IFI governance


US deadlock stalls IMF governance reform

8 April 2013

The IMF governance debate goes beyond the mathematics of voting shares and representation, bringing to the fore critical questions about the Fund’s legitimacy.

The implementation of the IMF’s 2010 agreement on quota and governance reforms, due to finish in October 2012 (see Update 73), has suffered a further setback with the refusal of both houses of the US legislature to sign off their government’s request to reallocate an existing $65 billion of the US loan to the IMF (see Update 65) into a permanent increase in shareholding. Although the March request did not commit the US to an increase in funding, it coincided with politically sensitive negotiations over spending cuts. US congressional approval is needed for the 2010 agreement to come into force.

The IMF quota and governance reform proposed, amongst other things, a doubling of IMF quotas, a shift in quotas to emerging markets and under-represented countries and reform of the executive board. The measures, predicated on increasing the representation of fast-growing but underrepresented middle-income countries at the Fund, have been shown by the IMF’s own economic projections to be overdue. Min Zhu, deputy managing director of the IMF, said during a mid March speech that 2013 is expected to be the year when economic output from developing nations exceeds that of the traditional industrialised countries.

systematically biased against emerging markets and developing countries

The 2013 UN Human Development Report, published days later stressed that “the rise of the South is unprecedented in its speed and scale” with over 40 developing countries making higher than predicted development gains. The report saw “scope for renewed multilateralism” but that “there have been only modest governance reforms at the IMF and World Bank.”

Not when, but how

As the January deadline for revisions to the quota formula (see Update 84) passed without agreement, the process was incorporated into the schedule for the IMF quota review. Although the deadline for this review is January 2014, as these negotiations happen at the inter-governmental level, policy makers are likely to near a decision at the IMF annual meetings in October.

In early February, Russian President Vladimir Putin stated at a finance ministers meeting in Moscow his belief that “at the upcoming Russian summit, the G20 will be able to agree proposals for a new formula for calculating quotas that will take full account of the modern distribution of forces in the global economy.” The declaration of the fifth summit of Brazil, Russia, India, China and South Africa, released end March, asked that “the reform of the IMF should strengthen the voice and representation of the poorest members of the IMF, including Sub-Saharan Africa.” The European Commission position, as given at the October 2012 annual meeting of the Bank and Fund in Tokyo, argues that “GDP and openness should remain the main variables in the quota formula” and that openness should carry an increased weight. Whilst the BRICS and low-income countries would welcome a more equitable adjustment, the US and EU are unlikely to want to forego their influence maintained by their current shares in this zero-sum game of reallocation.

A February paper by the G-24, a developing country grouping at the IFIs, makes clear the democratic deficit inherent in the current quota formula. It argues that the formula is “systematically biased against emerging markets and developing countries”, mistakenly characterising them as “over-represented” whilst at the same time making “the quota for advanced Europe as a group a third larger than its relative weight in the global economy.” Amar Bhattacharya, of the G-24, said that “achieving a more equitable and democratic governance structure is a prerequisite for the legitimacy of the Fund; and its capacity to fulfill its mandate effectively. The governance structure must recognise the growing role of emerging markets and developing countries in the global economy, and ensure that all members including the poorest have an equitable stake in the institution.”

IEO: Advanced economies “indifferent” to IMF advice

In mid February the Independent Evaluation Office (IEO) of the Fund released a report on the Role of the IMF as a trusted advisor, which focused on the assessment of Fund advice to its members. It followed a late December evaluation which found perceptions that the Fund is unduly influenced by the US and against China in the formulation of its reserve policy (see Update 84). The new report found that “the degree to which the Fund is viewed as a trusted advisor is found to differ by region and country type, with authorities in Asia, Latin America, and large emerging markets the most sceptical, and those in large advanced countries the most indifferent.”