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Harvard Professor Jeffrey Frankel : Absent America

4187 Jeffrey Frankel Harvard SMALLThe US Congress has now carelessly blocked a long-awaited reform of the International Monetary Fund. That would be bad enough if it were an isolated episode. But this is just the latest in a series of self-inflicted blows since the turn of the century that have needlessly undermined the United States’ claim to global leadership.

The IMF reform would have been an important step in updating the allocations of quotas, which determine member states’ monetary contributions and voting power. The US was not being asked to contribute more money or lose its voting weight, which has always given it a unique veto power. Instead, the proposed increase in quotas for China, India, Brazil, and other emerging economies would have come largely at the expense of European countries.

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The change in IMF quotas is a partial and overdue response to the newcomers’ rising economic weight and Europe’s outdated dominance. Indeed, the principle of matching representation to countries’ contributions – sometimes known as the Golden Rule (“He who has the gold, rules”) – is probably one of the reasons that the IMF has usually been more effective than other international organizations (for example, the United Nations General Assembly).

To be sure, US President Barack Obama has tried to exercise global leadership. He pushed for the agreement to reform the IMF at the G-20 summit in Seoul in November 2010 (the first meeting to be hosted by a non-G-7 country), and he prevailed over understandable European reluctance to cede power.

But congressional rejection of an international agreement that the president had painstakingly persuaded the rest of the world to accept is not a new pattern. It goes back a century, to President Woodrow Wilson’s inability in 1919 to persuade a myopically isolationist Congress to approve the League of Nations. Since then, Congress has rejected the International Trade Organization (1948), the SALT II nuclear agreement (1979), and the Kyoto Protocol (1997), among others.

A history of trying to reopen international negotiations that the executive has already concluded is also the reason why Congress has to give Obama so-called trade promotion authority (which entails fast-track congressional votes on trade agreements). Otherwise, America’s trading partners will not negotiate seriously in ongoing regional and global trade negotiations.

Commentators have been warning since the 1980’s that the US may lose its global hegemony for economic reasons – budget deficits, a declining share of global GDP, and the switch from net international creditor to net debtor – with the historical hypothesis of imperial overreachgaining renewed attention.

But the main problem seems to be a lack of will rather than a thin wallet. Or perhaps it would be more accurate to describe the problem as one of wild swings in US domestic politics between excessive isolationism and excessive foreign intervention in response to short-term events, and untempered by any longer-term historical perspective. These days, after a decade of war in Iraq and Afghanistan at an estimated cost of $4 trillion (including the medical care that veterans will need for the rest of their lives), the pendulum has apparently swung back in thedirection of isolationism.

One had hoped that the shortsighted members of Congress who foolishly shut down the US government three months ago had become aware of the damage caused to America’s credibility and global leadership. Most visibly, the Obama administration had to cancel its participation at the Asia-Pacific Economic Cooperation (APEC) summit in Bali in October, impeding progress on the US-led Trans-Pacific Partnership. It was widely reported that Asian countries concluded from Obama’s absence that they should cultivate ties with China instead.

The growing power of China and other major emerging-market countries is a reality. That is precisely why it is so important that the US support a greater role for these countries in international institutions such as the IMF, the G-20, and APEC.

The rise of China could go well or badly,  depending in part on whether the status quo powers make room for the newcomer – a risk to international stability first noted by Thucydides, who traced the cause of the Peloponnesian War to Sparta’s response to the rising power of Athens. Likewise, failure to accommodate Germany’s rise contributed a century ago to the outbreak of World War I.

Though Chinese President Xi Jinping’s call for “a new type of great power relations” may sound anodyne,  the phrase apparently demonstrates awareness of the “Thucydides trap.” It signals China’s openness to working with other countries to avoid a repetition of the tragedies of 431 BC and 1914 AD. It is only sensible to take him up on his offer.

The continuing potential for US global leadership, despite America’s move from global creditor to debtor, has partly been a matter of luck. In the Asia-Pacific region, historical and territorial frictions among Japan, Korea, and China have ensured that America’s presence remains more welcome than it otherwise would be. Meanwhile, Europe’s fiscal follies have been even more egregious than America’s.

Asians are acutely aware that the IMF has intervened in the euro crisis with much greater support than it provided during the Asian financial crisis of 1997-98, and they understandably feel entitled to a larger say in how the Fund is run. But the emerging-market countries have been so disunited that in 2011 they failed to support a common candidate for IMF Managing Director. As a result, though the three previous incumbents were Europeans who did not complete their terms in office, another European, Christine Lagarde, won the top spot yet again. (Lagarde has done a good job, rather than kowtowing to Europe, but that is beside the point.)

Latent global demand for enlightened US leadership, which first appeared at the end of World War I, can survive budgetary constraints and even misguided military interventions. What it cannot survive is an abdication of interest by the US Congress.

Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University.

© Project Syndicate 1995–2014



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