As the US Congress failed to incorporate the International Monetary Fund (IMF) reform package of November 2010 into its budget legislation, the IMF quota and governance reforms are once again stalled. Ms. Christine Lagarde, Managing Director of the IMF, indicated in a statement that the board would meet next month to weigh “alternative options” to the four-year-old reform plan and ensure that the IMF has adequate resources.
The IMF reforms are designed to reflect the increasing importance of emerging market countries and ensure that smaller developing countries will retain their influence in the IMF. According to the reform plan, 6% of the quota shares of developed countries will shift to emerging economies. China’s quota share will rise from the current 3.99% to 6.39%. As a result, China will become the third largest shareholder after the United States and Japan. China’s voting share will also increase from 3.65% to 6.07% and the other BRIC countries such as Russia, India and Brazil will all be in the top ten. The reforms are hailed as the “most fundamental reforms of governance” in the history of the IMF.
In spite of the fact that the United States won’t lose its unique veto power in the institution, it still feels that its dominance in the IMF is at risk and therefore has adopted procrastination tactics in an attempt to drag the reform into limbo.
In essence, the reforms have been crafted to democratize the IMF governance. Now, those sitting at the head of the IMF’s table are either American allies, or its Western partners, whereas the developing countries are underrepresented as a whole. They do not have a say in the IMF decision-making process, or in protection of their fundamental interests. Should the reforms be put into effect, things will change, emerging economies will gain a significant increase in weight, and some will sit at the “head table”. Perhaps, the United States will feel uneasy about that prospect.
On the other hand, the United States may find that it is unaffordable to initiate the reform process. According to the reform plan, the United States needs to transfer 63 billion US dollars as a quota increase out of 70 billion US dollars from IMF emergency funds, which it lent to the IMF. Some US congressmen opposed to the reforms claim that, as the United States currently suffers from high fiscal deficits and budget cuts, it would be too costly for the US to approve its quota increase. In fact, this will only involve transferring the money from the United States’ IMF account to another and will not increase the US burden at all. The United States is very much concerned that if the reforms are set in operation, the future developments may get out of control. As emerging economies’ share of the world economy continues to rise, the West IMF shares may continuously be diluted in accordance with the IMF periodical realignment of quota shares. Sooner or later it may endanger the US position as the largest shareholder of the IMF.
In addition, as the US’ economy improves, its agenda priority has changed. It was when the US urgently needed the help and support of the emerging economies at the peak of the World Financial Crisis that it actively promoted the IMF quota and governance reforms. Now, with the quantitative easing coming to an end, and the return of some companies manufacturing to the United States, the economic recovery in the US has gained a relatively solid foundation. In this circumstance, the quota expansion of countries with high foreign currency reserves in the IMF is no longer urgent.
There is growing discontent about the US’ chop and change approach. Fred Bergsten and Edwin M. Truman, senior fellows of Peterson Institute for International Economics, wrote to the Financial Times, calling for the IMF to move ahead without the United States. If the United States does not want to participate in reforming the IMF, it should get out of the way. They proposed two options. One way would be to make permanent the 2012 initiative by Christine Lagarde to arrange temporary bilateral credit lines of nearly $500 billion from 38 countries, augmenting the Fund’s capability to finance its lending. The United States opposed that proposal, but the IMF and other countries could convert it into a permanent arrangement, placing decision making in the hands of the funding countries, not the United States. A more radical approach would be to increase total country quota subscriptions in a manner that would also not allow the United States to stop the Fund from reforming its governance on its own.
More and more countries are fed up with the US delay in approving the reform package. Some members of the IMF’s steering committee indicated their desire to deprive the US of its veto power on the IMF executive board.
The United States’ reticence to endorse the IMF reform plan not only indicates its lack of confidence in its future growth and inward-looking inclination to focus on the problems at home, such as ObamaCare, immigration, high unemployment, inflation, the national debt, among others. But it also undermines its claim to global leadership and highlights its hypocrisy to use “responsibility” or a “leadership role” as a pretense to attack other countries and cast it away without hesitation if it offends America’s interests.
Due to America dragging its feat, the failure to implement IMF reform plan has seriously affected public confidence in the IMF, making its representation, legitimacy and relevance questionable in the eyes of the international community. Therefore, it is imperative that the IMF rapidly advance the reform plan.
The international community will closely follow the alternative reform options that the IMF produces January.