Time for the United States to Risk Its IMF Veto
Support in the United States for the International Monetary Fund (IMF) is at a new low. The reasons are many and varied, and the IMF is unpopular in many countries, not just among the women and men on the streets, most of whom have never heard of the IMF unless their countries are in crisis, but also among the policy elites. But it is Washington's failure to back the IMF that threatens the legitimacy of the world's most important financial institution.
The most recent indicator of US lack of support for the IMF is the failure of the Obama administration and the Congress to incorporate the IMF quota and governance reform agreement of November 2010 into legislation adopted in early April supporting Ukraine. Because the United States has 16.7 percent of the votes in the IMF and the IMF reform package was crafted so that it would only go into effect if the United States formally approved the package, which requires an act of Congress, the US inaction effectively blocks implementation of the IMF reform package. As C. Fred Bergsten and I note in a letter in the Financial Times on April 10, this has created a potential existential crisis for the IMF as well as a policy crisis for the United States, because the Obama administration was the principal architect of the 2010 agreement. The delay of nearly four years in approving the 2010 IMF reform package has damaged the IMF's legitimacy and substantially reduced US influence in that institution and in other areas.
The best hope (Plan A) is that the US administration and Congress repair the damage and work together to enact the IMF legislation, which will come before lawmakers again as part of the administration's fiscal year 2015 budget request.
Absent prompt action to enact the IMF legislation, the administration and the world need a Plan B. In my proposed Plan B, the United States would risk, but not relinquish, its ability to block or veto major IMF institutional reforms. My Plan B has four parts. It would:
First, set aside the 2010 IMF reform package's three components requiring the approval of IMF members: (1) a doubling of IMF quotas, which are commitments by members to lend to the IMF and are the principal determinant of voting power in the IMF; (2) a proportionate reduction in commitments to the New Arrangements to Borrow, which are an additional channel through which 38 members of the IMF can provide financing to the IMF; and (3) an amendment of the IMF Articles of Agreement to provide an all-elected IMF executive board, instead of the current situation in which the five countries with the largest quotas appoint their own executive directors.1
Second, resubmit to the IMF membership the amendment of the IMF Articles on an all-elected IMF executive board as a stand-alone proposal,2 which would require an 85 percent majority vote for its approval.
Third, amend the IMF quota reform component of the 2010 package and combine it with the 15th general review of quotas. As part of the agreement on the 2010 IMF reform package, the 15th general review of quotas is scheduled to be completed by January 2015 along with a revision to the IMF quota formula. The revision of the quota formula and the completion of the 15th general review of quotas, which originally were to be agreed by January 2014, are at an impasse because of the failure of the United States to approve the 2010 IMF reform package. The expectation in 2010 was that the 15th review would lead to a further reallocation of quota and voting shares in the Fund away from the advanced European countries in particular.
Fourth, to break the impasse on IMF quotas, adopt a three-part approach:
- Revise the quota formula to increase the weight of the GDP blend variable—60 percent GDP at market rates and 40 percent GDP at purchasing power parity exchange rates—from its current 50 percent to 90 percent.
- Double total IMF quotas again relative to the size anticipated in the 2010 package.
- Provide in the IMF governors' resolution on the revised changes in quotas that they will take effect when formal consents are received from members with less than 85 percent of the total voting power in the IMF, say 80 percent.
This three-part approach to IMF quota reform offers something to the United States. It further advances IMF reform, while also putting the United States on the spot to participate. The three-parts are an integrated whole.
With respect to the first part of the new quota package, the quota formula, if the revised formula were only based on the blend GDP data through 2011, IMF quotas were again doubled, and increases in quotas were distributed according to the new quota formula, the US quota share would increase from 17.4 percent under the 2010 proposal to 19.5 percent. The United States might want to negotiate away some of this implied increase.
Importantly, the combined quota share of the European Union would shrink from 30.3 percent to 27.2 percent. This would imply a substantially larger decline in the combined EU quota share than the puny reduction of 1.6 percentage points, from 31.9 percent, in the 2010 reform package. This aspect should be attractive to the emerging market and developing countries, in particular if the United States were to cede to those countries a portion of the implied increase in its quota.
With respect to the second part of the new quota package, the further doubling of IMF quotas, the increase in usable IMF financial resources would be about $550 billion, raising the total to about $1.4 trillion. The increase in usable resources would be less than the headline figure of about $735 billion because the quotas of about 25 percent of members are not normally available to finance IMF lending.
This element is relevant because the principal way that voting shares in the IMF are reallocated is via an increase in total quotas that is distributed differently than current quotas. Aside from the governance aspect, an increase in IMF quota resources of this size would merely make permanent the $461 billion in additional financing that is now available from the temporary bilateral borrowing that IMF managing director Christine Lagarde lined up during 2012 over US objections. The increase in IMF financial resources should be sufficient to carry the IMF through to the middle of the next decade, which is the earliest date the 16th general review of IMF quotas is likely to take effect.
The third part of the new quota package is the most radical element, but its inclusion in the approach is dependent on the first two to make the approach palatable to the United States. My proposed IMF governors' resolution on the increase in quotas would establish a trigger for its implementation defined by approval (consents) to quota increases from members with less than 85 percent of total votes—technically less than 83.3 percent. This requirement would deprive the United States of the capacity to block the implementation of the package via its non-approval of an increase in the US quota. Thus the United States would be forced to put up or shut up.
The Secretary of the Treasury, who serves as US governor in the IMF, could vote for such a resolution by the IMF governors without the approval of the US Congress, and has done so in the past when the US veto was not at stake, for example in approving ad hoc quota increases for several IMF members in 2006. US law only requires that the Congress approve any consent to an increase in the US quota in the IMF.
Consequently, absent action by the US Congress, on approval of the increases in their quotas by other IMF members with sufficient votes, the US quota and voting share would be reduced to about one quarter of its current size.3 US capacity alone to block other institutional changes in the IMF would lapse. The lapse likely would be temporary because normally countries that have not yet consented to increases in their quotas are granted a grace period to do so after the initial proposal has taken effect. I presume that this would continue to be the practice because the United States would not be the only country that has not yet consented to the increase in its quota.
No doubt, Secretary Jacob Lew would be roundly criticized by many in Congress and US punditry if he were to embrace Plan B. Plan A is clearly superior because the US veto is not at risk. But the United States would be seen in the rest of the world to be exercising its right in a manner consistent with its responsibilities.
Under Plan B, the United States would set an example for other members of responsibility in exercising its rights. This would help to restore the legitimacy and authority of the IMF. The Europeans who have been recalcitrant in agreeing to a reduction in their combined quota share also would be put on the spot in the 15th quota review. At the same time, the major emerging market and developing countries, which would benefit from the resulting reallocation of quota and voting shares, would come under increasing pressure to act more responsibly in their policies, for example, with respect to exchange rates, reserve accumulation and investments, and transparency and accountability in these and other areas.
2. The proposal was part of the 2010 IMF reform package, but its approval was linked to the increase in IMF quotas and redistribution of IMF voting power.
3. Under the 2010 proposal the US quota would approximately double, and under the approach of Plan B it would double again so that, absent US consent to any increase in its quota, its original quota share would be approximately one quarter of its current 17.4 percent. Because the United States and probably a number of other members would not yet have consented to the increases in their quotas, the reduction in the US quota share would not be quite 75 percent.