A happier ending for International Monetary Fund reform?

NEWPORT BEACH – Despite an elegant solution that involved no new commitments of resources, the US Congress has refused to take up a long-delayed funding proposal for the International Monetary Fund. In the process, it derailed a multilateral agreement that was hammered out back in 2010 – ironically, in the eyes of the rest of the world, with US President Barack Obama’s administration taking a leading role. And it did so at a time when financial disruption in emerging economies is reminding the world of the importance of a strong stabilizing anchor at the core of the international monetary system. After the initial disappointment, many are hoping that Congress will again take up the Obama administration’s IMF request after a short interlude. It will certainly have several opportunities to do so while working on other financial legislation. But, with Congressional elections due later this year, few are confident that lawmakers will be in any mood to change course until 2015 at the earliest. Meanwhile, global developments confirm that the recent period of financial tranquility remains a tentative one. Rather than being anchored by fundamental and durable reforms, the current calm has been secured through prolonged reliance on central banks’ experimental monetary policies, especially in the United States, Europe, and Japan. These policies have improved domestic prospects in advanced countries, but they have accentuated the policy dilemmas facing many emerging economies. In some cases, they have overwhelmed policymaking capability and added to internal political instability – all of this at a time when no one knows the full range of side effects and unintended consequences of the West’s unconventional measures. Yes, this is an important lost opportunity for all who value global growth and financial stability. That is undoubtedly bad news. But there is also a silver lining, because last month’s disappointment can be turned into an opportunity. The 2010 agreement was, after all, a compromise – albeit a hard-fought one – that advanced only marginally the cause of long-delayed IMF reforms. Moreover, there were insufficient assurances that the limited changes would end up providing a springboard for more meaningful reforms down the road. Indeed, rather than modernizing economic multilateralism and revamping its governance, what many would have regarded as an unsatisfactory yet final partial compromise could have played into the hands of those who advocate regional arrangements as a substitute for multilateralism, not a compliment to it. But this new opportunity, born of disappointment, will not be seized if the international community’s approach is simply to wait for the US president to submit the same set of limited reforms to Congress again and again. Instead, leaders need to come together and support the initiation of discussions on a more comprehensive set of reforms. Such reforms could start by targeting a more aggressive, and much-needed, realignment of voting power and representation at the IMF – one that reflects the world of today and tomorrow, rather than that of decades ago. This could be achieved by pursuing three specific initiatives. Leaders should target a much bigger shift in favor of emerging economies and away from Europe – in voting power, representation on the IMF’s Executive Board, and funding obligations. The outmoded relic of a system that de facto reserves the position of Managing Director for European citizens should be eliminated once and for all. Third, policymakers should build on recent progress to ensure a more level operational playing field for the implementation of Fund surveillance. There is no better time than now to start working on these three initiatives. The last two – further improving the procedures governing the election of the next Managing Director, and more even-handed surveillance – could be pursued rather quickly and without having to secure parliamentary approval. What is required is stronger political will by governments and, in the case of Europe, greater humility. The first initiative, pertaining to voting power and representation, would inevitably take longer and be much more complicated to implement. In many countries, governments would need to obtain parliamentary approval. And the process of getting there is bound to require difficult negotiations and hard compromises. To adapt a concept that the columnist Thomas Friedman recently used for the Middle East, the key is to recognize that, at the national level, it is about “no victor, no vanquished.” This is not about individual countries, but rather about the well-being of an international system that can better serve and protect individual countries’ interests over the longer-term. Anyone who wishes to see a strong IMF at the center of a fluid international monetary system – and most economists see great merit in this – would agree that such a multi-speed outcome is far superior to doing more of the limited same. Mohamed A. El-Erian is CEO and co-Chief Investment Officer of the global investment company PIMCO, with approximately $2 trillion in assets under management. Copyright: Project Syndicate