2010 IMF quota legislation, which would support the IMF’s capacity to lend additional resources to Ukraine, while also helping to preserve continued U.S. leadership within this important institution.

What’s the “2010 IMF quota legislation” the White House is talking about here? Well, among other things, it would double the funds that the IMF is allowed to loan to any country it wishes, without much limit. For the United States, it means a 100 percent increase in its contribution to the IMF from its current level, $63 billion. According to the Congressional Research Service, “this would be the largest proportional quota increase in the history of the IMF.”

Moreover, the data suggest there’s no reason to require higher quota contributions in order to increase IMF support for Ukraine to the increase in quota contributions. In fact, according to the IMF, its forward-commitment-capacity figure (how much they can lend, basically) is “over $400 billion” at the current exchange rate. AEI’s Desmond Lachman explains:

For there is little link between how much money the IMF can lend to Ukraine and the proposed increase in the IMF’s quota resources. With currently more than US$400 billion of uncommitted loanable resources at its disposal, the IMF can single handedly very comfortably meet Ukraine’s borrowing needs for the next two years. After all, the Ukrainian government itself estimates its total borrowing needs for 2014 and 2015 at only around US$35 billion. This would imply that at most the IMF would be called upon to finance Ukraine by between US$15 billion and US$20 billion. Such amounts would represent no more than 5% of the IMF’s currently available resources.

In other words, the White House seems to be trying to use the Ukrainian crisis to push through changes to our IMF policies that Congress refused to adopt in the last spending bill.

As John Taylor explained in the Wall Street Journal a few weeks ago:

The $1.1 trillion spending bill signed into law by President Obama last month did not include a crucial change in the U.S. financial contribution to the International Monetary Fund. By refusing to accommodate the White House’s strenuous pleas to increase the IMF’s discretionary loan budget, Congress effectively rejected an international agreement brokered at the 2010 G-20 meeting—and set off cries in some Washington quarters of a new isolationism.

Now, leaving aside the question of whether the U.S. should double its contribution to the IMF (it shouldn’t, since it would be fiscally irresponsible due to the massive debt explosion in our own future), there are other reasons to be opposed to the 2010 IMF quota legislation. This doubling in spending comes at a time when the IMF is already breaking its prior agreement to refuse funds to countries with unsustainable debts. Taylor explains:

While the G-20 was reaching agreement on the funding boost, the IMF was quietly breaking an earlier, far-reaching agreement on how such funds were to be used. That agreement, called the “exceptional access framework,” set criteria for countries seeking access to huge IMF loans. The framework was put in place in 2003 as a response to the recurrent emerging-market financial crises raging since the 1990s. It barred the IMF from making new loans to countries with unsustainable debts. Such loans effectively bailed out creditors, raised the debt burden on a country’s citizens, encouraged irresponsible fiscal policy, increased risk-taking, and thereby created a crisis atmosphere.

Since 2003, countries and their creditors had to restructure and write down debt to a sustainable level before the IMF would grant them any new loans. The point was to reduce the bailout mentality, and it helped improve the policies and economic performance of emerging markets. While this exceptional access framework was in force, few large crises originated in emerging-market countries, and these countries weathered the 2008 financial crisis far better than most expected.

But then the IMF violated the agreement to bail out Greece:

Then the Greek sovereign-debt crisis emerged in 2010. Rather than sticking to its rule—no loans to a country with unsustainable debt—the IMF simply changed the rule, perhaps under pressure from euro-zone countries and their banks, which held a large fraction of Greek debt. The IMF declared that it could make new loans if there was also a “high risk of international systemic spillover,” then claimed, with very little evidence, that such a spillover risk was high and approved a €30 billion loan to Greece without any debt restructuring.

The change in policy came at the same time the Greek loan was approved, which was strong evidence that the rule was broken solely to allow for the loan. Some argue that the change was made surreptitiously: According to minutes of the May 9, 2010, Executive Board meeting on the Greek bailout decision, the Swiss representative to the IMF noted that the IMF staff had “silently changed . . . i.e. without a prior approval by the board . . . the exceptional access policy.”

The Greek economy deteriorated sharply under its heavy debt burden after the loan, and by February 2012 all parties admitted that a restructuring was essential. Greek debt was written down by about 60%, with some arguing more may be required. An earlier and larger restructuring could have prevented much of this pain.

This isn’t the IMF’s first idiotic move. For one thing, in most cases, it provides bailouts to governments after they make reckless and corrupt fiscal and monetary policies of their own, thereby facilitating corruption and encouraging moral hazard. The organization also spends a notable amount of time advocating for higher taxes in the U.S. — while charging the price to the U.S. taxpayer, the single largest contributor to the IMF.

A letter to the editor by George Mason University economist Donald Boudreaux sums up the reasons why the U.S. should maybe even be cutting its contribution to the IMF:

The IMF’s original purpose was to help cash-strapped governments maintain their currencies’ fixed exchange rates as directed by the 1944 Bretton Wood system.  But that system gasped its dying breath in the summer of 1971, when – with Pres. Nixon’s closing of Uncle Sam’s gold window – all pretense of an international system of fixed exchange rates was abandoned.

Undeterred by the total disappearance of its purpose, the IMF – flush with continuing streams of subsidies, especially from American taxpayers – morphed into a “development” agency.  The quotation marks around “development” are no mistake.  There’s no evidence that the IMF’s efforts as a development agency have had any positive effects, unless by “positive effects” you include creating among many poor countries a culture of dependency upon foreign “aid,” along with propping up authoritarian regimes.*

As my great teacher Leland Yeager observed, “self-important international bureaucracies have institutional incentives to invent new functions for themselves, to expand, and to keep client countries dependent on their aid.”

Isn’t it time to close the window on funding for the IMF?

There are even more other reasons for Congress to reject the 2010 IMF quota legislation: The Heritage Foundation’s James Roberts has argued that the changes would increase the voting power of certain emerging-market nations and “would chip off yet another little piece of American sovereignty—handing it and potentially billions of U.S. taxpayer dollars over to international civil servants at the International Monetary Fund (IMF) to bail out economically distressed countries.”

Even if the package weren’t a bad idea, it still wouldn’t have anything to do with helping Ukraine.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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