The I.M.F. Needs a Reset
By ROBERT H. WADE and JAKOB VESTERGAARDFEB. 4, 2014
For all the criticism that has been directed at it over the decades, the International Monetary Fund provides vital services to the world economy. In particular, it acts as the nearest thing to an international lender of last resort to countries experiencing external financial crises — and thereby helps to maintain international financial stability.
But the I.M.F. is experiencing a crisis of governance. The governments of big developing countries have become frustrated with the unwillingness of Western countries to adjust the distribution of power in the fund in line with their rising economic weight. Frustration has encouraged some to explore bypass institutions, such as the development bank and the currency-pooling scheme being negotiated among the BRICS (Brazil, Russia, India, China, South Africa).
Today the four big BRICS (Brazil, Russia, India, China) have a combined share of world gross domestic product of 24.5 percent, compared with the 13.4 percent share of the four big European economies (Germany, France, Britain, Italy); but the four BRICS countries have a combined share of votes of only 10.3 percent, compared with the four European nations’ share of 17.6 percent.
In 2010 the fund’s board of governors agreed on a package of governance reforms, subject to ratification by the I.M.F.’s member countries. Members would increase their quota subscriptions (similar to credit union deposits), raising the fund’s resources. At the same time 6.2 percent of voting shares would be shifted in favor of “dynamic” emerging-market and developing countries.
The I.M.F.’s managing director at the time, Dominique Strauss-Kahn, called the accord “the most fundamental governance overhaul in the fund’s 65-year history and the biggest-ever shift of influence in favor of emerging-market and developing countries to recognize their growing role in the global economy.”
But the small print revealed that the agreed vote shift from developed countries to emerging-market and developing countries was only 2.6 percent, the rest being adjustments within the category of emerging-market and developing countries from “overrepresented” ones to “underrepresented” ones. Even if implemented, the 2010 reforms would leave large discrepancies between a country’s share of economic weight and its share of voting power.
The overwhelming majority of I.M.F. member states approved the changes, but more than three years later the quotas and votes remain unchanged because the United States Congress has still not approved what the executive branch agreed to. Without congressional approval the whole readjustment remains paralyzed.
The deeper problem is that the 2010 accord is a one-off. I.M.F. member states say that the fund should agree on a formula for the adjustment of quota shares going forward, but the executive board has repeatedly missed deadlines for doing so. Most members agree that quotas and votes should be based on a country’s G.D.P., in the interests of simplicity and consistency. But the Europeans insist they should be based not only on G.D.P. but also on “openness.” In response, some developing countries argue that if measures beyond G.D.P. are to be included, criteria like “contributions to global growth” should be among them.
The upshot is stalemate. This lack of agreement suits the Europeans well, for it protects their current overrepresentation in the I.M.F.
To unblock the stalemate, the board of governors should agree to amend the fund’s constitution to delink the reallocation of quotas and votes from increases in total financial subscriptions. The I.M.F.’s constitution says that a member state can veto any loss of quota and votes. In practice this means that a reallocation can only occur when there is also a large net increase in financial subscriptions. By separating the two issues, the fund could institute a routinized adjustment of voting power as countries’ relative economic weight changes, without the changes always being held hostage to governments’ willingness to make new capital contributions.
This would remove the fiscal component of the reforms and go a long way to disarm its opponents in the Republican Party. The remaining parts of the 2010 reform might even make them happy to come on board. The United States would keep its solitary veto over super-majority decisions requiring 85 percent of votes, such as changes to the fund’s constitution. And an agreement by the United States would open the way to changes that substantially cut Europe’s overrepresentation, making space for increased representation for emerging-market economies — a long-standing American objective.
2014 is the 70th anniversary of the Bretton Woods conference at which the International Monetary Fund and World Bank were founded. Breaking the deadlock in I.M.F. governance reform would help to ensure that emerging-market and developing countries see the fund as a cooperative of states — and no longer a device for Western countries to impose their conditions on others. It also would boost the prospects for international financial stability, and not incidentally, constitute a triumph for President Obama and the I.M.F.’s current managing director, Christine Lagarde.
Robert H. Wade is a professor of political economy at the London School of Economics. Jakob Vestergaard is a senior researcher at the Danish Institute for International Studies.
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