Congress Set to Finally Approve IMF Reforms

WASHINGTON: The massive $1.1 trillion omnibus spending bill presented to lawmakers Tuesday night contains provisions for new funding and governance reforms at the International Monetary Fund. The House could vote as early as Thursday on the package, which is expected to pass. Approval is also likely in the Senate and President Obama’s signature is assured. The president pushed hard for the IMF deal, calling it vital to US leadership and security.

The measure doubles to $670 billion the resources available to the IMF to lend to countries in distress like Ukraine or Greece.  The US contribution is put at $300 million.

The legislation gives key developing countries like China, India and Brazil a bigger share of the weighted votes in the IMF while preserving the sole veto power of the United States. The US has 16% of the votes in the 188-member Washington-based IMF. China’s share rises from 4% to 6%.

The governance reforms date from 2010 but because 85% of IMF votes are needed for implementation it has been blocked by US inaction. Former treasury secretary Larry Summers blamed US delay for creating space for China to create alternative institutions that challenge the IMF. Despite US opposition, China this year led in the formation of a China-based Asia Infrastructure and Investment Bank. Last year it joined other BRICS countries (Brazil, Russia, India, and South Africa) in forming a new development bank as well as an arrangement for mutual financial support should it be needed.

Despite being the dominant player in the IMF, which was founded in Bretton Woods, New Hampshire in 1944, congressional support for the powerful agency has always been lukewarm. In recent years some lawmakers have accused the IMF of bailing out big banks that made loans that couldn’t be repaid. Others argue that US sovereignty is diluted when US money is pooled into IMF lending.

Randall Henning, a professor at American University and specialist on the IMF, rejects that critique saying, “the IMF reflects US economic policy preferences more faithfully than perhaps any other international organization.” Henning says the IMF promotes free markets and requires borrowers to put in place appropriate, prudent economic policies. The IMF played a central role in resolving the Latin American debt crisis in the 1980s and the Asian crisis in the late 1990s.

Former IMF official and financial analyst Mohamed El Erian has argued that US approval was overdue. He says the recalibration of votes “better reflect the realities of today’s global economy and entail neither new US funding commitments nor any dilution of its power within the institution.” Economic historian Liaquat Ahamed says it is absurd that tiny Belgium has had as many IMF votes as Brazil, or that Belgium and Holland together had more votes than China.

Policy makers including Chinese vice central bank governor Yi Gang and British Chancellor of the Exchequer George Osborne lamented the long delay in US action. Yi called “failure to deliver this reform a threat to IMF legitimacy.” Osborne said recently in New York that “it is a tragedy that an agreement reached across all the members of the IMF was being blocked by the US congress.”#

Easing of US Restrictions Promises Better Lives for Cubans

Beginning with a trickle and then growing rapidly, a steady flow of money into Cuba will be the first tangible effect of normalized US-Cuban relations. With more cash reaching the island’s impoverished citizens comes hope for a better life, something all Cubans desperately want.

Cubans typically earn only $20 per month so that tips from visitors rank just below remittances as a financial lifeline.

Like the communists in China, the overriding objective of Cuba’s communist party is retaining power. But unlike the Chinese who have concluded that higher living standards derived from economic freedom is the recipe for preserving one party rule, Cuba’s leaders haven’t made that determination.

“Cuba’s communists are going through an identity crisis, not knowing what they want,” says John Kavulich of the US-Cuba Trade and Economic Council.  He says the ruling party views itself as still under US attack and fears the income inequality that would result from a freer market.

Kavulich says it was economic desperation that led Raul Castro to agree to the normalization with the US that was announced in mid-December. Cuba, he says, is essentially bankrupt with huge debts that it can’t pay. With the collapse of oil prices, Venezuela has cut back on transfers, aggravating Cuba’s financial distress.

While US companies can now sell to Cuba, the ban on financing for Cuban importers remains. Most business transactions will be cash only, a significant impediment particularly to US food and agricultural firms eager to expand in the Cuban market.

