The US Congress has finally passed long awaited IMF governance reforms. President Obama claimed it as a victory for the White House that will strengthen 'America's leadership of the IMF'. USA Today reported 'Congress finally preserves US leadership in global finance'.
Some leadership. With the US having a veto power over major decisions in the IMF, it has held up for five years reforms that were endorsed by nearly all the 188 members of the Fund. The reforms give emerging markets and developing countries a larger say in the institution.
The long delay in getting the reforms through the US Congress has significantly damaged US credibility. The British Chancellor of the Exchequer, George Osborne, said it was a 'tragedy that an agreement reached across all the members of the IMF was being blocked by the US Congress'.
The belated passage of the legislation through Congress supporting the reforms is welcome, particularly since it includes a doubling of IMF quota resources, but it will not restore, let alone strengthen, US leadership in the IMF.
The delay in implementing the IMF reforms highlighted that, regardless of commitments made by the US Administration, it — and, at times, the rest of the world — is hostage to the unpredictable and often irrational workings of the US Congress. This was evident in the recent Paris climate change negotiations, when a 'typo' in the final text nearly scuttled the whole agreement. The text said developed countries 'shall' be obliged to cut emissions rather than 'should'. The US delegation could not accept 'shall' because of the problem of getting through Congress support for anything involving a legal obligation.
Significantly, the delay in obtaining Congressional support for reforms agreed in 2010 has limited the immediate prospects of advancing further reforms. This is important because the legislation that has finally gone through the US Congress was intended as a first installment of much larger reforms. The measures agreed in 2010 only contain a 2.8 percentage point shift in quota shares from advanced to emerging markets, and while China will become the third largest member, it is still short changed relative to its weight in the global economy. The 2010 reforms were to be part of bigger changes to come, including a review of the formula for determining quota allocations. This was expected to result in a larger shift in quota shares to emerging markets.
Any change in IMF quota distribution is highly contentious, because it is a zero sum game. For some countries to have a larger stake in the IMF, others have to see their share reduced. History shows that an agreement on changing quota shares only occurs when a country takes leadership and, at least figuratively, 'bangs some heads together'. The US normally plays this role and it was US leadership that achieved agreement on the package of IMF reforms reached in the G20 in 2010. After a long period of protracted and deadlocked negotiations, a deal was achieved at the October 2010 meeting of G20 Finance Ministers when then US Secretary to the Treasury, Tim Geithner, gathered the main protagonists — led by the Europeans and the emerging markets — in a room and thrashed out a deal. In brokering the agreement, the US gave assurances about getting the reforms through Congress and, in fact, the agreement was designed to facilitate such passage.
Given the experience of the last five years, there is little prospect that the US can play the same role in brokering agreement on a more extensive range of reforms to IMF representation.
It is often cited that the US delay in giving China a greater say in the IMF contributed to China establishing alternative institutions, such as the Asian Infrastructure Investment Bank (AIIB). This view underestimates China's motivation in establishing the AIIB, which was more than a reaction to what the US did or did not do. China had its own reasons to establish the AIIB, particularly in the context of its Silk Road Initiative, and it is highly likely that the new bank would have been established even if there had been speedy implementation of the 2010 IMF reforms. It was the US, not China that turned the establishment of the AIIB into a clash of leadership between the two countries; a clash the US lost.
While USA Today proclaims the action by Congress will 'keep the US on top — where it belongs', it is far from clear which country will provide future leadership in the IMF. The US is damaged goods. The interesting issue is whether China will, at some stage, step up to the plate and 'bang some heads together' in order to advance deadlocked IMF reforms.