Voices of contention

04/10/2009 | Phil Thornton

Fixing the IMF’s governance to give emerging economies more say could be vital if the Fund is to build on its newly acquired relevance. But Europe is digging its heels in over giving up its share of the votes

Europe is heading for a showdown with the US and leading emerging markets over radical plans to restructure the way the IMF is run. The US wants to see the number of seats on the 24-strong executive board held by European countries slashed from seven to just two.

Meanwhile emerging economies want the shares of votes on the board to reflect better their growing share of global economic growth. Again it is clear that Europe would be the loser.

Perhaps the most striking features of the whole issue is that the debate has intensified at a time when the IMF has suddenly recovered a role and legitimacy during the global crisis that many had thought it had lost forever.

Giving emerging market economies more say could be vital if the Fund is to build on its new-found relevance.

Timothy Geithner, secretary at the US Treasury, says he supports reducing the size of the board from 24 to 22 chairs by 2010 and down to 20 chairs by 2012, while preserving the existing number of emerging market and developing country chairs. The US Treasury would not comment on the specifics of the negotiations or on reports that it wants 5% of the voting share transferred from wealthy to developing nations.



BRICS BLOC

Brazil, Russia, India and China – the emerging market group known as the Brics – have called for a 7% shift in quotas in favour of emerging markets.

In a statement issued before the meeting of G-20 finance ministers in London last month, the four said that only such a radical step would achieve “an equitable distribution of voting power between advanced and developing countries.

“This would lead the overall share of emerging market and developing countries in the IMF and World Bank to correspond roughly to their share in world GDP.”

Guo Qingping, a deputy governor of the People’s Bank of China, has said that reform “should focus on transferring voting power from developed countries to developing countries”.

But as South Africa’s head of the National Planning Commission, Trevor Manuel, tells Emerging Markets, “Vested rights trump rational behaviour when discussions of IMF reform are on the table. “The European Commission has in the past proposed giving the 16 states that use the euro a single seat with non-euro EU members sharing another.

However, EU leaders have recently dismissed calls to scale down their role. After a meeting held to formulate a joint agenda for the G-20 meetings in Pittsburgh and for the IMF annual meetings, they said: “The current size of the IMF executive board reasonably well reflects the trade-off between inclusiveness and legitimacy, and the effective functioning of the Fund.”

Christine Lagarde, the French finance minister, says the issue of voting rights was “somewhat superfluous”. “Maybe the combined shares of European members is greater, but we need to consider all of this. It is impossible to alter voting rights without reviewing the whole mandate of the IMF,” she tells Emerging Markets.

“This is not a matter of dodging the issue or delaying tactics. This is because we cannot adopt a piecemeal approach. Every time you turn over a stone, you unearth a problem that is relevant to one country or another. If you deal with one of these, you only address specific issues of specific countries.”



ALTERNATIVE PROPOSALS

In their statement, EU leaders said any shift in voting power should increase the votes of under-represented countries in relation to the over-represented irrespective of whether they are advanced or developing countries. Spain is under-represented in the IMF, while Argentina and Saudi Arabia are over-represented, EU sources have said. The Saudis have made it clear they would put up fierce resistance to calls for a reduced quota share.

Ted Truman, a veteran IMF-watcher and a Fellow at the Peterson Institute for International Economics in Washington, says the Bric countries have a strong argument to demand a 7% shift in voting rights. “Something of that order of magnitude would achieve rough parity,” he says.

Developed countries currently have 57.9% of the total IMF votes and developing and transition countries 42.1%.On the idea of cutting the European quota he says: “As a group the European countries are the same size as the US but they possess double the votes.”

The EU holds 32.4% of the votes compared with the US’s 17.1%. “If you think about it crudely, you could slice Europe from, say, 30% to 23%, and it would still have more than the US,” he says. “The US is not particularly over-represented.”

Peter Chowla, director of the Bretton Woods Project, a NGO that monitors IMF activities, says it is in US interests to push for a lower European vote because any reform would still leave them with the 15% share that allows them to operate a veto.

“It is clearly Europe that needs to shrink, and the US has an interest in taking the emerging markets’ side because reform will never hurt the US and will give them better relations with the likes of China, India and South Korea.”

Proposals to change voting shares and the board make-up are part of a major review of the governance of the Fund that has been going on for three years. While governance covers a vast range of issues, the debate has concentrated on three key issues: the shares of votes held by members; the size and composition of the board; and the way the managing director is picked.

The next review of voting quotas does not have to be completed until January 2011, but the IMF executive board must deliver a report on non-quota governance issues at or before the annual meetings in Istanbul.

Additional reporting by Thierry Ogier

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