Group 2 American Foreign Policy Memo #1

 To: The Biden Administration 

From: Stephen Bogli, Matthew Dias, Spencer Higgs, Aidan Ridings, and Leah Tabor, Policy Advisors 

Date: 03/06/22 

RE: International Monetary Fund Reform 

 

Issue: 

Reformation of the International Monetary Fund’s power imbalances regarding veto power and funding structure.  

 

Executive Summary: 

The International Monetary Fund contributes to the ever-increasing globalization of the world economy through several aspects of multilateral participation. While the IMF has helped alleviate many crises in the past, current national interests bring to light some of the key faults of the organization. Through an analysis of the establishment of the IMF, there is an argument to be made that such a globally renowned organization is easily manipulated by a handful of actors. In particular, the United States is a lead monetary contributor to the IMF as reflected through the voting structure. However, for this same reason certain inequalities arise. Other fully developed countries may be identified as “free-riders” to United States led IMF aid, while developing countries who are the primary actors in need of aid struggle to find any voice due to their lack of voting power. We propose and outline three strategies including trade liberalization, a continuation of current IMF functions, or our recommended strategy of adjusting voting rights to better promote equality. These strategies were envisioned keeping the mind the long-term goal of U.S. investment and the need to sustain the role of being a global leader in an economic and political sense.  

 

Relevant National Interests: 

As the world continues to struggle with the social, political, and economic ramifications of the COVID-19 pandemic, as well as the ever-developing state of international affairs (the escalation of the Nile dam conflict, Russia’s invasion of Ukraine, etc.), the role of the International Monetary Fund has become increasingly relevant and crucial to the financial and social stability of all. The United States is the largest cumulative contributor to the International Monetary Fund (IMF) as well as its strongest voting bloc—holding veto power over major policy decisions. The United States has an undeniable stake in the effectiveness of the institution because its failures often result in investment losses. It is necessary for the United States to guide the IMF in a direction which benefits individuals, governments, and economies both at home and abroad. But is this strong, uncontested American leadership sustainable? Has the IMF been weakened with the abandonment of parts of the Bretton Woods economic system? What changes can be made to facilitate our role as a global economic leader and ensure U.S. investment in the IMF is well placed?  

 

Analysis: 

Established in 1944 in the aftermath of the Great Depression, the IMF is a global organization that aims to facilitate global economic cooperation and stability. Today with over 190 member countries, the IMF is an extremely influential part of the global economic system. By financing through quota’s and borrowing, the IMF monitors economic status and provides monetary and technical support to countries in need. While the intentions of the IMF are admirable and are critical to today’s global economic platform, they are far from flawless and are seen to have numerous problems. Recently, there have been issues regarding the overall contribution structure and veto powers within the organization. For the past few years, the United States has been the biggest contributor to the IMF with their pledged commitment being around $155 billion, while other countries are slowly reducing their financial commitments. Concerns are growing about fairness or lack of contributions from other developed member countries. On the other hand, some member countries are concerned about the United States’ huge voting bloc within the IMF which stands around 16% and is large enough to sway most policy decisions regardless of the input from other countries. The IMF remains under immense financial and public pressure to commit to changes in monetary contributions, policies, and voting power that desperately need to be re-evaluated and reformed. 

 

Strategic Options: 

 

Strategy 1: Restructure Veto Powers 

The United States should not use its veto power, or the IMF should be restructured to reform the United States ability to veto. As stated previously, the United States currently maintains the most significant veto power in the IMF. This has been something that the U.S. has insisted on maintaining in the voting structure of the IMF.1 Other countries can veto; however, they cannot do so on their own, and can only veto in voting blocs. This has been done before; however, it requires the use of up to 85% of the voting power of the IMF for other countries to veto.2  Western European nations and developing countries have each exercised vetoes on prior occasions.3  Encouraging developing countries, especially those with emerging economies such as China, India, and Brazil, to play a larger role in the IMF could make the organization more effective.  One prior proposal was to abandon the use of reserves and foreign trade in determining voting quotas.4  It has also been proposed that population or poverty indexes be used to determine voting quotas.5  These are just some examples of how to reform the IMF’s voting quotas.  In addition, placing more power with developing countries could be one method to try to prevent IMF money from being given to corrupt governments.6   

 

• Pros: The U.S. could have fewer potential concerns if the country does not exercise, or no longer has, a veto. Developing countries will have more power in the IMF, which could be especially useful since they are the main beneficiaries of the IMF.  Increasing the role that developing countries play in the IMF could boost interest and perhaps even limit or prevent IMF money from being used by corrupt governments.   

• Cons: The U.S. could no longer have the right to policies in the IMF that it disagrees with or that hurt U.S. interests.  With regards to corruption, it is possible that some developing countries, if their governments are corrupt, could attempt to give more funding to other corrupt governments.   

