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Unless states commit to IMF reforms, the IMF’s role in global economic governance is doomed to increasing irrelevance. Discuss. Essay Example

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Unless States Commit to IMF Reforms, the IMF’s Role in Global Economic Governance is Doomed to Increasing Irrelevance

Unless States Commit to IMF Reforms, the IMF’s Role in Global Economic Governance is Doomed to Increasing Irrelevance

Introduction

In recent years, problems associated with global economic governance as mentioned by Moschella and Weaver (2013, p. 41) have turned out to be exceedingly urgent. The issue materialised in 1997 during the Asian financial crisis, when speculative capital massive outflow from Southeast and East Asia was prevented because there were no global financial flows’ regulations; thus, resulting in the collapse of numerous economies in that region. In view of this, IMF role in exposing such economies to volatile capital flows has continually been condemned, given that it worsened the these economies’ crisis by introducing contractionary stabilization programs. Basically, good governance can be defined as the proper exercise of economic, administrative as well as political rights at every level. The global economic governance landscape was evidently changed during the 2008 financial crisis. IMF role in global economic governance according to MercoPress (2015) will be rendered irrelevant because its rules must be supported by United States’ since it is the institution’s largest shareholder. Even though a number of other IMF member states have formally approved the IMF reforms, until now US is yet to approve these reforms formally. In this essay, I will discuss why states must commit to IMF reforms so that IMF’s role in global economic governance remains relevant.

Discussion

IMF as required by the world should function to benefit both troubled as well as strong states. IMF indispensable role is exhibited by its recent engagement in the stabilization programs for Europe states facing financial crisis such as Ukraine and Ireland (Truman, 2015). However, some states such as China have become more worried of IMF’s governance since the institution has failed to recognize their growing significance of these countries in the world economy. The 2010 IMF reform package needs US congressional approval, and it entails a change of quota shares. Basically, the US voting is protected by the reform package at 16.5% while shares for some of the developed economies were reduced, especially in Europe. Besides that, the quota shares of emerging-market such as China as well as developing countries were enhanced. These reforms were made 2010, after IMF’s highest governing body (the Fund) approved a reform package that sought to handle two issues concerning the institution: first, that the resources’ size of the institution could not meet the growing global economic activities; and second, that the developing and emerging economies representation at the institution failed to reflect their increasing importance in the global economy. Certainly, the reform package main parts cannot be implemented if a certain number of IMF member states have not approve the reforms formally. As mentioned by Nelson and Weiss (2015), if these reforms are put into effect, they would consequently increase the size of the institution’s core funding source as well as increase the developing economies and emerging market representation at the IMF so as to accurately reflect their importance in the global economy.

Given that the IMF reforms are crucial in defining IMF role in global economic governance, there are arguments for and against the reforms. The reform proponents hold the view that the IMF reform package is crucial for sustaining IMF’s legitimacy as well as effectiveness as the main institution for the stability of global economy. In view of this, they argue that the main funding source of IMF must be increased so as to offer the institution the resources it requires to successfully respond to global financial crises. Furthermore, they argue that the emerging economies under-representation at the institution is perceived widely as biased; thus, reducing support from a number of member states in its initiatives as well as programs (Ellmers, 2014). Other scholars arguing against the reforms as cited by Nelson and Weiss (2015) posit that IMF has means of enhancing its resources at the time of economic crises; therefore, the core funding source of IMF should not be increased. The critics of these reforms are as well doubtful that emerging economies such as China, India, and Brazil are backing the current values as well as norms of the international financial institutions (IFIs). They further argue that such countries support trade and financial strategies that do no align with those of US. Currently, the United States is only IMF member state that has veto power over key decisions made by IMF. US to approve the IMF reforms that seek to offer more weight to emerging economies has outstretched the rage of China as well as other countries that would gain from the reforms. Hill (2014) posits that U.S. continued reluctance to approve the IMF reforms has left other countries including its allies questioning its commitment to multilateral institutions such as IMF, which advance key global and U.S. economic interests.

