BACK TO MAIN  |  ONLINE BOOKSTORE  |  HOW TO ORDER

TWN Info on Finance and Development (Oct06/4)

3 October 2006


Why the IMF quota reform is inadequate


Below is an analysis of the decision on the reform of the IMF quotas that was adopted on 18 September at the IMF meeting in Singapore.

The analysis is by Peter Chowla of the Bretton Woods Project (based in London). It was published in SUNS on 19 September.

According to this article, the IMF decision is completely inadequate to address the institution's problems.

It does nothing to alter the imbalance of power in decision-making at the IMF or to give more "voice" to developing countries.

The ad hoc vote increases for four countries and a doubling of basic votes (which would not be implemented for years), will decrease the voting weight of advanced economies from 60.6% of the total to just about 59% of the total. African countries will see their vote shares increase a paltry 0.5% to a total of about 6.5%.

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. Furthermore, the revision of the quota formula may negatively impact the voting rights of many low- and middle-income countries.

Below is the full article.


With best wishes
Martin Khor
Third World Network

--------------------------

Why the IMF quota reform is inadequate

By Peter Chowla (Bretton Woods Project)
Published in South-North Development Monitor 19 Septenber 2006

The IMF proposal to reform its voting structure (which was adopted by vote on 18 September) is completely inadequate to address the institution's problems.

The IMF's International Monetary and Financial Committee has hailed the reform proposal as a significant step forward. But it is a real shame that this proposal has succeeded despite the reservations of more than 50 developing countries.

Anything short of fundamental reform of the IMF's governance structure will not restore its credibility.

The IMF proposal initially granted voting rights increases to just four countries - China, South Korea, Turkey, and Mexico - and called for a small increase to basic votes and a revamping of the way quotas are calculated.

But the proposal does nothing to alter the imbalance of power in decision-making at the IMF or to give more "voice" to developing countries.

The ad hoc vote increases for four countries and a doubling of basic votes (which would not be implemented for years), will decrease the voting weight of advanced economies from 60.6% of the total to just about 59% of the total. African countries will see their vote shares increase a paltry 0.5% to a total of about 6.5%.

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. Furthermore, the revision of the quota formula may negatively impact the voting rights of many low- and middle-income countries.

The third element of the proposal - a redesign of the formula that determines voting power - is hotly contested, and the last time the members of the Fund tried to reach consensus on a change, the issue became deadlocked. If the US preference for a quota formula based almost entirely on GDP at market exchange rates is accepted, then countries like Nigeria, Indonesia, Venezuela, Malaysia, South Africa and nearly every other African country would have diminished voting rights in the organisation.

Developed countries seem determined to waste this opportunity for reform by pushing cosmetic changes that do nothing more than tinker at the edges. The increase in basic votes is just symbolic and will have no substantial effect on the inequality in decision-making at the IMF.

British NGOs - including Oxfam, ActionAid, Christian Aid and others - have thrown their support behind a proposal for comprehensive reform and demand wholesale changes at the IMF, rather than tinkering with quota adjustments within the two-stage process that has been proposed.

The governance of the IMF needs a fundamental rethink to bring it in line with democratic principles considered acceptable at the national level. This should have been part of a comprehensive package that also addressed the composition of the board and the lack of transparency at the institution.

An examination of the resolution adopted by the IMF Board of Governors would show that the immediate ad hoc quota increase for China, South Korea, Turkey and Mexico would be limited to one-third of the gap between their current quotas and their calculated quota.

In order to prevent the quota change from adversely impacting the voting shares of low-income countries, the resolution includes provisions for at least a doubling of "basic votes", the votes allocated to every country just for being a member.

This seemed to satisfy the demands that emerged from the Africa Caucus of finance ministers who met in Mozambique at the beginning of August. Their communique stated that increasing basic votes "is the remaining alternative to safeguard the interests of Africa in the quota review process."

A leaked 28 August memo from the three African Executive Directors on the IMF board revealed their anger that in a draft resolution the basic vote increase would have had to await two rounds of ad hoc quota increases and an amendment to the quota formula.

In the interval, the African countries would have seen their meagre voice at the Fund further eroded. They initially called on their finance ministers to reject the draft resolution and looked to European countries to support their position. However, it appears that they were placated by a last-minute amendment to the resolution which ensures that a second round of ad hoc quota increases will have to await resolution of the basic votes issue.

However, the increase in basic votes would not alter the balance of power at the Fund, nor change the relative strength of any of the constituencies.

A September 2005 board paper, prepared by the Fund's finance department, indicated that an increase in basic votes "may not itself be sufficient to address broader concerns about the relative voting power of groups or members."

The paper notes that even an increase of basic votes to 10% of the total (the current discussions vary between 4.2% and 6.3%) would still give advanced economies 56.8% of the vote, only marginally less than the 60.6% they currently hold.

Ranjit Bannerji, a senior advisor to the Indian delegation at the IMF, was sceptical: "In any new formula where GDP carries a preponderant weight, the Europeans lose out hugely."

Additionally, the increase in basic votes would not take place immediately as it would require an amendment to the IMF's articles of agreement, a long process that involves approval by national legislatures. The US Congress is notoriously reticent to agree to IMF quota increases.

Daniel Bradlow, a professor at American University, was also doubtful about the utility of any basic vote increase. "The increase will only have a limited impact on the voice of the low income countries, particularly those from Africa, in the IMF."

Ngaire Woods of Oxford University agreed. Increasing the basic vote "would not achieve the goal of ensuring wider participation and coalition-building across the institution."

Bannerji concurred with these assessments, preferring the G24 proposals which suggest changes in how quotas are calculated. "The Africans would gain far more if a new quota formula is based on GDP at [purchasing power parity] terms and variability (including the variability of flows on account of fluctuating commodity prices) is adopted. But... the Europeans will have none of it."

An alliance of more than 40 European civil society organisations (CSOs) has proposed more radical governance reforms than those being discussed in official circles. Their open statement calls for restructuring to bring the institution's governance in line with standards that are considered acceptable at the national level.

As an interim step towards achieving that long-term goal, they have supported an immediate shift to a double majority voting system, under which any decision would have to be supported by a majority of member countries and a majority of the voting weight.

Under this system, no decision could be rammed through by rich countries holding most of the votes, nor by an unrepresentative group of small, poor countries.

This would also be much easier than trying to devise a quota formula that would satisfy all the different countries interested in IMF reform.

In addition, the CSOs have demanded an end to the convention of the IMF's top job always going to a European and full transparency, including publication of board meeting transcripts and votes.

(* Peter Chowla is Policy Officer with the Bretton Woods Project [www. brettonwoodsproject. org], which is a UK-based network of NGOs including Oxfam, ActionAid, Christian Aid, One World Trust and New Economics Foundation.)

 


BACK TO MAIN  |  ONLINE BOOKSTORE  |  HOW TO ORDER