Washington – Among the topics expected to be discussed at the annual meetings of the World Bank and International Monetary Fund (IMF) that started this week and will continue through the weekend is the reform of the IMF’s governance.
The latest chapter in this ongoing governance debate came Thursday when the Group of 24 (G24) developing and emerging economies met here and came out in favour of the reform – specifically of realigning the quotas of votes allotted to countries on the institution’s board.
“The realignment must reflect the rapidly evolving weights in the world economy,” said the communiqué from the G24 meeting, noting that the legitimacy, relevance and effectiveness of the IMF rests on how it addresses “the imbalance in voice and representation.”
The composition of the IMF’s board and the number of votes allotted to the countries represented there were set following World War II and still largely reflect the relative economic weight of countries at that time.
With the emergence of China, India, Brazil and other countries, however, there have been increasing demands for rebalancing countries’ say in the IMF’s day-to-day operations.
Those demands finally bubbled over in August when the U.S. made good on threats to use its veto power over the size of the IMF board to demand a larger voting share for emerging economies – thus cementing the issue’s importance amongst the laundry list of topics to be discussed here this weekend.
The IMF has come out in favour of giving these developing countries more influence, and Europe therefore is under increasing pressure to relinquish some of its seats and votes. European countries currently hold about a third of the seats on the board, despite accounting for an increasingly small portion of the global economy.
A book put out by the World Bank last week concluded that developing countries have “come to the rescue” of the global economy – picking up the slack of the advanced economies in the wake of the financial crisis.
And in a major speech last week, World Bank president Robert Zoellick said, “The developing world is becoming the driver of the global economy. Led by emerging markets, developing countries now account for half of global growth and are leading the recovery in world trade.”
Yet Belgium and the Netherlands still combine for a larger vote total than China, while India and Brazil each hold fewer votes than either of those small European countries. Brazil, in fact, holds about the same number of votes as Spain – and less than half those allotted to Italy or Canada. Likewise, Europe currently holds nine seats on the board, while Africa holds two.
“Africa is hugely under-represented at the IMF. A third chair for Africa would be a step towards making the institution fit for purpose in the 21st century,” said Oxfam’s Elizabeth Stuart. “The IMF reform battle is a confrontation between the old and new, and it’s time for the old guard to move aside.”
The IMF board originally consisted of 20 seats. Maintaining a board with 24 seats requires an 85 percent majority vote every two years. The U.S., however, holds a large enough percentage of the vote – about 17 percent – that it can veto this re-approval, which is what it did in August, meaning the board will shrink by four seats by the end of October if the U.S. does not change its mind.
This move has started a scramble to rearrange the board, and, says ActionAid’s Soren Ambrose, “forces the European countries that control 9 out of 24 seats to either give some up or watch as Brazil, India, Argentina, and 23 African countries lose all their representation on the board.”
“It is absurd that it has come to this. Europe must get its act together and agree on a way to consolidate,” Ambrose adds.
The European Union offered a plan late last week. It proposed adding two additional groupings of countries, which would be made up of emerging economies.
It drew less than enthusiastic responses from U.S. and developing country analysts. The most likely outcome remains that the European countries will lose seats. It is also possible the 85 percent majority will be reduced, thus depriving the U.S. of its veto power.
Another possible reform would be ending the long-standing – though unofficial – agreement whereby the World Bank president is from the U.S. and the IMF managing director is from Europe, thus making the selection of these senior positions a more transparent and potentially egalitarian process.
Whether that will come to pass remains to be seen, but IMF Managing Director Dominique Strauss-Kahn addressed the topic briefly at a press conference Thursday.
“I think that is one important part of the governance reform, and I think it has been accepted,” he said. “The idea has been accepted, the so-called agreement between the U.S. and Europe for the leadership of the two sister institutions has to disappear. I think that on that principle, everybody agrees. The question is how will it be implemented. That is another point.”
NGOs like the London-based Bretton Woods Project question whether the reforms that are on the table will go far enough. They point to proposals offered by the IMF in July and a G20 working group in August that would shift less than three percent of voting shares to under-represented developing countries, short of the five percent shift the IMF promised at the conclusion of its annual meetings a year ago.
There is also “a real danger that the promised shift in IMF board quotas will end up just shuffling power from of one set of emerging countries to another,” says Oxfam’s Stuart.
A senior U.S. Treasury official told Dow Jones Newswires Tuesday that he does not expect a governance compromise to be reached this weekend, and instead indicated an agreement may be worked out ahead of the G20 meet in Seoul.
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