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TWN Info Service on Finance and Development (Oct07/05)

24 October 2007


REFORM IMF TO INCREASE OVERSIGHT OF ADVANCED ECONOMIES, SAYS G24

Developing countries have called on the International Monetary Fund (IMF) to improve its surveillance of advanced economies, putting as much focus into evaluating their vulnerabilities as the institution does in emerging market economies.

In issuing this call at their meeting on Friday, the ministers of the Group of 24 (the developing country grouping at the IMF and the World Bank) referred to the vulnerability of the US sub-prime mortgage market and its financial and real spillover effects on the global economy, and said that the recent financial turbulence highlighted the need to strengthen the multilateral regulation and supervision of the international financial system to manage systemic risks.

This surveillance, the G24 insisted, must be unbiased, impartial and applicable to all players in the global financial architecture. And in order to do so effectively, the IMF’s governance structure must also be reformed to ensure greater voice and representation to developing countries within the institution. The G24’s stress on the urgency of making progress on IMF governance reforms in their Communique  reflect the increasing frustration felt by developing countries on not only the pace of reform but also on the commitment of developed countries to the process.

Below is report on the G24 demands. It was published in the SUNS #6349, Tuesday, 23 October 2007.

This article is reproduced here with the permission of the SUNS.  Reproduction or recirculation requires permission of SUNS (sunstwn@bluewin.ch)."

With best wishes
Martin Khor
TWN


Reform IMF to Increase Oversight of Advanced Economies, says G24
By Celine Tan, Washington DC, 22 October 2007

Developing countries have called on the International Monetary Fund (IMF) to improve its surveillance of advanced economies, putting as much focus into evaluating their vulnerabilities as the institution does in emerging market economies.

In issuing this call at their meeting on Friday, the ministers of the Group of 24 (the developing country grouping at the IMF and the World Bank) referred to the vulnerability of the US sub-prime mortgage market[1]  and its financial and real spillover effects on the global economy, and said that the recent financial turbulence highlighted the need to strengthen the multilateral regulation and supervision of the international financial system to manage systemic risks.

This surveillance, the G24 insisted, must be unbiased, impartial and applicable to all players in the global financial architecture. And in order to do so effectively, the IMF’s governance structure must also be reformed to ensure greater voice and representation to developing countries within the institution, the G24 said after the second of their biannual meetings held here in the run-up to the World Bank and IMF Annual Meetings.

In their communiqué, G24 ministers also called for the “even-handed implementation of the 2007 Surveillance Decision recognizing that members have legitimate policy objectives in light of their particular circumstances and constraints” and highlighted “the importance of addressing the potential impact of volatile capital flows” in the light of the current financial context.

They added that “emerging markets and developing countries would be in a better position to face this challenge if they could have more confidence in receiving timely financial support” and reaffirmed their call to the IMF “to come forward expeditiously with a concrete proposal on a new liquidity instrument” to meet the needs of these countries.

They also underscored that “active policy coordination is critical to prevent the emergence of a larger crisis” and called for “the full implementation of the policy plans agreed to under the multilateral consultation process”, requesting that the Fund “should stand ready to call for a second process”.

Speaking at a press conference after the ministerial meeting, Oscar Tangelson, the Argentinean Vice-Minister of Economy and Production who is current chair of the G24, said that the G24 felt that the multilateral financial architecture needed to be improved in two areas - more effective surveillance and greater representation.

Firstly, there is a need “to strengthen the surveillance and regulation of the international financial system to avoid speculation protected by non-transparent financial activities” which “increases risks, negatively impact investments and therefore the whole economy”.

In this regard, the G24 stressed the need for the IMF to exercise surveillance over members’ economies on an impartial basis and to provide an automatic line of credit access without conditionalities to countries in crisis. “So far, the Fund has done its best only to survey our economies rather than developed countries, but as this crisis shows, this is a problem for the whole international financial system,” said Tangelson.

The G24 noted, however, that the ability of the Fund to play such a role is contingent upon reforming its governance structure, stressing “the utmost importance of reaching an agreement on a reform package to redress the legitimacy and democratic deficits in the Bretton Woods institutions that have eroded their effectiveness and public support”.

In this vein, the G24 said that a redistribution of quotas should be “the direct outcome of a simple, transparent and robust formula that should stand on its own merits” and that the reformed quota formula “must meet the test of producing a significant increase in the calculated quotas of developing countries compared to their shares in actual quotas”.

The G24 called for a new formula which includes a GDP blend with a strong component measured in purchasing power parity (PPP) terms and which corrects the measure of variability and increases its weight relative to openness to better reflect vulnerability. “It should also correct the measure of openness for intra-currency union trade and incorporate a compression factor to redress the economic size bias.”

The ministers called for “a sizeable second round quota increases so as to reduce the current overweight of advanced economies in the quota and voting structure” and stressed that there should be regular reviews of quotas and actual adjustments are made independent of liquidity needs in order to reflect the evolution of relative positions of countries within the world economy.

They also called for “at least a tripling of basic votes in order to enhance the voice of low-income countries” and for a consideration of a ‘double majority’ voting system for all policy decisions taken by the IMF.

Elaborating on this point, Tangelson said that anything less than a tripling of basic votes “would condemn less developed countries to playing a marginal role” in the institution. He said: “We need to recognize in the Fund’s decision-making process that we all have equal rights and obligations. To allow the Fund to continue taking decisions based on one dollar for one vote goes against credibility. Surveillance is not credible nor policy advice nor conditionalities of an institution managed only by the rich”.