Trade lawyer Robert Muse doubts that congress will repeal the 55-year-old trade embargo this year. He concedes that President Obama has wide authority to use executive action to resume trade and travel but says the ban on financing is a huge constraint. 

Kavulich, a frequent visitor to Havana, believes  “Cuba will allow in only what it thinks it can control.”  Permitting travel and lifting of the ban on credit card use are positive moves but the island is not being thrown open to US trade and investment. US Visitors still have to obtain visas to enter Cuba and normal tourism is still banned under terms of the embargo that only congress can lift. Havana has a limited tourist infrastructure with few restaurants and hotels that meet western standards.

Before there can be widespread investment American firms have $5 billion of outstanding claims that have to be resolved.

Since Raul Castro succeeded his brother Fidel as president in 2008 Cuba has initiated modest economic reforms.  Cubans can now buy and sell their cars, homes and apartments. During a visit to Havana this month I was surprised to see occasional “for sale” and “for rent” signs.  Small-scale entrepreneurship is beginning to take hold.  

Rental apartments in Old Town Havana

While the charm of once grand but decaying buildings, 1950’s automobiles, the absence of advertising and US-style fast food may be compelling, prospective visitors should scale back their expectations. Internet service is spotty. English-language newspapers aren’t available. Those vintage cars can’t be exported.

What visitors will find is a vibrant Cuban culture, great music, friendly people and a receptivity to Americans.

Marco Rubio, the Cuban-American senator from Florida, believes the loosening of  US travel and trade restrictions creates “a windfall for the Castro regime that will be used to fund its repression against Cubans.”  Short-term there may be truth in his assertion but long-term Rubio is certainly wrong.

Like people everywhere Cubans crave freedom and that quest will not endear them to the Cuban communist party. Equally Cubans value their independence and are proud of their revolution’s accomplishments.    

But the risks of normalization rest primarily with Cuba’s rulers. Their country is changing and the lifting of US trade restrictions deprives the communists of a powerful weapon, that the embargo is the cause of all of Cuba’s problems.   

A Look at Cuba Before Normalization Takes Hold

HAVANA, CUBA: In light of the historic thaw in US Cuban relations announced on December 17^th, three items stand out from a four-day visit to Havana:  1/ Cuba’s economy is a disaster in desperate need of reform. 2/ The communist party retains its tight grip and political change is a long way off. 3/It is likely to be months before normalized bi-lateral relations produce real change.

The Economy

 Havana is a ruin, a surreal time warp, exemplified by ancient cars and trucks from before the 1959 revolution. For 50 years there’s been no imports of cars for private use.  Houses and apartment buildings are run down with their occupants not having cash for needed repairs. 

Amazingly, most Cubans subsist on salaries of $20 per month.  Those with more are communist bureaucrats, workers in tourism with access to hard currency, and those receiving remittances from abroad.

Cuba’s economy is dead in the water with barely any advance in gdp. The country is nearly bankrupt with no access to credit. There are frequent power outages. Unemployment is kept low because jobs are provided in a bloated and inefficient public sector where four out of five Cubans work. Inflation is suppressed. There are chronic shortages. Basic foodstuffs are rationed. Ninety percent of Cubans don’t own a car.

Despite the negatives, reforms unveiled in 2011 by President Raul Castro have allowed a small but growing private sector to take hold. The reforms permit Cubans to buy and sell their apartments, 84% of which are privately owned. But while an incipient real estate market exists, it is stymied by an absence of mortgage credit.

Similarly, Cubans can buy and sell their privately owned vehicles. But contrary to expectations liberalization has boosted car prices. Unbelievably, the asking price on the refurbished 1956 Chevrolet pictured below is well over $100,000. Classic cars can’t be exported, meaning that US-based collectors won’t be able to import these treasures anytime soon.

Restored 1956 Chevrolet on Havana’s Prado

Cuba’s economy is further distorted by there being two currencies, both of which circulate. The government says unifying the exchange rate is a priority but that is unlikely to occur until Cuba obtains access to hard currency. Look for early moves for Havana to rejoin the International Monetary Fund.

