By Lowy Institute Non-Resident Fellow Mike Callaghan and G20 Research Fellow Tristram Sainsbury
When it comes to IMF quota reform, the words of Yogi Berra come to mind: 'It's like deja vu all over again'.
The US Congress continues to block the reforms before it, and the rest of the world continues to set meaningless deadlines for their approval.
The IMF has just set another deadline for when it will look at alternatives if the reforms are not passed – this time it's June 2015. The latest Board of Governors resolution has two main elements: delay until 30 June 2015 any action on possible alternative options if the existing reforms (the 14th General Review of Quotas) are not passed, but reaffirm 15 December 2015 as the deadline for the next reform package (the 15th General Review of Quotas).
It is all a bit of a mess.
The latest sequence of deadlines is unrealistic, the IMF reform process seems rudderless and there is the danger that it might permanently undermine the foundations of the Fund.
We have seen it all before. In 2010 the G20 and IMF agreed to a series of reforms to the Fund's quota and governance arrangements. The aim was to strengthen IMF funding and shift quota shares to better reflect changes in the global economy, particularly the rise of emerging market economies (EMEs). The changes were modest; the proposed shift in quota share from advanced economies to EMEs was only 2.8%, although China would have become the third-largest member of the IMF. However, the 2010 reforms were to be part of bigger changes to come, including a review of the formula for determining quota allocations for the next review. This was expected to result in a larger shift in quota shares to EMEs. As such, the reforms were hailed as a historic step.
All well and good, except for Congress. The original date for implementation of the reforms was end-2012. But the Obama Administration could not get them through the Republican-controlled Congress, which for a range of irrational reasons is opposed to the reforms. Countries representing over 80% of IMF votes have approved the reforms, but the required threshold is 85%. And the US has a veto with its 16.75% share of IMF votes.
To say the world is frustrated with these developments is an understatement. It has drawn condemnation from the G20 and from BRICS leaders, who found the delays a source of 'serious concern and disappointment'. The lack of progress has undermined the credibility of the US, G20 and IMF, and has been a factor behind the birth of bodies such as the BRICS development bank and currency pool. The G20 then set the end of 2014 as a deadline for US consent and said if that did not occur, alternative options would be pursued. This was interpreted as a threat to bypass the US.
There are two messages from the recent IMF resolution.
First, the IMF Board has not been able to agree on a practical set of alternative options to circumvent the US blockage – it has no workable 'Plan B'. This has been suspected for some time. The latest set of options proposed by Ted Truman is highly problematic, particularly the idea that the Obama Administration would snub Congress and give up the US veto.
The second is to not expect any grand developments on IMF reform in 2015, including from the G20 meetings in Istanbul. The best and simplest way forward is for the US to promptly ratify the reforms. But there is little to suggest Congress will pass the reforms by June, or for that matter at any point in this term.
The G20 and IMF should continue to press the US on passing the reforms, but they should not get bogged down on the issue. They should be more proactive.
The first step is to be explicit in ensuring that the failure to progress governance reforms in no way damages the operations of the Fund. In particular, the G20 should ensure that access to IMF resources and its surveillance is even handed and not biased in favour of any group of countries. This is the core concern of EMEs.
The next step is to secure the IMF's resourcing. Conversations should commence over the future of the US$460 billion in temporary bilateral loans that are scheduled to expire at the end of 2016.
Third, the IMF should look at options to improve cooperation with regional financial safety nets.
The Economist sagely notes that by the time the US gets around to approving the IMF's reforms, it may have become a much less important institution. This is a worry, because the world needs an effective IMF. However, it is also a major concern if frustrations result in steps that accelerate a reduction in US involvement in the international economy and international financial institutions. Cool heads are needed.
Photo courtesy of Flickr user International Monetary Fund.