Time For US Congress to Support IMF Reforms
A challenge for policymakers is to reform the international organizations created in the past century so that they will be positioned to meet the challenges of the current one. The US Congress faces this issue right now, as the Obama administration has asked it to support historic reforms of the International Monetary Fund. These reforms deserve the full support of both houses, and a failure to act weakens global economic governance at a time in which it is sorely needed.
These reforms, which were agreed to by the members of the G20 in 2010, have two elements. The first is a reform to the IMF’s quota. We can think about the IMF as a global credit union, and the quota represents not only a country’s borrowing rights, but also its voting rights. The quota reform is designed to reshape the Fund’s representation so that rapidly growing emerging economies have voice commensurate with their economic power. China will become the third largest quota-holder at the Fund (second only to the US and Japan), and Brazil, Russia, and India all become top-ten quota-holders as well. The rationale behind the quota reform is simple. Not all economies are the same size, and one would expect those countries that bear a greater burden of managing the global economy to have disproportionate voice in decision making. This was exactly what the US sought in forming the IMF in the first place. The only thing the emerging markets are doing in lobbying for this quota reform is paying attention to history.
The second reform is an amendment to the Fund’s Articles of Agreement, which reduces the influence of European countries on the IMF’s Executive Board. The 24 member board was largely dominated by European countries, and these countries have reallocated their seats on the board so as to reduce their influence by two seats. This has the effect of empowering emerging countries like Turkey and Hungary who were previously less likely to have a seat on the board. Amending the Articles of Agreement buttresses the aforementioned quota reforms, and serves to reforge the institution so that it can better serve as a vehicle for global economic cooperation.
The political challenge for the Obama administration is one of poor timing. The quota reform is based on strengthening the IMF’s callable capital. In practice, this means that the Congress has approve a move of $65 billion dollars out of an ad-hoc fund set up in 2009 called the New Arrangement to Borrow and into the US quota. While this is effectively an accounting transfer, in this time of partisan bickering over fiscal policy, $65 billion dollars is an easy target for politicians wishing to score cheap points with their constituents. It is no accident that the House and Senate kept the issue out of the Continuing Resolution that it passed, which funds the government until the end of the year. Given the easy potential for partisan gamesmanship, it is no wonder that the White House has delayed action on this measure for years. The challenge for incoming Treasury Secretary Jack Lew is to make the case for the reforms to Congress so that these measures are included in next year’s budget. These reforms are in the US interest for three reasons.
First, despite leading the charge to strengthen the IMF, the US is bringing up the rear in signing off on the quota adjustment, which has already been endorsed by 146 countries. The Europeans, including Belgium and Austria, who are giving up executive board seats, have already given their assent. Germany, France, and the United Kingdom, whose vote totals are decreasing under these reforms, support these reforms. By contrast, defacto US control over the IMF is preserved, as the US still holds 16.5% of the votes in an institution in which major decisions are made by an 85% supermajority. The US is the sole developed country holdout, and the supermajority makes US support for reforms essential.
Second, Congressional failure to act will have detrimental repercussions. The BRICS countries held their annual summit last week, at which time they endorsed forming their own development bank. The future size and scope of that bank, and more importantly whether it is a supplement to the IMF or a competitor, may well be determined by the US reaction to the IMF reforms. More broadly, the US ability to obtain any meaningful reforms by the BRICS countries will be set back considerably if the IMF reforms are not adopted. Given the growing concern over competitive currency devaluations by countries, this is the wrong time to reject cooperation.
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Finally, Congressional failure to approve IMF reforms will only serve to raise broader questions about America’s level of engagement in the global economy. The US can only expect a frosty reception from the G20 after scuttling reforms that took years to develop and that we pledged to implement. Even as they wait for the US, IMF member countries are now working on another round of quota reforms which they hope to propose next year. At a time in which Europe remains in crisis and there is still need for policy coordination, weakening the one institution empowered to address these matters sounds more like abdication than leadership.