 

Strategy 2: Promote Trade Liberalization 

One approach the U.S. could take to reform the International Monetary Fund is through promoting trade liberalization, which would be beneficial to all, not just the United States. Through trade liberalization, benefits are usually illustrated within developing nations. Trade liberalization within developing countries often creates more jobs.7 Evidence also shows that the lower price of goods and services leads to an increase in income across the board. Promotion of trade liberalization includes the benefit of tariffs being reduced, meaning that the goods which are imported are cheaper to the consumer (evidence: the Caribbean Region).8 For the United States, freeing up trade is estimated to make net gains of upwards of $250 billion dollars per year.9 Making a push for countries in all stages of development to reduce trade barriers is important, and a key catalyst behind each country's economic success. Liberalizing trade is also beneficial for developing nations as it would give them access to various markets to assist with development and the reduction of poverty.10 For developing nations, a reduction in poverty can also be attributed to advantages in the manufacturing of various products. According to the IMF, “... benefits of trade liberalization can exceed the costs by more than a factor of 10”.11 Trade Liberalization has been seen to assist all countries, big or small, in economic efficiency (a focus within the IMF), and “international competitiveness...”.12 

Trade Liberalization is not without opposition. Such ideas have been seen to reduce tax revenue in certain countries which, for some, is alarming. The reduction of tariffs can be seen as either a positive or a negative as tariffs have also previously brought in extra money. For many smaller developing nations, the tax money they get from products is what keeps them afloat.13 Another issue with trade liberalization is that it is not an immediate “fix”, more programs and resources need to be combined to see potential progress.14 

 

Strategy 3: Continue Current Economic Support 

Another option is to let the IMF operate as it has been and not make any changes to its structure.  The IMF has had successes helping Brazil, Mexico, and several East Asian countries during financial crises and working to pay their debts.15 With how widespread and globalized the IMF is, changing the current course of action may lead to unintended consequences. The difficulty of forecasting what each specific change could mean to the global economy carries heightened risk.  

 

• Pros: These numerous successes show that the IMF has been working as it should, and that the IMF has successfully adapted from its previous and original role to its current role as a “lender of last resort” and “the world’s ... financial firefighter.”16 

• Cons: The IMF has been criticized for its work in African and Latin American countries, as well as uncertainty over its more recent engagement in Europe, and for its controversial tactics used to help countries exit financial crises and pay their debts.17 

 

Recommendation: 

Our recommendation is to reduce the U.S.’s veto power by adjusting each country’s contribution to the IMF based on their economic development and status. This adjustment would be accounted for every few years. 

 

Implementation: 

Following the recommendation, if the plan is used reaching out and discussing with allies within the IMF is crucial. Making sure that all allies agree with the parameters that this move would have on the world stage, while also encouraging other allies’ feedback and ideas in relation to the change of country's contributions. Meeting to discuss how this change will work in the long run is also recommended as the situation is fluid and will be reassessed every few years. If the U.S. takes a backseat (due to the changes), it is imperative that the country keeps an eye on what is happening within the IMF as corruption may come to the surface, which could harm the U.S. and its allies. Although the U.S. would have less power veto wise, due to the new terms, that does not mean that they should be quiet on matters that effect the country. Using their platform within the IMF (as a respected nation) to encourage critical thinking and effects on all levels is important.  

 

Talking Points: 

• Relationship with Rising Powers: Encouraging emerging powerhouse economies like China, Brazil, and India to take on a greater role within the IMF will help develop the foundation for solid, long-lasting relationships with these rising powers. Each of these countries have expressed a willingness to take on more responsibility in international institutions. This change should not be feared; it will facilitate the mitigation of future crises and conflicts. 

• Boost to US Economy: In our world’s increasingly globalized economy, that which benefits one will benefit all. The growth of lesser economies will boost our own economy: foreign citizens will feel enabled to purchase more American goods, trade barriers will be reduced, the strain on American refugee and immigrant resources will be eased, etc. 

• Lessen Burden on US: A stronger, less American-focused International Monetary Fund will lessen the burdens put onto the U.S. during times of global crises, while still ensuring that U.S. economic interests are protected for generations to come.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Footnotes  

1. 1. Leo Van Houtven, "Governance of the IMF: Decision Making, Institutional Oversight, Transparency, and Accountability," International Monetary Fund, published 2002 and accessed 3 March 2022, https://www.imf.org/external/pubs/ft/pam/pam53/pam53.pdf: 11-12. 

2. 2. Van Houtven, 11-12. 

3. 3. Van Houtven, 11-12. 

4. 4. Van Houtven, 5, 9, 21, 45, 50-52. 

5. 5. Van Houtven, 6-7. 

