IMF Governance Reform: Unfinished Business for the 113th Congress

November 12, 2014 12:15 PM

US senators and representatives return to Washington on November 12 to complete the urgent unfinished business of the 113th Congress. They have a lot unfinished, and very high on that list for both the administration and the Congress should be approval of the 2010 International Monetary Fund (IMF) governance reform package. The administration has signaled that it will try again to get the package approved in the lame-duck session in the budget for the remainder of the fiscal year, but success is far from assured. Failure to accomplish this simple task will signal a further decline in US support for international economic and financial cooperation, diminished US standing and leadership across the board, and unknown consequences for the shape and content of international monetary cooperation in the future.

What is in the IMF reform package?

The IMF governance reform package was agreed at the 2010 meeting of G-20 in Seoul four years ago, in November 2010. It contains four elements:

  1. Financial commitments to the IMF in the form of quota subscriptions are doubled, including for the United States. This would not entail an increase in the overall US financial commitment to the IMF but a shift from one category, the US commitment to the IMF's New Arrangements to Borrow (NAB), which will decline, to another, the US quota subscription, which will increase by an equal amount. But the associated adjustment in the quotas of other countries would redistribute voting power in the Fund in a direction long advocated by Republican and Democratic administrations.1 In particular, the share of quotas and votes in the IMF of the emerging-market and developing countries, in particular toward a group of the most dynamic economies in recent years, will increase relative to the advanced countries as a group, but not relative to the United States.
  2. The IMF Articles of Agreement (charter) is 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 facilitate the future consolidation of representation among the European countries.
  3. Once the first two elements are in place, the advanced European countries will reduce their current overrepresentation on the 24-member IMF executive board by two seats from their current maximum of nine seats.
  4. As part of the original package, the formula used to allocate changes in IMF quotas were to be reexamined and the completion of the next review of IMF quotas was to be accelerated to January 2014, with the expectation of a further redistribution of voting shares. This target was missed and a new date of January 2015 was set, which will also be missed by a large margin if the United States does not approve the IMF governance reform package.

US approval is required for the entire package because the first three elements are linked. And approval of the amendment requires the votes of at least 60 percent of IMF members with at least 85 percent of the votes. To date, 146 of the 188 members of the IMF (77.66 percent) with 77.07 percent of the votes have approved the amendment, but approval by the United States is required because the US voting share is 16.7 percent.2

Arguments against approval of the IMF governance reform legislation

A number of arguments have been advanced against congressional approval of the IMF governance reform legislation.

  1. Impact on the US budget: Although the proposed legislation involves no net additional US financial commitment the IMF, the Congressional Budget Office (CBO) has determined that the increase in the US quota would require an appropriation of $315 million because of the risk to the US taxpayers. This reasoning is questionable. When the IMF draws on the US quota or NAB commitment to lend to another member, the US claim is on the IMF as a whole rather than the country borrowing from the IMF. And, although countries have delayed repaying the IMF, no member has ever defaulted. In addition, the IMF has senior creditor status; it has $15 billion in precautionary reserves and holds 90.5 million ounces of gold worth about $110 billion at its current market value. Contrary to the CBO, the financial risks of lending to the IMF in any form are thus negligible. [Revised November 13, 2014, to clarify the CBO determination.]
  2. Dilution of US influence: The United States can block activation of the NAB because it holds an 18.7 percent share and an 85 percent vote is required for activation. But the United States has never exercised this right. If the United States were to act alone to do so when the IMF clearly has a financial need, it would run into overwhelming international criticism and therefore is unlikely in the extreme.
  3. Inappropriate redistribution of IMF voting power: The governance reform package increases the votes of some countries the United States currently would prefer not to reward, such as China and Russia. The adjustments in voting shares are small: A combined 2.5 percentage points, more than 90 percent to China.3 But the purpose of the reform package is to recognize the increased role and responsibilities of countries like China for the global economic and financial system to keep them inside the tent of international monetary cooperation.
  4. The IMF does not need the additional financial resources: The reform package is not about increasing the financial resources of the IMF, which would increase by about $75 billion, or 8 percent of the current total of quota and NAB commitments. The reform package is about governance. To the related argument that if the IMF does need more resources, it can borrow them bilaterally from other countries, the IMF can and has added to its resources via temporary bilateral borrowing agreements. However, reliance on such mechanisms also dilutes US influence in the IMF.
  5. Disapproval of recent IMF lending: Less than 20 percent of IMF budget resources are devoted to lending operations. The IMF has a broader mission of providing a range of public goods in terms of information, analyses, and advice. With respect to criticisms of recent IMF programs for European countries, the IMF was designed to lend to all member countries in need, not just to lend to emerging market and developing countries, as is the case with the World Bank. The programs have been large relative to members' quotas, but that says that quotas are too small in general. Some have criticized the European programs because the IMF altered its guidelines with respect to requiring debt write-downs. This criticism is not entirely unreasonable, but it should not stand in the way of strengthening the IMF.

Arguments in favor of immediate passage of the IMF governance reform legislation

One principal argument in favor of passage of the IMF legislation is the weakness of the arguments against doing so, as outlined above. There is no downside.

More positively, the IMF is the central institution of international cooperation on economic and financial issues, producing a range of global public goods. The United States for 70 years had leveraged the IMF to promote its economic, financial, and national security goals. The United States has relied on the IMF through many global transitions. It is a dynamic institution whose evolution and infrastructure must be constantly nurtured and repaired.

The United States was the principal architect of the 2010 IMF reform package. It has an obligation to complete what it started. In March 2014, a bipartisan group of 36 former high-level US economic, financial, and national security officials urged the Congress to implement the IMF reform package promptly. They were joined by almost 200 policy experts, business and academic leaders, and Senate-confirmed appointees.

US approval of the IMF governance reform package is long overdue. Lack of US approval has already stalled further discussions of IMF governance and financial reform. If the 113th Congress fails to act, the issues will not go away. They will be pushed into the 114th Congress.

Meanwhile, the rest of the world is waiting with increasing frustration. In October, the chief decision-making body of the IMF, its International Monetary and Financial Committee, declared: "If the 2010 reforms are not ratified by year-end, we will call on the IMF to build on its existing work and stand ready with options for next steps." The alternatives to the 2010 governance reform package are limited, but many of them involve setting aside the IMF in whole or in part and replacing it with an institution in which the United States has little or no influence.

One thing is sure: If the 113th Congress and the administration cannot reach agreement on the 2010 governance reform package, the legitimacy of the IMF will be called into question, the influence of the United States on global economic and financial policies will be further reduced, and as a result the global economy and financial system will become a riskier place.

See also: Policy Brief 14-9: IMF Reform Is Waiting on the United States

Notes

1. A member's votes and voting share in the IMF are based primarily on the size of its quota, which also governs the size of its commitment to lend to and borrow from the IMF.

2. To date, 163 members with 79.64 percent of the votes have consented to the increases in their quotas, more than the 70 percent of votes that is required, but the quota adjustments cannot go into effect unless the amendment is approved as well.

3. The US voting share is essentially unchanged at 16.5 percent compared with the current 16.7 percent.