The impending congressional adoption this week of a $1.1 trillion appropriations bill has been hailed far and wide as a victory for sorely needed bipartisanship cooperation in Washington. Left out of the legislation, however, was an important but little understood and underappreciated proposal to implement reform at the International Monetary Fund (IMF). The proposal would fulfill an agreement pressed energetically by President Barack Obama at the G-20 leaders’ meeting in Seoul in November 2010. The omission, which has gotten too little attention, is a major blow to US credibility around the world, with ominous consequences for the future of international economic, financial, and political cooperation.
The 2010 Seoul agreement contained four elements. First, financial commitments to the IMF, in the form of quota subscriptions, were to be doubled. These commitments would not entail net new funding from the United States for the IMF, but rather a shift of the US financial commitment from one category to another, with a budgetary cost of $315 million—yes, million not billion! Any funding of the IMF, nonetheless, is not favored by some in Congress unhappy with the IMF’s role as a lender of last resort in crises over many decades.
The funding shift meant that commitments of some countries, including the United States, were to be reduced for what is called the New Arrangements to Borrow and would be replaced by an increase in the US quota subscription. The financial resources potentially available to the IMF would be essentially unchanged. But what is important is that the associated adjustment in IMF quotas would result in a redistribution of voting power in the Fund in a direction that has been advocated by Republican and Democratic administrations for years with essentially no change in the US voting share. In particular, the share of quotas and votes in the IMF of the emerging-market and developing countries as a group would increase relative to the advanced countries as a group, in particular for countries like China, India, and Brazil, whose economics had been most dynamic in recent years.
A second element of the Seoul agreement called for the IMF Articles of Agreement (charter) to be amended so that all executive director representatives on the board of the Fund would henceforth be elected. At present, countries with the five largest IMF quotas appoint their directors. This change would treat member countries more equally and would facilitate the future consolidation of representation among the European countries, which now appoint three executive directors.
The third element called for the advanced European countries to agree that once the first two elements were in place they would reduce their current overrepresentation on the 24-member IMF executive board by two seats from their current maximum of nine seats.
Fourth, the formula used to allocate changes in IMF quotas would be reexamined and the completion of the next review of IMF quotas would be accelerated to January 2014. At that time, it was expected that the emerging-market and developing countries as a group would be granted a further increase in their IMF quota and voting shares. This further reform is now effectively on hold.
The United States has the largest say of any member of the IMF. But because the US voting share in the IMF is 16.75 percent and an 85 percent majority vote is needed to implement the Seoul package of IMF reforms, there must be “formal” US approval of them, necessitating an act of the US Congress. Absence of such formal approval constitutes a “veto” that prevents the entire package of reforms from going ahead without US agreement, which is understandably unpopular with other countries. The Obama administration unfortunately decided not to submit the necessary legislation to Congress until early 2013, only to have it caught up in budget battles. The result has been an effective veto of the implementation of the package because it only awaits US approval.
The administration pressed hard for the inclusion of the IMF legislation in the omnibus appropriations bill, by most accounts. The bipartisan leadership of Congress and of the relevant committees reportedly either favored or was not antagonistic to the legislation. But the inclusion of the IMF reform package in the appropriations bill was not assured. It was the last issue to be resolved. In the event, the IMF provisions were held hostage by some members who reportedly pressed for a concession from the administration in some other area of policy, and the administration declined to pay the ransom. It is not for me to judge the wisdom on either side. Both are responsible for this failure of leadership.
The short-term and longer-term implications of this failure for the United States are severe. The United States has scored an “own goal,” as soccer fans would say—a self-inflicted wound in other words. US status as a leader of IMF institutional reform is seriously tarnished. In the future, the United States will be less trusted to implement international agreements in this and other areas. Moreover, the IMF is weakened because, after more than three years, the package of reforms remains in limbo, and prospects for future reform are diminished if not postponed indefinitely.
The IMF may not be popular. The countries that provide funding are not happy about rescuing countries they believe have engaged in irresponsible behavior, and the countries that need to be rescued never like the strict policy measures they must undertake to get IMF financial help. But like it or not, the Fund is the premier forum for international monetary cooperation and guardian of and advocate for international economic and financial stability. Because the United States has balked at approving the IMF reforms to reflect changes in the global economic and financial environment, the IMF’s status and legitimacy is diminished. Not only will the rest of the world suffer as a consequence but the United States will as well.
Progress in IMF reform can be put back on track. In his State of the Union address on January 28, President Obama should declare that the administration will immediately submit a stand-alone piece of legislation approving the 2010 Seoul agreement and advocate for it. The Congress should promptly approve the legislation. I am not holding my breath.
The failure of the Obama administration and US congress to exercise leadership on this issue was likely driven by a lethal combination of antipathy, apathy, or ignorance. But it means that other countries may now start turning further away from supporting financially and politically each of the institutions of international economic and financial cooperation that have nurtured and sustained the remarkable economic, financial, and political progress of the world since World War II.
Public support for the IMF, the World Trade Organization, the multilateral development banks, and even regional institutions, such as the European Union, has declined in recent years in all countries. It is ironic that at the same time countries and the global economy and financial system have become more interdependent, we have allowed our support for the institutions of international cooperation to atrophy.
Tuesday, January 14, 2014, the day after the bipartisan budget agreement, dawned dark and rainy in Washington. The weather mirrored the gloom of those who hoped for a better outcome for the IMF reform package on the US legislative front and their growing concern for the future of international economic and financial cooperation.