At the Pittsburgh Summit in September 2009, the leaders recognised the need to reform the IMF’s governance as ‘a core element of our efforts to improve the IMF’s credibility, legitimacy, and effectiveness’, and agreed to address, among others, ‘the size and composition of the Executive board; ways of enhancing the board’s effectiveness; and the fund Governors’ involvement in the strategic oversight of the IMF’.

Despite the rhetoric, the G20 has not achieved results when it comes to IMF reform. To be sure, important changes have taken place at the IMF. The IMF has been able to augment its resources, including through securing bilateral loan commitments; there has been an expansion of the New Arrangements to Borrow (NAB); and agreement on a new general allocation of Special Drawing Rights (SDR). Parallel to these developments has been what Dominique Strauss-Kahn, the IMF managing director, has called a ‘modernisation’ of conditionality, designed to remove the ‘stigma’ attached to IMF borrowing. Although the global crisis brought some lending business back, the IMF decided to make its facilities more attractive to potential borrowers by establishing a flexible credit Line for pre-qualified ‘strong performing’ economies, and also by doing away with quantitative performance criteria for macroeconomic policy.

The G20 may well have helped build the consensus for such reforms more quickly, but these changes were dictated by the extraordinary nature of the global financial crisis, and the G20 cannot claim much credit. Rightly, the London Summit of April 2009 simply noted ‘the progress made by the IMF with its new flexible credit Line and its reformed lending and conditionality framework’.

The G20 Summits have stressed the need to increase the voice and representation of new economic powers in the governance of the IMF, but the latest agreement on quota reform had already been made before the first G20 Summit. What the G20 has called for is to accelerate the schedule of the next quota reform, stipulating that the process must be completed by January 2011, with an adjustment of at least 5 per cent toward the under-represented dynamic emerging market economies. Yet quota reform is a zero-sum game. To achieve the adjustment of an even 5 per cent is probably a political feat that would only be possible with the full might of the G20. But in substance it amounts to virtually nothing even if it is achieved as promised.

IMF governance reform will be particularly important, going forward, because the stigma attached to IMF borrowing, at least for many Asian countries, is related not to conditionality, but fundamentally to the perception of how the institution is run. Streamlining conditionality is not the way to win back Asia’s trust. To win this trust, the IMF must be perceived to be politically neutral; Asia must feel that it has sufficient ownership in the strategic oversight of the institution. The lack of Asian influence reflects the lack of Asian intellectual input. Asia must specify what must be done to allow the IMF to become a global financial safety net for the region once again. For example, Asia could reasonably demand a quota share of 35 per cent for the region (compared with just over 20 per cent now); IMF management should be made more independent of the political process by removing the executive board from day-to-day operations, consistent with modern corporate principles.

The G20 is about to propose a transparent and merit-based process of selecting the senior leadership of the IMF. But is this all that the leaders of nations that claim over 80 per cent of world GDP can agree on after two full years of discussion? If so, the utility of the G20 process as the premier forum for international economic cooperation might rightly be questioned, once the immediate task of responding to the global crisis has been completed.

Strengthening global financial safety nets is high on the agenda of the Seoul Summit, but if strengthening global financial safety nets involves an enhanced role for IMF financing in the post-crisis world, the required reform of IMF governance must be far-reaching. Otherwise it can hardly be expected that any of the major dynamic Asian economies will utilise what the IMF may offer, even when called for by another extraordinary crisis.

Professor Shinji Takagi is Professor of Economics, Graduate School of Economics, Osaka University.

This article is from the most recent edition of the East Asia Forum Quarterly, ‘Asia and the G20’.