Global Trends by Martin Khor
Monday 5 April 2004
This year will see elections in many countries. But will the democratic process be witnessed at the International Monetary Fund?
Democracy has now emerged as a critical issue at the IMF as it has to choose a new leader. Whether he or she will be chosen democratically or through “back room deals”
Is now a major controversy.
The IMF’s main power comes from its being able to control the economic policies of a majority of developing countries that were unlucky enough to have fallen into an external debt trap.
To reschedule their loans, or get fresh loans, the borrowing countries have to follow a set of policies formulated by the IMF. Thus, who heads the IMF’s secretariat is able to wield tremendous power over the fate of developing nations, especially since the management and staff do have a lot of influence.
And despite so many criticisms of the IMF’s policy conditions and advice (for example, during the Asian financial crisis of 1997-99), it has basically stuck to its old formulas.
In recent years, the IMF has stressed that developing countries must adhere to principles of “good governance”, transparency and participation.
But these principles, or rather the lack of them, are coming back to haunt the IMF itself in its selection of a new leader.
On 4 March, the IMF’s managing director, Horst Kohler, resigned with immediate effect. He had been selected by some German political parties to take over the mainly ceremonial role of President of Germany.
This has started a race for his successor. Here lies the controversy. Although the IMF
has 184 members, and theoretically the new MD can come from any of these countries, it is the “tradition” that the post is reserved for a European.
In exchange, the post of President of the World Bank, the sister organization of the IMF, is reserved for an American.
Choosing the new MD will most likely not be through an open process involving the IMF’s 184 members, but through a “back room deal” involving a few rich countries.
Kohler’s “selection” four years ago was itself the result of an unseemly scramble between the major rich countries, which was then heavily criticized for its arbitrariness.
The German government made it clear it was the turn of a German to take over the MD post, after it had been held successively by two French men. Its first choice, Calo Koch-Weser, was turned down by the US. The Germans then put up Kohler’s name and insisted on his appointment, and others bowed to the demand.
This time around, the Europeans are again insisting on their apparent prerogative, with European Commission president, Romano Prodi, saying he was “deeply convinced this position should be occupied by a European.”
But this “reservation” of the top spot for a European is not in any constitutional provision. It is only a convention, and one that is challenged by developing countries as well as pockets of the establishment.
The Financial Times of London declared in an editorial headline: “The IMF should not be a European fief: Time to end the carve-up of top Fund and World Bank jobs.”
It concluded: “It is time to end the 55-year-old traditional horse-trading that allots the head of the IMF to a European and the World Bank to an American and to institute a global executive search for candidates based on merit, rather than nationality.”
Officials in developing countries have been arguing just that. They have a larger stake in the IMF as they are the recipients of the IMF’s loans and of the policies that come with the loans.
Policy mistakes made by IMF management and staff can have (and have had) devastating effects on the economy and social-political fabric of the developing countries. They thus feel they must be given greater participation rights in decision-making, including in the choice of person for the IMF’s top post.
The Group of 24, which represents developing countries in the IMF and the World Bank, has called for an open process of selection of the new IMF head, based on merit.
The G24 secretariat’s director, Ariel Buira, said at a press briefing in Geneva on 9 March that the new IMF managing director should be chosen through “a transparent, democratic and participatory process on the basis of merit regardless of nationality, and not through back room deals among a few countries”, according to a report by C. Raghavan in the SUNS Bulletin.
Buira said the executive boards of the IMF and World Bank had set up a working group
on the appointment of the heads of these two institutions, and the boards had endorsed the group’s report on 25 April 2001.
It recommended that in choosing the IMF managing director, all executive directors should be informed in a timely manner regarding the candidates, their credentials and knowledge of the institution.
All members of the executive board should be consulted in the process of considering the candidates. The choice of a candidate representing the diversity of the IMF’s membership across regions would be in the best interests of the Fund regardless of nationality.
Buira said these recommendations should be implemented in choosing Kohler’s successor.
According to the SUNS Bulletin, Buira also said the governance structures of the IMF and World Bank were based on the economic situation in 1945. But now the world was different, economically, politically and socially, yet the institutions did not reflect these changes.
“The group of 7 industrialised countries have been using their position of dominance as share holders through initial quota allocations, to decide that the IMF head shall come from Europe and that of the Bank from the US, and the candidates are named and chosen through back-room deals,” said Buira.
“The choice should be through an open, participatory and objective assessment process. Only those who have been using the resources of the two institutions and have experience of their programme conditionalities and the costs would be better able to understand the needs of the users.”
The candidate with the best qualifications and merit should be chosen through an open process. The choice should not be confined to Europeans. There are any number of highly qualified and able personalities in the developing world who could be chosen, added Buira.
Despite this most reasonable position of the G24, it is unlikely the rich countries will give up what they see as their privilege and allow an open process.
In recent days, the Western newspapers have been speculating on the Europeans likely to succeed Kohler. They include the Spanish finance minister Rodrigo Rato, Jean Lemierre of France, and UK chancellor Gordon Brown.
The developing countries’ executive directors in the IMF should act quickly by demanding that the IMF and World Bank working group’s recommendations on the IMF managing director’s appointment, and endorsed by the boards in April 2001, be implemented.
This issue of how the IMF head is selected is part of the larger problem of undemocratic governance of the Fund and the World Bank.
The decision-making power in these institutions is divided through votes which are in turn weighted according to the quotas allocated to each country for owning shares in the institutions.
An overwhelming share of the quotas are held by the developed countries (for example, the US having 17% of the total, Japan, Germany, France and the UK 22%, and Canada, Netherlands, Italy and Belgium 11%).
The original quotas were set more than 50 years ago and do not reflect changed realities, such as the increased share of developing countries in world income, trade and foreign exchange reserves. But it is difficult to change them because of resistance from the rich countries that benefit from the system.
As Buira says in a paper “Governance of the IMF”: “Current quotas do not accurately represent the actual size of economies, their ability to contribute resources to the IMF or their importance in world trade and financial markets...
“While current quota formulas are difficult to defend by any reasonable criteria, strong vested interests make change difficult.”
So, in a year when so many countries will have elections to choose their governments for another four or five years, it is unlikely that we will see democratic elections in the IMF to select its leader for a five-year term.