In testimony before the House Foreign Affairs Subcommittee on Terrorism, Nonproliferation and Trade last week, CGD president Nancy Birdsall argued that support for the G-20 commitments to increase lending resources at the IMF is a critical part of ensuring U.S. recovery from the economic crisis and global prosperity and security. She was, however, confronted with a host of concerns about whether multilateral lending would go to governments like Iran, Sudan, and Syria, and with one member of Congress’s view that he “is a citizen of the United States, not the world.”
The hearing cast a broad net: “Foreign Policy Implications of U.S. Efforts to Address the International Financial Crisis: TARP, TALF and the G20 Plan.” Other witnesses included Kevin Kearns, president of the U.S. Business and Industry Council; Roger Robinson Jr., president and CEO of Conflict Securities Advisory Group; Damon Silvers, associate general counsel at the American Federation of Labor and Congress of Industrial Organizations; and Terry Miller, director of the Center for International Trade and Economics at the Heritage Foundation.
Birdsall’s testimony focused on the G-20 plan and its implications for emerging and developing economies, as well as for the United States. As in previous testimony, Birdsall said that today’s global challenges—disease, human and food insecurity, climate change, and financial crises—do not respect borders; they threaten security globally and at home.
The G-20 leaders recognized the urgent challenge of ensuring that developing countries have the resources to cope with the global economic crisis—avoiding setbacks in Asia, Africa, the Middle East and Latin America that would not only undermine the fight against poverty and disease worldwide but would create the instability and associated security risks for everyone including here at home. I want to emphasize that what happens in developing countries—where more than 5 billion of the world’s 6 billion people live, and where about one-third of world GDP is now produced—matters for Americans’ security and for our economic recovery.
Birdsall also referred to a statement that Tim Adams, former Under Secretary of Treasury for International Affairs, made when they testified before the House Financial Services Subcommittee on International Monetary Policy and Trade last month. Adams said,
Failed states and extreme poverty breed unrest and instability and create the types of conditions that allow dictators, extremists and terrorists to thrive. In short, it is in our national security interest to ensure that financial and economic crises don’t destabilize fragile states.
Birdsall reminded the subcommittee that many of the recent recipients of International Monetary Fund (IMF) support (e.g. Mexico, Colombia, Poland, and Pakistan) are crucial players in the success or failure of our foreign policy and national security objectives.
Birdsall also argued that in addition to the national security and foreign policy implications of the G-20 plan, U.S. recovery from the economic crisis depends not only on the U.S. stimulus, but on sustaining demand abroad, including in emerging and developing-country markets. She explained to the subcommittee that in economic terms, emerging-market and developing economies have driven much of recent world growth:
In 2008, U.S. growth relied almost completely on our exports—about one-third of which went to China, India, Brazil, Mexico, and other emerging markets. An estimated 10 percent of U.S. jobs—about 12 million—depends directly on these exports. . . . Lower global growth, as in the Asian financial crisis, will cause U.S. growth, jobs, and exports to fall more sharply. Collapsing economies overseas will exacerbate the contracting economy at home. Stimulating the global economy is vital for our domestic recovery.
Birdsall urged members of the subcommittee to support the G-20 commitments currently moving through Congress, and in particular the proposed increase in lending resources for the IMF that have been attached to the war supplemental, but not yet voted on.
Congress, however, remains strongly divided over the IMF proposals. The witnesses at this particular hearing, including Birdsall, encountered the type of disdain normally reserved for administration officials defending their own policies, not private guests invited to provide expert opinion on the matters at hand. The range of issues—TARP, TALF, and G-20—gave the members a virtual grab-bag for political grandstanding. My sense is that several members of this particular subcommittee were grumpier than usual because they feel that President Obama’s G-20 commitments bypass Congress’s policymaking and oversight role. It is true that the House really hasn’t had a chance for substantive floor or committee debate on the issues and that this subcommittee lacks direct jurisdiction (or control) over the IMF or World Bank issues. And in the absence of strong outreach and education on the complexities of the IMF and G-20 proposals, the administration’s gamble of attaching the IMF funding to the war supplemental may be backfiring (see this article in the Financial Times). The unfortunate result, however, is that many members of Congress are taking aim at the G-20, and multilateral engagement more broadly, rather than criticizing a flawed process.
Bruised egos and flawed processes aside, there are several misconceptions expressed at the hearing that merit response.
- Misconception:The administration’s IMF package is a $109 billion IMF bailout paid for by U.S. taxpayers.
