There has been a crying need for structural reform within the International Monetary Fund (IMF) for a long time. The required reforms fall in the areas of representation, governance and funding. In spite of acknowledgement of the need for reform concrete actions have been lacking so far. While the majority of the member countries agree on the agenda of reform only one country, America, has been stalling the change almost obstinately. Ironically, it is not the American administration which has been in default, but the legislators who are pussyfooting in making legal amendments of the concerned law. It has become another example of dysfunctional democracy in America along with occasional budgetary paralysis. Internal politics has held much-needed reform in IMF hostage to partisan politics.
The IMF, designed to address global financial crisis, was launched in 1944 with the world's new superpower, United States, as the key force and major shareholder. The US holds 16.7 per cent of the voting power by virtue of its shares, which gives it an effective veto over any major policy. Changes in the Fund's structure and activities are also beholden to it for the same reason. China has already become the world's biggest economy. But its voice at the Fund remains that of a minor country. China has a 3.8 per cent voting share, not far from Italy's which has an economy one-fifth the size of China. The worry is that this asymmetry in voting power may undermine the crucial 70-year-old institution. IMF's difficulty in conforming to the present global power balance is already making its work difficult.
The US Congress's refusal to ratify a four-year-old set of reforms that would boost China, India and the other emerging countries at the institution is beginning to cut into the Fund's stature and operational ability. The risk for the IMF is that it will become less and less relevant and perhaps increasingly illegitimate. Already the BRICS (Brazil, Russia, India, China and South Africa) countries have set up a bank and a development fund, frustrated with the western domination over World Bank and IMF. Working in parallel to the Bretton Woods sisters the new institutions may undermine the power and scope of work of the existing ones in the near future. More and more countries may now be interested to become members of the new bodies.
The reform programme for IMF agreed four years ago envisaged change in quotas, effective modifications of the voting power of share holders and supplying additional volume to the Fund's overall financial resources. The last component of reform is crucial for conducting major operations like the rescue of Greece and Ireland and most recently, support of Ukraine. The reform package has been endorsed by all member countries, including America. But to implement it the American legislative action is required in the form of amendment of existing laws. Unfortunately the reform measures have come up against a wall in the US Congress. The administration of Barack Obama has piloted the reform bill in the Congress repeatedly but has been unable to persuade the Republican Congressmen to ratify the reform package. The stalemate has gone on for so long that some are talking of seeking an alternative to the current governance. This was before the BRICS came up with the new institutions to run parallel to the World Bank and IMF.
Tired of appealing for reform and frustrated at its futility in the face of American opposition the IMF Managing Director, Christine Lagarde has been on record saying that she would perform a belly dance in front of the US Congress if they were to ratify the reform. "It was due in 2012. It is overdue in 2014", she said. Clearly her impatience has reached its nadir. Her pronouncement is a measure of the widespread feeling of ire and frustration felt by others who are shocked at the uncooperative attitude of America. By naming and shaming the US Congress Christine Lagarde has taken the desperate move to break the logjam. It remains to be seen whether her pyrotechnic will do the trick. Many doubt that it will.
According to former IMF officials, the rise of China and India have rendered the IMF voting rights allocation not only unfair but also ridiculous. Moderates among them point out that even with the skewed voting rights, China, India and other emerging countries are generously represented in the top management circle of the Fund. But others point out that it is the voting rights that is important and even the delayed 2010 quota reform represents only a modest step towards changing the governance structure of the IMF to reflect the shifting economic realities. Surprisingly, it is not only America which is standing in the way of reform in the IMF. There is still stiff resistance to change inside the institution, including from Europeans. According to some observers, the US has been incapable of delivering and the Europeans have been hiding behind this lack of delivery on the part of the US to postpone the other elements of the reform process.
What surprises many about the American refusal to back the reform is that it involves no additional commitment of resources from her. The refusal can therefore be simply unwillingness to part with power. While the Obama administration has a liberal attitude to the issue of reform that would give more voting rights and representation to other countries, the majority of US Congressmen, particularly the Republicans, do not agree with this. There is some hope that after the initial disappointment the Congress will again take up the IMF reform proposal. It will have several opportunities to do so while working on other financial legislation.
US Congressional unwillingness to take up necessary legislation to reform IMF is unfortunate and regrettable. Both the IMF and the international community have been badly hurt by this. Congressional obstinacy is forcing the Fund to miss out on an opportunity to strengthen its finances at a time when most other countries have already approved the initiative. It is also being held back from addressing governance and representation deficits within the organisation that has eroded its credibility and effectiveness. It is an important lost opportunity for all who value global growth and financial stability. Still all hope is not lost. The latest disappointment can be turned into an opportunity because of the strong reaction created. Bold gesture made by Christine Lagarde to perform belly dance speaks of the seriousness of the management of the fund to convince all members to agree on reform. It is the management of IMF which delivers the services to member countries and they know what reform is needed to make their work more effective. The member countries who are still recalcitrant cannot ignore them for long. Leaders of countries may feel morally obligated to be behind them. They may come together to support the initiation of discussion of a more comprehensive set of reform to give IMF a new look and operational role. Anyone who wishes to see a strong IMF at the centre of a fluid monetary system would agree that such an outcome is far superior to doing more of the same. Â
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