IFI governance


Ungovernable debate over Fund governance reform

4 December 2007

With the wait for new leadership at the IMF over and the deadline for a deal on quota reform looming, the hard bargaining over power at the Fund will now begin. Still no end to European dominance of the institution is in site.

Dominique Strauss-Kahn took over as the managing director at the IMF on 1 November after keeping a low profile during the October annual meetings and letting his predecessor Rodrigo de Rato stay centre-stage. On Strauss-Kahn’s second day in office he started discussing his approach to governance reform: “the change in the quota question has to be significant, a shift has to be significant from the developed and rich countries to the low-income countries and emerging market countries, that is clear, but it is not enough, and so on my agenda we cannot stop.”

There was no clarity on how he would implement his campaign promise to use a system of double majority decision making for some decisions at the board (see Update 57). Fund executive directors assumed he planned to assess agreement based on the number of executive directors consenting to a decision, without any recognition of the number of countries in their constituencies. Strauss-Kahn’s November comments seem to confirm that suspicion: “I launched this idea … of having a practice of double majority on some questions, which means that … the management will have to take into account the number of chairs supporting an idea or fighting against a proposal.” The Bretton Woods Project issued a briefing in the just before Strauss-Kahn took office criticising this approach because it would allow industrialised countries to continue to dominate the agenda. The report indicated: “while the number of European chairs at the board will continue to need adjustment, for the purposes of immediately implementing a double majority decision-making system at the board, the only effective way to overcome the perceived domination of the board by Europe would be to institute a state-based second majority.”

the IMF includes the word monetary, the EU has one money, it should consolidate

The new chair of the International Monetary and Finance Committee (IMFC), Italian finance minister Tommaso Paddoa-Schioppa, may have angered his European colleagues by addressing an issue that has generally been kept out of the discussions over IMF governance so far: European dominance of the IMF board (see Update 52). In the press conference after the IMFC meeting, the IMFC is an advisory committee of finance ministers that is supposed to set the strategic direction of the IMF, the Italian declared that European countries should combine their representation on the board to make space for developing countries: “the IMF includes the word monetary, the EU has one money, it should consolidate.” Despite such high-level support, the topic did not find its way onto the agenda for the next meeting of European Union finance ministers in Brussels on 13 November.

Criticism had been heaped on Paddoa-Schioppa for aggressively campaigning for the post of IMFC chair immediately after fellow European Strauss-Kahn was selected to be the managing director. Perhaps to placate the critics, Paddoa-Schioppa circulated a proposal in November  to set up a clear system for rotating the IMFC chairmanship between global regions every three years, much as is done with other coveted international posts at the UN and WTO.

Wrangling over quota, transparency

On the quota reform issue, the hard bargaining is yet to come, as there is still a gulf between European and emerging market countries over every aspect of the decision. Comparing the communiqué of developing countries in the G24 group to the IMFC statement  of German finance minister Peer Steinbrück shows the disagreement over: all of the variables that will go into a new quota formula, the use of compression factors (which reduce the difference between the largest and smallest shareholders), the level of adjustment after the new formula is agreed, and whether future adjustments should be automatic.

The G24 group declared: “The new quota formula should include a GDP blend with a strong component measured in purchasing power parity terms, correct the measure of variability and increase its weight relative to openness to better reflect vulnerability. It should also correct the measure of openness for intra-currency union trade and incorporate a compression factor to redress the economic size bias. Ministers stressed the importance of implementing a regular process of quota reviews and actual adjustments independent of liquidity needs in order to reflect the rapid evolution of relative positions in the world economy. Ministers called for a sizeable second round quota increase so as to reduce the current overweight of advanced economies in the quota and voting structure.”

Meanwhile German finance minister Peer Steinbrück said this on behalf of the European Union: “While we agree that the weight given to GDP could be increased significantly, a sufficiently high weight for openness is critical too. There is no principled case for the calculation of GDP in the formula using anything other than market exchange rates. Once a new quota formula has been agreed, a second round of limited ad hoc quota increases should take place to adjust the quota share of under-represented countries, based on an equal treatment of all countries concerned. Taking into account the IMF liquidity situation, we consider that a limited increase would be adequate to allow for the envisaged quota adjustments.”

With limited progress on staffing allowances for executive directors from developing countries (see Update 56) and nothing yet on diversity of staff or the number of alternate executive directors, the items left on the governance reform agenda are transparency and accountability. The Fund had been scheduled for a transparency policy review in the first half of 2008, but it has been delayed to sometime in 2009 to lighten the workload for the executive board. That leaves in place the unsatisfactory arrangements guaranteeing board secrecy for potentially another two years.

Richard Calland of the Institute for Democracy in South Africa (IDASA) was unimpressed: “The IMF’s transparency is already abysmal when compared to the norm for freedom of information legislation in place in nearly 70 countries around the world. That they are willing to further delay addressing this issue only demonstrates how hollow their statements on good governance really are.” Calland and IDASA are members of the Global Transparency Initiative (GTI) which promotes a Transparency Charter for International Financial Institutions (see Update 53). The GTI produced a guide for civil society on transparency at the IMF, which explains some of the “serious deficits in the IMF’s transparency” but also describes how to access and use the information that the IMF does produce.

The Independent Evaluation Office (IEO) of the IMF has started its review of the Fund’s internal governance, which is likely to make recommendations on transparency and accountability, as well as the selection process for the managing director and a slew of other issues. The evaluation should be presented to the board around the time of the spring meetings in April 2008.