Standing In The Way of Change at The IMF

By Sam Willie

In December 2010, the Executive Board of the International Monetary Fund (IMF) approved a proposal that would shore up the Fund’s lending power and alter how the Fund apportions voting power, funding, and financial obligations amongst its member States. The move caused great excitement in the international community and was heralded by then IMF Managing Director, Dominique Strauss-Khan, as “the most fundamental governance overhaul in the Fund’s 65-year history and the biggest ever shift of influence in favor of emerging market and developing countries.”  More than four years on, that celebrated proposal has yet to be implemented, and the IMF’s lending power, and the quota-based rights and obligations of its member countries remain much the same as they did in 2010. So what is the holdup?

While it is rare that blame can be ascribed to one particular source, in this case, the United States is the sole reason the 2010 proposal has yet to been implemented. As the Fund’s largest member, the United States currently enjoys 16.75% of the total vote share. Furthermore, because all major IMF decisions require 85% of the votes, the United States has an effective veto power in the IMF and no major proposal can pass without the United States, which requires Congressional approval. Though President Obama and some Democrats have thrown their weight behind the IMF’s quota reforms and increased lending power, the proposals have made little headway on Capitol Hill. A Republican majority in Congress has repeatedly punted on these quotas, which they argue would see the United States on the hook for more money, and would come at the expense of the United States’ veto power.  

On the financial side of the issue, the proposed increased contributions from member countries would raise the IMF’s capital by $677 billion, and would shore-up additional permanent lines of credit, which had in the past required renewal every 6 months. On its face, the United States would be accountable for $63 billion of the increase, but the Congressional Budget Office estimates that in reality, the increased contributions will cost $315 million, as much of the money is reallocated funds approved in 2009. In further support of this claim, the Department of the Treasury has said, “The United States is not committing one new dollar to the IMF. The reforms move money from one U.S. account at the IMF to another account, but do not change our overall financial commitment and exposure to the IMF.”

Perhaps more significantly, with regards to quota based voting power, the reforms would transfer approximately 6 percent of voting power from the United States and Europe to dynamic emerging market and developing countries (EMDCs), like Brazil, China, and India. At present, the quota system fails to reflect the shifting sands of global economies and most significantly the rise of powerhouse EMDCs. Under the current system, Brazil, China and India represent a mere 8% of the voting rights, despite accounting for 19% of global economic output. The cost to the United States of this reallocation of votes is undoubtedly significant and a sticking point for those resisting change. The United States’ vote share would be reduced to less than 15%, and with that, the United States would no longer have a veto on the IMF’s most significant matters. Waiting in the wings, but undoubtedly a point of concern, is the fact that China would become the third most powerful voting member in the IMF, just behind Japan in second place.

As it seems unthinkable that a Republican controlled House and Senate will budge on this issue, the future of these 2010 proposals is far from bright. The IMF has been forced to consider alternative routes to reform, and just this past month announced that it would have a “plan B” prepared by June as an interim step to, but not a replacement for, the 2010 proposals. It is not clear what “plan B” will involve, nor how the IMF will be able to work with the United States on this issue—short of scrapping any proposal that would see the United States lose its effective veto over the IMF.