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ON THE LEFT: Pace of reform too slow

Dr Nemat Shafik

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Five years after the onslaught of the global financial crisis, economic governance remains at the centre of the policy debate. I would argue that this is no surprise, given that, historically, there has been a symbiotic relationship between crises and the evolution of governance.
Granted, governance is often seen as evolving slowly and in an incremental manner and at a stately pace, while crises are intrinsically disruptive and revolutionary. However, as history has repeatedly shown, crises often bring out the shortcomings of existing governance arrangements, while the fear of recurrence can galvanize support for reform.
As with similar situations in the past, the global financial crisis of 2008 imposed large costs and hardship on affected countries. However, from a perspective of economic governance, it has also provided a window of opportunity to advance reforms and strengthen policy coordination.
In the case of the IMF, the agreement reached in 2010 on important quota and governance reforms that would further increase the voice and representation of emerging market and developing economies has not yet been implemented.
While two of three required conditions have been fulfilled, further support is needed to meet the final condition that will allow the reform to take effect.
If we put all this together, the report card on global governance reform since the crisis is somewhat mixed.
Policymakers across the globe need to keep the momentum alive and seize the opportunity to advance governance reform while memories of the crisis and the sense of urgency remain fresh.
Indeed, there is a real danger that the window of opportunity for addressing some of the most challenging global issues might soon be closing. How can this trend be reversed and important reforms finalized? To answer this question, it is helpful to look at the different types of solutions that have evolved as means to deliver global public goods.
Going forward, it will be crucial for the IMF’s effectiveness and legitimacy to ensure that its governance structure reflects the relative position of its member countries in the global economy.
Approval of the 2010 reforms would be an important step in this direction, although further shifts in quota and voting shares to dynamic economies will also be needed.
To achieve this, some countries will have to accept relative declines in their quota and voting shares.
Understandably, for them this will not be an easy decision, but in return they will help ensure that the fund can continue to remain strong and legitimate for the benefit of the entire membership – and the global economy.
While significant efforts to improve global economic governance were made in the initial phase of the crisis, the momentum of reform and policy coordination has slowed recently.
Indeed, while the current system is able to deliver governance and policy coordination when there is a lot to lose – such as in a crisis, it is much less effective in galvanizing action when there is potential for mutual gain – such as global economic rebalancing.
One possible explanation is that the global community tends to rally in a time of crisis when the time horizon is short and immediate costs are high. However, in normal times, gathering momentum for action today may be hard because the cost of inaction lies far in the future.