Sunday, August 15, 2010

The Elephant in the Room: The United States and IMF Supermajority

As it has become clear that the US economy can no longer support the dollar demand resulting from reserve currency status, a number of voices have called for IMF Special Drawing Rights to supplement and perhaps replace the dollar reserve system in international trade and finance. The percent of a country's currency within the SDR would be set by its contribution to global GDP or possibly other factors generally reflecting the strength of its productive economy. This would smooth out trade imbalances in the way Keynes envisioned with his Bancor proposal, and reduce volatility most especially in terms of unemployment. It would also reduce the need for countries and large-scale holders of private capital to waste their surpluses on US treasuries and probably lead to increased investment in some of the poorer areas of the world that are now capital starved.

The voices of currency reform are quiet in the United States, for now, but should grow louder as mass unemployment becomes the norm. Opposing them will be 'Wall Street' and politically powerful financial interests who benefit from dollar recycling and their relationship with the Federal Reserve. An overvalued dollar relative to the strength of production and output means a hollowing out of the country and an erosion or collapse in manufacturing and its associated multipliers. This unvirtuous cycle is well under way. There are no more domestic bubbles left to blow, and even if there were, domestic politics have become so chaotic that it is unlikely they will be implemented on the fiscal side.

The major obstacle to an expansion of Special Drawing Rights as an alternative to the Dollar comes from US-centered super majority provisions written into the IMF Articles of Agreement.

Article XV - Special Drawing Rights:

The method of valuation of the special drawing right shall be determined by the Fund by a seventy percent majority of the total voting power, provided, however, that an eighty-five percent majority of the total voting power shall be required for a change in the principle of valuation or a fundamental change in the application of the principle in effect.(1)

Any significant expansion of SDR's has to come with an eighty-five percent vote, with the United States holding 16-17% of total votes. It's a de facto veto.

Article XVIII - Allocation and Cancellation of Special Drawing Rights:

Section 4:
(d) An eighty-five percent majority of the total voting power shall be required for decisions under Section 2(a), (b), and (c) or Section 3 of this Article except for decisions under Section 3 with respect to a decrease in the rates of allocation.

Section 2:
(a) Decisions of the Fund to allocate or cancel special drawing rights shall be made for basic periods which shall run consecutively and shall be five years in duration. The first basic period shall begin on the date of the first decision to allocate special drawing rights or such later date as may be specified in that decision. Any allocations or cancellations shall take place at yearly intervals.
(b) The rates at which allocations are to be made shall be expressed as percentages of quotas on the date of each decision to allocate. The rates at which special drawing rights are to be cancelled shall be expressed as percentages of net cumulative allocations of special drawing rights on the date of each decision to cancel. The percentages shall be the same for all participants.
(c) In its decision for any basic period the Fund may provide, notwithstanding (a) and (b) above, that:
(i)the duration of the basic period shall be other than five years; or
ii)the allocations or cancellations shall take place at other than yearly intervals; or
(iii)the basis for allocations or cancellations shall be the quotas or net cumulative allocations on dates other than the dates of decisions to allocate or cancel.

Section 3:Unexpected major developments
The Fund may change the rates or intervals of allocation or cancellation during the rest of a basic period or change the length of a basic period or start a new basic period, if at any time the Fund finds it desirable to do so because of unexpected major developments.(2)

It's also a sweet deal for U.S. financial interests and Washington's imperial power in terms of IMF governance.

The Fund shall have a Board of Governors, an Executive Board, a Managing Director, and a staff, and a Council if the Board of Governors decides, by an eighty-five percent majority of the total voting power, that the provisions of Schedule D shall be applied.(3)

Schedule D, on 'Council' begins:

Each member that appoints an Executive Director and each group of members that has the number of votes allotted to them cast by an elected Executive Director shall appoint to the Council one Councillor, who shall be a Governor, Minister in the government of a member, or person of comparable rank, and may appoint not more than seven Associates. The Board of Governors may change, by an eighty-five percent majority of the total voting power, the number of Associates who may be appointed.(4)

Therefore, the United States is able to contribute to the IMF at a rate beneath its current global GDP while having veto power over governance and major decisions. Veto power has been historically true for core Europe as well, and will to the extent it remains politically unified - something the EU has facilitated. With the continued compound growth of surplus capital, especially in developing regions, it seems almost inevitable that rival organizations to the IMF will eventually surface unless concessions are made. But eventually is a long time, and political progress in East and South East Asia - areas of rapid growth - remains fragmented. As dollar reserve status therefore continues, it seems that a credibility crisis for the political class of the United States stemming from chronic undercapacity and unemployment is more likely to develop first.

Lastly, one must consider whether a SDR or Bancor system is even feasible within a capitalist world-system of nation states. It would mean giving up direct currency control and a significant measure of sovereignty - a possible no-go politically. From this we could conclude that a Marxian dialectic contradiction is at play that will eventually threaten the entire system with collapse.

1IMF-Article XV - Special Drawing Rights
2Article XVIII - Allocation and Cancellation of Special Drawing Rights
3IMF-Article XII - Organization and Management
4IMF-Schedule D - Council
5IMF Quotas and Voting Share
6'Soros - bring China into the creation of a new world order' - Financial Times; Interview
7'Reform the International Monetary System' - Zhou Xiaochuan, People's Bank of China

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