IFI governance


Bank voting remains unbalanced

Rich countries retain almost 60% voting power

16 April 2010

Small shifts in voting power at the World Bank are expected to be formally agreed at April’s spring meetings, leaving high-income countries holding almost 60 per cent of the vote, with further reform put off until 2015. Meanwhile the Bank is expected to receive a smaller capital increase than it sought, which could push lending back to pre-crisis levels.

The World Bank’s spring meetings are expected to ratify a shift of voting share from developed countries to “developing and transition countries” of around 3 per cent. This will implement last September’s G20 agreement (see related article). Bank claims that this would give developing countries around 47 per cent of the vote are not true, an analysis of the figures reveals.

The Bank has employed a slippery way of classifying countries to reach its figure. For IBRD, the Bank’s middle-income country lending arm, the Bank has slipped 16 countries into the “developing and transition country” group which do not belong there by using the classification in the IMF’s World Economic Outlook. These 16 countries, which include Saudi Arabia, Hungary and Kuwait, are all classified by the Bank as high-income economies and together hold over 5 per cent of the vote. This means developing countries will in fact end up with around 42 per cent of the vote.

employed a slippery way of classifying countries to reach its figure

At IDA, the Bank’s low-income country lending arm, the Bank came up with another way of fiddling the figures. By using its own IDA classifications, a number of high-income countries are included in the developing country category, including OECD members such as the Czech Republic and South Korea, as well as Israel and Saudi Arabia. These high-income countries hold around seven per cent of IDA votes, meaning the real IDA developing country voting share will also be in the low 40 per cent range.

This outcome leaves rich countries with close to 60 per cent of the vote, a long way short of the parity the G24 group of developing countries had demanded, and which the G20 agreed to work towards (see Update 62). High income countries also hold 14 out of 24 seats on the Bank’s executive board. Bank claims that developing countries hold a majority of the seats are based on including Saudi Arabia and Kuwait as developing countries and adding an additional seat for African countries, which was agreed in 2008 but has still not been added.

Discussions on a new formula to determine future voting reform have also been inconclusive. Current proposals emphasise economic weight and donations to IDA, both factors that favour rich countries. The G24 and NGOs had argued that population, and the contribution of developing countries to the Bank should be strongly reflected in the new formula, but in the end realpolitik prevailed. IBRD is entirely funded by loan repayments from developing countries, as is a significant portion of IDA. Overall, these piecemeal changes have ignored the more comprehensive approach advocated by the Zedillo commission (see Update 68). Voting reform at the International Finance Corporation (IFC), the Bank’s private sector lending arm, where the developing country vote share is even smaller, is yet to be agreed.

The difficulty in getting rich countries to budge on governance issues was highlighted in a March report by a US Senate committee. The US is the largest shareholder, with an effective veto over any changes to the Bank’s governance. The committee called on the Obama administration to maintain “United States voting shares and veto rights at the international financial institutions” and questioned existing reforms to the selection of the World Bank president (see Update 68), by demanding preservation of “United States leadership of the World Bank and senior level positions at the other IFIs.”

Roberto Bissio of NGO Social Watch said: “Once again grand rhetoric has masked tiny change. The Bank remains miles away from being a truly representative and accountable institution.”

Capital increase

In autumn last year, a paper for G20 finance ministers suggested the Bank would substantially increase its total lending, from a pre-crisis level of around $15 billion per year to as high as $100 billion (see Update 66). This would have required shareholders to put their hands in their pockets for a large boost to the capital the Bank holds as insurance against its loans. The idea, however, was rebuffed at the time, largely by developed country shareholders (see Update 68).

At the spring meetings, negotiations are expected to agree a more modest increase of around $60 billion for the IBRD, about a third of existing capital, which could force the Bank to return to pre-crisis levels of lending. Given the massive increase in the Bank’s lending in response to the crisis, with commitments in the 2009 financial year reaching a record $60 billion the Bank had over-extended its capital base, and would have had to significantly scale back lending in future years without this capital increase. The IBRD’s trebling of commitments accounted for the lion’s share of last year’s increased Bank lending, but this is now likely to subside to pre-crisis levels.

Offers by middle-income countries to pay for the majority of the capital increase in return for increased votes were snubbed. Instead, almost all of the cash will come in the form of a general capital increase, meaning that all countries will contribute in proportion to their voting shares. This will be the first general capital increase since 1988. Of the estimated $60 billion increase, only $3.5 billion – around 6 per cent – will be paid into the Bank’s coffers, with the remainder being made available to the Bank by member countries should the Bank need it. This capital is then used to guarantee borrowing on the capital markets, which the Bank then lends on to its clients.

The IFC also asked for an increase, but this is expected to be rebuffed, in part due to US opposition. The Bank’s new strategy paper (see Update 70) says that “the IFC will engage the board over the next several months on its financial capacity and on options for capital instruments.”

In a March paper, US NGO Bank Information Center (BIC) argued that significant reforms should be a precondition for any capital increase. In addition to “a narrow agenda for governance reforms” and concerns about the Bank’s energy and climate policies, “an increasing reliance on instruments that have no safeguards, little attention to strengthening evaluation accountability and an uninspiring results matrix highlight.” The paper also questioned the Bank’s distribution of funds, noting that “60 per cent of the Bank’s overall outstanding loans are in only eight of the Bank’s 135 borrowing countries” and called for “a transparent and meaningful public discussion prior to any capital increase decision.” It highlights the fact that the Bank has a very high capital to lending ratio, currently in excess of 30 per cent meaning that the Bank could cover its expanded lending without more capital if it were to lower this high ratio.

Vijaya Ramachandran, a former World Bank economist and now a senior fellow at the Washington-based Center for Global Development said “I would like to see the World Bank spend more attention trying to make its lending more effective, better managed.” Instead, the debate has largely taken place behind closed doors, with papers detailing the final proposal only released days before the spring meetings. This is in contrast to the Inter-American Development Bank which had a three month consultation process as part of its capital increase negotiations.