August 2000

ASIA CALLS FOR MORE SAY IN FINANCE SYSTEM

A United Nations regional meeting on Financing for Development heard many Asian countries and experts calling for a reform to the international financial institutions, in which the developing countries have little say, due to the decision-making structure of these agencies.

The quota system, which determines voting rights in the International Monetary Fund and World Bank, should be reformed, said several delegations and panelists, to better reflect the interests of developing countries.

By Martin Khor

Third World Network Features

The global financial system is dominated by a few countries acting on behalf of private financial institutions, and its system of decision-making should be changed to allow developing countries their rightful say.

This was a clear message coming from several Asian countries as well as experts and non-governmental groups at an Asia-Pacific regional meeting held in Jakarta in early August.

Dissatisfaction with how developing countries have been marginalised in the process of decision-making and reform of the international financial system was evident in the meeting.

Countries making the call for reform included Malaysia, China, Indonesia, Pakistan, Korea and Japan.

The consultation meeting was co-organised by two United Nations agencies - ESCAP (the Economic and Social Commission for Asia and the Pacific) and UNCTAD (the UN Conference on Trade and Development) - to prepare the region for a UN high-level ‘event’ on Financing for Development to be held in 2001.

One of the panelists, Ariel Buira, said that the legitimacy of the international financial institutions (IFIs) has come into question.

‘We are aware that in these institutions there is a heavy concentration of power in a few countries, and this has to do with the system of quotas,’ said Buira, who is the Mexican Ambassador to Greece and a former Deputy Governor of Bank Mexico (the Central Bank).

Buira was referring to the distribution of voting rights among member states in the IMF and World Bank, which are weighted according to the ownership of equity of these institutions, where these shares are allocated according to a system of quotas.

A few major developed countries hold a majority of the shares allocated by the quota system and therefore are able to dominate the institutions’ decision-making process.

Buira added that an important question is how to develop a system of wider participation in the IFIs that takes into account members of the international community.

Another panelist, Aziz Ali Mohammed, Adviser to the Group of 24 (developing country members of the IMF and World Bank, based in Washington), said that one key issue on financial reform that is not on the table, but should be, is the distribution of voting power in the global financial system.

‘This distribution derives from a totally arbitrary formula designed to perpetuate the dominance of developed countries,’ he said.

He added that another important issue so far missing in the discussions is the internal governance of the IMF. He said that very few countries exert influence on the Executive Board and the staff. The proximity of the IMF to the US Treasury creates an undue influence, which should not be determined on the basis of geography, he added.

Malaysia’s delegation at the meeting was also vocal in voicing the need for developing countries to have more rights and a bigger say in international financial matters.

Tan Seng Sung,  a senior official of the Foreign Ministry,  said at the meeting that an adequate representation of  developing and emerging countries in international fora on financial reforms is important. ‘At present there is inadequate representation and participation by developing countries and the decision-making or discussion fora are highly lopsided and dominated by the developed countries,’ he said.

‘Reforms are therefore needed to the decision-making structures and processes in the IFIs. This will balance the current leanings towards free-market principles against issues facing emerging markets, taking into cognisance the need to accommodate the different interests and circumstances of individual countries that are at different stages of development.’

Dr Makarim Wibisono, Indonesia’s Permanent Representative to the UN and current President of ECOSOC (the UN’s Economic and Social Commission), also called for changes to the IMF and World Bank, their decision-making system and policies.

He said that with the advent of globalisation and unprecedented financial flows, the adequacy of these agencies to manage the world economy has become increasingly questioned. Despite the wake-up call of the Mexican crisis, the institutions had not responded by the time of the Asian crisis and it is ‘therefore urgent that we review the capabilities and modalities of these institutions to respond to financial crises induced by large capital movements.

‘We must be mindful that the decision-making structures of these institutions also need to be reviewed and made more inclusive and democratic.’

A representative from China said the Asian crisis had shown inherent weaknesses in the present financial system and there is now a widespread demand for reform and a need for the region’s participation in the reform process.

She noted that there are now many fora and agencies devoted to deliberations on reform and the rules and standards of the game are being formulated. ‘But the participation of developing countries is partial or even sometimes excluded,’ she said.

‘Developing countries are asked to follow the standards and rules, yet we are left out of the negotiations setting these rules. This is unacceptable to us as developing countries. This situation should be redressed. The full participation of developing countries is demanded.’

A delegate from Korea, referring to Buira’s presentation, agreed that the reform of the IFIs should be at the heart of international efforts to build a new international financial architecture.

‘The IFIs must operate according to the changing economic climate,’ he said, adding: ‘The quota system should be adjusted to reflect the demands of member countries. This will strengthen the accountability of the organisation.’

Ambassador Hideaki Kobayashi, Japan’s permanent representative to the UN in New York, and member of the preparatory committee bureau of the Financing for Development event, agreed with previous speakers that the allocation of quotas in the IFIs should be revised.

Taking his own country as an example, he said that Japan has a 6.8% quota in the IFIs, when it should be around 10%. In comparison, Japan’s quota for UN contributions is 20%, whilst its share of world GNP (gross national product) is 14%. ‘There is a big gap between these different quotas,’ he said. ‘There must be a thorough review and consideration of the allocation of quotas.’

He cautioned, however, that the rules of decision-making of the Bretton Woods institutions need to be fully respected once it is agreed upon and their jurisdiction should be respected.

Pakistan’s permanent representative to the UN in New York, Ambassador Shamshad Ahmad, said the participation of developing countries is important to redesign the international financial architecture so that it is geared to financing development.

‘But the voice of developing countries in the reform process is muted,’ he said. ‘Only a handful of developing countries are in the Group of 20. We want transparent and democratic forums.’

The meeting also discussed many other issues, including disruptions caused by excessive capital flows, and the need to better prevent and manage future crises. - Third World Network Features

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About the writer: Martin Khor is Director of the Third World Network.

2080/2000