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November 10, 2010 5:02 pm

IMF reform: Change in voting may be more symbol than substance

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Sometimes it takes a crisis to force action. For years before the financial crisis, the International Monetary Fund and its sister institution, the World Bank, witnessed a desultory and inconclusive conversation about how the institutions should be run.

Still bearing the imprint of the economy in the immediate aftermath of the second world war, during which time the institutions were created, their governance structures heavily overweighted European economies, giving them nearly a third of the votes on the IMF’s executive board and eight (sometimes nine) of the 24 seats on the executive board.

But with the voting weights, or “quotas”, linked to contributions to the IMF, the absence of financial crises in the half decade preceding the credit crunch in 2007 meant there was little imperative to raise more money, with all the rearrangement of votes and seats that might entail.

But the crisis itself, and the drive to triple the lending resources available to the IMF and increase the capital of the World Bank, gave sudden impetus to a stalled debate. More over, the G20 grouping of countries, following its inaugural heads of government meeting in 2008, began to supplant the Group of Seven industrialised economies. It looked increasingly surreal that the emerging market countries, which were proving to be the engines of growth in the world economy, and which were being invited to take their places at the top table of global governance, nonetheless continued to be under-represented in the international financial institutions.

At the third of the meetings of G20 heads of government, in Pittsburgh in September 2009, leaders made a commitment to shift at least five percentage points of the total voting weight on the IMF’s executive board towards dynamic emerging markets – a code for countries such as China and Brazil.

Yet there still remained a whole host of devils in the detail. The formula used for calculating the so-called “quotas”, or national contributions to the IMF’s finances, is fiendishly complex, and the question of which nations get to occupy the seats on the fund’s 24-member executive board equally so.

Eventually, tiring of the endless rounds of discussions, the US decided to execute a neat procedural trick to force a decision.

Technically, the IMF’s board only has 20 members, and the decision to extend it to 24 has to be periodically renewed. This August, the US simply refused to vote to extend the board in its current form – meaning that, in theory, the body would revert to 20 members after November 1 and forcibly expel four executive directors from emerging market countries by doing so.

This was a high-risk strategy, as it threatened to plunge the IMF into chaos, with the board either shrinking in size or rapidly losing credibility. In the event, it was a calculated risk that appeared to pay off.

The move threw a bucket of cold water over the European governments, which had previously been bickering endlessly about just who should give up seats and votes, and at the G20 finance ministers’ meeting in October, attendees agreed to shift six percentage points of voting weight to the emerging markets – more than the pledge made at the Pittsburgh G20 – and that the Europeans would give up two of the 24 seats on the board.

Although the precise details have been deferred for two years, the concessions were enough for the US and the big emerging-market countries to claim that a serious shift in governance had been made.

How much difference this will make in practice is doubtful.

Most votes on the IMF board take place by consensus in any case: if the fund’s management thinks it is likely to lose a vote, it will simply not bring it to the board. The only real meaning that can be attached to the weights is the ability to block an attempt to gain the 85 per cent supermajority of votes required to pass certain decisions. And the US, which is actually under-represented in the IMF relative to its weight in the global economy, will retain the vote of about 17 per cent that in effect gives it a veto.

Indeed, it is hard to see just what difference the move will actually make to Fund policy. The IMF has already shifted considerably on some of the issues, such as the desirability of capital controls, for which it was criticised by emerging markets, and few could accuse it of failing to be generous in the amounts of money it doled out to crisis-hit countries over the past two years.

Yet there is no doubt that the shift is of highly symbolic importance. For years the IMF had a reputation – particularly in east Asia, where memories linger of the fund’s tough conditions attached to rescue lending during the financial crisis of 1997-1998 – of being a US-dominated institution that ignored or marginalised the views of emerging market and developing countries.

Having the board look a little more like the actual make-up of the global economy is at least an advance.

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