While IMF members continue to debate a decision on increasing basic votes and reforming the quota formula, questions are being raised about the approach of IMF management and major shareholders.
IMF members committed in Singapore in September 2006 to try to reach a deal on the increase in ‘basic votes’, the votes every country gets just for being a member of the IMF, by the annual meetings 2007 (see Update 53). However, inside sources indicated that countries are unwilling to commit to a specified increase in the basic votes without knowing the outcome of the deliberations on changing the quota formula, which guides the determination of a country’s voting rights in the IMF. The quota reform proposals being pushed by management have so far prompted salvos from the dean of the IMF board, academics and civil society.
voting rights should be determined "exclusively on democratic principles"
One of the most powerful critiques has come from Iranian Abbas Mirakhor, the longest-serving IMF executive director, whose working paper written with Iqbal Zaidi argues that any approach to reforming quotas should be judged on whether it is ‘just’. They feel that “the discussion is being confined to an unduly narrow area, and important issues are not being raised.” In particular they fault IMF management and staff’s repeated insistence that there is agreement to limit the new formula to three or four of the existing variables used in quota formulas and accuse them of making “an even bigger mistake by pushing the discussion toward an inexorable and mistaken conclusion of sticking close to the flawed formulas.”
Mirakhor and Zaidi go on to propose a host of new factors for consideration in a reformed quota formula, including population, number of past-IMF supported programmes, credit ratings, capital flows as a portion of gross domestic product (GDP), sovereign bond spreads, and the ratio of reserves to a range of economic variables. They believe these new factors combined with the traditional demands of the G24 countries – for GDP to be weighted by purchasing power parity, intra-currency zone trade to be excluded from the calculations, and variability of current account payments to be measured relative to GDP – would bring the quota formula closer to the notion of justice.
Consideration for using population in the calculation of IMF voting rights was a centrepiece of the paper presented to the G24 technical meeting by David Woodward of the UK think tank the new economics foundation. Woodward argues “that the standards applied should be those commonly accepted in democratic processes at the country level” and concludes that voting rights should be determined “exclusively on democratic (ie one-country-one vote and/or population-related) principles, in such a way that votes increase less than proportionally with population.”
A common theme for both papers is that the quotas play too many roles and that the formula for voting rights should be delinked from rules about access to Fund resources and contributions to the Fund’s pool of reserves. Mirakhor and Zaidi argue that “The quota formulas are overburdened by the multiple role of quotas, and there is no need to have a rigid relation between financial contribution, access to Fund resources, voting power, and share of SDR general allocations.” Special Drawing Rights, or SDRs, are a unit of currency created and distributed by the IMF.
Civil society and academic voices have also sought solutions that circumvent the divisive debate over quota formulas and the appropriate variables. Peter Chowla, Jeffrey Oatham and Claire Wren, of the UK NGOs the Bretton Woods Project and the One World Trust, have proposed the implementation of a double-majority system of decision making. Their proposal would require “the achievement of two separate majorities – one based on one-country one-vote and the other on economically weighted quotas – for any decision to be made.” This approach has been endorsed by a number of academic voices, including former World Bank research head Joseph Stiglitz, because it works to bring consensual decision-making back into the Fund’s operations.
Refusal to move on
Despite these more innovative approaches to resolving the deficit of legitimacy at the IMF, others have continued to push solutions that are likely to further disempower low-income countries. A policy brief by Richard Cooper of Harvard University and Edwin Truman of the Peterson Institute for International Economics has rehashed the conclusions of the 2003 report of the Quota Formula Review Group (QFRG), itself chaired by Cooper. Its main recommendation is that the quota formula should include only GDP and the variability of current receipts.
However, the Cooper/Truman approach would actually shift votes toward industrial countries, worsening the IMF crisis of legitimacy. To solve this, Cooper and Truman suggest that industrialised countries “should agree to a target of limiting (over time) their quota shares to 60 percent of their GDP shares. Criteria would have to be developed for future graduation into this category.” Not only would this be difficult to negotiate and implement, it would still see the bulk of the voting weight shifted to the fastest growing emerging market countries. African countries, currently the largest block of users of Fund resources and the most effected by Fund policy, would actually see their shares drop.
Despite the rhetoric on increasing, not just holding steady, the vote share of developing countries, major shareholders in the US and EU have so far favoured the Cooper approach. While they have haggled over the exact variables, their preferences have been pushing the Fund’s management and staff to formulate the proposals in just the way that Mirakhor and Zaidi criticise.
Much of the negotiations on the governance reforms have been pushed to the G20, a more informal grouping of the largest economies in the world. It includes the G7 advanced economies as well as large emerging markets such as Brazil, China, India, South Africa and Turkey. According to inside sources, the latest negotiating session at a G20 technical meeting in Brazil seems to be bringing the group to the conclusion that there must be a compromise quota formula that includes both GDP measured at market exchange rates and GDP measured at purchasing power parities.
A compromise formula that encompasses both measures of GDP as well as other factors may be the mostly likely outcome. Several variations of such a formula were presented by Ralph Bryant of the Washington-based think tank Brookings Institution to both the G20 deputies meeting and the IMF executive board in March. Despite his conclusions, consensus among the key member states has yet to be achieved because of entrenched positions of the negotiating parties. While further negotiations are expected at the IMFC deputies meeting in London at the beginning of April, it is unlikely that they will produce a consensus sufficient to see the basic votes issue decided by the spring meetings.
Grand bargain needed
All the fuss on how to structure a quota formula has obscured some of the other issues plaguing the governance of the IMF. Johannes Linn and Colin Bradford, also of the Brookings Institution, have argued in a new book that reforms to the vote holding structure of the Fund need to be part of “a grand bargain” that includes eliminating any countries from holding vetoes at the Fund, reforms of the executive board, and opening up the leadership selection processes for the Fund and the World Bank.
A high-level panel on reform of the IMF board has argued that even those steps would not be enough to meet contemporary standards of accountability for international organisations. The panel – composed of ex-IMF board members, former Fund staff, academics, and civil society representatives – has recommended that the IMF’s executive board transform its processes and IMF policy to improve evaluation, participation and transparency. Notably, it called for publication of board meeting transcripts, Fund operational guidance notes to staff and draft versions of any policy papers before they go to the board. It also insisted on better lines of accountability and evaluation so that the executive board and management are more accountable to both shareholders and stakeholders such as parliaments and civil society.
This has echoed long-standing calls from civil society for comprehensive reform covering not only voting rights but also transparency, participation, leadership selection and board structure at both the Bank and Fund. With the US and European countries continuing to resist moves for a real democratisation of the structure of the institution, the Fund risks continuing down the road to irrelevance.