July  
2009

Vol 9 - No. 1


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ECONOMY


Change At The IMF - Forlorn Hope or Real Possibility?

BY ERNEST COREA (IDN)

Every 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. 

Skeptics 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 here.) 

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 payments support.

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 politico/geographic area.

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 middle-income countries."

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 a veto.

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.
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The 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.

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