IMF Governance Reform: Better Late than Never
At last the road blocks to reform of the International Monetary Fund (IMF) are about to be removed. Embedded in the Consolidated Appropriations Act of 2016 now before the US House of Representatives and the Senate are provisions that will allow the IMF to implement quota and governance reforms agreed in Seoul in 2010. All indications are that the legislation is likely to pass and to be signed by President Barack Obama. The world has been waiting on the United States to provide the necessary approval at least since the end of 2012. The delay has cost the United States dearly in terms of its credibility and global leadership. The costs would have been worse had the administration and Congress again failed to address US international responsibilities.
The IMF quota and governance reform package was crafted largely by the United States at the G-20 economic summit in Seoul in 2010 (see Truman 2013, Policy Brief 13-7; and 2014, Policy Brief 14-9). It includes three major items: (1) a doubling of IMF quotas, with a corresponding reduction in the size of commitments for some countries to lend to the Fund under the New Arrangements to Borrow (NAB) and a reallocation of quota and voting shares in the IMF away from advanced countries, principally in Europe, and toward rapidly growing emerging-market and developing countries, such as China; (2) an amendment to the IMF Articles of Agreement to provide an all-elected executive board; and (3) an understanding that the "advanced" European countries would reduce their representation on the 24-person executive board from the then-current eight or nine seats.1 US congressional approval of the second element is required for the first and third elements to be implemented. The direct US financial commitment to the IMF under the first element will be unchanged, although there will be a small budget cost, likely less than $500 million.
The administration and Congress should have acted on the IMF reform legislation years ago. Unfortunately, the price demanded by Republicans, in particular in the House, was higher than the administration was willing to pay. We do not know, and likely will never know the full price that was paid to push congressional action over the finish line. We do know from the proposed legislation that the legislation poses conditions on US involvement with the IMF.
One condition requires Congressional approval of continued US participation in the NAB after 2022. This is a high price to pay if it leads to US withdrawal from the NAB. It would undercut the financial capacity of the IMF and US leadership in that institution.
A second condition requires the US representative in the IMF to use his or her "voice and vote" to urge the IMF to repeal the "systemic exception" that allows the IMF to grant large-scale financial assistance to a country whose debt may be unsustainable on the ground that failure to help that country would destabilize the global financial system. The United States cannot formally consent to the increase in the US quota in the Fund until the US Treasury secretary has taken "all necessary steps" to secure repeal of this exception. Its repeal is certain to happen because many IMF members favor taking such a step. But what, if any, procedure or processes is to be put in place in those circumstances is unknown. Moreover, creating a new exception would only require IMF executive board approval by members with 50 percent of total votes. Therefore, this condition in the IMF legislation is symbolically important and may further delay the implementation of the reform package, but that is all.
A third condition in the legislation imposes reporting requirements on the US IMF representative before he or she can vote to approve any large-scale IMF financial assistance—known as exceptional access. Again, such a provision does not cripple the IMF from doing what it needs to do because these programs require only a majority vote in the IMF executive board.
First, the United States, the only member that has the votes to block major changes in how the IMF operates, has diminished its ability to influence events. The United States is no longer seen as a reliable negotiating partner on IMF issues.
Second, the prospects are dim for further reform of IMF governance in the direction of increasing the voting shares of emerging-market and developing countries and provision of additional financial resources to the IMF. The reform package approved in Seoul in 2010 called for completion of another review of IMF quotas by the end of 2014 rather than 2015, but that review has been stalled. The review was expected further to redistribute IMF voting power and to augment IMF financial resources more than what will flow from congressional approval of this legislation. 2
Third, future US administrations will have to rethink the US approach to legislation promoting US interests in the IMF. The approach of the Obama administration, implicit in the legislation and the secretive manner in which it has moved toward passage, has been to treat IMF quota and governance reform as an issue that needed to move under the radar. Such a stealth strategy has guaranteed delays. Supporters of the IMF, most likely including the next president even if that is not her or his position during the campaign, must educate the public and the Congress about the importance of continued US support for the IMF to US interests in the economic, financial, and stability of the world.
Bottom line: My glass is only half full with champagne!
This post contains corrections made December 16, 2015, at 4:30 pm.
1. The NAB is a mechanism in which a substantial number of members of the IMF commit to lend to the IMF over and above their commitments to lend embedded in their quota subscriptions. The NAB members have to vote separately to activate this mechanism.
2. The quota and NAB adjustments will increase the IMF's usable financial resources by less than 10 percent.