Don’t Rush to Reform the Fund (and the Bank)

Pressure is building on the G- 7 finance ministers to act decisively this year to fix the International Monetary Fund, but the time is not ripe for one compelling reason: The IMF’s major shareholder — the United States — the only one with a voting share large enough to block fundamental changes, is not ready to act and will not be ready until 2009.

Is it possible to reform the IMF without the support of the U.S.? And is it possible for the Bush administration to propose a set of reforms acceptable to a high majority of the IMF’s member countries and also the U.S. Congress? The answers to both questions seem to be no, which suggests a lack of political realism in the current flurry of interest in IMF reform.

Some worthy reforms proposed by Governor of the Bank of England Mervyn King and Institute for International Economics Senior Fellow Edwin Truman can be implemented without any change in the IMF’s constitution (Articles of Agreement). However, the most critical reforms—related to voting and representation— will require amendments to the IMF’s Articles.

Only three amendments to the Articles have gone into effect since the Fund was established in 1945. Each time, the United States has played the lead role in the amendment process. A fourth amendment has been in limbo since 1997 because the voting majorities in the U.S. Congress required to ratify it have not been forthcoming.

The main obstacle to a U.S. initiative to reform the Fund this year is the Bush administration’s lack of credibility, both at home and abroad. Regardless of its content, the rest of the world is likely to respond skeptically to any proposal advanced by President Bush or Treasury Secretary John Snow. One reason for this skepticism is the Bush administration’s single-minded pursuit of the war on terrorism and regime change in the Middle East to the neglect of other issues of priority for the rest of the world.

Even if there were broad international support for an IMF reform initiative advanced by the United States, it would not fly domestically. The president’s approval rating is on the floor. Republican control of both houses of Congress is likely to be sharply eroded, if not lost, in the November elections. The country at large seems sharply divided on most domestic and international issues.

The best chance for successful reform is to orchestrate an informed debate within the United States in the context of the presidential election in November 2008. The goal would be to have an IMF reform plank in the platform of each major party that can be acted upon in the first year of the next presidency. To be credible these planks must contemplate bold changes such as giving up the exclusive veto power of the United States. Actively seeking the views of other countries on the future role of the Fund will also be necessary to ensure success.

An IMF that has the capacity to identify weaknesses in the international financial system and generate effective pressure on member countries to address them can make an enormous contribution to global well being. No other country today has as big a stake in implementing the reforms required for the Fund to perform this role. No other country is in a position to provide the leadership required to push through a reform package. That is why it is critical to create the political space for the next president of the United States to stop the current drift and propose changes that will be seen as good not only for 300 million Americans but also for the other 6 billion co-inhabitants of this world.

A similar approach would set the stage for fundamental reforms at the World Bank, where the urgency of reform is even greater. While shutting down the IMF would leave a serious gap in the international financial system, shutting down the World Bank would not. To remain relevant for another 60 years, the World Bank will probably have to move its headquarters out of Washington, disperse its staff to offices in the countries where it operates, select a non-American president, and untangle itself from the IMF. The Bank will be scarred by such reforms, however, if they are resisted by the United States. A public debate is the best way of building support for these and other changes that appear radical now.