Reform of the International Monetary Fund (IMF) has long been recognised as overdue, given the changes in the global economy. The most important among these is the spectacular rise of emerging markets; besides, capital movements have become the fundamental determinant of the stability of the global financial system. Between 1980 and 2007, for example, global capital flows increased more than 25-fold as compared to an eight-fold expansion in global trade[1].
These changes have implications for the IMF’s role in the global economy. They have created the need for new structures to govern the IMF and other international financial institutions, more effective financial and multilateral surveillance, and a global lender of last resort.
The recent reforms of the IMF were conceived in 2010 at the G20 Summit in Seoul.[2] However, the approval and implementation of the reforms was held up, mainly because of repeated delays in the U.S. Congress—its ratification is required to meet the 85% voting power approval for constitutional changes by the IMF. The reforms were finally ratified five years later, on January 27, 2016.
But to what extent do these reforms actually change the IMF’s governance structure? And what are their implications for the IMF’s role as a lender of last resort?
Changes in the IMF’s governance structure
Since 2010, the global economy has further transformed—therefore, reforms of governance structures conceived five years ago can go only some distance, but not far enough. Of the changes in structure, the most important is the change in the quota subscription of each country, which determines its voting power and financial commitment to, and benefits from, the IMF[3].
The IMF recognised in 2010 the need for a new and more responsive formula for determining the quota of its members. This would make the institution more representative of the relative position of countries in the changing global economy. The formula used until then was outdated—in particular, the periodic quota reviews were based on complex and questionable methods for adjusting country quotas. This slowed down the process of changing the representation on the executive board (and in voting rights) to reflect new economic realities.
After the review, BRIC countries are among the IMF’s 10 largest shareholders[4], reflecting the overall shift towards emerging market countries. China’s voting share, for example, has now doubled, making it the third largest member. But it is still only 6% despite its economy weighing well in excess of 10% of global GDP. And India’s voting share is still under 3%[5]. Overall, the total share of emerging markets in the IMF remains well below their global share of GDP.
In summary, the new reforms shift the governance structure of the IMF in the right direction, but the loss of time in moving to the 15th quota review, and in increasing the legitimacy and effectiveness of the Fund, has made further reform overdue.
Implications for the IMF’s role as a lender of last resort
The quota increase is significant because it makes more—and sustainable—resources available to the IMF. Together with the IMF’s framework of bilateral borrowings, this improves its ability to function as a global financial safety net. Its flexible and precautionary liquidity lines and other arrangements for financial support will also improve.
But in aggregate, the total resources available to the IMF are still only a fraction of any measure of global capital flows or external liabilities, and its share in these measures has fallen over time. In addition, the IMF has been forced to rely in recent years on bilateral, temporary, borrowings from member countries—and that will begin to decline. As such, the IMF remains unable to deal effectively with the financing responsibilities that have been assigned to it over the years, and its capacity as a lender of last resort will be insufficient in the event of another systemic crisis.
As a consequence, the global financial safety net has become small, fragmented, and uneven, because countries have resorted to ensuring their security by building reserves, or using collective arrangements with other countries, such as swap lines and regional reserve pooling arrangements.
For the IMF to function more effectively as a lender of last resort as well as to manage global liquidity, far more reforms are needed, well beyond what has now been implemented.
One, the IMF needs access to considerably more permanent resources. This can be done by elevating the role of the SDR instrument, so that the IMF need not resort to more funding through quotas, bilateral or capital markets borrowings. But SDR elevation and capital markets borrowing will require further constitutional changes of the IMF.
And two, in order to swiftly manage global liquidity, the IMF must also be assigned the responsibility of monitoring movements in capital account balances—just as it does with current account balances.
Rebuilding the IMF in this direction will also require strengthening the evenness and effectiveness of its surveillance, which in many ways is regarded as the IMF’s primary function. In the wake of the recent global crisis, and in response to requests from the G20, the IMF’s surveillance instruments have appropriately broadened.[6] But in practice, the surveillance is uneven. It carries much more weight in countries that depend on the IMF for financing—usually, until recently, emerging markets or developing countries; the weight of the Fund’s surveillance diminishes among advanced economies. Instead, if all countries cooperate better with bilateral and multilateral surveillance, a future global economic crises can be prevented.
Anoop Singh is Distinguished Fellow, Geoeconomics Studies at Gateway House: Indian Council on Global Relations.
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References
[1] Alfaro, Laura, Sebnem Kalemli-Ozcan, Vadym Volosovych, “Sovereigns, Upstream Capital Flows, and Global Imbalances”, Harvard Business School and NBER, December 2012, <https://www.aeaweb.org/aea/2013conference/program/retrieve.php?pdfid=240>
[2] International Monetary Fund, G-20 Ministers Agree ‘Historic’ Reforms in IMF Governance, 23 October 2010, <http://www.imf.org/external/pubs/ft/survey/so/2010/NEW102310A.htm>
[3] Factsheet, International Monetary Fund, IMF Quotas, 27 January 2016 <http://www.imf.org/external/np/exr/facts/quotas.htm>
[4] Ibid.
[5] About the IMF, International Monetary Fund, IMF Members’ Quotas and Voting Power, and IMF Board of Governors, 3 March 2016, <https://www.imf.org/external/np/sec/memdir/members.aspx>
[6] International Monetary Fund, IMF Triennial Surveillance Review—Overview Paper, SM/14/227, 30 July, 2014, <http://www.imf.org/external/np/pp/eng/2014/073014.pdf>