The ministers said that staffing resources to Executive Directors representing large constituencies should be strengthened and called for the amendment of the Articles of Agreement to allow them to appoint more than one Alternative Executive Director as well as for better representation of Africa and other highly under-represented regions in the staffing and management of the Bretton Woods institutions themselves.

On the question of institutional leadership, the ministers reiterated “the importance of reforming the process for the selection of the heads of the [Bretton Woods] institutions, with rules and practices that are merit-based and promote broad geographic representation” and urged the Executive Directors to reach agreement on this new approach before the 2008 Spring Meetings. The ministers also “endorsed the agreement to open the process and establish a term limit and geographic rotation in the appointment of the IMFC Chairman”.

The G24’s stress on the urgency of making progress on IMF governance reforms in their Communique  reflect the increasing frustration felt by developing countries on not only the pace of reform but also on the commitment of developed countries to the process.

Speaking at a separate event later in the day, Amar Bhattacharya, head of the G24 secretariat, said that there had been frustration among developing countries over the recent leadership selection processes which favoured US and European candidates, not only for the post of IMF Managing Director (which went to Frenchman Dominque Strauss-Kahn) and Bank President (which went to former US Trade Representative Robert Zoellick), but also that of the chair of the International Financial and Monetary Committee (IMFC).

The new chair of the IMFC whose role is important in shaping the agenda of the

Fund’s political oversight body eventually went to Italian economy and finance Minister Tommao Padoa-Schioppa over Indian finance minister Palaniappan Chidambaram and Canadian finance minister Jim Flaherty after lobbying by the Europeans. The post was vacated by UK’s Gordon Brown, who chaired the IMFC for a decade, when he became Prime Minister.

The G24 discussions also prioritised climate change and its implications for developing countries and for development and poverty reduction. Ministers stressed that “any approach to climate change must take into account the fundamental issues of equity on energy access, climate mitigation and climate adaptation”, noting that “climate change arises mostly from the stock of past emissions which are primarily attributable to advanced countries” with per capita carbon emissions in developing countries remaining, on average a fifth of that of developed countries.

They called for the international community to find multilateral solutions to the problem based on the principle of “common but differentiated responsibilities and respective capacities” based on the United Nations Framework Convention on Climate Change (UNFCCC). This includes the development of a new framework to reduce carbon emissions to be agreed upon by the time of the UNFCCC conference in Bali this year as well as the development of innovative financing mechanisms for clean energy access and the development and transfer of technology to meet challenges of mitigation and adaptation in developing countries.

According to Tangelson, the G24 is concerned that the dimension of equity is included in the debate on climate change and that they become concrete action to help fulfil social development and environmentally sustainable activities: “We believe that there is inter-generational responsibility regarding the environment throughout the world. Climate change is in particular affecting production in less developed countries and is obviously in contradiction with poverty reduction goals that are the Millennium Development Goals”.

On the World Bank, the G24 ministers agreed that inclusive and sustainable globalization is the central development challenge, as outlined in the institution’s draft long-term strategy. They called upon all donors of the International Development Association (IDA) to raise overall aid commitments to its 15th replenishment.

While recognising the recent enhanced contribution of middle-income countries to IDA through substantial increases in transfers to the Association from the International Bank for Reconstruction and Development (IBRD) and the International Financial Corporation (IFC), the G24 stressed that “such transfers should not be in any way be considered as a substitute to the commitments by IDA donors”.

The ministers also called for the World Bank “to improve and tailor its support to meet the major but differentiated developmental challenges of middle-income countries” over and above the recent welcomed steps to simplify and reduce IBRD loan pricing. “Much more needs to be done to address the non-financial costs of doing business”, the ministers said, including the enhancement of the use of country systems and broadening the scope of infrastructure financing.

“The Bank Group will need to play a greater role in the provision of global and regional public goods, but thus must be based on its comparative advantage and mandate and in close cooperation with other multilateral organizations especially the UN,” they said.

The G24 also noted that process of enhancing the voice of developing countries at the Bank also needs to be expedited in line with the same principles and objectives which underlined the process of governance reform at the IMF. They called on developed countries to assist low-income countries in taking up their allocated capital subscriptions to the IDA (and hence enhancing their overall voting power) and affirmed the role of the IDA Executive Board where developing countries are more fully represented as the IDA’s main policy-making body.

The Democratic Republic of Congo takes over the G-24 chair from Argentina next year.

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[1]  The obliquely and politely worded “sub-prime mortgage market” reference is to what mainstream journals and financial media plainly calls the “collapse of the US housing market” or the bursting of the housing bubble. Long foreseen, but ignored by US authorities (including by then US Fed chief Alan Greenspan, now turned critic), this has been created by sub-prime mortgage lending by US banks and others, the financial re-engineering of these mortgages by use of derivatives and reissuing them as securities with very high ratings (often by self-assessment of hedge-fund managers), lax or non-existent regulations in the US and perhaps somnolent regulators in Europe, and reckless speculation by big banks in their ability to influence treasuries to step in and rescue them, and now the US Treasury initiated a $85 billion move for a private Super-fund (to ensure that Citigroup and others don't have to take big hits in their profits and capital) to create, in the words of Paul Krugman in a New York Times column, more smoke and mirror effects in the markets (SUNS).

 


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