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 (IMF). In the process, it has derailed a multilateral agreement that was hammered out back in 2010 ironically, in the eyes of the rest of the world, with 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 stabilising anchor at the core of the international monetary system.
After the initial disappointment, many are hoping 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 this year, few are confident that lawmakers will be in any mood to change course until next year at the earliest.
This is an unfortunate and regrettable outcome for both the IMF and the international community as a whole. Congressional obstinacy is forcing the IMF to miss out on an opportunity to strengthen its finances at a time when most other countries have already approved the initiative. It is also being held back from addressing, albeit modestly, governance and representation deficits that have steadily eroded the integrity, credibility and effectiveness of this important multilateral institution.
Meanwhile, global developments confirm that the recent period of financial tranquillity 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, particularly in the US, Europe and Japan.
These policies have improved domestic prospects in advanced countries but 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 multitude of unconventional measures.
Yes, this is an important lost opportunity for all who value global growth and financial stability. Sure, this is undoubtedly bad news. But there is also a silver lining, as last month's disappointment can still 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 modernising 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 complement 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 can be achieved by pursuing three specific initiatives:
- Leaders should target a much bigger shift in favour 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 IMF 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, will inevitably take longer and be much more complicated to implement. In many countries, governments will 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 the well-being of an international system that can better serve and protect individual countries' interests over the long term.
Acting through its 24 representatives on the IMF's executive board, the international community would be well advised to move quickly to empower the managing director to appoint an independent committee of outside experts to devise detailed proposals in each area including by drawing on work that has already been undertaken. Indeed, the emerging world's recent bouts of instability and the risk that they may spill over to advanced countries where growth has yet to achieve "escape velocity" are a timely reminder of the danger of reform paralysis.
Anyone who wishes to see a strong IMF at the centre of a fluid international monetary system and most economists see great merit in this would agree that such a multispeed outcome is far superior to doing more of the limited same.
Mohamed A. el-Erian is the former chief executive and co-chief information officer at Pacific Investment Management Co and the author of "When Markets Collide".