TWN Info on Finance and Development (Oct06/03)
The proposal for reform of the quotas of the International Monetary Fund was adopted by vote at the IMF annual meeting in Singapore (held 19-20 September).
Although the proposal obtained 90% of the votes (voting is weighted according to the share of quota or equity), there was significant disquiet felt and expressed by several developing countries. The decision was also attacked by several development NGOs that said that the measures were grossly inadequate to give developing countries a bigger say in the IMF's decision-making, and did not alter the developed countries' dominance over the organization.
The adoption was officially announced on 19 September by the IMF managing director. The resolution received 90.6% of the votes (which was above the 85% required), there were 23 countries (of the 184 members) that voted against, and many other countries that voted in favour did so reluctantly and only on the understanding that the immediate measures to raise the quotas of four countries would be followed up with a more comprehensive set of reforms within two years.
Ironically, the immediate result of the adoption of the resolution was to decrease the quota shares of individual developing countries (except those few whose quotas were raised), even though the professed aim of the reform was to raise the participation and voice of developing countries in the decision-making structure of the IMF.
Below is a report analysing the resolution adopted by the IMF Board of Governors at their annual meetings held in Singapore from 19 - 20 September 2006 and the implications of the quota proposal on developing country members.
This report was published in the SUNS #6102 Wednesday 20 September 2006.
IMF adopts quota
proposal amidst disquiet by many
The proposal for reform of the quotas of the International Monetary Fund was adopted by vote amidst a significant amount of disquiet felt and expressed by several developing countries.
The decision was also attacked by several development NGOs that said that the measures were grossly inadequate to give developing countries a bigger say in the IMF's decision-making, and did not alter the developed countries' dominance over the organization.
The adoption was officially announced this morning by the IMF managing director Rodrigo de Rato at the opening session of the meetings of the Boards of the IMF and the World Bank.
The resolution received 90.6% of the votes (which was above the 85% required), there were 23 countries (of the 184 members) that voted against, and many other countries that voted in favour did so reluctantly and only on the understanding that the immediate measures to raise the quotas of four countries would be followed up with a more comprehensive set of reforms within two years.
The immediate measures (in the "first phase" of the reform) will raise the shares of quotas of the four countries by a little: China from 2.98% to
3.72%; Mexico from 1.21% to 1.45%; Korea from 0.77% to 1.35%; and Turkey from 0.45% to 0.55%.
Because of this rise, the relative shares of other countries went down; for example, the US share fell from 17.4% to 17.1%, Germany from 6.09% to 5.99%, India from 1.95% to 1.91%, Brazil from 1.42% to 1.4%, Malaysia from 0.7% to 0.68% and Nigeria from 0.82% to 0.81%.
Thus, ironically, the immediate result of the adoption of the resolution was to decrease the quota shares of individual developing countries (except those few whose quotas were raised), even though the professed aim of the reform was to raise the participation and voice of developing countries in the decision-making structure of the IMF.
The reason why a majority of developing countries was persuaded to go along with the resolution was that it also contains a second phase, during which:
* The Executive Board will agree on a new quota formula before the 2007 annual meetings and not later than by the Spring 2008 meeting of the International Monetary and Financial Committee; the formula will provide a simpler and more transparent means of capturing members' relative position in the world economy, with consideration given to higher weight on members' GDP and ensuring other variables (e. g. openness of members' economies).
* The Executive Board will recommend (by the 2007 annual meetings and no later than the 2008 annual meetings) further increases in the quotas of members that request for such increases, based on the new quota formula.
* The Fund's articles of association will be amended to provide for at least a doubling of the "basic" votes of each member and thus protect the existing voting share of low income countries as a group and (a) ensure that the ratio of the sum of the basic votes of all members to the sum of members' total voting power remains constant following the increase under (a) above in the event of any subsequent changes in total voting power of members. A specific proposal is to be put forward by the 2007 annual meeting and no later than the 2008 meetings.
