CIGI, together with the Intergovernmental Group of Twenty-Four (G24) and the Brookings Institution, organized a seminar on "pressing and future issues in IMF Reform and Options for their Resolution" at Brookings in Washington, D.C. Friday afternoon. It was, as the great American social philosopher Yogi Berra said, "deja vu all over again." A year ago (almost to the day) a similar seminar was organized at Brookings featuring many of the same participants, who said much the same thing. And, while I hope to be proven wrong, I am reasonably confident that, in a year's time, we could have yet another conference with pretty much the same script.
This is not a criticism of the seminar planners, nor of the participants (full disclosure: I was one). The comments of the other participants were uniformly thoughtful, informed and constructive. The recurring nature of these discussions, rather, reflects a simple observation: governance change, like constitutional reform, is difficult and divisive in the best of times; it is especially hard to do in periods of transition, such as the transition underway in the global economy.
As a result, discussions of IMF quota reform resemble less meetings of the Oxford Debating Union, in which the victor is marked by the precision of her logic and eloquence of presentation, and more like a street fight, where victory belongs to the one who can take a punch better and has the necessary stamina to be the last man standing. There has been some movement on the quotas issue over the past year, but the participants are bloodied and exhausted.
It has become a cliche to note that quota reform is so excruciatingly difficult because it is a zero-sum game: what one country gains, another must lose. And, yet, it is also a fact. In this respect, reforms are possible if, in the words of the somewhat immodestly-monikered Haley Rule, there are large gains to share or large losses to avoid. Moreover, as others noted, it helps if there is an "asymmetric distribution" of power such as that prevailing at Bretton Woods, which gives a dominant player the power to cram down a deal on others using its considerable influence to offer side-deal sweeteners or implicit threats to get an agreement "broadly acceptable" to all.
Notwithstanding the fact that the U.S. remains the dominant player, it no longer has the capacity to shape the terms of international agreements, as it did at Bretton Woods nearly 70 years ago. At the same time, Europe is entangled in a self-constructed snare of monetary and economic confusion that exhausts its partners in internal debates, making it, arguably, a less effective external partner. Meanwhile, the main beneficiaries of the international "architecture," which has supported global growth and trade and fuelled their growth, rightly claim a larger voice in international fora, even as some undermine the system.
So, what is to be done?
First, recognize that IMF quotas will, by necessity, reflect a political compromise between sovereign states. Efforts to devise a transparent and defensible quota formula can help by focusing discussions on how the quota formula can advance the key role of the Fund and by removing tangential issues from the negotiating table. But no technical 'fix' will solve a political problem.
Second, acknowledge that quota reform is but one part of the "legitimacy, effectiveness, credibility" triad of the governance reforms that are required. Quota reform that reflects the changes that have occurred in the global economy since Bretton Woods and that is capable of accommodating the further changes that will continue would enhance the legitimacy of the IMF, but it would not necessarily address effectiveness and credibility. Quota reform is a necessary, and not sufficient condition.
Third, embed the quota discussion in a broader, positive-sum game of architecture writ-large aimed at avoiding the large potential losses to the global economy.
What are those risks and what is that broader game?
It may be a dystopic vision, but I worry that given the enormous adjustment challenges in the global economy there is a risk that the remarkable system of open, dynamic trade that has been the wellspring of prosperity for so many over the past decades could be imperilled. Consider, for example, the large public debt burdens confronting many (but not all) advanced economies. Consider, as well, the extraordinary monetary measures adopted by some (but not all) advanced economy central banks. While necessary given the circumstances and the adjustment burden placed on monetary policy, quantitative easing has raised the spectre of the competitive devaluations and 'currency wars' that marked the Great Depression and the beggar-thy-neighbour policies they elicited.
In the face of these threats — not to mention the demographic challenges faced by most advanced economies and China, and the potential economic and social consequences of climate change — the need for cooperation is, quite possibly, as great today as it was at Bretton Woods.
It is, of course, a syllogism of game theory that cooperative outcomes dominate non-cooperative outcomes. (If this were not the case, players could agree not to cooperate!) But to support cooperative outcomes, some external commitment or enforcement mechanism. That, in a nutshell, is precisely the role of the IMF.
To be continued...