Reality: The proposal for the United States to provide $100 billion in additional lending for the IMF’s New Arrangements to Borrow (NAB) emergency financing mechanism is not a cash outlay, but a line of credit (more like a revolving loan than an expenditure). The Congressional Research Service explains in their report: “In the case of the NAB, the U.S. would receive a promissory note from the IMF pledging to repay the loan with interest.” It further explains that the United States would receive back from the IMF a monetary instrument of equal value which it would add to its foreign exchange reserve. If the NAB is used by countries struggling to cope with the crisis, the U.S. line of credit would go to the IMF, not the country in need, and the loan would then be backed by the IMF’s substantial gold reserves (3,217 metric tons) which might just make it a safer bet than U.S. T-bills. In recognition of these complexities, the $100 billion outlay is scored as $5 billion on the budget; however, it is not an expenditure. And bear in mind that by scoring $5 billion on the budget, the United States would leverage a total of $500 billion in additional lending resources through similar contributions by other countries, and the IMF executive board, on which the United States effectively has a veto, will still have an opportunity to vote on (or veto) specific country requests. (For more on the budget scoring, see CBO’s blog and the FY09 conference report, starting on page 59.)
- Misconception: The IMF routinely forces structural conditionality, cuts in social-sector spending, and wage bill ceilings on developing countries.
Reality: The IMF today is not the IMF of old. Birdsall argued in her testimony that in response to the global economic crisis, the IMF has recognized the logic of supporting deficit spending during a downturn, and has encouraged and indeed urged countries to preserve or increase their spending on health, education, and the social safety net in general. She said fiscal targets have been loosened in 18 of 23 African countries with active IMF programs and, on average, fiscal deficits are widening by 2 percent of GDP. She also said the creation of a new precautionary facility (the Flexible Credit Line or FCL) that makes substantially more resources available more quickly on better terms, on request, to countries with an adequate record of good policies and sound management is another sign of positive change.
- Misconception: The IMF gives buckets of money to odious regimes like Iran, Syria, and Zimbabwe, which runs counter to our U.S. foreign policy interests.
Reality: The IMF hasn’t loaned to Iran since 1962, Syria since 1972, or Sudan since 1984. And future loans must be approved by the IMF executive board (see above!). More complicated is the role of the World Bank in some of these regions. A Daily Kos blog post by Kimberly Killen highlights these concerns, as did the subcommittee’s chairman Brad Sherman (D-CA), and argues that “little is being done in regards to which nations are granted loans.” But Killen said she supports aiding developing nations, and she argues for a modernized Foreign Assistance Act to help provide capital and assistance to transform developing countries. An Across the Aisle blog post takes a different view and says that while some World Bank programs may take place in these regions, they do not compromise our security interests. She argues that “preventing the World Bank and IMF from loaning to Iran won’t hurt the repressive regime or cripple the nuclear program. Instead, Iran will stop spending on disaster relief and clean water. If anything, denying the funds will only hurt the nascent democratic movement in Iran.” She argues the United States should support Obama’s promised increases for the international financial institutions while pressuring those institutions not to loan to our adversaries.
More troubling is the refrain of Rep. Donald Manzullo (R-IL) who told the witnesses that he is “a citizen of the United States and not of the world” (apparently a phrase used by Newt Gingrich) and criticized the G-20 communiqué for saying that prosperity is indivisible. Manzullo said “the United States wants to be profitable” and “apparently everything we have to do in this world is to make sure that every third world country and every country has the same prosperity that we do.” Absent from his statements was a recognition, as many of the witnesses tried to convey, that what happens in the rest of the world matters for our own economy and our safety (not to mention the subcommittee’s issues on trade, nonproliferation and terrorism, or some of the largest employers in Manzullo’s district like Hamilton Sundstrand and Ingersoll Machine Tools that happen to be export-dependent manufacturers).
It’s clear that the IMF legislation and the process by which it is moving through Congress is raising populist hackles on the right and the left. But it is also clear that people left, right, and center are prepared to stand with Birdsall and other thoughtful analysts of global finance in the awkward middle. The Washington Post editorial last week summed it up nicely:
These are old arguments; the fact that support for the IMF helps purchase a public good—global financial stability—gets less frequent mention. As the administration has argued, IMF support does not add to the projected budget deficit because it is more like a revolving loan than an expenditure. President Obama has correctly observed that "other countries are looking to the United States to deliver on our commitment"; Congress should not undermine him.
There are strong and compelling cases to be made on these issues, and it’s unfortunate that they are suffering under the weight of bailout fatigue, a panoply of other political hot-button issues, and a risky (but understandable) gamble from the administration on process with Congress. Here’s hoping the Obama administration and others can continue to work with members of Congress on explaining not only the IMF financing mechanisms to dispel concerns over an "IMF bailout," but also continue to make the case that a more effective, legitimate, and better-resourced IMF is important for the United States' own recovery from the economic crisis as well as national (and global) security, and that it is not the only mechanism that the United States can and should be using to help emerging and developing countries cope with the current crisis.