The U.S. and Europe Are Blocking Global Cooperation

Discussion in 'International Politics' started by ejazr, Jun 12, 2012.

  1. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

    Oct 8, 2009
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    Hyderabad and Sydney
    The U.S. and Europe Are Blocking Global Cooperation - Businessweek

    Leaders of the world’s largest economies are off for a G-20 get-together June 18 in Los Cabos, Mexico. No doubt, their closing communiqué will declare that the governance of the International Monetary Fund and the World Bank should “more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness.”

    We know that because the statement has been repeated in pretty much every G-20 declaration since the first one in 2008. But thanks to the shortsighted foot-dragging of the U.S. and Europe, this important ambition is proving difficult to realize. As the economic crisis rumbles on, hitting the old, very rich of Europe and North America far more than the new, somewhat rich of Asia and Latin America, the traditional order of global financial governance is looking increasingly frayed. Still, for all the talk of reform, the U.S. in particular can retain its veto power at the World Bank and the IMF, if it is willing to pay the price of those bodies being less effective.
    What about voting control? At the spring meetings of the IMF in April, donors from Japan, South Korea, India, Saudi Arabia, and China among others agreed to lend the fund $430 billion to help it contain the euro crisis. The IMF has resorted to borrowing money rather than increasing quota contributions for the simple reason that quotas are the basis for voting shares on the board. Emerging countries and oil producers have the cash to commit and want the additional say, but Europe and the U.S. don’t want to relinquish their voting shares.

    The 2010 G-20 meeting in Seoul agreed to a “comprehensive review” of the IMF’s quota formula—the system that decides voting shares in the institution—to be completed by January 2013. The first step of the Seoul reforms involved doubling the IMF’s quotas, which would leave the U.S. with veto power and involve no increase in U.S. financing (resources that Washington has already lent the IMF would be converted into quota shares). But a congressional vote is required to pass the reform package. And the Obama administration has yet to submit the legislation to Congress.

    Not least, under the current arrangement, the European Union, with about 7 percent of the world’s population and 20 percent of world GDP, has about one-third of the IMF quota and of the board’s current 24 seats. Even after the Seoul adjustment, voting shares will look decidedly antiquated. The BRICs as a whole will have 14 percent of voting power in the fund compared with 29 percent for the EU. This despite the fact that using a measure that averages market and purchasing power measures of GDP, the two groups are the same size. Use GDP measures that fully account for the fact you can buy more for your money in developing countries, and the BRICs are considerably larger. The IMF reports the U.S. accounted for 20.4 percent of GDP in 2009 and 17.4 percent of proposed quota share under the Seoul formula. China accounted for 12.6 percent of total GDP but has a quota share of 6.4 percent under the proposed reform.

    A lame ostrich strategy of being too weak to commit additional resources, but too fearful to give up votes, can last only so long. The BRIC countries agreed to announce their final response to the IMF’s latest call for loans at Los Cabos, specifically linking the issue to progress on reform.

    Any significant revision of the IMF quota system that accounts for both economic weight and a concern with “voice”—votes for the world’s poorest countries—would involve the U.S. losing its veto power at the fund, either immediately or very soon. This time it may work out that the IMF can borrow enough money even under the old quota system that, alongside the $1 trillion European Stability Mechanism, it can prevent a euro collapse. But what about the next crisis? This is a game of chicken that is almost as stupid as the U.S. federal debt ceiling debate—and involves the same cast of characters.

    It isn’t just the IMF where the U.S. is trying to preserve party host influence while contributing a sub-potluck share of resources. When it came to the latest giving round in 2010 to the World Bank’s soft-loan arm, the International Development Association, the U.S. gave 12.1 percent of total funds. That compares to the U.K. with 12 percent and Japan with 10.9 percent. Canada, with an economy about one-ninth the size of the U.S.—smaller than California’s—gave 4.1 percent. And, of course, there are the negotiations over reducing global greenhouse gas emissions, where the U.S. has shown the strength of global leadership usually associated with San Marino or Brunei.

    It appears the threat of losing worldwide economic dominance has left the U.S. too scared to engage constructively in building up global institutions. But having a smaller share of worldwide GDP is no threat to long-term U.S. economic performance and quality of life—if anything it is a benefit. On the other hand, the failure to reform global financial governance is a clear and present danger not just to recovery in the U.S., but to the world as a whole. It is time for the country to return to the bold decision-making of the 1940s—and realize that, more than ever, what is good for the world is good for America.

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