6. 6. M. Emilia Berazategui “Is The IMF Doing Enough To Tackle Corruption?” Transparency International, published 25 June 2020 and accessed 3 March 2022, https://www.transparency.org/en/blog/is-the-imf-doing-enough-to-tackle-corruption; Bernard Reinsberg and Thomas Stubbs, "How IMF programmes can increase corruption," The Conversation, published 27 September 2019, https://theconversation.com/how-imf-programmes-can-increase-corruption-123718; Robert Keleher, "Can IMF Lending Promote Corruption?" (Memo), published December 1999 and accessed 3 March 2022, https://www.jec.senate.gov/public/_cache/files/de4362e5-ffb0-4874-b0e5-9c906815a6fe/can-imf-lending-promote-corruption---sept-1999.pdf ; DJ Nordquist and Dan Katz. "Where Did That IMF Covid Money Go?" (Opinion), published 29 November 2021, https://www.wsj.com/articles/where-did-that-imf-covid-cash-go-special-drawing-rights-11638223617  

7. 7. Janet Stotsky, Esther Suss, and Stephen Tokarick, “Trade Liberalization in the Caribbean,” International Monetary Fund (IMF, June 2000), https://www.imf.org/external/pubs/ft/fandd/2000/06/stotsky.htm 

8. 8. Janet Stotsky, Esther Suss, and Stephen Tokarick, “Trade Liberalization in the Caribbean,” International Monetary Fund (IMF, June 2000), https://www.imf.org/external/pubs/ft/fandd/2000/06/stotsky.htm 

9. 9. IMF Staff, “Global Trade Liberalization and the Developing Countries -- an IMF Issues Brief,” International Monetary Fund (IMF, November 2001), https://www.imf.org/external/np/exr/ib/2001/110801.htm#iii. 

10. 10. IMF Staff, “Global Trade Liberalization and the Developing Countries -- an IMF Issues Brief,” International Monetary Fund (IMF, November 2001), https://www.imf.org/external/np/exr/ib/2001/110801.htm#iii. 

11. 11. IMF Staff, “Global Trade Liberalization and the Developing Countries -- an IMF Issues Brief,” International Monetary Fund (IMF, November 2001), https://www.imf.org/external/np/exr/ib/2001/110801.htm#iii. 

12. 12. Liam Ebrill, Janet Stotsky, and Reint Gropp, “Revenue Implications of Trade Liberalization, OP 180 - Table of Contents,” International Monetary Fund (IMF, 1999), https://www.imf.org/external/pubs/nft/op/180/index.htm. 

13. 13. Liam Ebrill, Janet Stotsky, and Reint Gropp, “Revenue Implications of Trade Liberalization, OP 180 - Table of Contents,” International Monetary Fund (IMF, 1999), https://www.imf.org/external/pubs/nft/op/180/index.htm. 

14. 14. Mark Weisbrot and Dean Baker, “The Relative Impact of Trade Liberalization on GDP Growth,” The Relative Impact of Trade Liberalization on Developing Countries, by Mark Weisbrot and Dean Baker, June 2002, June 12, 2002, https://cepr.net/documents/publications/trade_2002_06_12.htm. 

15. 15. Jonathan Masters, Andrew Chatzky, and Anshu Siripurapu, "The IMF: The World's Controversial Financial Firefighter," Council on Foreign Relations, updated 8 September 2021, https://www.cfr.org/backgrounder/imf-worlds-controversial-financial-firefighter; "IMF: What is it and why does it matter?" British Broadcasting Company, published 18 October 2019, https://www.bbc.com/news/business-50069765 

16. 16. Jonathan Masters, Andrew Chatzky, and Anshu Siripurapu, "The IMF: The World's Controversial Financial Firefighter," Council on Foreign Relations, updated 8 September 2021, https://www.cfr.org/backgrounder/imf-worlds-controversial-financial-firefighter; "IMF: What is it and why does it matter?" British Broadcasting Company, published 18 October 2019, https://www.bbc.com/news/business-50069765. 

17. 17. Jonathan Masters, Andrew Chatzky, and Anshu Siripurapu, "The IMF: The World's Controversial Financial Firefighter," Council on Foreign Relations, updated 8 September 2021, https://www.cfr.org/backgrounder/imf-worlds-controversial-financial-firefighter; "IMF: What is it and why does it matter?" British Broadcasting Company, published 18 October 2019, https://www.bbc.com/news/business-50069765; Bernhard Reinsberg and Thomas Stubbs, "How IMF programmes can increase corruption," The Conversation, published 27 September 2019, https://theconversation.com/how-imf-programmes-can-increase-corruption-123718; Bernhard Reinsberg and Thomas Stubbs, "Lots of IMF programmes are never completed – because they’re unworkable," The Conversation, published 12 July 2021, https://theconversation.com/lots-of-imf-programmes-are-never-completed-because-theyre-unworkable-161905; Gordon Gray and Thomas Wade, "U.S. Participation in the International Monetary Fund (IMF): A Primer," American Action Forum, published 23 October 2018, https://www.americanactionforum.org/insight/u-s-participation-in-the-international-monetary-fund-imf-a-primer/. 

 

 

 

 

 

 

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