Over the past five years, the U.S. Congress has been continuously browbeaten by the U.S. Administration, as well as by a chorus of international leaders, for its failure to approve the G-20 International Monetary Fund reform agreement. Over the same period, however, there have been a number of major developments affecting the IMF that must raise serious questions as to the continued appropriateness of those reform proposals. Those changes would suggest the need for crafting a new IMF reform agenda that would not only be more palatable to the U.S. Congress but would also enhance the IMF's effectiveness.
In 2010, in the aftermath of the global fallout from the Lehman bankruptcy, the G-20 agreed to basic IMF reform. It did so in part to bolster the global financial system, whose weaknesses had been exposed by that bankruptcy. It also did so with a view to improving emerging market buy-in to the IMF by making the IMF's governance structure more reflective of the relative economic importance of those countries.
By now, the G-20's IMF reform package has long since received legislative approval in practically all of the IMF's member countries. The notable exception has been the United States, where Congress has steadfastly been opposed to any increase in the IMF's permanent resources. This has stalled the coming into effect of the IMF reforms, which requires 85 percent approval in terms of the IMF's weighted voting system. Since the United States still has almost 17 percent of those votes, Congress enjoys an effective veto on IMF reform, which it has chosen to exercise.
THE NEED FOR IMF REFORM
Following the September 2008 Lehman bankruptcy, financial instability quickly spread from the United States to the rest of the global economy. That gave rise to large capital movements towards the United States as market participants sought the relative safe haven of U.S. Treasury bonds. In the process, many countries' balance-of-payments positions came under acute pressure, which required massive IMF financial assistance. The situation revealed that the IMF's own permanent resources were not adequate to effectively deal with a crisis of that magnitude.
The Lehman crisis also shone a bright spotlight on a glaring weakness in the IMF's governance structure. At a time when the major emerging market economies, most notably China, were being called upon to help resolve the crisis, either through lending to the IMF or through refraining from allowing their...