Reform the IMF quota and decision-making system

A new international financial architecture must address the issue of adequate representation for developing countries in the key decision-making processes of the international financial institutions. The reform of the IMF and the World Bank to better reflect the interests of the countries of the South was one of the themes taken up by delegates and panelists at the UN regional meeting on Financing for Development in Jakarta.

by Martin Khor

THE need to reform the decision-making system in the international financial institutions and enhance the participation of developing countries was one of the key themes of several delegations and panellists on 3 August at the regional meeting on Financing for Development.

The quota system in the IMF and World Bank should be reformed to better reflect the interests of developing countries, said several delegations and panellists.

Dissatisfaction with how developing countries have been marginalised in the reform process and in the decision-making processes of the international financial system was evident at the meeting.  Redressing this situation became a major point of the Jakarta meeting.

At a session on 3 August morning on the reform of the international financial architecture (IFA), one of the panellists, 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, a former Deputy Governor of Bank Mexico and currently the Mexican Ambassador to Greece.

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 shares in the 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 it was important to develop a system of wider participation in the IFIs that takes into account members of the international community.

Another panellist, Aziz Ali Mohammed, representing the Washington-based Group of 24, in reflecting on the state of debate on the IFA, said that one key issue 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 discussion was the internal governance of the IMF. He said that a 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.

Momentous opportunity

ECOSOC President Wibisono said many ministers took part in the special high-level meeting between ECOSOC and the Bretton Woods institutions for the third time this year and stressed that the Financing for Development high-level event would be a momentous opportunity to deal with global financial issues.

Wibisono also called for changes to the Bretton Woods institutions (BWIs), and their decision-making system and policies. He said that with the advent of globalisation and unprecedented financial flows, the adequacy of the BWIs to manage the world economy has come increasingly into question.

Despite the wake-up call of the Mexican crisis, the institutions had not responded by the time of the Asian crisis. It is ‘therefore urgent that we review the capabilities and modalities of these institutions to respond to financial crises induced by large capital movements,’ he said.

‘We must be mindful that the decision-making structures of the BWIs also need to be reviewed and made more inclusive and democratic. Broadening the decision-making process would help foster stability in the system.

‘One of the most persistent problems and dilemmas pervading the current financial and monetary system is that of painful adjustments. Many countries continue to be weighted down by inordinate debt overhangs. These imbalances should be fully addressed.’

Participation in the reform process

A representative of the Chinese delegation said the Asian crisis had shown up inherent weaknesses in the present financial system and there was 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 of the game, and standards 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 international financial institutions 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 bureau of the preparatory committee 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 had a 6.8% quota in the IFIs when it should be around 10%. In comparison, Japan’s quota for UN contributions was 20%, whilst its share of world GNP 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 they are agreed upon and their jurisdiction should be respected.

Malaysian representative, Tan Seng Sung of the Foreign Ministry, said 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 cognizance the need to accommodate the different interests and circumstances of individual countries that are at  different  stages  of  development.’

Pakistan’s permanent representative to the UN in New York, Ambassador Shamshad Ahmad, said the participation of developing countries is important to redesign the IFA 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.’

Martin Khor is the Director of Third World Network.