Trump, the World Bank, and the IMF: Explaining the Dog that Didn’t Bark (Yet)
A big surprise of Donald Trump’s “America First” presidency has been the moderate tone he has adopted toward the World Bank and International Monetary Fund (IMF), which hold their annual meetings in Washington this week. Few observers expected this outcome back in January. Trump, who had spent his campaign railing against globalization, delivered a dark inaugural address praising protectionism. Stephen K. Bannon, his chief strategist, pledged that populist nationalists would put globalist elites in their place. The Bretton Woods institutions, as pillars of the post-1945 liberal world order, seemed obvious targets.
That hasn’t happened, making the international financial institutions (IFIs) an anomaly. Trump has blasted multilateral trade arrangements from the Trans-Pacific Partnership (TPP) to the North American Free Trade Agreement (NAFTA) to the World Trade Organization (WTO). He’s belittled NATO, America’s most important alliance. He’s chastised and slashed the budget of the United Nations. And he’s renounced the most important international accord of the twenty-first century, the Paris Climate Agreement. The IFIs have fared better—at least in comparative terms. Much of this can be attributed to savvy diplomacy on the part of its leaders—particularly Jim Yong Kim, president of the World Bank, but also Christine Lagarde, managing director of the IMF. Still, bankers will be holding their breath to see if their overtures can translate into more sustained support from the Trump administration.
Diplomacy and International Institutions
International Monetary Fund (IMF)
To be sure, early signs pointed to a bumpy relationship between the IFIs and their new neighbor in the White House. In April the Trump administration rattled Group of 20 (G20) finance ministers by refusing to sign onto an IMF communique pledging to avoid “all forms of protectionism” (language the fund quickly dropped). When Lagarde warned against protection, Commerce Secretary Wilbur Ross accused her and other free traders of “sloganeering,” while ignoring the real trade barriers the United States faced abroad. Nor has the World Bank been unscathed. Mnuchin has taken it to task for high lending to middle-income countries and has insisted that the Bank focus on “outcomes, results and accountability.” The president’s proposed FY18 budget, moreover, would cut $650 million in U.S. support for multilateral development banks (MDBs) over three years, with the bulk of savings coming from reduced outlays for the International Development Association (IDA)—the World Bank’s window for concessional loans to 77 of the world’s poorest countries.
Still, it could have been much worse. The administration’s overall request for the World Bank is $541 million larger than the figure proposed by appropriators in the Republican-controlled House, who would have reduced Bank funding by a whopping 52 percent (from $1.4 billion in 2017 to under $659 million). Some of this reduction can be justified, moreover, as a reversion to the mean following the great recession. Between FY08 and FY14, U.S. funding for MDBs more than doubled, from $1.28 billion to $2.67 billion, as donors pumped more capital into the Bank’s non-concessional lending facilities and issue-specific trust funds.
The relative modesty of these cuts reflects the influence of Cohn and Mnuchin. The two are creatures of Wall Street who understand that the Bank has a valuable role to play in leveraging private sector investment in developing countries, just as the Fund can help stabilize nations experiencing balance of payments difficulties. Speaking at the Spring IMF meetings in April, Mnuchin praised the IMF for doing “a great job,” adding that its “expert guidance and financial assistance” remained “crucial.”
Moreover, the IFIs themselves have played their weak hands skillfully, if controversially. In the immediate wake of the election, senior management at both the IMF and World Bank went into damage-control mode, instructing staff to refrain from public comment on possible directions the new administration might take, particularly provocative statements that might goad Trump and his coterie into a confrontation. Lagarde’s own pronouncements were bland, as in February, when she described the IMF as “an agent of financial stability in any country where we operate…” adding: “A leading power like the United States has a vested interest in economic stability and peace.” This quietist approach paid off, as the President directed his tweetstorms at other targets.