A Closed Political System

Cuba remains a one-party communist state with little prospect of liberalization. The media is tightly controlled and state-owned newspapers are mostly propaganda. English language newspapers from abroad are banned.

This past week Cuba released more of the 53 political prisoners it promised to liberate as part of the December accord between presidents Obama and Castro. Thirty-six are now free, a move the White House calls “a tangible sign that Cuba is keeping its word.”

As part of the 2011 reforms Cubans can have cell phones, stay in hotels previously reserved for tourists, use the internet, and travel abroad. But because most people don’t have disposable income, the new freedoms mainly help the better off.

Contrary to what many outsiders want to believe, Fidel, his brother Raul and the revolution remain popular, although independent surveys don’t exist. Cubans are proud of their country’s achievements in education and health care, which is free to all.

Change from Normalization May be Slow

 Every Cuban of the two-dozen or so I spoke with favors normalization. Some were deeply emotional, saying they can’t wait for Americans to arrive in significant numbers. The lives of ordinary people are bound to improve with the lifting of the embargo.

But while Cubans and Americans are eager for visits, important restrictions remain. Despite President Obama’s announcement, it is still not possible to use US-issued credit cards in Cuba. Likewise getting email on dial up internet servers can be difficult.  I was unable to access my Google and Yahoo email accounts, getting instead a prompt saying, “access is denied in the country you’re in.” There is disagreement whether these measures can be lifted by executive order or must await congressional action.

Bob Corker, the new chairman of the Senate Foreign Relations Committee, said last week that the embargo has been ineffective, a clear sign that he may favor its repeal. Both the Chamber of Commerce and leading agricultural organizations favor normalization. Congressional hearings are already planned and a top state department official is visiting Havana this month to advance the normalization process.

A Cuban businessman, who declines being identified, told me that Cuba urgently requires reform.  “We’ve created a system,” he said, “that we can’t control.”  The only way for us to have any prospect of economic improvement, he continued, is to open up and build a market economy.

Last May Washington’s Peterson Institute for International Economics released a study on the Cuban economy.  In it researcher Gary Hufbauer concluded “that once the tectonic plates shift” there will clear benefits for both Cuba and the United States.  The tectonic plates have shifted and from my perspective Hufbauer is spot on.#

Barry D. Wood writes often about economic transitions. He last visited Cuba 11 years ago. This piece appeared first on market watch.com.

South Africa’s Nuclear Agreement with Russia Raises Questions

WASHINGTON: On the sidelines of a conference in Vienna on September 22d, South Africa signed an agreement for Russian nuclear power plants to be built in the country. The deal could be worth $50billion.

Signing ceremony in Vienna: South African Energy Minister Tina Joemat-Pettersson and Rosatom CEO Sergei Kirienko (photo: Rosatom)

Assuming the deal goes forward, they would be the first Russian nuclear reactors in Africa, joining the continent’s sole nuclear facility, the French-built Koeberg power station near Cape Town. 

South Africa badly needs additional generating capacity. Its power grid is overstretched and rolling brown outs have become common. The African National Congress (ANC) government has long favored additional nuclear plants to augment coal-fired facilities. The Russians would build eight VVER reactors with a combined output of 9.6 giga watts by 2030. It would be one of South Africa’s biggest infrastructure projects.

The opposition Democratic Alliance is calling for details of the strategic partnership agreement to be made public. The South African energy department says the accord is preliminary and that constitutionally mandated procurement procedures will be followed.

With the government having a history of shady business transactions, the Russian nuclear deal has set off alarm bells in the South African media. Commentators are calling attention to President Jacob Zuma’s surprise five-day visit to Russia last month, for which no official program was released.  It is known that Zuma met with President Vladimir Putin but it is not known if the nuclear framework was discussed.

Zuma is already under fire for financial irregularities in a $20 million upgrade to his private residence.  In 1999, long before he became president, there were charges of kickbacks to ANC officials-- including Zuma—as part of a $5 billion arms deal with Sweden.

