Time for the US to lead

Time for the US to lead

LAST week, a major setback to international cooperation and prospects for a stable and growing world occurred when the US Congress passed up an opportunity to ratify historic International Monetary Fund (IMF) reforms as part of the recent US budget deal.

In 2010, Washington demonstrated global leadership when it approved reforms that will secure the effectiveness and legitimacy of the IMF. Today, ratification by the US Congress remains the final step in implementing those reforms.

It is not our role to pass judgment on US domestic policy or the trade-offs required for a deal. But failing to deliver on the commitment it has made to the world comes at an enormous cost to US influence and its standing in the world.

The IMF's unique international role should not be taken for granted. IMF lending, and more importantly the credibility it brings, is critical to help countries and regions deal in times of crises as well as minimise contagion to the rest of the world and restore growth. The world would be in a worse place without it.

It is now as important as ever for the world to have a strong and effective IMF. Growth remains below potential in most regions, including in major markets for the United States. Unemployment in many countries remains at historic highs, with the number of long-term jobless still growing. If these crises are not resolved soon, an entire generation could be blighted.

And even though much of the world has yet to recover fully from the last financial crisis, it must continue to work to defend against the next. A significant part of the global banking system suffers from weak balance sheets. Asset bubbles are reappearing, and emerging markets are still vulnerable to the volatility of capital flows. Government finances have improved in the short term in many places, but markets have little confidence in their longer term health.

In order for the IMF to effectively address these challenges, the 2010 reforms must be completed. The IMF has been relying on temporary, bilateral borrowings to supplement its resources. But only a permanent augmentation of its resources will provide the needed confidence in the IMF.

The 2010 reforms will achieve this by permanently doubling the IMF's funding capacity. On the part of the US, the reforms only require a shift of funds, not new financial commitment.

The reforms will also rebalance representation at the IMF, shifting 6 per cent of voting share to the dynamic emerging and developing countries that are contributing to an increasing share of global output. As part of the deal, European countries have agreed to give up two seats on the IMF Board to the developing world.

If implementation of the reforms is continually delayed, it will feed perceptions that the IMF has no assurance of permanent funding or a voting structure that reflects new economic realities. Delay risks undermining international commitment to the multilateral system. IMF reform is a core priority for its members, and very much central to the G-20 agenda.

Perceptions that the IMF has no assurance of permanent funding, and that its voting structure does not accurately reflect new economic realities, will increasingly lead countries towards regional and bilateral arrangements.

Such alternative arrangements, while a valuable complement to the IMF, cannot replace the multilateral system. A more fragmented international financial system will mean higher chance of contagion in times of crisis and less support available to individual countries. These risks are not academic or distant.

Global stability is ultimately nurtured through trust in international institutions that resolve issues through cooperation rather than economic or political dominance. Should the IMF reforms continue to be delayed, what is at risk is the trust that is key to the stability of the international system.

The US, whose shareholding in the IMF gives it a unique veto power, has a particular responsibility to preserve this trust by ratifying the 2010 reforms. It demonstrated strong and decisive leadership during the financial crisis to help restore confidence and set the stage for a global economic recovery. The time has come for the US to demonstrate leadership again.

It does not matter on which side of domestic political issues one falls; following through on its pledge to IMF reform is in the interests of the US. The world will be watching.

The first writer is the Treasurer of Australia, which is G-20 Chair for 2014. The second writer is Singapore's Deputy Prime Minister and Finance Minister, and chairs the IMF's International Monetary and Financial Committee.

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