The Obama administration signaled it won’t jeopardize the U.S. power to veto IMF decisions to achieve its goal of giving China and other emerging markets more clout at the lender, according to people familiar with the matter.
That message was delivered at the International Monetary Fund’s spring meetings in Washington last month, the people said, where officials discussed how to overcome congressional opposition to a 2010 plan to overhaul the lender’s voting structure.
A solution backed by Brazil would have enabled an end-run around Congress -- while potentially sacrificing the veto the U.S. has held since World War II. With that option off the table, the people said, IMF member nations are considering a watered-down proposal that risks alienating China and India, which are already challenging the postwar economic order by setting up their own lending and development institutions.
“I’m not at all surprised the United States has rejected anything that puts the U.S. veto at risk,” said Edwin Truman, a former assistant U.S. Treasury secretary for international affairs. Yet on the new alternate plan, “You can imagine some countries saying, ‘Why are we doing this at all?’”
The Obama administration’s priority remains securing congressional support for the 2010 plan, Whitney Smith, a spokeswoman for the Treasury Department, which oversees U.S. engagement with the IMF, said in an e-mailed statement.
Congress’s failure to ratify the changes “threatens U.S. leadership and causes other nations, including some of our allies, to question our commitment to the IMF and other multilateral institutions,” Smith said, without referring to the U.S. position on the measure that would threaten America’s veto power.
Simonetta Nardin, an IMF spokeswoman in Washington, declined to comment beyond saying that the lender “continues to work with the membership on an interim solution.”
The 2010 plan calls for increasing the emerging markets’ sway through a doubling of the IMF’s capital, with the U.S. contribution subject to approval by Congress. Without that approval, the plan wouldn’t have the support of the required 85 percent of members’ voting shares, because the U.S. has 16.7 percent. Voting rights are proportional to capital shares at the fund.
The option backed by Brazil and other countries would have pushed through the changes without requiring Congress to ratify them. The catch was that the U.S. veto over major IMF decisions may have been at risk if Congress failed to react by approving the 2010 plan, because America’s voting share would potentially fall below the 15 percent threshold needed to maintain the power.
The fund is now considering a capital increase of just 10 percent, said the people familiar with the matter, who asked not to be identified because the discussions are confidential. Most of the boost would go to emerging nations that are underrepresented based on the size of their economies.
The solution is unlikely to satisfy some emerging economies because the capital increase is too small, said Truman, now a senior fellow at the Peterson Institute for International Economics in Washington.
In a column last month, former U.S. Treasury Secretary Lawrence Summers cited Congress’s failure to pass the IMF reforms as one of the reasons why China is pushing to reshape the global economic order with new institutions such as the Asian Infrastructure Investment Bank.
Treasury Secretary Jacob J. Lew has said the changes are crucial to maintaining the fund’s ability to lend to countries in crisis. Republicans say they would give too much influence to countries that don’t share U.S. interests, with some in the party questioning the need for international bailouts.
China, the world’s second-largest economy, currently ranks sixth in its voting shares at the IMF, behind Japan, Germany, France and the U.K. Under the 2010 plan, China would jump to third, while India would climb to eighth from 11th and Brazil would move up four spots to 10th.
At a press briefing at the close of the IMF spring meetings on April 18, Banco de Mexico Governor Agustin Carstens said the fund’s member countries would still prefer Congress to ratify the 2010 reforms. Carstens, who heads the IMF’s main policy committee, didn’t say what position the U.S. had taken on the stopgap measure that would put its veto at risk.
Lew, at the spring meetings, reiterated his call for Congress to pass the 2010 plan, without offering his view on putting the U.S. veto in play. “A strong and well-resourced IMF is in America’s economic and strategic interest,” he told reporters April 17.