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How to reform the IMF without Congress s help
Jan 31st 2015 | WASHINGTON, DC
AMERICA, the International Monetary Fund s largest and most influential
shareholder, has lately been its most troublesome too. In 2010 the world agreed
to expand the IMF s lending power and rejig its voting rights. But because
Congress has not approved America s contribution to the proposed increase in
capital, the reforms have yet to take effect. In December Congress once again
passed a budget without paying up.
The rest of the world is growing impatient. The IMF s capital has been steadily
shrinking relative to the world economy: its clout is half what it was in 2000.
Moreover, the giants of the emerging markets Brazil, China and India have only
8% of the voting rights, even though they account for 19% of global output. On
January 15th Christine Lagarde, the IMF s boss, expressed her profound
disappointment with America and resolved to explore interim solutions .
The abeyant reforms would double the IMF s capital ( quota in the fund s
jargon) to $677 billion. Its additional line of credit with its members (dubbed
the New Arrangements to Borrow , or NAB) would shrink. Total lending capacity
would be roughly similar to the current $1 trillion, but more reliable since
the capital increase would be permanent whereas members must renew the NAB
every six months. About 6% of the fund s voting shares would shift to emerging
markets, in particular China, Brazil and India, along with two seats on the IMF
s board currently held by European countries.
Barack Obama s administration has pressed for the increase, but Republicans,
who have controlled the House of Representatives since 2011, have balked,
arguing that an increase in the IMF s lending capacity is an invitation to
fiscal recklessness. Now that the Republicans control the Senate as well,
approval is even less likely.
In theory, the IMF could sidestep Congress by leaving America out of the
capital-raising. But that would need to be approved by 85% of shareholders, and
America has 16.75% of the votes. One reason it might vote against is that its
shareholding would drop below 15%, costing it its veto. It is unlikely to agree
to such a loss of say, especially when Republicans are already accusing Mr
Obama of diminishing America s standing in the world. That leaves a more modest
option: allowing emerging markets quotas to increase by enough to give them
more say but not by so much as to reduce America s share below 15%.
The IMF s board has begun studying its options, and on January 28th recommended
its membership agree on something by the end of June. These interim steps would
not be a substitute for the main reform package, for which there is no
deadline. Yet the sense of urgency is growing.
The rash of recent bail-outs in Europe has added to the strain on the IMF. A
big share of its resources $268 billion has been lent out or committed. Worse,
the fact that its shareholdings do not reflect emerging markets growing clout
undermines its legitimacy and fuels interest in alternatives, such as a
BRICs-backed bank to finance infrastructure or bilateral agreements to provide
short-term financing. By the time America gets around to approving the IMF s
reforms, it may have become a much less important institution.