Global leadership in five easy installments: America and the general capital increase

Congressman Gary Miller held hearings earlier today on the impact of the World Bank and other Multilateral Development Banks on U.S. National Security. I was asked to submit testimony. If you sort through the details, the stakes could not be higher for the United States and our continued leadership in the world.
The context for …

Congressman Gary Miller held hearings earlier today on the impact of the World Bank and other Multilateral Development Banks on U.S. National Security.

I was asked to submit testimony. If you sort through the details, the stakes could not be higher for the United States and our continued leadership in the world.

The context for the hearing is that the Obama Administration is asking for five $400 million installments for what is called the “General Capital Increase” for the World Bank and several of the regional multi-lateral development banks including the African Development Bank, the Inter-American Development Bank, and the European Bank for Reconstruction and Development. This money is not the typical hatpassing exercise that the Hill sees every few years for the lowest income countries (the so-called “IDA
replenishments”), the General Capital Increase is about the United States maintaining its de facto control over these institutions and ensuring that they remain instruments of an American Style Globalization.

Asking for additional money for the World Bank and other multilaterals at this time has got to be one of the hardest things I can think of. There are many reasons that Republicans criticize the multilateral banks including the World Bank. Having worked at the World Bank Group for four years, I am keenly aware of the many shortcomings of these institutions but I also understand how useful these institutions are to the United States and our economic and national security interests.

During the 2008-2009 Financial Crisis, we, along with the other owners of the Banks told them to “send everything that can fly.” These institutions provided critical financing including trade financing to keep the global trade system open and they supported our friends and allies at a time of great challenge for the global system. As a result, the financial crisis in many parts of the world was less dramatic and they covered for us while we were tending to our problems here at home. The problem is that these banks lend against shareholder capital and all of the existing capital is now “spoken for” because of this massive lending as part of our response to the crisis. If we want these exporters of a U.S. version of globalization to continue we are going to have to put more money into these institutions.

For those of us who live in DC, it is common to think of the World Bank as an exotic institution. If you peel back the accents and the hauteur, you find an American DNA: all the experts studied in the States, they all work in English, they export policy ideas that were made in America, they use U.S. or British law for much of their work and they export American invented standards. U.S. policymakers worry about developing countries taking money from Venezuela, Russia, Iran, or China. The World Bank and the regional development banks (plus the IMF) are our set of alternatives to these funders and models of development. Oftentimes developing countries would prefer to take World Bank money and the expertise that comes with it because these institutions for all their problems have some of the best experts in the world.

The costs of walking away from this General Capital Increase are very high. In some instances, the levels of lending that they are doing at our behest are going to drop in half in a context where there are “other alternatives” to American led institutions for development financing.

First, in the case of the Inter-American Development Bank, the rules mandate that we control 30 percent of the shares. If the US does not pony up, none of the others will. The $2 billion the IDB has promised to spend in the next 10 years in Haiti will drop dramatically. Think about the implications to the United States of a completely failed state in Haiti to US interests. In addition, if the United States does not participate in the IDB’s general capital increase it will be very big news in the rest of the Americas and not good for the United States.

Second, in the case of the World Bank and the African Development Bank, our shares are going to come up for sale and “other countries” will be happy to buy them. We are on the knife edge of shareholder control with these institutions. Also, some of the perks we have come to enjoy such as the World Bank Presidency (Bob Zoellick’s current contract ends on July 1, 2012) and key posts in the other institutions will come under intense attack.

Third, we need to better understand the value of these institutions as part of maintaining our global leadership and as part of a long term strategy for victory in the Long War. They are a big part of our strategy in Afghanistan and Southern Sudan. They are designed to be on the ground for the long term — something that the United States has a very hard time doing and they are a convenient way for us to burden share on reconstruction in places like Libya. They provide money and American style advice from sources that are not American — sometimes very useful for us.

There is lots to fix and lots to criticize (they need to do an even better job of working in zones of conflict) but we have zero chance of fixing them if we don’t pay to play. Walking away from the GCI is a down payment on American decline.

Article Published in foreignpolicy.com on September 21, 2011.

 

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