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TWN Info on Finance and Development (Oct06/02)

2 October 2006


IMF GOVERNANCE REFORM PACKAGE INADEQUATE, SAY G24 MINISTERS

The Group of 24, which broadly represents developing countries at the IMF and World Bank, issued a Ministerial-level Communique during the recent Singapore meetings of the IMF/World Bank, stressing that the current package of reforms regarding the IMF's governance structure is inadequate to address the under-representation of developing countries.

The current package of reforms was adopted in a resolution by the IMF Board of Governors at the Singapore meeting.

Significantly, the G24 Communique states that the Ministers welcome the proposed ad hoc quota increase for China, Korea, Mexico and Turkey, but they balanced this by criticizing the inadequacy of the current package. The G24 communique seemed to be opposing a piece-meal approach to the reform of the IMF's system of quotas, voting rights and decision-making.

Ministers of four G24 countries - Egypt, Brazil, India and Argentina - have issued separate statements saying that the proposed quota reform creates a disturbing picture of future representation of developing countries in the Fund, that the proposal is unacceptable as it further erodes the IMF's credibility, and called for a genuine attempt to work out a simple and transparent formula for members' quotas.

Below is a report summarising the G24 position on this issue of IMF governance as well as on other issues of importance to developing countries discussed at the annual meetings.

It was published in SUNS #6101 Tuesday 19 September 2006

With best wishes
Martin Khor
Third World Network

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IMF governance reform package inadequate, say G24 Ministers
By Martin Khor, Singapore, 17 Septmbner 2006

The Group of 24, which broadly represents developing countries at the IMF and World Bank, has issued a Ministerial-level Communique stressing that the current package of reforms regarding the IMF's governance structure is inadequate to address the under-representation of developing countries.

The G24 Ministers stressed that any reform package should include an increase (at least a tripling) in basic votes; a new quota formula that accurately reflects the relative size of developing countries in the world economy (taking account of GDP at purchasing power parity, their vulnerabilities to commodity price fluctuations, capital flows and other shocks); and measures to enhance low-income countries' participation in the decision-making and management structures of the Bretton Woods Institutions (BWIs).

Significantly, the Communique states that the Ministers welcome the proposed ad hoc quota increase for China, Korea, Mexico and Turkey, but they balanced this by criticizing the inadequacy of the current package.

This balance reflects the shades of opinion within the G24 membership, with some of the members having explicitly spoken up to oppose the package.

Ministers of four G24 countries - Egypt, Brazil, India and Argentina - have issued a separate statement saying that the proposed quota reform creates a disturbing picture of future representation of developing countries in the Fund, that the proposal is unacceptable as it further erodes the IMF's credibility, and called for a genuine attempt to work out a simple and transparent formula for members' quotas.

The G24 communique seemed to be opposing a piece-meal approach to the reform of the IMF's system of quotas, voting rights and decision-making. In the proposed resolution, four countries (China, South Korea, Turkey and Mexico) will be provided additional quotas in a first phase, and in a second phase a formula will be worked out to allocate quotas, with developing countries supposed to get higher shares than at present, with also an increase in basic votes.

However, several developing countries fear that there may not be an agreement on the second-phase issues soon or at all, and thus prefer not to have a "first-phase" measure which would in itself actually decrease the relative shares of many or most developing countries.

The G24 Ministers held their 76th meeting on 16 September in Singapore. It was chaired by Philippines Secretary of Finance Margarito Teves; also present were Vice Chairs, Argentina's Economy Minister Felisa Miceli and Democratic Republic of the Congo's Cental Bank Governor Masangu Mulongo.

The meeting was attended by representatives of 9 African countries, 7 Asian countries, 8 Latin American countries and several observer countries and inter-governmental organizations; and with the World Bank President and IMF Managing Director as special guests.

The G24 Communique covers five issues: voice and representation of developing countries; global economic prospects; trade; support for low-income countries; and strategic issues for the IMF and World Bank.

In the most important topic of voice and representation, the G24 Ministers stressed the importance of reaching early agreement on a credible and time-bound package of reforms that would ensure an increase in the voice and representation of developing countries in the BWIs.

"While welcoming the proposed ad hoc quota increase for China, Korea, Mexico and Turkey, Ministers point out that the current package of reforms does not adequately address the fundamental issue of the under-representation of developing and low-income countries as groups.

"They note that the emerging market countries, other developing countries, and economies in transition account for over half of global GDP measured in terms of purchasing power parity, hold most of the world's international reserves, and represent a majority of the world's population. In order to reflect this new reality in the world economy and increase the legitimacy and relevance of the BWIs, the voting power of developing countries and low-income countries as groups should be expeditiously increased and protected.

"Ministers reiterate that any package of reforms should include both an early and substantial increase in basic votes - at least a tripling - and a new quota formula that accurately reflects the relative economic size of developing countries in the world economy.

"Such a formula should take into account GDP at purchasing power parity, as well as countries' vulnerabilities in commodity price fluctuations, capital flows and other exogenous shocks. These reforms should include measures to enhance the participation of low-income countries in the decision-making and management structures of the BWIs, including through, but not limited to, additional Alternate Executive Directors and Senior Advisors for chairs with the largest constituencies."

