Pivotal Power

June 15, 2009
Bailing out the bailer-outer

Members of the International Monetary Fund meet with officials in the Maldives.

The battle over America’s pledge of new funds to the International Monetary Fund is shaping up and will play out in Congress this week during the negotiations over the war supplemental. Recall that the G-20 nations agreed in April to boost IMF lending capacity by $500 billion.

This extra capital is necessary because, in an effort to stem the economic crisis, the IMF bailed out a number of countries such as Pakistan and Iceland that may have otherwise gone belly up. Now the IMF needs additional funds that it can loan to other countries on the brink.

Opposition is coming from both sides of the political spectrum. There is the usual neo-con fearmongering that this money is a “giveaway”—more on why this is silly below.

There are also progressives who argue, with reason, that the IMF should be less strict in its demands from poor countries because past IMF conditions on loans to developing economies often caused great pain and were ultimately unproductive. All sides are demanding greater transparency in the IMF’s lending practices and governance.

Much room remains for improvement at the IMF, but we need to ante up. Congress should deliver the funds we’ve pledged, while also keeping up the pressure for reform. Here are five reasons why:

1. The IMF extends our dollars. Our share of the additional $500 billion pledged—$108 billion—is less than 22 percent of the total. That means that for every one dollar we contribute, other countries are putting in about $3.50. Japan already signed an agreement with the IMF to provide its promised $100 billion, and their economy is at least as bad as ours, and much smaller. The amount we owe is significantly less than what we needed to bailout one U.S. company (AIG), and these are countries at stake.

2. We are going to pay one way or the other. Let’s be serious. We aren’t going to let Pakistan’s economy collapse, or for that matter Hungary’s, Romania’s, or Guatemala’s. The potential national security consequences of any of those countries failing are too dire, not to mention the ultimately higher economic costs to America. Better the IMF prop them up — as they have — than us shoulder an even higher burden in funds and hassle.

3. This is a chance to show leadership again. American economic leadership has taken a serious beating lately. The world blames us for this crisis. This is a chance to do the right thing when countries are in need and gain back some credibility as an economic leader. Let’s not be the last country to pay what we pledged.

4. China is increasing its influence at the IMF. That’s largely good, because it comes with an increased contribution from them, and the IMF is developing into a forum to talk about their undervalued currency. But America will want to maintain significant influence at the IMF, too. We can’t have leverage if we don’t pay up. China has committed $50 billion of the $500 billion total.

5. The IMF will pay us back. These are bonds we are buying. And they’ve got gold to back them up.

- Nina Hachigian

This post originally appeared at The Center for American Progress.

Photo courtesy of Flickr user Presidency Maldives under a Creative Commons license.

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[...] Bowers took major exception to an article I recently wrote supporting U.S. funding for the IMF. I was motivated to write the article by the [...]

Nina Hachigian is a senior fellow at the Center for American Progress and the co-author of “The Next American Century: How the U.S. Can Thrive as Other Powers Rise.” She has worked on the staff of the National Security Council in the White House and been a senior political scientist at the RAND Corporation. She specializes in U.S.-China relations and great power relationships, multilateral institutions and U.S. foreign policy.

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