Washington Prism – Valentina Pasquali
Last month, the International Monetary Fund (IMF) and the
World Bank (WB) held their annual meeting in Singapore, a gathering that
witnessed a first step towards the reform of the governance structure of the
IMF.
The 184 participating members approved a proposal to
increase the quota shares of the four most under-represented countries on the
organization's Board of Directors: China, South Korea, Mexico and Turkey. Quota
shares, in IMF jargon, translates into increased voting power, as well as wider
opportunities to borrow money from the Fund.
The week prior to the summit, IMF's Managing Director
Rodrigo de Rato, speaking at the Brookings Institution, a research center in
Washington DC, said that the proposed reforms will "rectify the most extreme
distortions in the representation".
The plan for change was strongly backed by President George
Bush. The reforms, however, have met with the suspicion of two sets of members.
European countries are concerned that the rebalancing of
quota shares within the Board of Directors will benefit the four
under-represented countries at their expenses. Germany and the Netherlands put
forward an alternative formula for reform that would distribute voting rights
based more on the openness of the states' economy rather than on mere economic
power.
German finance minister Peer Steinbruck said in an
interview to Bloomberg news service, "The one-sided position of the US that a
country's Gross Domestic Product (GDP) should play the predominant role is not
in line with our views".
At the same time a host of developing nations also voiced
doubts, although in the end chose to endorse the vote. The group of 24 countries
– including Argentina, Brazil, Colombia, Egypt, Iran, Pakistan, Peru, India,
Venezuela, South Africa and Nigeria - issued a communiqué in Singapore saying
that they welcomed the increases of quota shares for the four countries but that
the package did not address "the fundamental issue of the under-representation
of developing and low-income countries as groups."
Such concerns are expected to be tackled in a second round
of broader reforms of the IMF structure in a way that would recognize the
growing weight of emerging nations. The G24 worries that this second phase is by
no means guaranteed, as Brazil, India, Argentina and Egypt pointed out in a
joint statement issued during the summit.
India, for its part, seems committed to try to take the two
year reform plan on a more equitable path. Prior to the September 18th vote, New
Delhi mobilized political dissent to try to stop the implementation of the
reform as it was.
Now, after the vote has passed, it still intends to pursue
a different strategy for further reform. India's Finance Minister P. Chidambaram
told in an interview to The Hindu that he was now "looking forward to all
countries, including the G-7, agreeing to construct a formula based on relevant
criteria and reflecting the economic strength of countries in the 21st
Century."
Johannes F. Linn, Director of the Wolfensohn Center at the
Brookings Institution, and Colin I. Bradford, a Fellow at the think tank's
Global Economy and Development Program, recently co-authored an analysis of the
reform plan in the Washington Post.
In their opinion, although the vote can be deemed as a
first step towards making the IMF a more representative and legitimate body, "to
truly repair what has become an ailing global financial institution, the members
of the IMF should move forward quickly with the managing director's longer term
agenda and even go beyond it".
The two analysts suggest an action program that would
comprise of five steps. First the IMF should increase the "basic" quota
allocations for all countries – independent of economic weight – in order to
give the smallest and poorest members a greater share in voting and better
access to finance. Second, criteria for the allocation of "shares" should truly
consider the reality of changing economic and financial weights of countries.
A third important step would be to reduce the total number
of IMF Board "chairs" from the current 24 to 20. This could be done by
consolidating the European seats on the Board into one representing the European
Union as a whole.
The idea is already under consideration in Europe and it
has the backing of the president of the European Central Bank, Jean-Claude
Trichet as well as the chairman of Euro-zone finance ministers, Luxemburg leader
Jean-Claude Juncker. However Germany, the largest European member to the IMF,
remains opposed to the plan.
Fourth, the Brookings scholars believe that the selection
of the IMF's Managing Director should become independent of nationality,
merit-based and more transparent. In practical terms, this would basically
require that the Europeans give up their traditional claim to electing the
Managing Director.
Finally, the United States needs to step in, and lead the
European Union – the most affected by all of these changes – into accepting the
reform of the IMF structure.
This could be done by not claiming, for example, the
American increase in shares that would likely follow most revised quota
allocation formulas. It could also translate in the US renouncing its claim to
select the World Bank's President. And Washington could also give up the veto
power that it exclusively enjoys at the IMF and WB boards.
"The US", Linn and Bradford write, "has broadly supported
the steps suggested above, but it has failed so far to offer up any serious
contribution of its own. It is time for the US to show its readiness to take an
effective lead in global governance reform and allow the IMF, to more accurately
reflect today's global economy".
"Unfortunately," Johannes Linn told Washington Prism in a
phone interview, "the current US administration is showing little interest in
taking any serious action that would shake the political balance within the IMF
Board of Directors."
Mr. Linn continued, "Certainly Washington is very busy
dealing with other issues. At the same time the Bush administration does not
appear too interested in strengthening the role of International Institutions."
Although this might not be the moment for a real opening,
"there could be a new momentum in a couple of years, with a new administration
that would not necessarily have to be Democrat, but just simply more
multilateral in its approach", Linn said.
In an interview with Fareed Zakaria on the PBS show Foreign
Exchange, Zanny Minton-Beddoes, Washington bureau editor for the Economist
Magazine also expressed reservations on the willingness of the US to waive some
of its influence; "the US is basically prepared to give up something but it's
not prepared to lose its veto power."
Because of how the planned reform will negatively impact
the Europeans and because the US administration seems unwilling to take those
steps that could convince the EU to go along, the preoccupation of the G-24 that
the second round of reform will not go through seems to be justified. "If pushed
too hard," Johannes Linn told Washington Prism, "the Europeans might walk away."
The consequences of an eventual EU retreat from the Fund
could be felt not only within the IMF itself but could also impact the World
Bank; for example if the Europeans decided to retaliate, they could do so by
lowering their contributions to the Bank's programs, Linn pointed out in our
interview.
A return to a less multilateral approach towards more
significant regionalism is not necessarily a problem, depending on where one
stands on the issue. "To me personally," Linn said, "it would be very
unfortunate though".
Valentina Pasquali writes for Washington Prism |
