At The IMF - Forlorn Hope or Real Possibility?
ERNEST COREA (IDN)
country that enters into an agreement with the International Monetary
Fund (IMF) immediately acquires a second finance minister, a former
Secretary General of UNCTAD once said. The new minister who holds the
country's destinies in a firm grip is the IMF's point person for the
country agreement. He or she has access to an institutional check book,
and carries the text of the "Washington Consensus."
Unfortunately, this point person represents an institution that is
increasingly considered to be in need of a substantial makeover.
will say "don't hold your breath," but backing from the Group
of 20 (G20) for reforming and revitalizing international financial
institutions (IFIs) suggests that a makeover could actually happen. The
G20 represents some 90 percent of the world's gross national product, 80
percent of world trade, and two-thirds of the global population. Their
engagement in change that is overdue cannot, surely, be just shrugged
off? Or can it?
The G20 includes Argentina, Australia, Brazil, Britain, Canada, China,
France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi
Arabia, South Africa, South Korea, Turkey and the United States, and the
European Union, represented by the rotating council presidency and the
European Central Bank.
In the final communiqué following their meeting in April, the G20
reaffirmed their determination to reform the "mandates, scope and
governance" of IFIs "to reflect changes in the world economy
and the new challenges of globalization, and that emerging and
developing economies, including the poorest, must have greater voice and
representation. This must be accompanied by action to increase the
credibility and accountability of the institutions through better
strategic oversight and decision making." Not a moment too soon.
As Ralph C. Bryant of the Brookings Institution, who has written
extensively on the subject, points out: "After more than 60 years
since the IMF's creation, existing governance procedures are seriously
flawed. Most notably, the current distribution of quota and voting
shares in the IMF is unbalanced and inappropriately reflective of
nations' relative status in the world economy and polity. Similarly, the
composition of the Executive Board is inadequately representative of
current economic and political conditions in the world. The IMF is –
and to an even greater extent is perceived to be – an institution
excessively dominated by the interests of transatlantic nations."
(For Dr. Bryant’s full analysis, please click
Along similar lines, a group of financial and development experts
convened by the Bretton Woods Committee earlier this year said:
"The (World) Bank and the (International Monetary) Fund are seen as
under the control of the United States and Europe . . . run by the rich
largely for their own benefit."
On May 14, Secretary of State Hillary Clinton demonstrated the dangers
of a skewed governance structure, when a reporter asked her what
"concrete measures" the US planned in connection with the
situation in Sri Lanka where a civil war was in its penultimate days. In
reply, Clinton repeated the demand already made by France, the UK, and
the US that Sri Lanka should declare a ceasefire, and added: "We
have also raised questions about the IMF loan. At this time, we think
that it is not an appropriate time to consider that until there is a
resolution of this conflict."
At that time, technical discussions between the IMF and Sri Lanka's
Central Bank had been completed. Thus, the "inappropriateness"
of considering IMF support to Sri Lanka was not related to technical
conditionalities. It was clearly an effort to force a small country to
accept POLITICAL demands or face the option of being denied balance of
Events have overtaken the political demands, and Sri Lanka's negotiation
with the IMF will be settled one way or another. The threat of political
conditonality will, however, continue to hover over the IMF. For it is a
reminder to all countries of how the existing structure of IMF
governance can tempt industrial countries with strong voting power to
impose or seek to impose its will on other members.
The spread of the IMF's functions and activities enables it to serve,
potentially, as a global traffic cop on the highway of international
finance, as policy guide, and as co-ordinator of both policies and
actions. These roles make it particularly important that the
organization and operations of the IMF should be fair and realistic.
The distorted nature of IMF governance begins at the top, with a
"power sharing" arrangement that is all about power and hardly
about sharing. From its inception, the Managing Director of the IMF has
traditionally been an European, and the World Bank President, an
American. Each of these institutions goes through the motions of a
confirmation process but a rejection would automatically be followed by
another "traditional" nomination from the same
The arrangement has been criticized as being unfair, irrelevant, and
facilitating transatlantic control. Former Argentinean Finance Minister
Guillermo Nielsen captured the spirit of that criticism when he said on
the eve of the G20 meeting that "leadership of the IMF must be
central" in any reform program. "Part of the reason why these
institutions have failed in their mandate is their lack of understanding
of the real problems facing the countries they try to help."
