The IMF is about to embark on a new round of negotiations over governance reform, but acrimony persists and already-agreed changes remain unimplemented.
The IMF is due to agree a new formula (see Update 79) to guide voting rights at the institution by the end of January 2013 (see Update 81, 73). The main debates in the quota formula review are over the inclusion of factors that measure trade openness and volatility, as well as the balance between the market-exchange-rate valuation of GDP with the purchasing power parity (PPP) valuation of GDP. Developing countries prefer the PPP valuation.
Formula “fundamentally flawed”
The Fund board discussed the formula again at end September, but failed to come to an agreement. The summary of the discussion included statements like “different views were expressed” and “views continued to diverge”. The statement reaffirmed the January deadline and concluded that “completing the review by January 2013 will require constructive engagement and a spirit of flexibility and compromise from all sides.”
the formula is fundamentally flawed
There has been a tendency for the negotiations to take place at G20 finance ministers’ meetings, a body which has no representative structure and excludes most of the world. In the September meeting, the executive directors stressed that the Fund should be “the centre of the deliberations.”
As one of his last acts as the Indian representative on the IMF board, Arvind Virmani, wrote in mid October that “the emerging economies, particularly Brazil, India and Russia, have called for a fundamental reform of the IMF quota formula, arguing that the formula is fundamentally flawed.” He argued that a new formula could be considered fair if the proportion of rich countries considered under-represented is similar to proportion of developing countries considered under-represented. He showed that under the current formula only 30 per cent of developing countries are considered under-represented, but 76 per cent of advanced economies are, which would mean that using the current formula the majority of rich countries should have more, not less voting rights at the IMF.
However, the quota formula reform is only the first step in the process, as afterwards countries will negotiate the application of the formula to a quota increase at the IMF and thus a change in voting rights. That is scheduled to take another year, with the process concluding in January 2014. Implementation will take even longer.
Acrimony has also been stoked by the failure to implement the 2010 agreement on governance reform at the Fund. The deadline for implementation was set to be the 2012 annual meetings, but was missed because the US administration failed to get Congressional approval for the deal (see Update 82). As of end November the US Treasury had still failed to send the legislation to Congress and told US civil society organisations that it was “thinking hard” about when to do so.
IMF board reform “slow, small”
The 2010 deal had interlocking agreements for doubling the size of funds contributed to the IMF, shifting some voting weight and reforming the executive board. All executive directors were to be elected, rather than allowing the top five shareholders to unilaterally appoint directors. However, the regular bi-annual election, held in early November, had to proceed under the old rules because of the implementation delays.
Europeans had promised to give up two full seats on the board to emerging market and developing country representatives, but the vote saw the Europeans still hold onto eight chairs, including seven for European Union members and one for Switzerland, out of the 24 total. The main change was Belgium, which moved from chairing a constituency to sharing a chair with the Netherlands. This left its old constituency chaired by Austria, though it has promised to rotate with Turkey. Former US Treasury official Ted Truman, now with the US think tank the Peterson Institute, complained of the seat reshuffle being “slow, small and largely cosmetic”.
There are more radical ideas. An October proposal from Robert Wade of the London School of Economics and Jakob Vestergaard of the Danish Institute of International Studies argues for voting rights to be divided up almost evenly between four regions of the world: Asia, Africa, the Americas and Europe, with some of the votes distributed according to economic size within each region. Rather than focus on reducing European over-representation, they take a longer view: “The allocation by regions ensures that the Fund does not become dominated by countries from Asia as Asian countries’ GDPs rise into the top ten.”