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Reform of IMF: much ado about nothing

Strategic review calls for new quotas to reflect emerging countries' contribution and a bigger say for smaller countries of Africa

WHEN THE spring meetings of the International Monetary Fund concluded in April this year, Rodrigo de Rato, its Managing Director, unveiled a `grand bargain.' He proposed an enhanced role for the IMF to address global imbalances so that it could go beyond bilateral consultations and engage in a multilateral process. It would go deep into "relationships, linkages, spillovers'' between a country's policies and the rest of the world. The intention, clearly, was to target China though China was not named.

The `grand bargain'

By early June, Mr. de Rato announced a plan to commence discussions with the world's leading powers. He included China and Saudi Arabia along with the U.S., the Eurozone and Japan. Apparently, the discussions have not made much headway as there are no reports of any breakthrough. Many analysts interpret this more "as the IMF yielding to U.S. demands that the Fund bring China to heel over the country's refusal to let the yuan appreciate against the dollar.'' There are nagging doubts about the efficacy of this process.

The other side of the `grand bargain' was the proposal to effect radical changes in the ownership and governance of the IMF. It was clear that without such reforms, the IMF would lack legitimacy.

In February 2006, in a lecture delivered in New Delhi, Mervyn King, the highly respected Governor of the Bank of England, said the IMF as constituted at present was Euro-centric and that its voting structure would need to take into account the changing realities. Earlier, Gordon Brown, British Chancellor of the Exchequer, had called for a new Bretton Woods conference to undertake the needed transformation of the global financial architecture and create an IMF for the 21st century.

Indeed, many other academics and civil society organisations have been campaigning for reforms for some years taking into account the relative rise of private capital flows, shifting global demographic balance, the rise of emerging economies and other developments. The call was to put through reforms that would effectively address the criticism of the IMF for its "democratic deficit.''

The strategic review submitted at the spring meetings recommended a re-look at the IMF's quota system in order to "give more vote to countries that now account for a much larger share of the world economy and more voice to smaller members.'' This guarded suggestion received wide publicity and raised hopes about the future shape of the IMF in which the emerging economies and smaller countries of Africa would have a bigger say. Mr. de Rato had no illusion that the issue was political and was outside the IMF's remit.

Significantly, the suggestion was included in Mr. de Rato's strategic review of September 2005 for the annual meetings and was promptly dismissed by the U.S. The U.S. Treasury wanted the IMF to be "far more ambitious in its surveillance of exchange rates'' and not be seen "asleep at the wheels on its most fundamental responsibility.''

Change in U.S. stance

By April 2006, the U.S. had shifted its stance and was willing to go along with a review of `quotas' and `voting rights.' This was perhaps on the realisation that the IMF could not have "surveillance'' unless it had legitimacy. It could not have legitimacy unless its quotas were more realistic. The question was about the extent to which the U.S. (and other major partners) would cede territory. Even around that time Morris Goldstein (formerly Deputy Director of the IMF) had assessed that it was no more than "window dressing and inaction'' that would not "advance the grand bargain.' (Financial Times, April 21, 2006)

de Rato's plan

Mr. de Rato began to unravel his proposal in bits and pieces. He outlined a plan to restructure quotas in two stages: an ad hoc increase in the first stage for countries under-represented. This is deemed a "down payment.'' The second stage would be a longer review or road map for the next stage which will `more accurately reflect appropriate weights in the international system.' The idea, as clarified by Anne O. Krueger, First Deputy Managing Director, in June this year, is to "agree on some sort of automatic adjustment mechanism so that we would not run up against this problem again.'' Peter Costello, who represents Australia's Treasury and currently chairs the Group of 20, has detailed how complex the issues relating to quota revision are. (Financial Times, August 20, 2006.)

It is evident from other press reports that much work has been going on behind stage and is shrouded in secrecy. Fuller details have not been disclosed though, it seems, the IMF management has a proposal cleared by members holding 85 per cent of the current voting power.

Quota revision

Details disclosed by Mr. de Rato on August 31 show that in the first stage the quotas of China, South Korea, Turkey and Mexico would go up subject to ratification at the Singapore meetings. The combined increase for the four is 1.8 percentage points. This will be effective for two years. In the next phase, new quotas will be worked out after negotiations. The future formula has not been disclosed.

As a sop to poor African countries, there is a proposal to approve an increase in basic votes. What are these basic votes? Though the IMF is essentially governed by a quota regime that decides a country's voting power on the Executive Board, members receive 250 basic votes plus one vote for each SDR 100,000 of quota. The basic vote is to protect the interests of smaller states. With successive general increases in quotas, the share of basic votes has been reduced to 2 per cent from 11.3 per cent in 1945. Thus, allotment of basic votes to poor members is like offering a whistle to a crying baby.

African countries have reacted strongly and written to Mr. Gordon Brown, Chairman of the International Finance and Monetary Committee (IFMC), to block the proposal as it "would leave them in an even weaker position.''

The proposed revision will leave the U.S.' voting power unchanged. It can continue to veto any decision. The U.S. was pleading for quota revision based on GDP in view of its economic strength. However, this idea would not progress and leaves the status quo untouched. Interestingly, the U.S. administration hopes that the proposed reform "offers the best hope for dealing with such problems as China's currency situation.'' (Washington Post, August 24, 2006.) Sadly, China does not share this view.

The European Union has ensured through its clout that its quota or share of seats on the Board will not be reduced. In the early stages, the European Commission was willing to accept some reduction. But the European Parliament voted against it. Thus, the EU has stonewalled any reduction in its quota.

China firm on yuan rate

China has been unmoved over its currency rate and unyielding to the U.S. or G-7 pressures. It has repeatedly clarified that its exchange rate will be set on its own terms and in its economic interest and in the larger interests of its Asian partners. Though it is keen to bring its voting power in line with its economic strength, it is determined not to let others link it with the yuan issue.

As reports suggest, Finance Minister Jin Renqing and central bank Governor Zhou Xiachuan are not likely to push for a higher quota from the current 2.8 per cent.

More pointedly, China has been pleading for an increase in voting rights for all developing countries, especially in Asia. It is aware that quota revision is highly political and will rather let sleeping dogs lie. It has never depended on the IMF for assistance and has reserves that can bail out the IMF!

`Flawed formula'

Indian Finance Minister, P. Chidambaram, has vehemently opposed hasty changes in IMF quotas of developing countries. The Finance Ministry is said to have taken the stand that any new formula should reflect India's growth and contribution to the global economy. It feels that the present formula for calculating a country's quota is flawed. India's Executive Director on the IMF Board feels "a two-stage approach is neither necessary nor practical.''

Whatever the views or reservations of member countries, the caravan will move on and the proposal will be cleared at the annual meetings. At the end, it will neither enhance the IMF's legitimacy nor permit a greater role for emerging economies in its decision-making bodies. It will prove to be much ado about nothing.

K. SUBRAMANIAN

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