TWN Info Service on Finance and Development (Nov10/11)
15 November 2010
Third World Network

IMF governance change proposals less than trumpeted
Published in SUNS #7039 dated 12 November 2010

Geneva, 11 Nov (Chakravarthi Raghavan*) -- The Executive Board of the International Monetary Fund on 5 November has approved proposals for what has been described as a "reform package" for increases in quotas and shift in voting power of its members, and for amendment of its Articles of Agreement to eliminate appointed Executive Directors and have instead a wholly-elected Executive Board.

The changes envisaged and announced by the IMF Managing Director, Dominique Strauss-Kahn, with much fanfare at the G20 Finance Ministers' meet at Gyeongju in South Korea results in a six percent shift of quotas and voting power in favour of the dynamic Emerging Market Developing Countries (EMDCs) and under-represented countries.

The detailed proposals, now approved by the Executive Board, have been sent to member countries and recommended for adoption by its Board of Governors representing the IMF's 187 member countries. It needs to be adopted by three-fifths of the membership representing 85 percent of voting power before it becomes effective.

Also, Art. III, Section 2 (d) of the Articles of Agreement provides that "The quota of a member shall not be changed until the member has consented..."

This thus leaves open the question whether the developing countries whose quotas and voting shares have been reduced to shift them to other developing countries to enable Strauss-Kahn to claim the 6 percent shift and the revolution change, can or may hold up the entire process by their not ratifying through their legislative processes the proposed amendments.

The amendments adopted in 2008, and on which the current proposed changes are built, are yet to become effective, since the requisite number of countries have not completed their legislative processes and ratified it.

The proposals, approved by the Executive Board on 5 November and sent to the Governors for a vote, involve completion of the Fourteenth General Review of Quotas, with a doubling of quotas to approximately Special Drawing Rights (SDR) 476.8 billion or about US$755.7 billion at current exchange rates. However, to the extent of the increased availability of funds to the IMF from the quota doubling, the current General Arrangements to Borrow will be reduced.

Despite the fanfare with which the purported shift in power structure was announced at Gyeongju, and subsequently in IMF press releases and remarks, a detailed scrutiny suggests that the shift is much less than made out, and involves about 2 percent of quota and voting power shifted from the advanced countries to the EMDCs and the under-represented. Much of the balance of change has come by reducing the quotas and voting shares of many developing countries, including so-called over-represented oil-exporters, but also a number of other developing countries - like South Africa and Nigeria.

The IMF management, and Dominique Strauss-Kahn (with his eyes set on the 2012 French elections), in presenting the changes as a six percent shift, has formulated the changes in a way that resembles the magician's pea-under-the-shell game, and proved Mark Twain's definition of statistics ("Facts are stubborn, but statistics are more pliable"). The announcements and the IMF press releases about the 6 percent change is almost like the Lewis Carroll tales: "words shall have the meaning I assign to them."

The much trumpeted 6% shift in voting power and quotas from the advanced to the developing world, from the IMF's own tables, seem to be no more than a little over 2 percent from the "advanced" economies to the developing world. The balance has come by taking away shares from some developing countries and giving it to others, and also by using the GDP data and formula (ad hoc) used for the 2008 decisions. At that time, the Executive Board in fact decided that the ad hoc formula (GDP marked value plus compression of Purchasing Power Parity data) would not be used for the Fourteenth General Quota revision. But the latest proposals and revisions are built on the 2008 changes (yet to be ratified by the requisite membership to become effective).

As the UK-based civil society watchdog group, the Bretton Woods Project, has noted in its press release on the latest proposed changes, the changes are less than meets the eye or revolutionary. Though Strauss-Kahn has called recent agreements reached on IMF governance reform "historic", 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.

[Incidentally, the term "emerging markets" was a Wall Street invention of the 1980s (the Brady bond era, when restructured and written down debt of Latin American debtors, were re-branded, mixed with some US Treasuries and sold off) -- Frank Partnoy's book "F. I. A. S. C. O: Blood in the Water on Wall Street", updated paperback edition 2000 (pp 67-68). As Partnoy (then a derivatives trader at Morgan Stanley) describes the tricks played, debt issued by sovereign developing countries were commonly dubbed by Wall Street banks as "emerging": "... It wasn't clear what 'emerging' meant, or how these markets might emerge. Still it sounded awfully good, and it helped cloud the fact that the emerging market fund that an investor bought was a Peruvian loan that had not paid any interest since 1800s..."]

According to the Bretton Woods Project press release, 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 losing 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, the IMF has included South Korea and Singapore in the group of emerging markets and developing countries benefiting 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 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. 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.

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."

The Bretton Woods Project notes that 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, the Bretton Woods Project says, 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.

The G20 agreement on Board seats has also been in dispute, since it has been 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. That report said 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, 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.

The Bretton Woods Project said that an 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 Bretton Woods Project noted the failure of the IMF to make public disclosures about the situation 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'."

(* Chakravarthi Raghavan, Editor Emeritus, contributed this comment and analysis to SUNS.) +