More proactively, the institutions’ leaders have sought to build bridges with the administration. Jim Kim has ingratiated himself with Trump by forging an alliance with his daughter Ivanka on the issue of women’s empowerment. At the G20 meetings in Hamburg, the Bank unveiled a Women Entrepreneurs Finance Initiative (the outcome of conversations among Kim, Ms. Trump, and Prime Minister Justin Trudeau of Canada). The fund was established with “a speed unusual at the World Bank.” Intended to help women in developing countries gain access to the funding, technical assistance and networks needed to start businesses, it seeks to leverage $325 million raised from donor nations to draw commercial finance. In July, President Trump pledged $50 million to the initiative.
Diplomacy and International Institutions
International Monetary Fund (IMF)
The “Ivanka Fund,” as it inevitably became known in Bank corridors, has raised eyebrows. Half of its initial capital of $200 million will come from Saudi Arabia and the United Arab Emirates, neither poster children for gender equality. And while the Bank already administers a number of standalone funds, making a deal with a president’s daughter presents a potential reputational risk and conflict of interest, since the Bank will have political difficulty pulling out if the fund underperforms.
In another savvy if controversial move, the World Bank in late May begun advising the Trump administration on its infrastructure plans. After Ms. Trump introduced the Bank president to her father, Mr. Kim offered to gather experts to provide informal advice on U.S. infrastructure plans.
As Kim has sought to deepen relationships with the Trump administration, he has also moved aggressively to position the Bank as an ‘honest broker’ between private capital and developing countries. Kim’s ‘cascade’ financing model seeks to leverage the Bank’s technical expertise and lending capacity to reduce risks to private investment in developing countries. The approach complements other Bank initiatives to tap private markets and lower dependence on donor largesse, such as the introduction of pandemic and IDA bonds. This focus on unlocking investment opportunities for the private sector is likely to find friends in the Trump administration.
This strategy seems to be paying off. In July, Trump proclaimed his support for Kim, whose legitimacy came into question after his presidency was extended hurriedly ahead of the November U.S. election. During the speech at the G20 summit where Trump announced his $50 million donation, he referred to Kim, the World Bank president, as “my friend” and a “great guy.” The big prize though would be U.S. approval for a World Bank capital increase. While it’s unlikely that the administration will agree to such a change next week, the meetings could set the stage for a decision next year.
Although less brazenly than the Bank, the IMF has also reached out to the Trump administration. While continuing to warn about the dangers of protectionism, the Fund has begun to acknowledge the economic dislocation driving populist politics in the United States and other Western nations. At a WTO meeting in Geneva late last month, Lagarde offered something of a mea culpa, conceding that while globalization had lifted millions out of poverty, it had also wreaked havoc on numerous cities and towns across the United States. Observers perceived this as a nod to the “forgotten” men and women who constitute much of Trump’s populist base. Lagarde also recently weighed in on economic priorities for the United States, focusing on tax reform, infrastructure investment, and cutting business regulations—a list that bears striking resemblance to Trump’s own priorities.
The dog may yet still bark. At least two senior U.S. Treasury nominations are known for their antipathy towards the IMF. One is David Malpass, the recently confirmed undersecratary of the Treasury for international affairs. A veteran of the Reagan and George H. W. Bush administrations, Malpass has been outspoken in his belief that the Fund does little to enhance economic growth and has criticized its role in bailing out governments. Another is Adam Lerrick, nominated to serve as assistant secretary for international finance. A visiting scholar at the American Enterprise Institute, Lerrick has consistently criticized the IMF and has called on the World Bank to stop lending to middle-income countries.
If the American dog does begin to bark, look for Kim and Lagarde to hedge their bets, by cozying up to their major emerging shareholder, China. Kim is already looking for ways that the Bank can support China’s Belt and Road initiative, while Lagarde joked in July that the Fund may move its headquarters to Beijing. In playing this game, they would be taking a page from UN Secretary-General Antonio Gutteres, who has said that China is ready to fill any global leadership vacuum left by the Trump administration.