September 12, 2024
I want to thank everybody for coming and welcome you. Thank you also for the work that so many of you do on these issues.
Our panel today is about harm reduction. My colleagues here from the Center for Economic and Policy Research will examine and explain a particularly harmful policy of the world’s most powerful financial institution, the International Monetary Fund. It’s called surcharges. These are additional fees that the IMF collects from some borrowing countries added to the regular interest rate and service fees.
Our panelists will show how IMF surcharges harm people in some of the most vulnerable and debt-stressed countries in the world, and how this interacts with instabilities in the global economy today, such as the increasing burden of their debt service.
This is especially true in the past two years as the US Federal Reserve has raised policy interest rates 11 times. This helped push developing countries’ interest rates up by nearly 8 percentage points, which is huge, as well as increasing the cost of borrowing in dollars since the vast majority of countries saw their currencies depreciate against the dollar. This is at a time when the global economy is facing projected economic growth over the next five years that is the worst in decades, as well as the growing burdens of climate destruction and the costs of transition away from fossil fuels.
The harm reduction needed here is very clearly for the IMF to abolish these surcharges, which could easily win a majority of the 190 countries that are members of the IMF. But there’s a problem. We need the US government, represented at the IMF by Treasury, to agree. And so far, at least, they have not.
How is it that one government, and here it’s really one part of one branch of one government, how is it that they can make the decisions for a multilateral organization of 190 countries? Much of the answer to this lies in the unrelenting weight of history that defines this so-called institution of global governance.
The IMF was created in 1944 when much of the world’s population did not yet live in independent countries. And the United States had emerged from World War II as the preeminent industrial power, accounting for over 40% of the world’s manufacturing output.
As a result, the US government had the predominant role in making the rules of the postwar order, including the rules which put them in charge of the IMF. Remarkably, that non-accident of birth for the IMF is with us to this day.
The US has a formal veto over the most important IMF decisions, which require an 85% vote, and the US share of the votes is bigger than 15%. For almost all other decisions, Europe votes with Treasury. This gives this alliance of high income countries, with their 60% or more of the vote, the same authority that they had led by Washington in 1947 when the IMF began its financial operations.
All this despite the fact that the US now counts for about half as much of the world economy as it did in 1950.
So, how can surcharges be abolished in this situation? Here we can look to more recent history. In 2021, Treasury allowed the IMF to approve the largest ever issuance of Special Drawing Rights, of which 209 billion –not including China, which cannot use them, mainly because it has three trillion in reserves– 209 billion went to developing countries. This is the biggest thing that developing countries have gotten from a multilateral organization or really anywhere else for that matter. It was more than all development aid for that year. And unlike most climate aid, as we’ll see, and much of development aid, it came with no debt and no conditions.
Special Drawing Rights are an international reserve asset created by the IMF. They’re convertible to hard currency, such as dollars and euros. And this issuance by itself saved an estimated hundreds of thousands of lives in developing countries. The whole episode showed that the US Congress, and I want to again thank people here, the US Congress can play a pivotal role in moving the Treasury and therefore, pushing the IMF away from some of its calcified decades long harmful traditions in ways that can change the world. It also helped that more than 100 organizations joined this fight, some representing tens of millions of Americans. There’s another effort right now, actually, to get a new issuance. And as some of you may know, regular issuances have growing support, which has the potential to change the IMF over time. Reforms of this magnitude could move member governments to take a more active role within the IMF if they see the structural change as possible. This has very big potential.
One of the biggest inequalities in the financial system is what happens when there’s a global economic downturn, and the high-income countries are able to use countercyclical macroeconomic policy to soften the blow and to get out of it, and the low-income countries aren’t. The United States since the Great Recession, had $10 trillion worth of quantitative easing and had zero interest rates for seven or eight years. When the pandemic recession hit, we ran deficits, record ones really, 15% of GDP in 2020 and over 10% in 2021. The developing countries can’t do that. This was a huge change because it lessens some of the gap between these two groups of countries and this great injustice and inequality that happens in a global economic downturn.
The surcharges, as we see, are much smaller, but they are an extremist form of this inequality that is supported by the IMF, and it is actually instituted by the IMF. So they bring in very little revenue relative to IMF resources. Despite that fact, they are large enough to cause serious harm, as we will see, to the countries that pay them and the people who live there. So this should be winnable. A better world is possible.
