It appears that IMF governance reform is heading towards a near certain crisis. 2015 should mark the completion of the Fifteenth review of IMF quotas, which affect the voting share of IMF members. However, the Fourteenth Review has not yet been ratified, as the US Congress has blocked it – the US’s 16.85% voting share gives it a de facto veto on any decisions requiring an 85% majority of votes. It seems highly unlikely that anything will change to alter this scenario, and 2015 will end with the Fourteenth review unratified.
Can a new quota reform with any credibility really be agreed in this environment? We should also remember that quota reforms have traditionally been highly political affairs with states taking positions on the basis of how changes will affect their voting shares. Even if a reform is agreed, is there any likelihood that it will be ratified?
This crisis comes at a time of significant global economic uncertainty, and high existing calls on the IMF’s resources. IMF quotas have to be paid for – so they directly affect the core resources that the IMF can lend to member countries. Edwin Truman of the Petersen Institute, and former assistant secretary of the US Treasury, recently estimated that IMF financing needs, dependent on the quota reform process, are “at least $500 billion” if not $750 billion in additional resources from this IMF reform round.
In my view, two scenarios could emerge from the crisis:
Scenario 1: IMF governance reform is so slow that the institution gradually loses its relevance, funding and role in global economic governance. This is a distinct possibility, as emerging market economies have already strongly signalled their desire to move away from the Bretton Woods Institutions (the IMF and World Bank) as the main pillars of global economic governance, through the establishment of alternative regional and other arrangements. Emerging markets currently support the IMF through participation in the Fund’s New Arrangements to Borrow (where countries lend to the Fund to preserve its short-term resources) but this is entirely voluntary and technically non-secure funding, and could be reversed.
Scenario 2: A grand bargain is struck to comprehensively reform the IMF to give it renewed legitimacy and support, securing its position in the future. Eurodad and allies have presented an alternative approach, based on a root and branch reform, including:
o Double majority voting – as a key first step to democratising decision-making at the IMF. This would mean decisions made through a majority of country votes as well as a majority of voting shares.
o Truly merit-based leadership selection – with no allocation of any top positions to countries or country groupings.
o Minimum standards of transparency, including publishing transcripts of board meetings.
This topic will be central to the upcoming Spring Meetings, and the subsequent Annual meetings to be held in Peru in October – the last chance for Ministers to meet before the end of year deadline.
At a time when the IMF has expanded its lending dramatically
and taken on additional roles, the forthcoming governance crisis at the Fund
provides an opportunity to admit that tinkering with an outdated governance
system is likely to doom the IMF to irrelevance in the not too distant future.
Of course, the US is not going to give up its veto power without getting
something in return. So other countries need to think what that would be. An
obvious move would be for European Union governments to merge their seven seats
into one. They would gain in terms of better coordination and a united voice,
but at the same time opening room on the board for many more countries.
Will the EU make the first step to avert the crisis and spark root and branch reform of the IMF?