U.S. President Donald Trump has a busy agenda upsetting international relations. His executive order to withdraw from the World Health Organisation and the Paris Climate Accord seem indication that the new administration does not believe in the benefits of multilateral engagements. Withdrawing from the International Monetary Fund (IMF) would arguably be the boldest move in the field of international economic collaboration. Governor of the Bank of England Andrew Bailey told the BBC recently that he had urged continued U.S. support for the institution. But would a U.S. IMFexit matter?
Trump’s early actions seem closely aligned with the Heritage Foundation’s Project 2025. Its manifest recommends: “The next Administration must end blind support for international organizations. […] If an international organization is ineffective or does not support American interests, the United States should not support it.” Ending membership in the WHO and support for the Paris Climate Accord were two such recommended policies. Exiting the IMF is another.
The IMF has been the creation of the U.S. and cornerstone of the post-war international economic order built on a rules-based system. Its aim is to support international trade and capital movements. The IMF remains the only formal multilateral institution for economic policy cooperation based on an international treaty, the Articles of Agreement.
At the 1944 Bretton Woods Conference, that laid the foundation for the establishment of the IMF, U.S. president Franklin Roosevelt, whose vision led to the IMF and who was host to the conference, stated in his welcome address to the delegates:” Economic diseases are highly communicable. It follows, therefore, that the economic health of every country is a proper matter of concern to all its neighbors, near and distant. […] The things that we need to do, must be done—can only be done—in concert.”
Acting in concert to fixing the world’s problem still seems the most sensible approach. However, a lot has changed since the war.
The IMF started life when the U.S. was the only game in town. The U.S. held by far the largest gold reserves when gold was necessary to settle cross-border transactions and the dollar was convertible into gold unlike most currencies. The dollar remains the dominant currency but it does not enjoy the historic monopoly of gold. After the war, the IMF would not have been feasible without the U.S.
If the U.S. were to withdraw from the IMF what would actually change? The first-round effects would impact financial assistance and surveillance.
The IMF assists countries in crises with financial resources. The IMF’s financial resources, known as member quotas, rest on the financial contribution of each member country. A U.S. withdrawal would imply a significant reduction in available resources. The U.S. represents 17 percent of quotas, the largest quota, that with the recently agreed quota increase make quotas the bulk of IMF resources. But at around US$1,000 billion, IMF total resources are small enough so other countries could step in to fill the gap. In the event of a financial crisis, the U.S. could still offer its support by lending to the IMF (the U.S. is too big to benefit from IMF assistance itself).
The IMF conducts surveillance of countries’ policies to ensure member countries comply with obligations under the Articles. It is to ensure countries do not impose undue restrictions on payments and transfers for current international transactions (Article VIII). To that effect, the IMF exercises regular reviews of the exchange rate policies of its members (Article IV).
If the U.S. was no longer bound by its obligations under Article VIII, it is not clear if the dollar can continue to maintain its central role in the international financial system. It would leave the U.S. free to impose unilateral exchange restrictions. However, it is hard to imagine the IMF preventing the U.S. from doing so today. The institution’s influence is limited especially with major countries. In 1971, unilateral action by the U.S. to end the convertibility of the dollar into gold and thereby putting an end to the then gold-exchange standard the world adhered to, brought almost the end of the IMF (the IMF was not notified in advance).
IMF member countries can terminate participation (Article XXVI) at any time.1 On a U.S. withdrawal, the IMF would have to pay an amount equal to the U.S. quota or US$108 billion (pre-quota increase) and other borrowings but it would not incur a transfer of actual resources. The U.S.’ Special Drawing Right (SDR) holdings would also likely cancel out and not incur additional net transfers. There is no provision for the gold the U.S. paid in as part of its original quota subscription. The IMF’s annual administrative budget of about US$1.5 billion would continue to be funded from the IMF’s own resources. The U.S. staff may be less likely to occupy prominent positions possibly weakening the human capital of the institution. The principal office of the IMF is to be located in the territory of the country having the largest quota which would mean a move away from Washington, D.C. its current headquarters.
The IMF needs reform. A U.S. withdrawal would offer a rare opportunity to realign meaningfully governance at the IMF a needed basis for reform. It would provide the possibility to readjust the IMF quotas—that also set voting rights—leading possibly to a perceived more equitable distribution of say at the institution in particular in light of the significant underrepresentation of some large emerging markets. It would remove the veto the U.S. currently enjoys on major decisions concerning the IMF and may bring new flexibility and compromise to the institution.
The U.S. leaving the IMF would be a big loss and severely dent the multilateral character of the institution. There may be multiple second-round effects that are difficult to estimate and could potentially significantly further impair the institution. Informal arrangements like the G7 and G20 may gain in relative importance if the U.S. adheres to those. But it could also be a new beginning and force the world to live with a less multilaterally engaged U.S. IMFexit would matter but should not be fatal for the IMF.
1 In the U.S. withdrawal from the IMF will most likely require Congressional approval as IMF membership is governed by statute (22 U.S.C. §286c).