TWN Info Service on Finance and Development (Nov10/09)
12 November 2010
Third World Network

IMF reform is less than what is claimed

The Bretton Woods Project in London has analysed the recently acclaimed governance reforms in the International Monetary Fund (IMF).  

It challenges the claim that the agreement reached on IMF governance reform by the IMF Board (following the G20 finance ministers' meeting on 23 Oct) would shift the voting rights to developing countries by 6 percentage points.  Actually the voting rights of the "advanced economies" would be reduced by only 2% or 2.6% and the rest of the shift in votes would come from a reduction of the share of other developing countries.

The basic power structure of the IMF will better incorporate large emerging markets, but it will also continue to see dominance of the US and Europe

We reproduce below the full article of the Bretton Woods Project below, which is also available at: http://www.brettonwoodsproject.org/art-567128

With best wishes,

Third World Network

Less than meets the eye: IMF reform fails to revolutionise the institution
By The Bretton Woods Project

IMF managing director Dominique Strauss-Kahn called recent agreements reached on IMF governance reform "historic". However, a closer analysis reveals that the shifts in votes are smaller than claimed and though the basic power structure of the IMF will better incorporate large emerging markets, it will also continue to see dominance of the US and Europe.

Two related agreements on IMF reform were reached, one in the G20 group of countries and one in the IMF board. These reforms bring to a close the IMF governance reform process launched by the G20 in a finance ministers' meeting in London in September 2009 (see Update 72, 71, 68).

In late October, G20 finance ministers meeting in Gyeongju, Korea agreed to "shifts in quota shares to dynamic [emerging market and developing countries] (EMDCs) and to underrepresented countries of over 6 per cent, while protecting the voting share of the poorest, which we commit to work to complete by the Annual Meetings in 2012." They also agreed to "a comprehensive review of the [quota] formula by January 2013" and "greater representation for EMDCs at the executive board through two fewer advanced European chairs" and "moving to an all-elected Board."

In early November, the IMF board formally approved the shift in quota shares, which will now have to be ratified by finance ministers and, in many countries, by parliaments. The all-elected board will require an amendment to the IMF's Articles of Agreement, again something that will require approval by member state parliaments, which explains the long delay for implementation.

False presentation on quota

The IMF has trumpeted these changes as historic, with the 6 per cent figure headlining news reports. The changes will make China the third largest shareholder and will vault India, Russia and Brazil into the top ten. However, more than half of the 6 per cent shift will come from other developing countries, which are loosing voting share as a result of the reforms. The data table released by the IMF after the board agreement shows that the voting share of "advanced economies" will drop from 57.9 per cent to 55.3 per cent, a loss of only 2.6 per cent.

The IMF's faulty classification of countries also makes the net shift to developing countries look bigger than it really is. Like the World Bank's reforms earlier in the year (see Update 70), the IMF has included South Korea and Singapore in the group of emerging markets and developing countries benefitting from the shift. This is despite the IMF's own flagship analytical report, the World Economic Outlook (WEO), classifying Korea and Singapore as "advanced economies". This misleading classification has added 0.6 percentage points to the shift. By the WEO definitions, advanced economies experience a net loss of only 2 per cent, far shy of the 6 per cent being reported in the press.

Strauss-Kahn called the November agreement "the biggest ever shift of influence in favour of emerging market and developing countries" which is again not bourne out by the evidence. Even by the faulty classification, the 2008 agreement on governance reform (see Update 60) shifted 2.7 per cent of votes to developing countries, a bigger shift than the 2.6 per cent agreed in early November.

The November agreement also marks a formal reneging by the IMF board on its 2008 promise to reform the IMF quota formula before it was used again (see Update 72). The flawed formula, which was only agreed for temporary use in 2008, has been hotly contested by the G24 group of developing countries as improperly specified. To get over the flaws in the quota formula, this time it was not applied in a straightforward way to decide who would get shares, with GDP weights and compression factors used to determine the number of countries that would be eligible for increases to achieve the final list of 54 countries that would gain from the process. Developing countries losing voting share include Venezuela, Nigeria, South Africa, Argentina, Cameroon, Algeria, Pakistan and Morocco.

Promises unfulfilled on decision rules

The agreement also leaves in place the US unilateral veto over the IMF's decisions which require members holding 85 per cent of the voting power to agree. The US, with 16.5 per cent of the vote after the November agreement, is the only country that can exercise such a veto, though a number of large emerging markets can get together to exercise a veto as well. In early November, German executive director Klaus Stein emphasised that the US veto is "anachronistic at this point. For one country, no matter how big it is to have the right to dominate decisions in that unique way is not legitimate anymore. If you talk about legitimacy, that's the major flaw in the organisation."

Inside sources at the IMF have indicated that some of the large developing countries opposed proposals made by Europe to lower the special majority voting threshold to eliminate the US veto, because they feared they would lose their ability to block things as a group. New Delhi-based researcher Rick Rowden of Jawaharlal Nehru University wrote "under any system for distributing power more equitably, one thing is certain: the US must give up its built-in veto." With developing countries blocking a change in voting majorities, the only possibility for ending the veto would be for the US voting share to drop below 15 per cent, which the US is unlikely to ever allow to happen.

When Strauss-Kahn was campaigning to be selected as managing director of the Fund he had explicitly promised the use of double majority decision making at the board as one of the reforms he would implement. This would be a roundabout way to soften the unique nature of the US veto because it would mean that any group of 28 countries could block a special decision. However no progress has been made on this promise, and with the current round of negotiations on IMF governance essentially finished, any adoption of this proposal would likely have to wait until 2013 at the earliest.

Mischief at the executive board

The G20 agreement on board seats has also been in dispute, with it being unclear whether Europe will give up two full seats on the board. The only firm European proposal available to the press was described by Reuters in early October. The Europeans had proposed that Spain would no longer share its seat with Mexico and Venezuela but would move into a European constituency, while Belgium would share the directorship of its constituency with Turkey. That would mean Europe losing the one-third of a seat held by Spain and one-half of the Belgian chair, for a total of 0.83 seats given up by the Europeans. No further details about the restructuring were made publicly available.

The board seat controversy had flared up over the summer (see Update 72), with Europeans resisting a move by the US to force them to consolidate their seats on the board. The controversy has meant that the elections for the board, which usually happen in October so that the new board's term can begin 1 November, have been delayed. With the old board's term expiring 31 October and no formal decision being taken by the IMF board of governors, it is unclear on what legal basis they have continued to make decisions.

A e-mail from an IMF official said "as the regular election of executive directors was not complete by October 31, 2010, those elected executive directors sitting at that time shall continue in office until their successor is elected. I would note that it is expected the 2010 election will become effective in late November. Until the election becomes effective, the executive board will continue to exercise all of its ordinary functions. Decisions of the board will continue to be posted on the Fund's external website, following standard practice."

Peter Chowla of UK NGO Bretton Woods Project noted the failure of the IMF to make public disclosures about the stuation of the board. "This complete lack of transparency about the process for the selection of the board is a bit worrying. In March the IMF's new transparency policy took effect, but it seems to have no effect on the Fund's operations - despite the supposed 'overarching principle that it will strive to disclose documents and information on a timely basis unless strong and specific reasons argue against such disclosure'."