After the initial disappointment, many are hoping that Congress will again take up the Obama administrations 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 later this year, few are confident that lawmakers will be in any mood to change course until 2015 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 Fund 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 tranquility 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, especially in the United States, Europe, and Japan.
These policies have improved domestic prospects in advanced countries, but they have accentuated the policy dilemmas facing many emerging economies. In some cases, they have overwhelmed policymaking capability and added to internal political instabilityall of this at a time when no one knows the full range of side effects and unintended consequences of the Wests unconventional measures.
Yes, this is an important lost opportunity for all who value global growth and financial stability. That is undoubtedly bad news. But there is also a silver lining, because last months disappointment can be turned into an opportunity.
The 2010 agreement was, after all, a compromisealbeit a hard-fought onethat 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 compliment to it.
But this new opportunity, born of disappointment, will not be seized if the international communitys 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 IMFone that reflects the world of today and tomorrow, rather than that of decades ago. This could be achieved by pursuing three specific initiatives.
n Leaders should target a much bigger shift in favour of emerging economies and away from Europe in voting power, representation on the IMFs Executive Board, and funding obligations.
n 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.
n Third, policymakers should build on recent progress to ensure a more level operational playing field for the implementation of Fund surveillance.
There is no better time than now to start working on these three initiatives. The last twofurther improving the procedures governing the election of the next Managing Director, and more even-handed surveillancecould 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, would inevitably take longer and be much more complicated to implement. In many countries, governments would 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 recognise that, at the national level, it is about no victor, no vanquished. This is not about individual countries, but rather about the well-being of an international system that can better serve and protect individual countries interests over the longer-term.
Acting through its 24 representatives on the IMFs 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 worlds recent bouts of instability, and the risk that they may spillover 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 systemand most economists see great merit in thiswould agree that such a multi-speed outcome is far superior to doing more of the limited same.
Mohamed A El-Erian
The author is CEO and co-CIO of PIMCO, and has written the book
When Markets Collide.
Copyright: Project Syndicate, 2014