Former IMF chief economist Simon Johnson on why loans won’t help Ukraine
Editor’s Note: Last week, the Senate Foreign Relations Committee approved an aid package for Ukraine that includes reforms to the International Monetary Fund — through which much of the loaned money to Ukraine would flow.
But the House Foreign Affairs Committee has introduced legislation for an aid package without IMF reforms — reforms that would give emerging economies greater representation in the organization. Congress is on recess this week, leaving the issue hanging as Russia annexes Crimea. The Senate’s Ukraine aid package will be sent to the full Senate for a vote next week.
In the meantime, Making Sen$e thought our readers would want to know more about the pending IMF reforms and loans to Ukraine — and how they’re related, so we called up former IMF chief economist Simon Johnson.
Johnson, of the MIT Sloan School of Management and the Peterson Institute of Economics, has been a regular Making Sen$e guest, talking to us about U.S. debt in 2012. And his blog, The Baseline Scenario, which he co-founded with James Kwak, is part of our economics diet.
Announcing additional sanctions on Russian officials Thursday, President Barack Obama urged Congress to pass aid legislation for Ukraine, saying “expressions of support are not enough.”
In the edited and condensed conversation below, Johnson explains why IMF loans to Ukraine may not be enough either.
—Simone Pathe, Making Sen$e Editor
What reforms to the IMF is the White House pushing Congress to include in aid legislation to Ukraine?
The IMF reform package that has been submitted to Congress involved an increase in quotas and some other changes in representation.
What are these quotas?
The quota, in this context, is an idiosyncratic name for the shareholder stake of a country. Every country “buys” shares in the IMF. And then they can borrow based on how much they put in. It’s a little bit like a co-op. Access to credit from the IMF is based on size of potential commitment to the IMF, which is based on the size of your country.
The U.S. and others want the IMF to be able to do more lending. Under the reforms, the IMF lending capacity would be bigger and borrowing amount — based on the relative size of countries — will go up along with the increase in quotas.
The way that the increase in the United States would take place is by shifting some of our commitment that’s in the form of credit provided to the IMF to become quota (i.e., our shareholder stake).
So there are some doubts; people are asking, is there risk involved to the U.S.? It’s not really a partisan issue though. Republicans want there to be an IMF and want it to be able to operate. Most people want there to be IMF reforms and a reduction of influence of European countries, which is basically a hold-over of the 1940s and 1950s. It’s harder to strengthen the legitimacy of the IMF without allowing emerging economies more influence.
Johnson recommends this primer from the Peterson Institute on why IMF reforms are important for the United States and how the U.S. is standing in their way.
But the House Foreign Affairs Committee has introduced legislation for an aid package without IMF reforms.
Yes, the IMF reforms are being held up by House Republicans, but the question is whether this is a matter of principle or a tactical move since they’re trying to tie it to other things they want. There’s not a big disagreement on the substance of those reforms.
The key difference between the U.S. and any other country [approving the reforms] is that the U.S. has to get the reforms passed through Congress for them to become law. We are the hold up now. The quota increase only goes through when 85 percent [of IMF shareholders] agree, and the United States is the only country that has veto power because we have such a big stake.
So how would these reforms affect a loan package to Ukraine?
Any loan package with these reforms would increase the maximum amount that Ukraine can borrow. But I should say, I’m not in favor of Ukraine borrowing a very large amount from the IMF. (To be clear, I’m in favor of the IMF reform package, but I wouldn’t link it so closely to Ukraine.)
If you think the cap on the amount Ukraine can borrow is the issue, then it’s appealing to have these reforms. But the notion of the cap is somewhat flexible. Other countries have received lots of money relative to their size. Yes, you can argue Ukraine needs money, but what they really need is reform. They need to change the nature of their economy and completely stamp out corruption. The IMF has been lending to Ukraine over the past 20 years, and that hasn’t helped reduce corruption.
Is that because the money gets funneled to the wrong people?
No, the IMF watches carefully what happens to the money. The loans are just supporting people in power who are fairly corrupt individuals. They have not wanted to open up their economy and make it easier for people without money to start businesses.
The IMF previously pledged $15 billion to Ukraine, but it wasn’t disbursed because Ukraine didn’t comply with the IMF’s “prior actions.” What happened?
“Prior actions” is IMF terminology that means you do things before you see the money. Most IMF conditionality is on the basis that “I give you money and you do things.” The prior action means that you do reforms then you get money. So Ukraine did enact pension reforms as a prior action, and the IMF gave them good marks. But they didn’t do much else, and subsequently the IMF has said they wouldn’t lend again without substantial prior actions.
What conditions would apply to aid this time?
That’s the big question. My assessment would be that the IMF would want substantial prior actions reducing corruption and bringing Ukraine’s budget deficit down through raising energy prices domestically. But, at the same time, the IMF is also under pressure from western governments to get loans out quickly and show support for Ukraine.
Is Ukraine more likely to comply this time?
They’ll make lots of promises; the question is what will they implement? There is fuzziness around prior actions; some things are harder and some are easier to do.
Ukraine already owes the IMF money and Russia even more (see my Economix article for details). Now, they’re going to have to restructure their debt — stretch it out. That means you don’t reduce the amount that I owe; rather you’re pushing back when I’m going to pay you. The IMF has to be involved, but they need to get the Russians on board too.
The quota reforms are a good idea because you need additional resources for the IMF in general. But I don’t like the linking of the two because that implies that all Ukraine needs is more money.
Sen. Rand Paul, R-Ky., opposes giving aid to Ukraine because he says it would indirectly benefit Russia. Is this a valid concern?
It depends on how the existing debt is handled. Stretching it out should apply to Russian debt too. There could be a scenario where the IMF money is used to pay off Russia, but that would not solve any of Ukraine’s problems. So it’s not wrong to raise this issue, but the IMF would surely not lend unless Russia were willing to stretch out its debt.