IFI governance


IMF governance renovations: fresh paint while foundations rot

1 April 2008

The shareholders of the IMF have squandered the political will for governance reform of the institution by making marginal changes that will fail to shift the balance of power.

The Fund’s members have been debating how to revamp the formula that sets voting rights at the institution for more than two years (see Update 58, 55). Much of the rancour has been directed at Europe, which has been the obstacle to quicker progress. A deal was finally approved by the IMF board at end March and sent to the IMF board of governors for approval. The total increase for developing countries is only 1.6 percentage points, meaning that rich countries, representing about 15 per cent of the membership of the IMF, will continue to wield nearly 60 per cent of the voting rights at the institution.

The final quota formula included the use of GDP measured at purchasing power parity (PPP), a key demand of developing countries, as part of the increase of the weight of GDP in the formula to 50 per cent. But PPP-weighted GDP will only make up 40 per cent of the new GDP measure, with the balance continuing to use GDP weighted by market exchange rates. Additionally the use of PPP in the formula has only been approved for 20 years, after which it must be reassessed.

'nothing' is a better gamble than an inadequate 'something'

The new formula continues to give a 30 per cent weight to trade openness, which the G24 group of developing countries has repeatedly called flawed because it is highly correlated with GDP and it tends to favour small rich countries with lots of trade. The balance of the formula is made up of 15 per cent variability and 5 per cent international reserves. The variability factor, which measures the volatility of trade and investment flows, has also been highly criticised by the G24 because it is not scaled by the size of the economy. A small compression factor of 0.95 has been introduced as a mechanism to shrink the dispersion in calculated quotas, as it will slightly increase the quotas of the smallest countries and slightly shrink the quotas of the largest.

The total size of quotas will be increased by about 9.5 per cent in this round of share increases, with only the new shares being distributed along the lines of the new formula and several mechanisms being used to determine which countries are eligible for more shares. This increase brings the total increase in quota for the reform process to 11.5 per cent, as some increases were handed out to Korea, China, Turkey and Mexico in late 2006 (see Update 53).

However, if the entire quota were adjusted to the new formula automatically, it would actually shift voting weight to rich countries at the expense of middle- and low-income ones, a problem identified as early as 2006 (see Update 53). The new formula gives advanced economies over 67 per cent of the quotas. To achieve the committed goal of increasing the voting weight of developing countries, several additional one-off measures had to be taken to adjust the outcome.

Fiddling with basic votes

Basic votes, which are given in a set amount to every member of the IMF, are set to treble from 250 to 750 votes and henceforth be indexed to the overall level of quota. However, though basic votes are set at 2.1 per cent of the total now, they will only go up to 5.5 per cent of the total after the deal, as the quota increase has further diluted the strength of basic votes. The 5.5 per cent level for basic votes is still far below their original level at the founding of the IMF of close to 12 per cent or their highest level of almost 16 per cent. The compromise actually runs against the spirit of the Singapore resolution, made at the 2006 annual meetings in Singapore, which had promised that basic votes and other issues of importance to low-income countries would be dealt with first before any further quota increases (see Update 53). That the share of basic votes will get indexed at 5.5 per cent instead of the promised 6.3 per cent is testament to how the major shareholders of Fund continue to marginalise the voice of low-income members.

The US has agreed to forego any increases in its voting share. It was joined in this promise by Germany and Italy. The IMF press release indicates that Japan, Ireland and Luxembourg also agreed to forego part of their increase, but in reality their voting shares will still go up. The US first promised in 2006 to keep its quota at the same percentage of the total before any changes were made, what is called the pre-Singapore level. In the final bargaining Washington-based official sources tell the Bretton Woods Project that they accepted remaining at their slightly lower current quota share, called the post-Singapore level, but that in return they expected all the other countries on the board to not publicly complain about the final compromise. This attempt to silence the losers from the deal seems to have worked as there has been little official negative reaction despite the marginal nature of the change.

One of the few officials willing to comment was the director of the South Centre, a Geneva-based intergovernmental think tank for developing countries, Yash Tandon. He said that the proposed changes "while positive in recognizing the need for such changes, do not however go far enough to remedy the governance imbalance in the IMF. What is being proposed is too little and preserves developed country control over the IMF. To be genuinely about sharing governance power in terms of votes, the increase should be much more substantial. Genuine IMF governance reform will not occur simply through marginal increases of voting rights. The real issue is how developing countries can have a stronger ‘voice’ in IMF governance and actually shaping how the institution is run. This means that other aspects of IMF governance must also be dealt with, for example enhancing developing country collective action and voice in the IMF by making the constituency system more representative and strengthening the multilateral and developing country institutions that support them."

The Indian executive director at the IMF, Adarsh Kishore, was willing to talk to the news agency Reuters, which reported his comments just before the deal was agreed: “We’re not happy about the proposal because it falls short of what we had expected, hoped for and we had strived for. We had two choices: some forward movement; the other is no movement at all. It has to be seen against a very real threat that unless we have real movement now, then we are in a real danger of eroding whatever is left of our legitimacy, obviously it is not entirely satisfactory, obviously we are not gung-ho about it, but we do see some forward movement".

Ralph Bryant, a scholar at the Washington-based Brookings Institution, called the compromise pallid and inadequate:  “The image to have in mind is that of a decades-old building in need of major repairs and renovation.  The plumbing is ancient and badly needs updating.  The roof is leaking in places. Termites have been found in the support joists in the basement.  What steps are being recommended to renovate the building?  What is on offer is, essentially, a fresh coat of paint in the entrance hallway and the fixing of some broken glass panes in the windows facing the street.”

