One of the challenges faced by the Obama Administration has been to reconcile existing international organizations with shifts in global power. Growth in emerging markets and the slow resolution of the European debt crisis present different problems but suggest a unique linkage between them. The White House can overhaul global economic governance by supporting the demands of emerging markets for reforms in the IMF, provided that countries work more transparently and collaboratively. This bargain will strengthen the Fund in dealing with European governments and further ensure that it will continue to provide global public goods long into the future.
The IMF projects that the growth rates of Brazil, Russia, India, China, and South Africa between now and 2017 will be effectively double that of the United States, France, and Germany. The National Intelligence Council’s Global Trends 2030 report notes that China will contribute about a third of global economic growth by 2025, which will be more than any other country. These rising powers have called for reforming the international economic organizations so that the distribution of power within them better reflects reality. These reforms include rewriting the rules to give emerging markets more voting power (because votes in these organizations are tied to the size of a state’s economy), and also revising the selection process for leaders of the Fund and the Bank (so that the process is based on merit rather than great power preferences). The G-20, for its part, has publicly endorsed both ideas at the 2009 London Summit. The formal amendment to the Fund’s Articles of Agreements that supports this change in voting rules was created in 2010.
This high-minded rhetoric, however, has not been met with results. IMF voting reforms require congressional approval, which has yet to occur in the US. Barring an agreement, emerging markets will remain underrepresented. Though the recent appointments of Christine Lagarde and Jim Kim both stemmed from competitive processes, the ‘gentleman’s agreement’ between the US and Europe to split control of the IMF and World Bank shows no signs of coming to a close.
In the coming year, the US-European watertreading over reforming the international financial institutions will face a serious test. A warning sign came last March with the fourth annual BRICS Summit. The closing statement expressed the members’ concerns over the slow pace of governance reforms of the IFIs. The only reason this wasn’t an issue at the IMF/World Bank meeting in October was that the Chinese boycotted this meeting because of their dispute with Japan. With Russia taking over the revolving chair of the G20 this coming year, governance of the international economic organizations is certain to be a top priority.
The concerns of the BRICS countries are not trivial, because these countries have both resources and outside options. Their choice is simple: if they can’t secure reforms of existing international organizations, they’ll create new ones that serve their interests. There were discussions of a BRICS development bank at their summit in March, and the leaders delegated the matter to their respective Finance Ministries for further study. This will certainly be discussed at the fifth BRICS summit in March of this year. Over the coming years, then, Washington faces a choice. It can either get serious about governance reforms at the IFIs, or it can watch as the BRICS countries create their own set of financial institutions to lend to developing countries. The consequences for the IMF and World Bank in such a world would be disastrous. Not only would competition limit their ability to lend, but differences in conditionality will alter the course of policy reform in borrowing countries. Allowing the emergence of a BRICS bank would undo the commitment to multilateral leadership enshrined at Bretton Woods, as the US would find itself increasingly unable frozen out of developing markets.
Engaging the BRICS is one challenge, but the lack of progress in the Eurozone has further exposed the cracks in global economic governance. The slow response of these countries to the economic crisis has been accompanied by their abuse of the IMF as a financial surrogate. The Fund’s role as a junior partner to the EU and the ECB limits its influence over the bailout process. This past spring, the IMF was steamrolled by the Europeans into lending to Greece a month before the elections, in a situation in which both the political and economic settings suggested a more cautious approach. Even though the Fund contributed 1/3 of the total money to the bailout, the Fund’s contribution was, as a proportion of the size of the country, more than double that of its bailout of South Korea in 1997. In November, the IMF’s proposals for official debt relief for Greece were rejected in favor of a debt buyback plan that was more politically acceptable to other Eurozone members. Rather than write-down their own loans to Greece, European governments lent additional monies to Greece so that it could purchase its heavily discounted debt. While these maneuvers help politicians curry favor with voters, whether such strategies will ultimately lead to growth in the next year remains an open question. The focus on austerity and the lack of results also demonstrates a pressing need to invigorate global economic governance, as one of the casualties of the crisis has been the independence of the IMF.
The Obama administration faces a choice. The status quo can only lead to increasing resentment by rising BRIC countries and a continuing charade in Europe. It is time for the White House to forcefully advocate reform of the IFIs, effectively allying with the BRICS against Europe. The Eurozone crisis has made clear the dangers of allowing other great powers to meddle with the IMF. Washington’s best option to avoid this in the future is a Madisonian solution: advocate voting shares reflective of the growing power of the BRIC countries to make European meddling with the IMF more difficult moving forward. This solution has the further advantage of ensuring that the emerging market economies are committed to extant global institutions rather than building regional competitors.