On global economic prospects, the Ministers welcomed the global growth performance in 2006 but they also underscored that risks to the global outlook have increased, particularly amid concerns over growing global imbalances, rising inflation and tighter monetary policies, volatile oil prices, the breakdown of the Doha talks, a cooling in the US housing market and increased geopolitical tensions.

The Ministers stressed the pressing need for early and meaningful efforts to address global imbalances. "This must involve a concerted response, including fiscal adjustment and efforts to increase household savings in the US, structural reforms in Europe and Japan, financial sector reform and increased exchange rate flexibility in emerging market countries where warranted by economic fundamentals. In this context, the Ministers support the IMF's efforts to undertake a more pro-active surveillance role, particularly through the recently initiated multilateral consultation exercise.

The Ministers expressed deep concern on the loss of life and devastation due to recent hostilities in Lebanon, called for urgent and substantial assistance and compensation to help Lebanon, welcomed the Bank's intention on a Trust Fund for Lebanon for a recovery programme and supported transferring $70 million from IBRD surplus to the Fund.

On Strategic Issues for the IMF and World Bank, the Ministers welcomed the initial discussion in the IMF on a new instrument that would guarantee high-access financial support to developing countries with market access that have strong macroeconomic policies that nonetheless remain vulnerable to shocks. They urged the IMF to develop this instrument, which must allow automatic and upfront drawings, and there must be no conditionality associated with the new facility beyond maintaining macroeconomic stability and reducing vulnerabilities.

The communique struck a very cautious tone regarding the World Bank's new and controversial anti-corruption initiative which appears to be the top priority of its President Paul Wolfowitz.

The Ministers supported a "comprehensive approach" to strengthening governance and fighting corruption, covering both supply and demand sides. Any strengthening of the World Bank's work on governance and anti-corruption should serve to advance its central mission of poverty reduction and achieving the MDGs.

The Ministers stressed the "fundamental importance of country ownership to ensure sustainable outcomes" and encouraged the Bank to work closely with government authorities to support their own plans and priorities.

Notedly, the Ministers, recognizing the multilateral character of the Bank, underscored that the Bank should not disengage from supporting its members, so as not to penalize the poor. The Ministers were apparently referring to the belief that the Bank intends to suspend loans to countries in which it has found corrupt practices.

Given the political dimension of governance, the Ministers also stressed the need to delineate more clearly the aspects of governance that are within the Bank's mandate.

The Ministers also noted with concern the large and growing negative net transfers from the World Bank to middle-income countries (MICs) which is largely due to the high costs of doing business with the Bank.

"Continued engagement with MICs is fundamental to the Bank's development mandate, its financial health and its sustained role as a knowledge bank," said the communique. Any enhanced strategy in MICs must be flexible, multi-pronged and comprehensive so as to respond to differential and evolving demands across the full continuum of MICs.

The Ministers noted that there has been little progress in the use of country systems, and their importance in reducing non-financial costs and strengthening countries' institutional capacity; they urged the Bank to act to achieve progress on this.

On the issue of Trade, the Ministers expressed "deep disappointment" about the suspension of the Doha Round. They stressed that the current trading system is heavily biased against developing countries, especially the least developed, particularly owing to the wide array of harmful subsidies, tariff escalation schemes, and non-tariff restrictions maintained by industrialized countries.

"Ministers reiterate that an ambitious and appropriately balanced conclusion of the Round holds the potential to yield significant global welfare gains and to deliver on its promise to support development and poverty reduction in low- and middle-income countries. A failure to overcome the current impasse risks squandering years of effort and an important opportunity to make progress in areas of interest to all countries, while opening the door to an exacerbation of protectionist trends across the globe.

"Ministers call for an urgent resumption of negotiations. They urge the IMF and World Bank to support this effort, including by helping to make the case for the Round by highlighting its potential economic benefits, as well as the costs to all countries of trade distortions and barriers, particularly from agricultural subsidies and tariff escalation schemes in advanced economies.

"Ministers welcome recent proposals regarding the 'aid for trade' agenda, while reiterating the view that this initiative should not be a substitute for an ambitious Doha Round. In addition to their concerns regarding the future of the Doha Round, Ministers also regret recent attempts at inappropriate political interference in the smooth functioning of the international trade, banking, and financial system.

On Support for Low-Income Countries, Ministers said they were concerned that while some progress toward the MDGs has been achieved, the prospects for sub-Saharan Africa remain challenging. Official development aid to low income countries has not increased, despite the renewed pledge made by the international community at the UN Millennium Review Summit in 2005 to help accelerate progress toward the MDGs.

The Ministers underscored that success will require significant scaling up of efforts on the part of both donors and aid recipients, in terms of increased resources, better policies and improved governance, and enhanced aid effectiveness.

The Ministers welcomed the debt reduction delivered through the enhanced HIPC Initiative and the MDRI, and called on the donor countries to provide the necessary resources to extend the MDRI to all LICs.

They stressed that the debt sustainability framework that has been designed by the IMF and the World Bank for LICs must be flexible and pay due regard to country circumstances. The Ministers called on donors to provide enough grants and highly-concessional loans to LICs to finance development needs, while ensuring debt sustainability.

They also encouraged donors to deliver their assistance more efficiently and predictably, and to align such flows with countries' own strategies for reaching the MDGs. They also urged the full implementation of the Paris Declaration on Aid Effectiveness.

 


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