Janet Yellen faces critical choice for global economy, poor nations rocked by coronavirus

But for months, the initiative has been blocked almost single-handedly by the Trump administration, which has used effective U.S. veto power over IMF decisions to reject theinternational consensus.

The fate of the additional IMF aid will soon fall in large part to incoming treasury secretary Janet Yellen, the former chairwoman of the Federal Reserve.

Even as she confronts daunting domestic economic needs, Yellen will face an early foreign policy test in the battle over the IMF's special drawing rights or "SDRs." Established as an international reserve asset in 1969, the SDRs can be converted into one of five major currencies, including the dollar or Japanese yen. The IMF can dramatically increase the amount of SDRs in circulation at no cost to U.S. taxpayers, economists say, allowing countries to stabilize their financial reserves and prevent capital flight.

The proposed increase in the IMF's crisis war chest is backed by American farmers and manufacturers hoping to revive their overseas markets, as well as global antipoverty advocates such as Oxfam and the International Rescue Committee. Larry Summers, a former Treasury Secretary, calls the move a "no brainer."

Yet Yellen has seemed skeptical, echoing in the past objections to the plan raised by her predecessor, Treasury Secretary Steven Mnuchin.

"A large share of the money goes to developed countries like the United States. It's unclear that this strategy would provide sufficient funds to stressed emerging markets," Yellen said in an interview with the Brookings Institution in April.

Mnuchin had raised similar concerns, saying last year that 70 percent of an SDR increase would go to members of the Group of 20 nations, which don't need the help. Only 3 percent would reach low-income countries, he said.

Mnuchin also told reporters last month that approving additional special drawing rights would effectively turn the IMF into "the equivalent of a central bank" by having it serve as a source of global emergency liquidity.

Some Democrats on Capitol Hill may seek to force Yellen's hand. Sens. Dick Durbin, D-Ill., the No. 2 Senate Democrat, and Bernie Sanders, I-Vt., have pushed legislation to increase the amount of SDRs in circulation by 2 trillion or roughly $2.9 trillion. Durbin, Sanders and incoming Senate Finance Committee chair Ron Wyden, D-Ore., are circulating a letter to Yellen urging her support for swift passage of their proposal, saying it would help "solve the urgent crises of poverty, hunger and disease being experienced by hundreds of millions of people worldwide." That effort has been approved by the House but stalled amid Republican opposition in the Senate.

Yellen could unilaterally approve U.S. support for the IMF issuing additional SDRs of about $650 billion, although she would have to give Congress 90 days notice before doing so, according to Mark Weisbrot, an economist at the Center for Economic and Policy Research, a left-leaning think tank.

A Biden transition spokesman did not respond to a request for comment.

Additional IMF aid could help some of those suffering the most from the pandemic and its economic consequences.

UNICEF estimates that 2 million children under five years of age could die this year due to a lack of health care and nutrition, with more than 140 million children being added to the ranks of the global poor due to economic deterioration caused by covid-19. World Food Programme director David Beasley recently said in the Guardian: "We are losing the battle against hunger as never before." Concerns have also emerged about poor countries' ability to pay for the coronavirus vaccine.

IMF Managing Director Kristalina Georgieva told reporters earlier this month that she plans to immediately start working with the incoming Biden administration on SDRs, touting them as "one of the instruments" for shoring up developing economies.

"It would avoid an enormous amount of suffering around the world and redound to the benefit of the United States," said Joseph Stiglitz, a Nobel Prize winning economist at Columbia University who mentored Yellen and remains a friend. Stiglitz said there is no good economic rationale against a dramatic increase in SDRs. "There's a very broad consensus among economists that this is a good thing to do."

Summers, who also served as chief economist at the World Bank, added that dramatically expanding SDRs would "require no U.S. budget cost" and is more urgent now given the spread of mutations of the coronavirus.

"This is a place where the new Biden administration needs to step up on behalf of American humanitarian values and economic common sense," added Gene Sperling, an economist who advised Biden during the presidential campaign and served as a top economic adviser to President Clinton. "This is the least we should do."

The dispute over IMF credit facilities illustrates the complex global agenda that awaits Yellen, if she is confirmed, as expected. Yellen weathered her first Senate committee confirmation hearing on Tuesday.

The former Federal Reserve chief is best known for her views on issues of domestic economic policy, ranging from deficit spending to wealth inequality. But her portfolio at the Treasury Department will also include enormous powers that could shape the global economy, including the ability to impose sanctions on nations that choke them off from international markets and bludgeon their economies.

