Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.

 

Is US leadership in the IMF and on global financial issues under threat? Over 100 former US senior policy advisors and academics think so.

They wrote to Speaker of the US House of Representatives John Boehner on 11 March 2013 warning that if Congress did not pass legislation ratifying governance reforms for the IMF, this would 'diminish the role of the United States in international economic policy-making and undermine US efforts to promote growth and financial stability.'

But President Obama's attempt to have the legislation passed was rejected by Congress, being described as 'too politically sensitive in the tense budget environment.' The Administration is expected to have another go later in the year.

The legislation would implement reforms agreed by the G20 in 2010, which were described by then IMF Managing Director Dominique Strauss Kahn as 'the most important decision on the governance of the IMF since its creation in 1944.' He went on to say that 'what we did today puts an end to a discussion on legitimacy that had lasted for years, almost decades.' Yet three years later these 'historic' reforms have not been implemented because of US opposition.

A large majority of IMF members has passed the reforms, but the changes require an 85% majority within the IMF to be implemented and the US has veto power with its 16.75% voting share.

The reform package doubles IMF quotas, shifts six percentage points of quota share to the fast growing emerging markets, moves two of the 24 IMF Executive Board seats from Europe to developing countries and introduces an all-elected Executive Board (currently the five largest members appoint a Director).

While the IMF's quotas would be doubled, this would not result in an increase in IMF resources. With the increase in quotas (equivalent to capital) there would be a corresponding reduction in the lines of credit the IMF has with its members (debt). The size of the financial commitments by the US to the IMF would not change. Hence this should not be a sticking point for the passage of the bill through Congress.

The most important aspect of the reforms is the increase in the quota shares of the rapidly growing emerging markets. For example, China's quota share in the IMF would almost double to 6%. The US share would fall slightly but it would retain its veto power.

The emerging markets have long complained that they are under-represented in the IMF, and as such that the organisation lacks legitimacy. As the Brazilian Finance Minister has said, 'resistance to reform undermines efforts to transform the IMF into a truly multilateral and respected organisation.'

Will delay in ratifying the changes in governance reduce US influence in the IMF? It has certainly damaged US credibility, but it has also damaged the credibility of the Fund and the G20. The commitment by the G20 and the IMF was to implement the reforms by September 2012. Failing to meet a commitment is a sure way to lose credibility.

IMF reform is a bellwether issue for emerging markets, recognition of their growing importance in the global economy. Continuing concern by emerging markets that they are under-represented will reduce the authority, and in turn the effectiveness, of the IMF. If a country questions the legitimacy of an organisation, this will influence its receptiveness to advice from that organisation. Concerns over the 'Western-dominated' IMF and World Bank have been cited as factors behind the push for a new 'BRICS development bank.'  

It is worrying that one of the arguments against the reforms presented by the US Congressional Research Service is that emerging markets may not be 'responsible stakeholders', and increasing their voice 'could result in the support of economic policies that are less aligned with the preferred policies of advanced economies.' This is a 'red rag to a bull' to the emerging markets.

Commentators may worry about the impact on future US economic leadership, but the rest of the world should be concerned that the US is failing to exercise leadership now in not ratifying the governance reforms. This is undermining the IMF, the G20 and efforts to enhance better international economic cooperation.

Image by Flickr user opensourceway.