Time to push on with IMF reform

US foot-dragging undermines its claim to global leadership and could lead to loss of its veto power

Because the US Congress failed to incorporate the International Monetary Fund reform package of November 2010 into its budget legislation, IMF quota and governance reforms are once again stalled. Christine Lagarde, managing director of the IMF, indicated in a statement in December that the board is due to meet this month to weigh "alternative options" to the four-year-old reform plan and ensure that the IMF has adequate resources.

The IMF reforms are designed to reflect the increasing importance of emerging economies and retain the influence of smaller developing countries in the IMF. According to the reform plan, 6 percent of the quota shares of developed countries will shift to emerging economies. China's quota share will rise from the current 3.99 percent to 6.39 percent. As a result, China will become the third-largest shareholder after the United States and Japan. China's voting share will also increase from 3.65 percent to 6.07 percent and the other BRICS countries such as Russia, India and Brazil will all be in the top 10. The reforms are hailed as the "most fundamental reforms of governance" in the history of the IMF.

In spite of the fact that the United States will not lose its unique veto power in the institution, it still feels that its dominance in the IMF is at risk and therefore has adopted procrastination tactics in an attempt to drag the reform into limbo.

In essence, the reforms have been crafted to democratize the IMF governance. Now, those sitting at the head of the IMF's table are either US allies, or its Western partners, whereas the developing countries are underrepresented as a whole. They do not have a say in the IMF decision-making process, or in protection of their fundamental interests. Should the reforms be put into effect, emerging economies will gain a significant increase in "weight", and some will sit at the "head table".

According to the reform plan, the US needs to transfer $63 billion from its $70 billion contribution to the IMF's emergency funds. Some US congressmen opposed to the reforms claim that, as the US currently suffers from high fiscal deficits and budget cuts, it would be too costly for the US to approve its quota increase. This will only involve transferring the money from the US' IMF account to another, not to increase the US' burden at all. Still they seek to maintain the US position as IMF's largest shareholder.

In addition, as the US economy improves, its agenda priority has changed. It was when the US urgently needed the help and support of the emerging economies at the peak of the global financial crisis that it actively promoted the IMF quota and governance reforms. Now, with quantitative easing coming to an end, and the return of some manufacturing to the US, the economic recovery in the US has gained a relatively solid foundation. In such circumstances, the quota expansion for countries with high foreign currency reserves in the IMF is no longer urgent. 

There is growing discontent about the US' chop and change approach. Fred Bergsten and Edwin M. Truman, senior fellows of the Peterson Institute for International Economics, wrote a letter to the Financial Times, calling for the IMF to move ahead without the US. If the US does not want to participate in reforming the IMF, it should get out of the way.

They proposed two options. One way would be to make permanent the 2012 initiative by Christine Lagarde to arrange temporary bilateral credit lines of nearly $500 billion from 38 countries, augmenting the IMF's capability to finance its lending. The US opposed that proposal, but the IMF and other countries could convert it into a permanent arrangement, placing decision-making in the hands of the funding countries, not the US. A more radical approach would be to increase total country quota subscriptions in a manner that would also not allow the US to stop the IMF from reforming.

More and more countries are fed up with the US dragging its feet on approving the reform package. Some members of the IMF's steering committee have indicated their desire to deprive the US of its veto power on the IMF executive board.

The US' reticence to endorse the IMF reform plan not only indicates its lack of confidence in its future growth and inward-looking inclination, it also undermines its claim to global leadership.

The failure to implement the reform plan has seriously affected public confidence in the IMF, making its representation, legitimacy and relevance questionable in the eyes of the international community. Therefore, it is imperative that the IMF rapidly advance the reform plan.

The international community will closely follow the alternative reform options that the IMF comes up with later this month.

The author is a senior research fellow at the China Foundation for International Studies. The views do not necessarily reflect those of China Daily. Courtesy: chinausfocus.com