The IMF is a multilateral institution with global membership. Yet, the countries that choose its leadership do not make up a majority share of the global economy, or the world’s population. So why do they get to run the show? A “gentleman’s agreement”made when the Bretton Woods Institutions (BWIs) – the IMF and the World Bank – were established in 1944, grants an American the role of World Bank leader, and reserves IMF leadership for a European (see Background What is the ‘gentleman’s agreement’?).
The responses to the ongoing crises, particularly interest rate hikes in advanced economies that are harming the rest of the world, reinforce suspicion these countries are looking out for their own interests.
The power dynamics between countries’ formal and informal influence over other decisions at the IMF are similar. The US holds sufficient voting power to veto major decisions within the Fund, and along with other members of the G-7 and the European Union, has an overall voting majority. The voting power of countries is determined by their quota share, adding to it a number of “basic votes” evenly distributed amongst all members. Basic votes only make up 5.5 per cent of the total, with voting power closely tracking quota distributions (see Inside the Institutions IMF and World Bank decision-making and governance). Quotas are also used to determine the distributions of Special Drawing Rights (SDRs) allocations. These require an 85 percent majority, making them subject to a US veto. This results in the inequitable distribution of SDRs, which have largely gone to high-income countries to the disadvantage of those that urgently need additional non-debt resources to respond to the evolving crises (see Observer Autumn 2021, Spring 2021).
Countries at the receiving end of programmes that fail, or harm people have no means to hold the IMF accountableLara Merling, Global Development Policy Center
At the IMF, countries are represented by 24 executive director offices within which all 190 members are distributed. Eleven of these offices are controlled by one single country that holds a majority of the votes within that office. This distribution results in further dilution of the voices of middle- and low-income countries. Sub-Saharan African countries, by contrast, are represented by only two executive directors at the IMF.
Quota reform remains elusive, reflecting the IMF’s democratic deficit
IMF quotas, assigned to members when they join the IMF, are supposed to reflect their relative importance within the global economy and determine contributions to the Fund’s resources. IMF quotas are periodically reviewed but in the last 30 years, only two reviews resulted in a quota increase (see Observer Summer 2019, Winter 2018). The US holds enough votes to veto any quota-related reforms, and recent changes to the size and distributions of quotas have been accompanied by tweaks to the formula for calculating quotas, ensuring the US maintained its veto power (see Observer Winter 2019).
Claims that linking contributions to voting power is necessary to safeguard resources are questionable. To meet financing needs, the IMF turned to separate arrangements with specific countries, which does not grant them additional voting power. Furthermore, the IMF’s preferred creditor status within the international financial system means there is little reason for concern about non-payment from borrowers, as such a move has acutely negative impacts on their perceived creditworthiness.
Access limits and policies on IMF fees are still based strictly on quota shares. The IMF charges penalty fees – known as surcharges (see Inside the Institutions What are IMF surcharges?) – to countries that borrow above 187.5 per cent of their quota or with outstanding debt after 36 months, or 56 months in the case of credit under the Extended Fund Facility (see Observer Winter 2022). The IMF defends this practice as a way to discourage excessive use of resources by a small number of countries. However, with quotas not increasing to match needs, it is almost the norm for loans to exceed that threshold: As of July 2022, 12 out of 16 active loans exceeded 187.5 per cent of each borrower’s quota. This situation is likely to worsen, as the global economic outlook darkens.
The IMF’s own metrics and evaluations concede that few of its programmes succeed on their own terms, and in most cases, programme countries fail to meet the IMF’s growth projections (see Observer Autumn 2022). The austerity measures imposed by the IMF are linked to worse outcomes on poverty and inequality (see Observer Summer 2022). Yet, the countries at the receiving end of programmes that fail, or harm, people have no means to hold the IMF accountable (see Observer Summer 2022). Over the last 20 years, of a total of 275 completed IMF programmes, only 7 were in advanced economies, and 117 were in Sub-Saharan Africa, a region that only holds 3.5 per cent of voting shares.
As the IMF takes on the issue of climate change, it means that advanced economies, historically large emitters, will guide and decide the IMF’s approach. Vulnerable countries are overwhelmingly middle- and low-income countries with little responsibility for causing climate change (see Observer Autumn 2022, Autumn 2020). These countries are barely represented at the IMF, with members of the Climate Vulnerable Forum controlling only about 5 per cent of votes, despite being home to over 1.4 billion people, and will have no say in shaping the IMF’s policy.
For the US and its peers to live up to their commitments on supporting multilateralism and a “rules-based” order, they need to support reforms of the IMF’s governance structure that would allow all countries to have a voice in how the rules are made. Only an IMF that is responsive to the needs of all members and not just creditor countries, as well as accountable when it fails, can maintain its legitimacy. The ongoing review of IMF quotas, to be concluded at the end of 2023, is the perfect opportunity to deliver on these needed reforms.
Lara Merling is a Senior Policy Advisor at the Boston University Center for Global Development Policy where she works with the Global Economic Governance Initiative and the Task Force on Climate, Development and the International Monetary Fund to advance a development-centered and inclusive policy framework at international financial institutions.
Access the full working paper No Voice for the Vulnerable: Climate Change and the Need for Quota Reform at the IMF here.