Like most money-lenders, the International Monetary Fund isn’t one of those institutions which inspires much in the way of affection – either from those who owe it money or from those who lend it the resources. So it’s of little surprise that unless the world is in economic crisis, and so desperately in need of the Fund’s help, the IMF is more often than not in an existential crisis of its own.
Up until 2007 the most common stories you’d read about the IMF were those that warned of its imminent demise. There were frequent scares that it had become irrelevant, some that it was running out of money, many that its structure no longer reflected the state of the 21st century global economy.
The last of these was right: a disproportionate number of the IMF’s quotas, which in turn determine voting power at the board, are held by European countries. Comparatively few are held by the fast-growing emerging economies such as China, India and Brazil.
But the Fund was never irrelevant. One might have thought the financial crisis and the euro crisis had proved that beyond doubt: the IMF was involved in the clean-up operation after both disasters. More importantly, the crises underlined the fact that – tempting as it is to see such episodes as being due to nasty bankers or incompetent regulators – the real problem and vulnerabilities lay in the structure of the international monetary system. Unloveable as it is, the Fund really matters.
All of which is why it’s rather alarming that with the nightmare of recent years having barely finished, the IMF is in the midst of another existential crisis. It comes back down to two things: first, that archaic structure mentioned above, second, the uncomfortable relationship that’s always presided between the US and the Fund.
The story goes more or less like this: back in 2010 the Fund negotiated a change in the structure of quotas: Europe’s power was to be reduced; the emerging economies’ shares would be increased. By historical standards, this was negotiated relatively painlessly: the Fund’s members (eg the finance ministers who go to each IMF meeting) signed up to it and agreed to get it ratified by their national governments by 2012. So far so good, and as that year approached, almost every member of the Fund got the necessary approval from their national governments. Except, that is, the United States.
In most institutions, the disapproval of one member would only have so much impact. But it so happens that the IMF needs 85% of the total members’ votes to get this reform through, and the US accounts for 16.7% of the voting share. You get the idea.
The years have gone by and still the US has refused to ratify the reforms (despite the fact that they are eminently sensible, and won’t dilute its power at all). The issue has become a political football tossed between the White House (which wants the reforms implemented) and Republicans in Congress (who don’t).
The upshot is that still, in 2014, these IMF reforms haven’t been passed, and probably won’t until at least after the mid-term elections this year – maybe until after the next Presidential elections. Why does this matter? There are two primary reasons.
The first is that the longer the Fund’s power remains primarily in the hands of smaller, older economies, the more likely are the fast-growing emerging economies such as Brazil, India and China to seek out an alternative to the Fund. In due course, it’s quite feasible that there could be a whole range of rival regional funds around the world.* That in and of itself wouldn’t necessarily be disastrous. But it would only raise the likelihood of political tensions between these regions, and raise the prospect of the kind of beggar-thy-neighbour policy we saw in the 1930s.
The second is that the Fund’s resources, which determine how powerful it will be in the face of a crisis, are diminishing, and fast. The chart below, which was created by Andy Haldane at the Bank of England, shows you the total size of IMF assets as a percentage of total external assets around the world. Such assets are a pretty good yardstick – after all, they represent the total sums of capital that could be quickly yanked out of countries in the event of a capital market crisis.
As you can see it headed south almost consistently between 1980 and 2010. During that period the stock of global assets became ever bigger while the Fund’s resources failed to keep up. The big jump in 2010 kind of represents the quota increases we’re talking about here.**
The upshot is that its capacity to afford to deal with future crisis has diminished as time has gone on.
The 2010 reforms do a bit to improve the situation – though not all that much. As you can see from that chart above, if you believe that there will be future international economic crises that are beyond the power of one country to deal with, what the Fund needs is even more resources. The problem is that it is difficult – perhaps impossible – to negotiate yet another round of Fund resource increases when the previous one hasn’t even been fully ratified yet.
There was plenty of hand-wringing but little progress on this issue at Washington this weekend, and little, for that matter, in the way of resolution. Instead there was another deadline: if the 2010 reforms are not ratified by the end of the year, the IMF will “develop options for next steps and we will schedule a discussion of these options”.
* This is something discussed by Mervyn King, former Bank of England Governor, in the epilogue to my forthcoming book, The Summit.
** The jump here denotes a temporary increase in Fund resources agreed at about the same time as those quota reforms – those temporary increases become permanent when the quota reform is ratified. Which is another reason why non-ratification would leave the Fund in a difficult position.