Next up is the IMF's 24-member Executive Board that manages the conduct
of day-to-day business. The board's directors are appointed or elected
by member countries or by groups of countries. The IMF Managing Director
is the board's Chairman. Each of the IMF's major shareholders has its
own director. The remainder are divided into clusters, each represented
by a director.
The size of the board – too big or too small – the special role of
the "big" directors and the fact that the structure of the
board does not reflect the diversity of IMF membership are all points on
which change has been sought. Among the various proposals for change,
the group of experts (convened by the Bretton Woods Committee) referred
to above has suggested that the board should be reduced to 20 members. A
smaller board, they said, "will help streamline board operations
and permit appropriate regional distribution while providing a framework
for the consolidation of European representation. This consolidation, in
turn, will allow for a more balanced representation of low and
Also in the realm of governance is the IMF's voting system. The
one-country-one-vote system was established at the United Nations
because, it was said at the time, this would create a democratic
apparatus for decision making. Presumably, money management cannot be
well served by democratic arrangements, and the voting strength of each
IMF member country is determined by a combination of "quotas"
set by the Fund and "basic votes" allocated to it. The IMF
explains that quotas "broadly reflect the size of each member's
economy: the larger a country's economy in terms of output and the
larger and more variable its trade, the larger its quota tends to
be." (Details of quotas, votes, and other related information are
available at www.imf.org)
Basic votes are allocated to each member in relation to its quotas. Some
decisions are reached by consensus but many require a majority vote.
Decisions regarding quota allocations, which determine voting strengths,
or changing the numbers of executive directors, require an 85 percent
vote. On these issues the US with 16.77 percent of the vote can exercise
The existing voting structure does not reflect changes in economic
development that have taken place across the globe. Adjustments that
were proposed last year but have not yet been implemented will not alter
the existing patterns adequately to reflect these changes. Some
comparisons demonstrate the point.
The combined international reserves of China and India, two of the
largest emerging market economies, amount to 23.1 percent of the world's
total, and their IMF vote share is 5.55 per cent. France and the UK have
a combined share of 2.0 percent of international reserves and a combined
IMF vote share of 9.72 percent. Under the proposed changes, China and
India would have a 6.1 percent vote share, and France/UK – 8.6
percent. The combined international reserves of Brazil, Chile, and
Mexico is 3.8 percent, and their IMF vote share is 3.21 percent. The
proposed changes would give them an IMF vote share of 3.6 percent.
Belgium, the Netherlands and Switzerland have international reserves of
1.7 percent, while their IMF voting share is 6 percent. The proposed
changes would give them 5.3 percent of IMF vote share.
On top of all this there is the "Washington Consensus," the
term used to describe a set of IMF policy proposals. They include fiscal
discipline, tax rate reductions, interest rate liberalization, exchange
rate reform, trade liberalization, liberalization of capital flows,
privatization, and deregulation of prices and markets. Over time, the
Washington Consensus has come to imply an all-inclusive prescription –
panacea or placebo – offered to all countries that need IMF help.
Critics complain that it has a poor record of effectiveness, although
there is evidence to show that it has helped to control inflation and
budget deficits. Development practitioners, both in civil society and in
public service, hope that with changes in governance, changes in the
one-remedy-fits-all approach will follow.
As an agenda for reforming governance, the G20 agreed that the package
of IMF quota and voice reforms adopted by the Board in April 2008 should
be implemented; and that the next IMF review of quotas should be
completed by January 2011 (accelerated from the due date, 2013). Taking
a great leap forward, they agreed that the heads and senior leadership
of the international financial institutions should be appointed through
an open, transparent, and merit-based selection process.
So is the time for an IMF makeover, now? There is nothing in the terms
of a communiqué that automatically make them work. They can serve as
the basis of change only if all those who have pushed for reform over
the years maintain their vigilance – and their persuasive pressure.
writer has served as Sri Lanka's ambassador to Canada, Cuba, Mexico,
and the USA. He was Chairman of the Commonwealth's Select Committee on
the media and development.