The key to making such a grand bargain with emerging powers work lies in compromise: changes in influence can only come with enhanced responsibilities. In exchange for the US commitment to open leadership selection and support for voting rule reform, emerging powers should be prepared to accept working in a more transparent IMF. Additional reforms will strengthen the capabilities of the Fund and allow it to become a more useful partner in global policy making. In this manner, we rearrange the chairs at the table, and create a stronger institution in the process.
Countries can all agree that enhancing the IMF’s surveillance capabilities is important. Once a year, IMF staff members meet with country authorities and prepare an evaluation of the member country’s economy. Strengthening surveillance, then, will benefit emerging markets (as the IMF will discuss the effects of the Fed’s quantitative easing on developing countries) Europe (by pointing to regulatory deficiencies in China’s banking system) and the US (by underscoring the urgency of deepening integration in the EU). While no country will be interested in the Fund talking tough about their own respective economic problems, the challenges of the crisis mean that there are plenty of problems to go around. Enhancing surveillance is something that all parties will be interested in.
Empowering the IMF would require additional elements. The rising powers that are receiving increased voting shares should commit to publicly releasing findings from their respective surveillance consultations with the IMF. Both rising and established countries should also commit to strengthening global economic surveillance by bolstering the G20’s Mutual Assessment Program by also making these findings public. Finally, all countries should consent to making the operations of the IMF more transparent. This in turn will invigorate the NGO community, which has been clamoring for further reforms.
This exchange would reinvigorate the Fund at a time in which it is sorely needed. It would be impossible to critique the US approach to managing the IMF once it becomes a public advocate for reform. It will serve to bolster domestic reform within emerging market countries as well. We do not know whether the BRICS countries will continue in their paths of economic liberalization. A public commitment to greater transparency makes it much easier to check these countries should their commitments to reform waver. More emerging market influence provides a means to end the ability of the Europeans to continue to use the IMF to serve their own ends in the Eurozone crisis. Finally, it also solves the problems of dealing with Congress, since the US will secure additional reforms from emerging markets in exchange for enhanced influence.
Rebuilding international organizations at a time in which they’re most in demand can seem counterintuitive, but this crisis offers an opportunity to recalibrate the IMF’s mission so that it is more influential with the leading economies. In terms of devising policies to resolve the economic crisis, this should be a welcome step.
One of the challenges faced by the Obama Administration has been to reconcile existing international organizations with shifts in global power. Growth in emerging markets and the slow resolution of the European debt crisis present different problems but suggest a unique linkage between them. The White House can overhaul global economic governance by supporting the demands of emerging markets for reforms in the IMF, provided that countries work more transparently and collaboratively. This bargain will strengthen the Fund in dealing with European governments and further ensure that it will continue to provide global public goods long into the future.
The IMF projects that the growth rates of Brazil, Russia, India, China, and South Africa between now and 2017 will be effectively double that of the United States, France, and Germany. The National Intelligence Council’s Global Trends 2030 report notes that China will contribute about a third of global economic growth by 2025, which will be more than any other country. These rising powers have called for reforming the international economic organizations so that the distribution of power within them better reflects reality. These reforms include rewriting the rules to give emerging markets more voting power (because votes in these organizations are tied to the size of a state’s economy), and also revising the selection process for leaders of the Fund and the Bank (so that the process is based on merit rather than great power preferences). The G-20, for its part, has publicly endorsed both ideas at the 2009 London Summit. The formal amendment to the Fund’s Articles of Agreements that supports this change in voting rules was created in 2010.
This high-minded rhetoric, however, has not been met with results. IMF voting reforms require congressional approval, which has yet to occur in the US. Barring an agreement, emerging markets will remain underrepresented. Though the recent appointments of Christine Lagarde and Jim Kim both stemmed from competitive processes, the ‘gentleman’s agreement’ between the US and Europe to split control of the IMF and World Bank shows no signs of coming to a close.
In the coming year, the US-European watertreading over reforming the international financial institutions will face a serious test. A warning sign came last March with the fourth annual BRICS Summit. The closing statement expressed the members’ concerns over the slow pace of governance reforms of the IFIs. The only reason this wasn’t an issue at the IMF/World Bank meeting in October was that the Chinese boycotted this meeting because of their dispute with Japan. With Russia taking over the revolving chair of the G20 this coming year, governance of the international economic organizations is certain to be a top priority.
