TOKYO - For the first time in recent memory, this week's big annual meeting of the International Monetary Fund will not be about saving the world from imminent financial collapse. With the most acute phase of the European crisis either behind or ahead of us (depending on your view) and the U.S. "fiscal cliff" still looming several months away, the major takeways from these Tokyo-based meetings will be more strategic and nuanced than in recent years. But, while the issues are more subtle, they are no less crucial. In fact, the IMF is more important to the global economy than ever, and this week's meetings may represent a more important directional step than is widely recognized. More importantly, the United States' influence at the fund is at risk of even greater decline than is generally believed. Here's why:
IMF governance: IMF governance issues are tedious, complicated and pedantic -- even to seasoned fund watchers. And generally, it isn't worth the effort to consider the implications of a shift in 0.02 percent voting power at an organization that most often takes decisions on the basis of consensus. But this year, governance issues are actually significant. And, that's too bad, because the United States doesn't come out looking very good.
These issues, colloquially known as "shares and chairs," involve the composition of the executive board of the fund, which manages the institution day to day, and the voting rights of the fund's 188 members. The IMF, created in the shadow of World War II, has been slow to recognize the global shifts that have taken place over the past decades and is seen by many as being too wedded to the past. In particular, even before the euro crisis dominated the fund's recent focus, Europeans held disproportionate sway, with between eight and 10 of the board's 24 chairs and, by tradition, the managing director position. Emerging markets, in particular the BRICs, are woefully underrepresented both at the board and in voting ("quota") shares -- and they're not happy about it.
To address this, and to take on charges that the fund was an institution looking to protect status quo interests, the Obama administration led an effort in 2010 for sweeping governance reform of IMF board representation and voting, with the specific goal of reducing European influence, including an explicit commitment by advanced European countries to reduce their board representation and to increase the voice and vote of emerging markets.
These hard-fought reforms gained the United States no friends in Europe, which had repeatedly promised to voluntarily reduce its influence over time, but had failed to do so. But they were seen as a sincere attempt to benefit non-European emerging markets without any direct benefit to the United States in terms of voice or vote. The idea was to gain political goodwill for taking the lead in redressing an unfair structure that undermined the credibility and legitimacy of the IMF -- an institution that the United States rightly saw as a positive benefit to itself and the world.
But, in spite of the U.S. success in forcing though governance reform at the board and engendering the ill will of our European allies, the effort looks likely to backfire. Not only did the Europeans cleverly find a way to propose a two-seat board reduction that actually increases their overall influence, but the United States itself has now become the impediment to implementing the broader reforms, as they cannot be finalized without U.S. approval and the administration has yet to even propose them to Congress -- the crucial missing step to overall ratification.
So, at the annual meetings this year, which Managing Director Christine Lagarde has themed "Keeping Promises," it is America that will be blamed for the most glaring promise not kept -- our failure to make long-fought for reforms a reality, thereby incurring not only the ire of the Europeans, but also the finger-pointing of the BRICs and other emerging countries -- precisely those countries we sought to benefit for broader strategic purposes.
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