It’s the End of the World as We Know It, and the IMF Feels Fine
Is the world's foremost lender of last resort finally ready to give developing countries the power they deserve?
As finance ministers and central bankers pack their bags to travel to Lima, Peru — where this year the International Monetary Fund and the World Bank will hold their annual meeting, starting Oct. 9 — the question on everyone’s mind will be whether the IMF members are finally ready to give more power to the world’s biggest developing nations. In the run-up to the event, figures such as Raghuram Rajan, the governor of India’s Central Bank, and World Bank President Jim Yong Kim have given voice to the frustrations that have chaffed at members since a major reform was passed — and then put on ice — back in 2010. But with purse strings tightening, and the reform holding the key to new capital, the meeting, which will likely be the last with Christine Lagarde as the fund’s managing director, might be the moment when things finally begin to change.
For all its faults, the IMF remains the only game in town — at least for now — and it is in everybody’s interest to ensure that it works. But for it to keep playing the role of the world’s foremost financial safety net, it needs more funding and better legitimacy with developing countries. These two needs happen to go together: The voting rights of each member is determined by the quota — the amount of funds — that each member country puts into the IMF’s kitty. The governance reform, in short, would solve two of the most pressing problems facing the IMF: funding and legitimacy.
The reform pack, if enacted, would bring fresh financial resources and, as a result, double the contribution from members’ quotas to an estimated $669 billion, from the current $334 billion. It would also increase the representation of emerging-market and developing countries to reflect their weight in the global economy and expand their voting power — though it would not remove the coveted veto power of the United States.
Under the rebalancing, China would become the third-largest member country and the other BRICs — Brazil, Russia, and India — would be among the 10 largest shareholders. In fact, the quota reform would align the IMF with the new global economic order, where emerging and developing countries have a growing role, and thus mark a break from the post-Bretton Woods world, in which the United States has been the dominant economy and sole superpower. Perhaps most importantly, it’s long overdue.
But five years after the governance reform was first discussed, not to mention four failed attempts to pass it through the U.S. Congress (which has stood as the final barrier to it being enacted), what options are available? There are a few on the table, though none guarantee a win. First, the quota reform could be separated from changing the composition of the board of executive directors — another item up for debate — shifting away from appointed executive directors who only represent their countries and toward elected executive directors with a wider representation and mandate. Currently, the five appointed directors belong to countries — the United States, Japan, Britain, France, and Germany — that have permanent seats on the IMF board. But as the U.S. Congress insisted on keeping quotas and the board together in 2010, it is unlikely to change its view now.
Another option is to advance the governance reform de facto. Preparing for Lagarde’s departure by lining up candidates from developing countries and making it clear that the long-established practice of a European leading the IMF — and an American the World Bank — is no longer acceptable would be a significant step in the right direction. This route has the advantage of avoiding the toxic domestic politics of the United States, which will almost certainly continue to frustrate emerging and developing countries — especially China.
Lagarde is slated to stand down in July 2016. Leaving aside the question of whether or not her performance is good enough to win a renewal of her term, and despite rumors about her willingness to serve another term, the main European countries should make it clear that it is unlikely she will be reappointed. Having another European manage the IMF is simply unacceptable. China will hold the G-20 chair in 2016, giving it a platform to kindle the debate on global economic governance and push the view that the new managing director should be somebody from a developing country.
Eligible candidates will still have to walk a fine line. They must have the technical skills needed to intervene meaningfully in the policy debate and a diplomatic touch. They will have to be agreeable to both China and the United States and be from a country that has good relations with both. And, of course, given the great deal of public scrutiny, they will need to be irreproachable in their personal and professional lives. The pool of plausible candidates is not deep, but Mexico’s Angel Gurría, who is currently secretary-general of the Organization for Economic Cooperation and Development, for example, could fit the bill.
When Lagarde was selected in 2011, she was a compromise candidate and very much a product of the moment: European countries were unwilling to step back, and the developing countries were unable to agree on a common candidate. But things may be different in 2016.
By then developing nations will be putting the IMF’s commitment to governance reform to the test. They will be demanding evidence that the weight of developing countries in the world economy, acknowledged in the steps made in 2010, is being fairly accounted for. They will want to see an end to the practice of a European leading the IMF and an American the World Bank. Of course, both Europe and the United States could decide to continue the status quo, having the voting system still in their favor given the deadlock in the formal approval of the governance reform. But if they do, the developing countries may finally turn their back on the unreformed Bretton Woods institutions. This week in Lima, the developing countries will take the temperature and gauge whether the future of the world’s multinational institutions lies in Washington — or somewhere else.
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