The concerns of the BRICS countries are not trivial, because these countries have both resources and outside options. Their choice is simple: if they can’t secure reforms of existing international organizations, they’ll create new ones that serve their interests. There were discussions of a BRICS development bank at their summit in March, and the leaders delegated the matter to their respective Finance Ministries for further study. This will certainly be discussed at the fifth BRICS summit in March of this year. Over the coming years, then, Washington faces a choice. It can either get serious about governance reforms at the IFIs, or it can watch as the BRICS countries create their own set of financial institutions to lend to developing countries. The consequences for the IMF and World Bank in such a world would be disastrous. Not only would competition limit their ability to lend, but differences in conditionality will alter the course of policy reform in borrowing countries. Allowing the emergence of a BRICS bank would undo the commitment to multilateral leadership enshrined at Bretton Woods, as the US would find itself increasingly unable frozen out of developing markets.
Engaging the BRICS is one challenge, but the lack of progress in the Eurozone has further exposed the cracks in global economic governance. The slow response of these countries to the economic crisis has been accompanied by their abuse of the IMF as a financial surrogate. The Fund’s role as a junior partner to the EU and the ECB limits its influence over the bailout process. This past spring, the IMF was steamrolled by the Europeans into lending to Greece a month before the elections, in a situation in which both the political and economic settings suggested a more cautious approach. Even though the Fund contributed 1/3 of the total money to the bailout, the Fund’s contribution was, as a proportion of the size of the country, more than double that of its bailout of South Korea in 1997. In November, the IMF’s proposals for official debt relief for Greece were rejected in favor of a debt buyback plan that was more politically acceptable to other Eurozone members. Rather than write-down their own loans to Greece, European governments lent additional monies to Greece so that it could purchase its heavily discounted debt. While these maneuvers help politicians curry favor with voters, whether such strategies will ultimately lead to growth in the next year remains an open question. The focus on austerity and the lack of results also demonstrates a pressing need to invigorate global economic governance, as one of the casualties of the crisis has been the independence of the IMF.
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The Obama administration faces a choice. The status quo can only lead to increasing resentment by rising BRIC countries and a continuing charade in Europe. It is time for the White House to forcefully advocate reform of the IFIs, effectively allying with the BRICS against Europe. The Eurozone crisis has made clear the dangers of allowing other great powers to meddle with the IMF. Washington’s best option to avoid this in the future is a Madisonian solution: advocate voting shares reflective of the growing power of the BRIC countries to make European meddling with the IMF more difficult moving forward. This solution has the further advantage of ensuring that the emerging market economies are committed to extant global institutions rather than building regional competitors.
The key to making such a grand bargain with emerging powers work lies in compromise: changes in influence can only come with enhanced responsibilities. In exchange for the US commitment to open leadership selection and support for voting rule reform, emerging powers should be prepared to accept working in a more transparent IMF. Additional reforms will strengthen the capabilities of the Fund and allow it to become a more useful partner in global policy making. In this manner, we rearrange the chairs at the table, and create a stronger institution in the process.
Countries can all agree that enhancing the IMF’s surveillance capabilities is important. Once a year, IMF staff members meet with country authorities and prepare an evaluation of the member country’s economy. Strengthening surveillance, then, will benefit emerging markets (as the IMF will discuss the effects of the Fed’s quantitative easing on developing countries) Europe (by pointing to regulatory deficiencies in China’s banking system) and the US (by underscoring the urgency of deepening integration in the EU). While no country will be interested in the Fund talking tough about their own respective economic problems, the challenges of the crisis mean that there are plenty of problems to go around. Enhancing surveillance is something that all parties will be interested in.
Empowering the IMF would require additional elements. The rising powers that are receiving increased voting shares should commit to publicly releasing findings from their respective surveillance consultations with the IMF. Both rising and established countries should also commit to strengthening global economic surveillance by bolstering the G20’s Mutual Assessment Program by also making these findings public. Finally, all countries should consent to making the operations of the IMF more transparent. This in turn will invigorate the NGO community, which has been clamoring for further reforms.
This exchange would reinvigorate the Fund at a time in which it is sorely needed. It would be impossible to critique the US approach to managing the IMF once it becomes a public advocate for reform. It will serve to bolster domestic reform within emerging market countries as well. We do not know whether the BRICS countries will continue in their paths of economic liberalization. A public commitment to greater transparency makes it much easier to check these countries should their commitments to reform waver. More emerging market influence provides a means to end the ability of the Europeans to continue to use the IMF to serve their own ends in the Eurozone crisis. Finally, it also solves the problems of dealing with Congress, since the US will secure additional reforms from emerging markets in exchange for enhanced influence.
Rebuilding international organizations at a time in which they’re most in demand can seem counterintuitive, but this crisis offers an opportunity to recalibrate the IMF’s mission so that it is more influential with the leading economies. In terms of devising policies to resolve the economic crisis, this should be a welcome step.