Marton (2013) argues that a robust framework for global economic governance needs IMF to be well-functioning for the interests of all its members, particularly the developing economies, which are marginalized in the processes of making global economic decisions. Besides that, the developing economies are always affected by the systemic spillovers as well as failures. Even though flawed, Gaspar, Arreola-Risa, Bierman, Hise, and Kolari (2013) think IMF is placed uniquely to manage global economic crises. Failing to review the governance of the Fund during the 2010 IMF reforms has weakened not just the credibility of the Fund, but also the trust as well as the embedded social contract specified by the members of the G-20. Therefore, IMF reform according to Bretton Woods Project (2013) is vital to the comprehensive governance architecture of the global economy. The IMF inability to fulfil its role will result in fragmentation and regionalism, and groupings such as Brazil, Russia, India, China and South Africa (BRICS) will offer a compensating means for emerging economies. According to Edwards (2013), IMF structure brings about power imbalance; thus, resulting in lack of equality. Undeniably, the emerging markets are growing and with no effective resolution for the debt crisis in Europe, Edwards (2013) suggests that IMF should first reform its governance structure as demanded by emerging markets so as to be well to handle the European crisis. Statistical projections indicate that the economic growth rates of the BRICS nations will be 2017 double that of Germany, France, and the United States. The BRICS countries have persistently demanded for IMF reform in order that power distribution at the institutions reflects equality. The role of IMF in global economic governance will be rendered irrelevant if the US and other European countries continue to dither in approving the reform since BRICS countries can look for other alternatives aside from the World Bank and IMF. Recently, NewDevelopment Bank(NDB) was launched in Shanghai by the BRICS countries, after the World Bank and IMF failed to give the developing countries sufficient rights to vote (BBC, 2015). Through the bank, the BRICS countries have been able to secure their interests.

Conclusion

In conclusion, I have proved why states, especially United States and European counters must commit to IMF reforms so that IMF’s role in global economic governance remain relevant. The 2010 IMF reforms are yet to be approved by United States and other European countries, and this has made emergent countries uneasy leading to the formation of NewDevelopment Bank(NDB) that serves and secures their interests. The IMF reforms sought to double the institution’s quota resources as well as allow developing economies and emerging markets to have adequate representations in the Fund’s governance. IMF can no longer be considered a key player in the global economy devoid of the BRICS support.

References

BBC. (2015, July 21). Brics countries launch new development bank in Shanghai. Retrieved from BBC: http://www.bbc.com/news/33605230

Bretton Woods Project. (2013). The Future of Global Economic Governance and the IMF: Challenges and Opportunities for Europe, Emerging Economies and Developing Countries. Berlin: Bretton Woods Project.

Edwards, M. S. (2013, March 12). It’s time to democratise global economic governance. Retrieved from East Asia Forum: http://www.jasondmacleod.com/condition-politics-conditional-lending-developing-countries/

Ellmers, B. (2014, November 20). IMF crisis response was biased to benefit powerful member states, IMF’s own Independent Evaluation Office finds. Retrieved from Eurodad: http://www.eurodad.org/Entries/view/1546301/2014/11/20/IMF-crisis-response-was-biased-to-benefit-powerful-member-states-IMF-s-own-Independent-Evaluation-Office-finds

Gaspar, J., Arreola-Risa, A., Bierman, L., Hise, R., & Kolari, J. (2013). Introduction to Global Business: Understanding the International Environment & Global Business Functions. New York: Cengage Learning.

Hill, P. (2014, April 6). Russia, China leading efforts to bypass U.S. as IMF reforms stall on Capitol Hill. Retrieved from The Washington Times : http://www.washingtontimes.com/news/2014/apr/6/russia-china-leading-efforts-to-bypass-us-as-imf-r/?page=all

Marton, V. (2013). The euro area crisis and alternations in global economic governance. Thesis, Copenhagen Business School, Copenhagen.

MercoPress. (2015, March 18). Failure to approve IMF reforms puts “credibility of the US at risk” Lew warns Congress. Retrieved from MercoPress: http://en.mercopress.com/2015/03/18/failure-to-approve-imf-reforms-puts-credibility-of-the-us-at-risk-lew-warns-congress

Moschella, M., & Weaver, C. (2013). Handbook of Global Economic Governance. New York: Routledge.

Nelson, R. M., & Weiss, M. A. (2015). IMF Reforms: Issues for Congress. Washington, DC: Congressional Research Service.

Truman, E. M. (2015). What Next for the IMF? Washington, DC: Peterson Institute for International Economics.