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2015-01-30 06:52:34
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.