"Quite possibly the most important decisions Treasury Secretary Yellen can really make will be in the international arena, where there has been an incredible vacuum of U.S. leadership," said Summers, who served as treasury secretary during the Clinton administration.

SDRs are only one part of Yellen's international portfolio. She and her deputy, Adewale "Wally" Adeyemo, also will be kept busy managing the active global sanctions agenda they will inherit from the Trump administration.

From his first days in office, President Donald Trump's enthusiasm for unilateral presidential power drew him to economic sanctions, which offer a middle ground between diplomacy and military force. In February 2017, the new president responded to an Iranian missile test by slapping sanctions on 25 companies and individuals involved in the military program.

Ever since, sanctions have been the administration's preferred tool in disputes with both adversaries such as China, Russia, and Venezuela, and allies such as Turkey. Trump has resorted to sanctions nearly twice as often as his predecessors, according to statistics compiled by Adam Smith, a partner at Gibson Dunn.

Trump has added an average of more than 1,000 individuals or companies to the government's sanction list each year, blocking any assets held by U.S. financial institutions and barring any American person or company from doing business with them. The comparable figures for Presidents Barack Obama and George W. Bush are 533 and 435, respectively.

Treasury's list of "Specially Designated Nationals and Blocked Persons" fills a 1,528-page online report.

"There's been a steady increase since 2001. But Trump has taken it to new levels," said Smith, a senior sanctions adviser at Treasury during the Obama administration.

Those figures probably understate recent U.S. activism. They don't take into consideration that Trump targeted more large foreign companies than his predecessors and they exclude export controls, Smith said.

By contrast, Biden is likely to seek allied agreement whenever possible before imposing new financial restrictions. Sen. Maria Cantwell, D-Wash., told Yellen to be "aggressive" in the administration's use of sanctions policy during the Senate finance committee hearing on Tuesday. Yellen responded by saying she would be tasking Adeyemo with a review of U.S. sanctions policy to ensure their efficacy.

"You can be sure I will be focused on making sure they're used strategically and appropriately," Yellen said of sanctions.

Yellen won't be the only Cabinet officer to grapple with key sanctions decisions in the administration's early months. More than a dozen federal agencies play an active role in sanctions implementation or enforcement, according to a 2020 General Accounting Office analysis. Last week, the Commerce Department added several companies, including China's state-owned oil exploration company, China National Offshore Oil Corporation (CNOOC), to an export blacklist barring it from U.S. suppliers. More than a dozen federal agencies play a role in sanctions implementation or enforcement, according to a 2020 Government Accountability Office analysis. So for many of the most consequential measures, she will be one of several players in an interagency debate.

Commerce has made frequent use of its power over U.S. exports in service of Trump's foreign policy goals.

But the details of implementing that ban, which only applies to CNOOC activities in the disputed South China Sea, will be left to the Biden team. Commerce also is leaving unfinished proposed regulations designed to largely prevent information technology gear from six countries - China, Russia, Iran, North Korea, Cuba and the Venezuelan government of Nicolas Maduro - from being used in U.S. communications networks.

The department must provide 60 days for public comments on the proposed restriction, meaning its ultimate fate rests with Biden's commerce secretary-designate Gina Raimondo.

Yellen also will be drawn into some of the administration's core foreign policy debates, including how to lure Iran back to the negotiating table. U.S. officials credited tough sanctions for getting Tehran to agree to the 2015 nuclear deal.

Trump quit the deal three years later, preferring to tighten the screws on Tehran in hopes of securing a more comprehensive settlement.

On Friday, Secretary of State Mike Pompeo announced new sanctions on the Islamic Republic of Iran Shipping Lines, its CEO and several companies that shipped steel to Iran via the Iranian shipping company.

"It's just become so messy. There are so many cooks in this kitchen," said Smith.

Treasury's Office of Foreign Asset Control (OFAC) has struggled to keep pace with the rising workload. Though Congress has agreed to fund a larger staff, the department has had trouble competing with the private sector and other government agencies for talent. In fiscal 2020, 21 percent of OFAC's 259 authorized staff positions were vacant, GAO said.

The proliferation of U.S. sanctions have imposed costs on global businesses, sparking grumbling from some foreign executives and government officials. In a 2016 speech, Treasury Secretary Jack Lew in a 2016 speech warned that Washington risked driving companies away from the U.S. financial system if it overdid the use of sanctions.

"Sanctions should not be used lightly. They can strain diplomatic relationships, introduce instability into the global economy, and impose real costs on companies here and abroad," Lew said.