Developing countries that are not among the four to obtain an immediate quota increase were lobbied to agree to the package with the promise that the phase two reforms would benefit them, or at the least would not leave them worse off.
However, a number of important developing countries have been explicitly opposing the resolution. A few days ago, Egypt, Brazil, India and Argentina issued a joint statement saying that the proposed quota reform creates a disturbing picture of future representation of developing countries in the Fund, and that the proposal is unacceptable as it further erodes the IMF's credibility. They called for a genuine attempt to work out a simple and transparent formula for members' quotas.
The African countries had objected to an earlier draft of the resolution, which had then been revised to include the provision on "at least doubling" of the basic votes, and an assurance that their relative shares would not decline.
As a list of which countries had voted for or against was not made available, it was not clear how individual countries voted.
Hailing the results of the vote, De Rato said "these governance reforms are tremendously important" for the IMF's future as they would add legitimacy to other reforms.
However, some countries that had voted against the resolution made their displeasure known in no uncertain terms.
Speaking at the plenary today, India's Finance Minister P. Chidambaram referred to the issue of "quota and voice" (i. e. the objective of increasing the voice of developing countries in decision-making) and said: "What is at stake here is the credibility and legitimacy of the IMF. Bridging the "voice" deficit requires fundamental reforms in the quota structure which are long overdue.
"We were therefore not in favour of any 'ad hocism' including the proposed two-stage process based on a hopelessly flawed formula. We believed that all reforms - new quota formula, realigning country quotas and increase in basic votes - could have been adopted simultaneously as a package.
"The two-stage process will mean that some developing countries will be asked to yield a portion of their quotas in favour of some other developing countries. We support the increase in quotas of the four countries, but we would have been happier if it was the result of a comprehensive reform that reflected accurately the economic weights of members countries and required countries that are over-represented to yield ground.
"Let me say that the 23 countries (many of them large, emerging and well-performing economies) that voted against the resolution may have lost the vote but have not lost the argument.
"We hold the IMF management and the countries that supported the resolution to their promise - that the second stage will begin now; that the criteria for a revised formula will be determined and defined; that there will be a second round of ad hoc increase for some more under-represented countries; that the Articles will be amended; and that in the end the quotas and voting rights will reflect the relative economic strengths of countries in the 21st century; and that all this will be done in a time-bound manner."
Malaysia, which had reservations but eventually voted in favour, said it was concerned because stage one was limited to only four countries but it supported the resolution like many others believing that this could ensure speedy resolution of the entire reform agenda.
"However, the real test is in the second stage," said Malaysia's second Finance Minister, Nor Mohamed Yakcop. "Malaysia calls for a stronger commitment from advanced countries to limit their claims for higher quotas to allow emerging market economies to have greater voice representation.
"We share the majority view that the new formula should be simpler and more transparent unlike the present one. More importantly, we should avoid prejudging that GDP would be the predominant factor in the new formula. All four variables - GDP, openness, variability and reserves - are important indicators of a country's influence within the global economy."
Several NGOs have criticised the decision for containing more "spin" than substance about increasing the developing countries' importance in the IMF's decision-making process.
The Bretton Woods Project, based in the United Kingdom, estimated that a combination of the quota increase for the four countries and a doubling of the basic votes (a key aspect of the second stage) will only decrease the voting weight of advanced economies from 60.6% of the total to about 59% of the total. African countries will see their vote shares increase a paltry 0.5% to a total of about 6.5%.
Calling the decision "totally inadequate", it said the balance of power at the IMF will not change with this measure, and developed countries will still maintain their grip on the decisions of the institution. (See separate article).
Christian Aid called the IMF's efforts to gain legitimacy a "farce." Its senior policy advisor Sony Kapoor said: "The voting deal does nothing for the poorest countries. The people most affected by the IMF's policies still have no effective voice.
"This process is nothing more than rearranging the deckchairs on a sinking ship. While the UK with a 4.95% vote share often ignores IMF recommendations, the 44 countries of sub-Saharan Africa with a collective share of 4.41% have no option but to pay the price."