IMF Reform Is Too Little, Way Too Late
Provided the U.S. Congress passes the 2016 appropriations bill on Friday, a major reform of the International Monetary Fund can proceed. But the five-year delay since the changes, meant to give more power to big emerging economies, were proposed makes them less useful in bolstering the IMF's role as the world's most important international financial institution.
In a changing world, governance of the lender of last resort needed modernizing. Leaders of the Group of 20 agreed in 2010 that individual IMF quotas and voting rights needed to better reflect its members' standing in the world economy. That meant reducing the role of advanced European countries and Gulf states, and increasing that of emerging nations, particularly China:
The reform required U.S. approval of an amendment to make all of the fund's executive directors elected (some are currently appointed). The U.S. wanted to safeguard its standing as the fund's dominant voice; doubling all quotas would achieve that. The changes wouldn't cost the U.S. more money; its commitment would remain at about $170 billion, with the quota increase coming from the extra funds it, like many other countries, provided to the IMF after the global financial crisis of 2008. Congress just needed to approve moving some of that commitment to the quota -- a mere technicality.
IMF critics in Congress, however, opposed the fund's decision to lend to Greece despite grave doubts about its repayment abilities. The IMF had invoked a rule that allowed such lending if a failing country threatened international contagion. To U.S. conservatives, that wasn't their problem; U.S. financial institutions had much less exposure to toxic Greek assets than European ones did, and Europe should take care of its own.
Indeed, Europe has benefited disproportionately from IMF lending in recent years:
Those U.S. objections make little sense now. Greece's latest bailout has proceeded without IMF participation: The fund still doubts that the country can repay its debt, but Greece no longer poses a systemic risk. The European Union turned out to be rich enough to fund Greece's 85 billion euro ($92 billion) rescue package. Besides, a political deal has been struck: The appropriations bill calls on the U.S. representative to the IMF to use his voting power for the repeal of the "systemic exception," which allowed IMF participation in Greece's previous bailout.
So the long-delayed rearrangement -- which former IMF Managing Director Dominique Strauss-Kahn called "the most important reform in the governance of the institution since its creation" -- should now go smoothly. It'll be useful to bailout recipients; the doubled quotas will make it easier for the IMF to lend them more, on shorter notice and under more flexible requirements. Yet the changes are probably too little, too late by now.
For one thing, the new distribution of voting shares still doesn't do justice to China. Though the U.S., too, has a smaller say than its share of the world economy warrants, the gap between China's economic might and its IMF influence is bigger:
The power redistribution will, no doubt, please China -- an added bonus after the IMF decision to designate the yuan as a reserve currency next year -- but it won't deter Beijing from building alternative institutions such as the Asian Infrastructure Investment Bank. China, huge as it is, cannot afford to put all its eggs in the U.S.-dominated basket.
Nor can other big emerging nations, such as India, Russia, Brazil and South Africa. They, with China, have already set up an IMF alternative -- the so-called New Development Bank. It's not going to be particularly important in the coming years, given the economic weakening of Russia and Brazil. Still, the desire for a lending pool independent of the West isn't going away.
Europeans, for their part, are also creating their own emergency infrastructure: advance notice that their role at the IMF would shrink highlighted that their needs in a serious crisis would exceed the fund's ability to help.
Edwin Truman, a specialist in international financial institutions at the Peterson Institute for International Economics, wrote recently that his glass "was only half full with champagne" at the Congress deal permitting the IMF reform:
The U.S., 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.
That, however, is probably not the issue at this point. The bigger problem is that the emerging world, in effect, wants international financial organizations to provide development financing. As Carmen Reinhart and Cristoph Trebesch pointed out in a recent paper, "the inherent conflict faced by the IMF is between strengthening its role as an international lender of last resort and the demands of many member countries for serial lending, resulting in repeated programs and a perpetual state of debt 'ever-greening.'" The authors argue that this marks a departure from the fund's original function as a lender of last resort.
The terms of U.S. consent to the 2010 reform -- including a requirement for the U.S. representative to ask permission at home before voting to approve any large-scale program -- appear to signal a U.S. desire to steer the IMF back toward its origins. In line with Reinhart and Trebesch's recommendations, they'd like the Fund to stick to its debt sustainability criteria and only help when there's a crisis that can be resolved by emergency aid. That makes the IMF less interesting to the emerging nations; and their empowerment by the proposed reforms won't resolve the conflict.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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