It finally happened. The US delivered on its long-standing promise to deliver the 2010 IMF quota and governance reforms, spreading a cascade of pre-Christmas cheer across the economic policymaking world.
My colleague Mike Callaghan has neatly summarised the implications on US leadership. I want to focus on a different dimension of the decision's strategic impact, namely what it means for policymakers. The passage of reform leaves two very large unanswered questions going into 2016; and neither are likely to lift the spirits of fatigued IMF reformers.
The first is what will be done about the ongoing process to modernise IMF governance arrangements. The 2010 quota and governance reforms delivered a 2.8% shift in quota share from advanced to emerging markets and developing countries. Emerging markets, and China in particular, finally have a greater say in the IMF, one that better reflects their role in the global economy. The reforms also complement the symbolically important inclusion of the yuan in the basket of currencies that underpins the IMF's special drawing rights. There was also a promise of more governance reform to come, including the next round of IMF modernisation talks — the15th General Review of Quotas — which was due to be completed last year but was unable to even begin while the 2010 quota and governance reforms were pending.
Back in January, Ted Truman from the Peterson Institute for International Economics calculated (see chart below) that a further 5 percentage points of shift in quota shares from advanced to emerging market economies would be needed to reflect the economic realities of 2015. About 80 per cent of this shift would be to the benefit of China, which would become the second largest member at the fund.
Chart: Quote share, various countries, various scenarios
Former Canadian IMF executive director and CIGI distinguished fellow Tom Bernes has tweeted his fear that the arduous passage of the 2010 reform package will mean that it will come to be viewed as a final act, rather than a down payment on further reform. Given how much more change is needed, this would be a serious problem. The G20 Finance Ministers and Central Bank Governors meeting in Shanghai in February will test the ongoing political commitment to reform. A strong statement of intent should be the benchmark.
The second, and related, question is what to do about IMF resources. [fold]
The ratification of the 2010 reforms doubles the IMF's permanent resources to more than US$650 billion (although overall resources remain unchanged as the increases are accompanied by a corresponding reduction in borrowed funds). Yet it does nothing to prevent the expiry, from late 2016 onwards, of the $379 billion in bilateral loans that currently form the IMF's second line of defence.
While these loans have not been called upon, their expiry has the potential to introduce unacceptable systemic risk into the global economy, given the reason they are still in place is the continued vulnerability of global economy. The G20 should look to negotiate their extension in 2016 on the basis that the 15th General Review of Quotas will detail a longer term vision on the Fund's resourcing.
The resourcing issue opens up a fundamental question that goes to the heart of the IMF. Earlier this month economists Carmen Reinhart and Christoph Trebesh detailed the tensions between the IMF's traditional role as international lender of last resort, and its more recent behaviour of 'serial lending' in which programs often span decades and there is a much greater risk of the IMF lending into insolvency. Competing visions of how much money the IMF needs to perform its role in the international financial architecture, and how far its role should extend, will underpin discussions on whether and how to replace expiring funds.
In an added complication, the US will probably be asked to contribute new and additional financial contributions to any future quota increases. The US was not required to provide additional funds this time around, due to the accounting exercise that allowed quota resources to replace borrowed resources. But this cannot occur again because the borrowed resources have diminished.
It's hard to believe, but the next round of IMF reform is likely to prove far more controversial than the one just completed. And the US is the only country with veto rights on key IMF decisions. With the US seen as damaged goods, it is difficult to escape the sense that the most challenging discussions at the IMF are yet to come.
Image courtesy of Flickr user World Bank Photo Collection
