Today we are pleased to present a guest contribution written by Jeffrey Frankel, Harpel Professor of Capital Formation and Growth at Harvard University, and former Member of the Council of Economic Advisers, 1997-99. This is an extended version of a column that appeared in Project Syndicate.
President Barack Obama has had a series of foreign policy triumphs over the last 12 months. One of the lesser-known was the passage of legislation for reform of the IMF on December 18, 2015, after five years of obstruction by the US Congress. As the IMF convenes in Washington DC for its annual spring meetings April 15-17, we should pause to savor the importance of this achievement. One could almost say that if Americans had let yet another year go by without ratifying the IMF quota reform, they might as well have handed over the keys of global economic leadership to someone else. That would be China.
The IMF reform was an important step in updating the allocations of quotas among member countries. (Quota allocations in the IMF determine both monetary contributions of the member states and their voting power. They are supposed to be determined by economic weight.) The agreement among the IMF members was to allocate greater shares to China, India, Brazil and other emerging market countries, coming primarily at the expense of European and Persian Gulf countries. The change in IMF quotas is a partial and overdue adjustment in response to the rise of the newcomers. President Obama managed to get the leaders of the other G20 countries to agree to this reform at a 2010 summit in Seoul.
Approving the agreement should have been a “no-brainer” from the viewpoint of the United States: it was neither to pay a higher budget share nor to lose the voting weight that has always given it a unique veto power in the institution. The reform was an opportunity to exercise US global leadership. But one might have thought it was a threat to US leadership if one judged from congressional opponents who blocked passage of the legislation until last December.
If the game is a competition between China and the US for international power and influence, then some damage has already been done. China feels that its economic success merits a greater role on the world stage. If the status quo powers “move the goal posts” by denying China the place at the table of global governance that it has earned, it will look to establish its own institutions. Meanwhile, Asia has been wondering if the US is committed to the region (as its “pivot” claimed). Indeed, the rest of the world has often in recent years wondered if internal politics prevents the US from functioning at all. Asians tend to prefer to have the US engaged. China’s territorial assertions in the South China Sea confirm its neighbors worst fears. But they will look elsewhere if need be.
Thus Asian countries (and others) were happy to join a new China-led institution, the Asian Infrastructure Investment Bank. The AIIB, widely viewed as a serious diplomatic setback for the US, went into operation December 25.
The good news is that the AIIB is off to a good start, with no sign so far of the feared lowering of standards relative to other multilateral development banks (such as the World Bank). But it is even better news that the US can now get back into the game, after a string of international successes.
It has been a busy 12 months for President Obama in the international arena. Consider global achievements in four areas (in addition to the IMF reform):
- On April 2, 2015, the United States (and five other major powers) reached a long-shot breakthrough with Iran over its nuclear program, which was then consummated in a July 14 agreement diverting Tehran from what had seemed an inexorable march to nuclear weapons. On January 16, 2016, the International Atomic Energy Agency verified that Iran had in fact completed the necessary steps under the agreement to ensure that its program remains exclusively peaceful.
- On June 24, 2015, Congress was persuaded to give the White House Trade Promotion Authority. It allowed the administration to complete the Trans-Pacific Partnership (TPP) in October.
- On July 20, 2015, the US and Cuba re-opened embassies in each other’s countries. Last month, on March 20, Obama because the first president to visit Cuba in 90 years. The historic event marked the end of 55 years of an attempted isolation policy that had only succeeded in giving the Castro brothers an excuse for economic failure and in handicapping American relations throughout Latin America.
- On December 12, against all expectations, representatives of 195 parties to the UN Framework Convention on Climate Change successfully reached an agreement on global action in Paris, spurred in no small part by an earlier breakthrough between President Obama and Chinese President Xi Jin Ping. This month, on April 22, the two leaders are scheduled to sign the Paris Agreement on behalf of their respective countries, the world’s two largest emitters of greenhouse gases. The signing will encourage others to ratify.
These accomplishments are not the kind that come automatically with possession of the Oval Office. A year ago, not one of them was expected. Not only did the international political obstacles appear nearly insurmountable; the domestic obstacles looked even worse. The overwhelming conventional wisdom was that Obama would not be able to accomplish much in his remaining time in office. After all, the Republicans had succeeded in blocking almost all Obama’s proposals since they took the House of Representatives in November 2010. Why should he have any better luck after they took the Senate (in November 2014) and especially now that he was a “lame duck” as well?
The Trade Promotion Authority legislation was declared virtually dead last May. The IMF quota reform legislation was considered so moribund, the press did even consider it worth reporting on.
A lot of the opposition came from Republicans who from the start have been eager to line up on the opposite side of whatever position President Obama takes. But opposition to such internationalism comes from the far left of the political spectrum as well as the far right, and not just in the area of trade. To take the salient example of Bernie Sanders, historically he has joined with congressional Republicans in trying to block efforts to rescue emerging market countries in Latin America and Asia at times of financial crisis. (These rescues are invariably called “bailouts,” even while they cost the US nothing – the Treasury made a profit on the 1995 loan to Mexico that Sanders fought – and even while they sustain economic growth.) To take another example, New York Senator Chuck Schumer joined the Republicans in trying to block the Iran nuclear agreement, an effort that failed on September 8.
The IMF deal is done. Managing Director Christine Lagarde is doing a good job (especially compared to her three predecessors, none of whom was even able to serve out his term). She is right, for example, to tell the Germans that a solution to the Greek problem requires further debt-reduction as one of its components.
But each of the other four initiatives could still be de-railed by US politics, especially if the far left and the far right join together. Congress has yet to repeal the Cuba embargo. It could reject the TPP, in effect telling Asia it is on its own. On June 2, a federal Appeals Court will hear a challenge to the Clean Power Plan whereby the Obama Administration hopes to begin implementing its commitment under the Paris Agreement. Donald Trump and Ted Cruz both say that if elected president they would tear up the Iran nuclear deal. (What would happen then? Probably the same thing that happened when George W. Bush took office in 2001 and tore up Bill Clinton’s “framework agreement” with the North Koreans: they predictably and promptly got a bomb.)
The struggle over whether the US will lead the world continues. It is not a struggle between the US and rivals, but a struggle within American politics.
This post written by Jeffrey Frankel.