For much of 2008, the International Monetary Fund (IMF) looked moribund. The Fund's only loans outstanding were costly ones to low-income countries (LICs). For the first time ever, the Fund had cut staff (by about 13 percent) but still faced a $300 million deficit over the next four years. No new customers were in sight. Former customers among the emerging market economies were self-insuring, all to avoid future dealings with the Fund. In April, the IMF's executive board had approved a minor reform of the formula for allocating quota shares, and hence voice and vote, among its members. Under-represented countries would receive some additional shares; tripling of base votes ensured that low-income countries would not lose shares. The two African constituencies would each gain a second alternate executive director to ease workloads. The reform package also proposed selling a portion of IMF gold, the profits of which would constitute an endowment to cover future administrative costs. The final step would be approval by member states' parliaments whose laws required such action--hence the power of the US Congress with its power of the purse making it genuinely independent of the executive. (1) The main question heading toward 2009 would continue to be whether or not the IMF was worth rescuing: Did it have a major role in the crisis of the global system? Should Congress approve the "reform" package?
On 15 November 2008, however, the Fund became a phoenix. The G-20 summit, led by the European Union, assigned it new roles along with substantial new funding. The summit's Action Plan referred to the IMF in two sections. Under "Enhancing Sound Regulation, Regulatory Regimes, Immediate Actions by March 31, 2009," the G-20 called for a single action: "The IMF, expanded FSF [Financial Stability Forum], and other regulators and bodies should develop recommendations to mitigate pro-cyclicality, including the review of how valuation and leverage, bank capital, executive compensation, and provisioning practices may exacerbate cyclical trends." (2)
In early 2009, Congress was to consider the IMF "reform" package. But now the questions had become more complex. Back in April 2008, it seemed a clear yes or no whether or not the IMF was worth keeping, with the weight pointing toward no, unless inertia won. By 16 November, most of the G-20 had approved the reform package, and its summit's concluding statement indicated that the IMF would assume new responsibilities and money conditioned on additional governance reforms! The G-20 summit understood the need for reforms far beyond those proposed by the IMF in April. The Summit Declaration, Section 9, "Reforming the International Financial Institutions," stated:
We are committed to advancing the reform of the Bretton Woods
Institutions so that they can more adequately reflect changing
economic weights in the world economy in order to increase their
legitimacy and effectiveness. In this respect, emerging and
developing economies, including the poorest countries, should have
greater voice and representation.
The same intention appears in the "Action Plan to Implement Principles for Reform" in which the summit participants commit to medium-term actions on reforming international financial institutions.
One has to ask: Where were the emerging markets when the April reforms were being negotiated? Why do the Europeans ask for additional change in November 2008 when they insisted in April 2008 that they could go no further? And the United States announced that this was the best possible reallocation of quotas and votes? The best guess was that under the pressure of the international financial collapse of 2007-2008, and the proximate pressure of the non-G7 economies in the room, the status quo powers of the United States and Europe agreed that additional changes in voice and vote were needed, without agreeing to any specific formula or any reform, such as removing the US veto. …