After months of official wrangling and European stalling, proposals for changing IMF quotas, which determine financial contributions and voting power in the organisation, have coalesced around a small ad hoc increase for four countries, a commitment to make the quota formula more closely match economic realities and an increase in the basic vote.
Developed by the managing director, Rodrigo de Rato after a jet-set summer visiting capitals across the globe, the resolution was passed by the executive board end August. It will now be sent to the board of governors, the IMF highest governing body made up of finance ministers and central bank governors, where it will have to be agreed by an 85 per cent majority before 18 September.
safeguard the interests of Africa in the quota review process
The resolution includes an immediate ad hoc quota increase for China, South Korea, Turkey and Mexico, but that increase would be limited to one-third of the gap between their current quotas and their calculated quota. This is accompanied by a commitment to review the quota formula over the next two years.
In order to prevent the quota change from adversely impacting the voting shares of low-income countries, the resolution includes provisions for at least a doubling of “basic votes”, the votes allocated to every country just for being a member. This seemed to satisfy the demands that emerged from the Africa Caucus of finance ministers who met in Mozambique at the beginning of August. Their communiqué stated that increasing basic votes “is the remaining alternative to safeguard the interests of Africa in the quota review process.”
A leaked 28 August memo from the three African Executive directors on the IMF board revealed their anger that in a draft resolution the basic vote increase would have had to await two rounds of ad hoc quota increases and an amendment to the quota formula. In the interval the African countries would have seen their meagre voice at the Fund further eroded. They initially called on their finance ministers to reject the draft resolution and looked to European countries to support their position. However, it appears they were placated by a last-minute amendment to the resolution which ensures that a second round of ad hoc quota increases will have to await resolution of the basic votes issue.
However, the increase in basic votes would not alter the balance of power at the Fund, nor change the relative strength of any of the constituencies. A September 2005 board paper, prepared by the Fund’s finance department, indicated that an increase in basic votes “may not itself be sufficient to address broader concerns about the relative voting power of groups or members.” The paper notes that even an increase of basic votes to 10 per cent of the total (the current discussions vary between 4.2 and 6.3 per cent) would still give advanced economies 56.8 per cent of the vote, only marginally less than the 60.6 per cent they currently hold.
Ranjit Bannerji, a senior advisor to the Indian delegation at the IMF, was sceptical: “in any new formula where GDP carries a preponderant weight, the Europeans lose out hugely.” Additionally, the increase in basic votes would not take place immediately as it would require an amendment to the IMF’s articles of agreement, a long process that involves approval by national legislatures. The US Congress is notoriously reticent to agree to IMF quota increases.
Daniel Bradlow, a professor at American University, was also doubtful about the utility of any basic vote increase.”The increase will only have a limited impact on the voice of the low income countries, particularly those from Africa, in the IMF.” Ngaire Woods of Oxford University agreed. Increasing the basic vote “would not achieve the goal of ensuring wider participation and coalition-building across the institution.”
Bannerji concurred with these assessments, preferring the G24 proposals which suggest changes in how quotas are calculated. “The Africans would gain far more if a new quota formula is based on GDP at [purchasing power parity] terms and variability (including the variability of flows on account of fluctuating commodity prices) is adopted. But… the Europeans will have none of it.” It is believed that India was joined by the constituencies led by Brazil and Argentina in refusing to support the resolution.
An alliance of more than 40 European civil society organisations has proposed more radical governance reforms than those being discussed in official circles. Their open statement calls for restructuring to bring the institution’s governance in line with standards that are considered acceptable at the national level. As an interim step towards achieving that long-term goal they have supported an immediate shift to a double majority voting system, under which any decision would have to be supported by a majority of member countries and a majority of the voting weight. In addition, they demanded an end to the convention of the IMF’s top job always going to a European and full transparency, including publication of board meeting transcripts and votes.
Despite this statement, European governments have not yet come forward with their own proposals for governance reform. A council of European Union finance ministers discussed the topic at an informal seminar in Helsinki on 9 September and indicated their support for the two-stage process of reforms but cautioned that EU members should be treatly equally with all other countries.
Shrink it or sink it
As governments continue to try to opt out of the IMF – Uruguay has joined Indonesia (See Update 51) in announcing its intention to pay off the entirety of its IMF debt early – the Fund is looking increasingly marginalised. Some civil society organisations are trying to capitalise on this weakness to force change at the Fund. A large coalition of NGOs have come together under the banner of “Shrink it or sink it” with a declaration that recognizes, “these circumstances provide critics of the Fund with an opportunity to radically shrink, disempower, if not decommission it altogether.”
The campaign, spearheaded by Bangkok-based Focus on the Global South but with participation from more than 50 organisations across the globe, urges developing country governments “not to enter into new loan agreements with the Fund”, “unilaterally repudiate debts claimed by the Fund”, and “to dispense with the advisory and management services of the Fund and Bank and review the commitments they have made under these programs, if not abandon them unilaterally.”
Once burned, twice shy
Asian countries have mounted massive foreign reserves to avoid risking a return to the Fund for a bailout. Through the Chiang Mai Initiative, a smaller scale version of the idea for an Asian Monetary Fund, Asian countries have now agreed to some limited reserve pooling. This trend is now moving to Latin America as well. Inspired by Venezuela’s president, Hugo Chavez, the ‘Bond of the South’, to be jointly issued by Argentina and Venezuela, is the latest in moves towards regionalisation of country insurance against economic shocks. Argentina’s president, Nestor Kirchner, called the bond the first step “in the construction of a bank, a financial space in the south that will permit us to generate lines of finance”. Eventually this may be a mechanism to cope with potential financial crises without involving the IMF.