World leaders said they'd reform the world's financial institutions in the wake of the Great Recession, but they haven't met their commitments. We all may pay the price.
- By Edwin M. Truman<p> Edwin M. Truman is senior fellow at the Peterson Institute for International Economics. </p>
The leaders of the G-20 countries have played a crucial role in rescuing the world from the brink of economic and financial disaster. They agreed to an impressive agenda in Washington in November 2008, and at their April 2009 London summit committed themselves to an integrated strategy to rescue the world economy from the brink of depression, to reform international financial regulation, and to transform the governance of the world’s most important global financial institutions.
But now the G-20’s accomplishments are in danger of unraveling, because these countries have failed to implement their agreements on reform of the International Monetary Fund (IMF). These reforms would enhance the role of the emerging market and developing countries, and help to cement the commitment of those countries to the global system. A failure now would produce multiple black eyes for the G-20 and represent a setback for the still-precarious world economy.
The challenge for the G-20 is to live up to its subsequent pledge in Seoul in November 2010 to implement a two-step reform of the IMF’s governance. The first step would double IMF quota subscriptions, which are the core financial resources the IMF uses to lend to other members. Although this step would not significantly increase the overall financial resources of the IMF due to offsetting reductions elsewhere, it would modestly redistribute voting power away from the advanced countries and toward fast-growing emerging market and developing countries.
In addition, the Seoul agreement included the adoption of an amendment to the IMF charter that would redistribute seats on the IMF’s executive board away from Europe. The G-20 leaders promised that this combined first step would be implemented by mid-October of this year, when the IMF’s annual meeting will be held in Tokyo.
The second step agreed to in Seoul called for a revision of the formula used to adjust IMF quota shares by January 2013. This revision would be followed by a substantial increase in IMF quota subscriptions and overall financial resources by January 2014. This also promises to further increase the IMF voting power of emerging and developing countries, which was a key to winning their agreement to the overall reform package. Many of those same countries are now being called by the Europeans and by IMF Managing Director Christine Lagarde to temporarily lend to the IMF to protect Europe and the rest of the world from an escalation of the European sovereign debt crisis. One would think they would be more inclined to heed those calls if prospects for the reforms’ implementation were better.
Unfortunately, and potentially tragically, the G-20 countries have dropped the ball on implementing the IMF governance reforms. Although October is still months away, it now looks like the Seoul commitments will not be met on the original timetable. None of the elements of the first step in the Seoul agreement can be implemented unless they all receive the necessary approvals. The crucial element is the amendment of the IMF charter: It requires acceptance by 60 percent of member countries (113 of 187) that also hold 85 percent of total IMF votes, which are weighted according to IMF quotas.
As of April 5, only 66 members with 46 percent of the votes had accepted the amendment. Crucially for the credibility of the G-20, only nine of the 19 core members of the G-20 have acted positively. The 10 missing G-20 countries have 36 percent of the votes in the IMF, 3 percent short of the remaining 40 percent needed to pass the amendment.
The United States, which has the largest IMF quota, is one of the major culprits behind the delay. Implementing the first step in the Seoul agreement requires formal approval by the United States because it holds 16.7 percent of the votes. But the Obama administration has declined to submit the necessary legislation to Congress, apparently fearing that doing so would ignite a fiscal battle that it does not want in an election year.
This lack of U.S. leadership is distressing, and at odds to the role the United States played in London three years ago. But it’s not only the United States that has failed to act: The list of G-20 countries that have failed to embrace these necessary reforms includes two other advanced countries — Canada and Germany — and seven emerging market countries — Argentina, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, and Turkey.
The foot-dragging on the part of Mexico — the current chair of the G-20 — is indicative of a lack of G-20 commitment to IMF reform. The presence of Russia and South Africa is also ironic as they are members of the BRICS — the group of developing economies that at its summit last month in India called for implementing the IMF reforms on the agreed timetable. Each G-20 country has its own reasons for delay, but at present the sum total is a colossal failure in G-20 leadership.
What should happen? Most importantly, the United States and the other G-20 countries should meet their international commitments by passing the IMF reforms on the agreed-upon schedule.
Because of the political season, there is a good chance that the United States will only consider acting after the election, in a lame-duck session of Congress. However, this alternative should not be in play unless enough of the rest of the G-20 countries has acted, or will act, by the end of the year. The reason is that a lack of progress on the first step in the Seoul package has delayed progress on the second step — and will continue to do so. The U.S. administration has little to gain from spending its scarce political capital on a controversial issue unless it has a reasonable assurance that the complete two-step IMF reform package is back on track.
An attractive alternative would be to restart the process in early 2013. The G-20 countries and the rest of the IMF membership could then focus on reaching agreement on the new quota formula and on a substantial, permanent increase in IMF quota resources — which the European crisis has demonstrated are needed — by January 2014. The two steps in the original Seoul agreement would be combined, and the United States and other laggard countries would be able to submit the package in its entirety to their national approval processes. This would allow the G-20 countries to catch up with their original timetable.
What is not acceptable, however, is for countries to allow these important reforms to remain in limbo indefinitely. A failure to do what is necessary will put the global economy and financial system at risk by starving the IMF of resources and sidelining it as the principal institution of the global economic and financial cooperation. This time, if there is another crisis, the G-20 countries would have only themselves to blame.