Bryant was one of a number of well-known US-based academics that wrote to the IMF board in advance of the final vote, urging them to reject the deal. The letter – also signed by Nancy Birdsall of the Center for Global Development; Colin Bradford, Homi Karas, Johannes Linn of the Brookings Institution; Ted Truman and John Williamson of the Peterson Institute for International Economics; and Jo Marie Griesgraber of the New Rules for Global Finance Coalition – said “the proposed reforms fall far short in addressing the challenges facing the IMF in its evolution toward a truly global institution with more balanced and inclusive representation and voting power.”

Truman, a former US Treasury official and fellow at Washington think tank the Peterson Institute, again laid the blame at Europe’s door in a speech to policy makers in Latin America: “Today, many European authorities appear to favour closing down the IMF as a meaningful international lending institution and most favour blocking meaningful reform of the Fund’s governance structure.  If they succeed it will be to the detriment of the international financial system and of regions such as Latin America that see a positive role for the Fund and seek an enhanced voice in the institution.”

The board of governors still must agree to the deal, which is expected to happen by end-April. And because it alters the IMF’s Articles of Agreement it must also be ratified by legislatures in some member states, like the US. This leaves a chance that the deal could be rejected.

Observers have been surprised that the deal is going through at all. News reports in mid March indicated opposition from some emerging markets who stand to lose out on the deal, notably IMF board chairs from Russia, Iran, Egypt, Indonesia and Kenya. But even they concede that the reforms will likely go ahead despite the opposition. In the final vote on 28 March, the Russian, Saudi Arabian, and Iranian-led constituencies all opposed the deal while the Egyptian and Argentinian executive directors abstained from the vote because of differences within their constituencies.

It seems that most developing countries think this is the best deal that they could get at this time so have resigned themselves to the minor changes.  Bryant would prefer that the developing countries showed a bit more vocal opposition, saying in a G24 technical paper: “For the short run, ‘nothing’ is a better gamble than an inadequate ‘something’.”

Board reform still off the table

Part of the problem is that the quota reform is being discussed in isolation from other elements of governance reform. While European government may not like it, their dominance of the board is becoming a hot political issue. But officially the quota reform was agreed without any compromise on the issue of board representation.

In a February speech in Washington, US Treasury under secretary for international affairs David  McCormick fired a shot across the bow of the Europeans: “The executive board is simply too large, too inefficient, too costly, and too unrepresentative of the world in which we live. … For this reason, we call on other nations to work with us to reduce the number of chairs in the IMF board from 24 to 22 seats in 2010, and to 20 seats in 2012. In doing so, the number of developing and emerging market country chairs should be preserved. To allow for greater voice of emerging markets and low-income countries, we also advocate an amendment to the Articles so that all executive board members are ‘elected,’ abolishing the current practice of ‘appointed seats’ for the five largest shareholders.”

Without mentioning Europe, McCormick targeted the continent as being the obstacle to reform. The proposal to end appointed chairs is aimed at facilitating the consolidation of representation for the three European countries with such seats: the UK, France and Germany. Truman likewise concluded: “everyone knows what needs to be done to break this logjam: dramatic consolidation of European representation.” These American voices are not alone, as civil society organisations across Europe have been pressing this point both in their capitals and with European Union institutions in Brussels.

The European Parliament concurred in 2006 (see Update 50) and now the EU commissioner for economic and monetary affairs Joaquin Almunia, the closest the EU has to a finance minister for the 27 EU member states, gave a speech in January recognising the need for faster movement. “Achieving a single euro area chair in international fora has so far been considered an objective for the longer term. But the world is moving faster and we need to reconsider our timetable. The first step is to work for greater coordination and dialogue within the Eurogroup and between institutions in order to better form common positions on external issues, but we cannot avoid pressing member states to move forward on this issue. I will come in the spring with more specific proposals on all of these areas when I present the report on ten years of the European Monetary Unit for the anniversary in May.” But Almunia’s timetable for actual change, measured in years not months, is too timid for many observers.

Truman speculated on why Europeans have been so reticent to embrace reform: “First, the larger countries in Europe, which want to preserve their relative positions in the IMF pecking order, are in an unholy alliance with the smaller countries in Europe, which want to preserve the careers of their nationals on the executive board.  Second, and more serious, is a lack of appreciation of the urgency of the issue.”

A few other governance issues have yet to be sorted out. African executive directors were promised more than one alternate director, thereby increasing the capacity of their offices to handle large work loads. But the IMF’s budget freeze means this will likely be offset by fewer advisor posts in the African EDs’ offices. Tommaso Paddoa-Schioppa, the former Italian finance minister, recently resigned from the post of chair of the International Monetary and Finance Committee (IMFC), in the wake of his government’s collapse in Italy. This may give impetus for the IMFC, an advisory committee of finance ministers that is supposed to set the strategic direction of the IMF, to finally be chaired by a developing country (see Update 58). However, despite the resignation Padoa-Schioppa will still chair the IMFC meeting in April and no announcements have been made about finding a successor.

Finally the delay of a review of the Fund’s transparency policy has rankled civil society . Since IMF managing director Dominique Strauss-Kahn took over in November he launched five internal working groups and ten internal task forces (see Update 59), but has given no indication that they will consult with external stakeholders or even publish their final reports publicly. This has prompted a group of 17 organisations from 10 countries to write to Strauss-Kahn to complain of being shut out of the process of Fund reform.