The IMF/G20 meetings in Washington last week were not good for the US. And things may get worse.
Instead of focusing on the possibility of additional economic sanctions on Russia, which no doubt would have been the desire of the US, the headlines were 'G20 gives US ultimatum over IMF reforms'.
The G20's frustration centres on US failure to ratify the IMF quota and governance reforms agreed by the G20 in 2010. While countries representing nearly 80% of IMF votes have approved the reforms, the required threshold is 85%. The US has a veto with its 16.75% shareholding and the US Congress continues to block the reforms.
At their recent meeting, G20 finance ministers said that 'if the 2010 reforms are not ratified by year-end, we will call on the IMF to build on its existing work and develop options for next steps'. This has been interpreted as the G20 threatening to move to 'Plan B' which will by-pass the US, an approach strongly advocated by Russia.
How significant are the reforms and is there a realistic 'Plan B'? Moreover, what would be the broader consequences of such a move? Or is it all a bluff?
Joe Hockey said the 2010 IMF reforms are a top priority because they would 'double the IMF's permanent resources and lead to a major realignment of voting shares'.
The reforms will not increase the overall resources of the IMF. While IMF quotas (equivalent to share capital) will be doubled, this will be matched with an equivalent reduction in the IMF's permanent credit line from 38 of its members, known as the New Arrangements to Borrow (NAB). Ironically, the US insisted that the increase in quota be matched by a reduction in its contribution to the NAB, because it judged the reforms were more likely to pass Congress if they involved no net increase in the US financial commitment to the IMF. This logic did not persuade Congress. But an increase in quotas is necessary to achieve a change in quota shares. Moreover, it is considered important that the bulk of the IMF's resource base be linked to members' quotas rather than loans from a small sub-set of the membership.
With regard to the shift in voting shares to better reflect the change in relative weights of countries in the global economy, the 2010 package represents a modest change — the proposed shift in quota share from advanced economies to emerging markets and developing economies is only 2.8%. But the package also includes a shift in shares among the emerging markets, with the rapidly growing economies benefiting at the expense of over-represented countries. The result would see China become the third-largest shareholder in the IMF.
Furthermore, the package is intended to be part of bigger changes to come. Part of the deal is for a review of the formula used to determine quota allocations and an acceleration of the next general review of quotas. This is expected to produce larger shifts in quota shares to emerging markets.
The other key aspects of the reforms are a move to an all-elected IMF Executive Board and Europe agreeing to give up two of its chairs on the Board in favour of developing countries.
Is there a realistic 'plan B' if the US continues to veto these reforms? Neither the IMF nor G20 are giving away any details, but an unnamed G20 official is reported to have said there is no plan B; 'there is nowhere to go, initially you have a discussion, but then when you move to details, there is nothing'.
Bergsten and Truman from the Peterson Institute proposed the idea of moving ahead without the US. Truman subsequently suggested that a way forward would be to set aside the 2010 package of reforms and renegotiate the quota formula such that the US quota would rise; then move to double the size of quotas, with the resolution to increase quotas contingent on the support of 80% of voting power, thus removing the US veto.
The prospect of getting agreement on such a package seems unlikely. The negotiations over the quota formula have been very contentious and given the extent of ill-feeling towards the US, it is unlikely countries will endorse a change with the aim to increase the US share. Moreover, the proposal to end the US veto is based on the assumption that the US Treasury Secretary would vote in favour of such a resolution. This hardly looks like a plan that by-passes the US. It will require the support of the US.
Assuming it could be achieved, the consequences of by-passing the US could be significant. The chair of the IMFC, Tharman Shanmugaratnam, said enacting IMF reforms without US congressional approval would be possible, though less desirable. He said it would reduce American influence in the global economy and could cause a 'disruption in the multilateral system'. Such a move could see Congress become even more insular and result in a reduction in US support for a range of multilateral institutions.
Is 'Plan B' a bluff? It is to be hoped we don't find out and the US Congress does pass the IMF reforms, for if it is not a bluff, it could accelerate a reduction in US involvement in the global economy and international institutions. This would be very disruptive.