IMF governance reform: Time for Plan B?

Leading international organizations is not always easy. Christine Lagarde, managing director at the International Monetary Fund, now heads an organization at an important crossroads. Since 2010, the Fund has been engaged in extensive negotiations on a package of institutional reforms intended to give emerging market countries a greater voice. Final approval of this package, however, has been recently thwarted by the U.S. Congress, an event viewed by U.S. analysts as “an embarrassment” and an “own goal.” Continued delay in implementing these reforms reinforces the image of both a United States that is indifferent to IMF reform and a Fund that is unable to resolve the problem. It is time for Lagarde to respond to Congress by redoubling efforts to break the governance deadlock.

In the wake of the global economic crisis, the U.S. was a leader on IMF reform. Emerging markets made additional contributions to the Fund on the promise that their representation on the Executive Board would be enhanced. The world is a very different place than it was when the IMF was founded, and with changes in economic power come sensible demands for a greater stake in Fund governance. As a result of the proposed reforms, China is now poised to become the third largest IMF member (behind the U.S. and Japan) and representation by European countries on the executive board is set to fall from eight out of 24 members to six. These proposed reforms also promised to make future changes in IMF governance easier by moving to an all-elected executive board.

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Promises made are not always promises kept. Because these reforms involve changes to the IMF Articles of Agreement, they need to be approved by the Fund’s membership. More than 140 countries have already approved them, including those certain to lose influence as a result of the reforms. While the Senate approved these reforms last year, the U.S. House has consistently failed to act. Though the U.S. is merely moving money from one account to another with negligible risk, the House Committee on Financial Services prefers fiscal austerity to global leadership. So in four years, the US has gone from a leader to a laggard on IMF reform, alienating allies in the process. The final act occurred last month, when the House Appropriations Committee tried to tie the money necessary for the IMF reforms in the new budget to compromises from the White House on the IRS and healthcare.

What is Madame Lagarde to do? Doing nothing will merely add to growing criticism by emerging markets, which will complicate Lagarde’s attempts to pursue other initiatives at the Fund. The delay in passing the 2010 reforms is also holding up the next review of quota reforms, which was scheduled to be completed in January. The crux of the problem is two-fold. The reform package that was presented to Congress contained both the reforms to the Executive Board as well as a vote on moving money from a temporary account to a permanent one. This second element, which is the sticking point, forms the basis for country voting rights at the Fund. Lagarde should set the money issue aside, and ask the White House to ask Congress for a straight up-and-down vote on the remaining reforms. This keeps the reform agenda moving, and it allows the Fund an important victory on the part of the emerging market countries.

Splitting the reform agenda in this way is not without risk. It keeps the IMF’s finances excessively informal. The Fund needs a ready supply of capital, and the quota increase was intended to rebalance influence as well as regularize country contributions to IMF coffers. Should there be a crisis in emerging markets this year, Fund resources will come under strain. It is also unfair to the rest of the world that has already approved the full package of reforms that the US will have to pass only a portion of them.

Of course, there is also the risk that the same legislators who failed to appropriate the money for the IMF will also scuttle the remaining Executive Board reforms. In this case, however, the risk is considerably lower. It brings to bear the full weight of the White House on a matter delinked from fiscal policy and serves as a rallying point for moderate internationalist Republicans that view the IMF as a natural force multiplier for US interests.

The benefits for Lagarde’s legacy at the Fund outweigh the downsides. It sends a strong immediate signal to emerging markets that the Managing Director is committed to reforms. It forces the White House to put its full attention on a matter that was put aside in the larger debate over the budget. It also resets the clock on further quota reforms by setting the stage for reintroducing the money transfer in the next fiscal year. To further underscore the seriousness of the matter, Lagarde should offer to testify before Congress in the coming year.

The theme of last year’s annual meeting was “188 Together.” This idea should underpin Lagarde’s thinking in the coming year. The reform agenda needs to move forward to both remind the Fund’s leading shareholder of its obligations and also to underscore the Fund’s value to emerging markets. This will dissuade them from developing rival financial institutions of their own. This will make the difference between whether we regard Lagarde’s tenure at the Fund as merely passable or simply extraordinary.

Edwards is an associate professor in the School of Diplomacy and International Relations at Seton Hall University.