IMF reform: Time to go back to the drawing board

OVER the past five years, the US Congress has been repeatedly browbeaten by the Obama administration, as well as by a chorus of international leaders, for its opposition to International Monetary Fund (IMF) reform proposals agreed by the G-20 nations in 2010. However, over the same period, there have been a number of major developments that must raise serious questions as to the appropriateness of the IMF reform package on the table. This could offer the opportunity for crafting a new IMF reform proposal that would be both more palatable to the US Congress and more suited for the effective operation of the IMF.

Two principal factors motivated the G-20 in agreeing to a basic overhaul of the IMF. The first was the recognition of the increased relative importance of major emerging market economies like Brazil, China and India. After more than a decade of very rapid economic growth, those countries had become grossly under-represented in the IMF's governance structure. The second was the belief that, in the aftermath of the Lehman crisis, the IMF needed additional permanent lending resources to fulfil its mandate of promoting external financial stability.

The essence of the 2010 IMF reform proposals was to increase the relative representation of the emerging market economies. This was to be achieved by trebling the overall lending capacity of the IMF - from US$250 billion to US$750 billion - and by having the emerging market economies make a disproportionately large share of the country quota contributions to achieve that result. The increase in the emerging market countries' relative representation in the IMF's governance was to be achieved at the expense of the European countries, which were generally considered to be grossly over-represented. By contrast, the US's relative IMF voting position was to be little changed, which would allow Washington to maintain its effective veto power on key IMF decisions.