Friday, March 20, 2015

Plan B to Pressure US Congress on IMF Reforms is Underway

The 2010 IMF reforms that would increase the quota of SDR's and increase influence for China and the BRICS nations remain stalled in the US Congress. The IMF and BRICS nations issued a number of "deadlines" that were basically ignored. Earlier this year the IMF announced that this summer an effort would be made to come up with a Plan B to implement the reforms.

It is becoming clearer that in the leadup to whatever Plan B might be, pressure will be ramped up on the US Congress. It is also becoming clearer that the recent news that the UK and several other EU nations will join a new Chinese led development bank is part of an effort to send a message to the US Congress. We noted that in this earlier blog article

More and more articles are appearing in support of the idea that the US needs to approve the IMF reforms because otherwise the US will lose status around the world within the IMF and other global institutions. Here is another article to use as an example. It is authored by former Goldman Sachs Jim O'Neill and titled "Making Space for China."  Below are some quotes and then a comment. Please click the link above to read the full article.


"When the United Kingdom announced earlier this month that it had agreed to become a founding member of the China-led Asian Infrastructure Investment Bank (AIIB), most of the headlines focused not on the news itself, but on the friction the decision had caused between the UK and the United States."

. . . . .

"The US Congress has yet to ratify a 2010 agreement providing China and other large emerging economies greater voting power in the World Bank and the International Monetary Fund. In the meantime, the agreement has become obsolete; China's economy has nearly doubled in size since the deal was struck.

America's reluctance – and that of France, Germany, and Italy – to give the emerging powers an appropriate voice in the established international financial institutions is counterproductive. It drives the creation of new parallel institutions such as the AIIB and the New Development Bank, founded in 2014 by the BRICS countries (Brazil, Russia, India, China, and South Africa)."

. . . . 

"Later this year, the IMF will recalibrate the weights in its unit of account, the so-called Special Drawing Rights, which comprises a basket of currencies that currently includes the US dollar, the euro, the British pound, and the Japanese yen. According to almost every economic and financial criterion, the SDR basket should now include China's renminbi. The US would be wise to not oppose such a move. Otherwise, it would risk accelerating the decline of the established international financial institutions.

Similarly, the US Congress should ratify the agreed changes to the governance of the IMF and the World Bank. By founding the AIIB and the New Development Bank, China and other emerging powers have signaled that they will not wait for their voices to be better heard. And decisions like that of the UK – and France, Germany, and Italy – show that they are not alone."
My added comments:

As time goes by things do become clearer. This latest development where we see the UK and other EU nations joining the new Chinese led bank is a clear signal that an attempt will be made to make the US Congress look isolated in its opposition to the IMF reforms. Australia and Japan have also indicated they may join the new bank as well. 

So far, the US Congress is yawning and indicating that it is not interested in changing its position on the IMF reforms any time soon. Here is quote from this Economic Times article that illustrates this:

"Kay Granger, chairwoman of the House State and Foreign Operations Appropriations Subcommittee, where Lew testified, said she did not believe Congress would pass the IMF reforms when the Congressional Budget Office estimated they would cost $3.1 billion. "In the past, there has not been sufficient congressional support for the IMF proposal, and frankly, I do not expect much to change this year," she said. . . . . 

US delays on the reforms have prompted the IMF's board to consider other options, including a proposal under which Washington would lose its veto power at the global lender."

We can expect that efforts to increase pressure on the US Congress will continue as move towards the new summer "deadline" the IMF has set. So far, they don't appear to be having much impact on Congress. We'll continue to follow it here.

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