Following the ANC’s victory in last May’s parliamentary election, Zuma reshuffled his cabinet, surprising analysts by elevating his lightly regarded agriculture and fisheries minister, Tina Joemat-Pettersson to the energy portfolio. Last year Ms. Joemat-Pettersson, a communist from Kimberly in the Northern Cape, was investigated for unethical conduct after awarding a fisheries contract to a company  inked to the ANC but with  no experience in commercial fishing. She turned aside opposition calls to resign.

At the signing ceremony in Vienna, Ms. Joemat-Pettersson said the accord “opens the door for South Africa to access Russian technology, funding and infrastructure.”

By signing with Rosatom, South Africa is ignoring the punitive sanctions levied against Russia by Europe, America and Japan to protest Moscow’s intervention in Ukraine. While in Washington in early August for President Obama’s African Leaders Summit, Mr. Zuma called for increased US investment in South Africa.  The Westinghouse unit of Japan’s Toshiba, as well as French and Chinese firms, have wanted to build nuclear plants in South Africa, but analysts say the Russian technology is cheaper.

South Africa is the leading beneficiary of AGOA, the African Growth and Opportunities Act, that allows most African products duty-free entry into the US market.  

A Stunning Lack of US Support for the IMF

Thessaloniki, Greece.  Some years back, I wrote that the annual meeting of the International Monetary Fund in Washington was Davos on the Potomac. It is, but it is much more.  Held two out of every three years in the IMF headquarters city, it is a much larger and more important gathering than the World Economic Forum.  

Marco Annunziata of GE, formerly the chief economist at Italy's biggest bank, calls the IMF meeting "an extraordinary concentration of policy makers and market participants...an opportunity to take the pulse of the global economy."

Created in 1944 by the British/American partnership that led the western war effort, the IMF is in Washington because then President Roosevelt and his Treasury Department wanted to keep an eye on it. (They weren't sure the wily Brits who wanted US money could be trusted)  

As the Fund gathered strength in the 1960s making emergency loans to countries in distress, US dominance in the financial agency that has always been headed by a European became paramount.

It still is. Washington alone has a veto over all major decisions as votes are weighted in accordance with economic strength and the US accounts for over 16% of the total.

And so it was that this year's meeting took place while the US government was shut and its treasury secretary distracted by calamity.  Put in simplist terms, with finance ministers and central from virtually all the world's major economies in town, the US government presented itself as unable to produce a budget, a task the IMF identifies as basic. 

Embarrassment to describe the political gridlock is too mild. Shock was a more typical assessment from the high-powered visitors. Frustration with US dithering on global and domestic policy prompted editorialists at Xinhua in China to write that it is time for the global economy to be "de-Americanized." 

They also had in mind the disgusting refusal of the congress to even consider a replenishing of IMF resources that the Obama administration and over 180 IMF member countries agreed to  in 2010.  The lack of both congressional action and administration prodding is galling since it is essentially cost free to the US taxpayer. 

Myopic politicians in both parties fail to comprehend the extent to which the IMF promotes US goals of free markets, financial rectitude, and a rules-based open world economy. That China and former "third world" countries are demanding more say in the IMF should be seen as a triumph of US policy.

Indeed, some US officials privately support increased votes for emerging market countries, something the Europeans--overweighted in the IMF-- do not. Former Treasury official Tim Adams, who heads the Institute of International Finance, says "the old concept of the first world leading in the IMF is outdated." A determination to get more say in the IMF is one reason that seemingly disparate Brazil, Russia, India, China and South Africa have banded together as BRICS, creating their own credit lines with plans to create a development bank. 

The US remains the dominant world economy with its dollar the world's reserve currency. That privileged status shouldn't be taken for granted. With chronic trade and budget deficits, if the US were not respected, Washington could be like Greece coming cap in hand to the IMF for help. Far-fetched as that seems, it could someday happen.  Aware that the US is still recovering from its deepest recession since the 1930s, most policy makers abroad want the US to succeed. They recognize that robust growth and prosperity in the US is in their own interest.

But they also want an end to gridlock and a plan to bring our financial accounts into balance. Without this, US leadership in the global economy will continue to erode. #