Subject: Fw: From the New York Times
THE IMF
NEEDS A RESET
For all
the criticism that has been directed at it over the decades, the International
Monetary Fund provides vital services to the world economy. In particular, it
acts as the nearest thing to an international lender of last resort to
countries experiencing external financial crises — and thereby helps to
maintain international financial stability.
But the
I.M.F. is experiencing a crisis of governance. The governments of big
developing countries have become frustrated with the unwillingness of Western
countries to adjust the distribution of power in the fund in line with their
rising economic weight. Frustration has encouraged some to explore bypass
institutions, such as the development bank and the currency-pooling scheme
being negotiated among the BRICS (Brazil, Russia, India, China, South Africa).
Today the
four big BRICS (Brazil, Russia, India, China) have a combined share of world
gross domestic product of 24.5 percent, compared with the 13.4 percent share of
the four big European economies (Germany, France, Britain, Italy); but the four
BRICS countries have a combined share of votes of only 10.3 percent, compared
with the four European nations’ share of 17.6 percent.
In 2010
the fund’s board of governors agreed on a package of governance reforms,
subject to ratification by the I.M.F.’s member countries. Members would
increase their quota subscriptions (similar to credit union deposits), raising
the fund’s resources. At the same time 6.2 percent of voting shares would be
shifted in favor of “dynamic” emerging-market and developing countries.
The
I.M.F.’s managing director at the time, Dominique Strauss-Kahn, called the
accord “the most fundamental governance overhaul in the fund’s 65-year history
and the biggest-ever shift of influence in favor of emerging-market and
developing countries to recognize their growing role in the global economy.”
But the
small print revealed that the agreed vote shift from developed countries to
emerging-market and developing countries was only 2.6 percent, the rest being
adjustments within the category of emerging-market and developing countries
from “overrepresented” ones to “underrepresented” ones. Even if implemented,
the 2010 reforms would leave large discrepancies between a country’s share of
economic weight and its share of voting power.
The
overwhelming majority of I.M.F. member states approved the changes, but more
than three years later the quotas and votes remain unchanged because the United
States Congress has still not approved what the executive branch agreed to.
Without congressional approval the whole readjustment remains paralyzed.
The
deeper problem is that the 2010 accord is a one-off. I.M.F. member states say
that the fund should agree on a formula for the adjustment of quota shares
going forward, but the executive board has repeatedly missed deadlines for
doing so. Most members agree that quotas and votes should be based on a
country’s G.D.P., in the interests of simplicity and consistency. But the
Europeans insist they should be based not only on G.D.P. but also on
“openness.” In response, some developing countries argue that if measures
beyond G.D.P. are to be included, criteria like “contributions to global
growth” should be among them.
The
upshot is stalemate. This lack of agreement suits the Europeans well, for it
protects their current overrepresentation in the I.M.F.
To
unblock the stalemate, the board of governors should agree to amend the fund’s
constitution to delink the reallocation of quotas and votes from increases in
total financial subscriptions. The I.M.F.’s constitution says that a member
state can veto any loss of quota and votes. In practice this means that a
reallocation can only occur when there is also a large net increase in
financial subscriptions. By separating the two issues, the fund could institute
a routinized adjustment of voting power as countries’ relative economic weight
changes, without the changes always being held hostage to governments’
willingness to make new capital contributions.
This
would remove the fiscal component of the reforms and go a long way to disarm
its opponents in the Republican Party. The remaining parts of the 2010 reform
might even make them happy to come on board. The United States would keep its
solitary veto over super-majority decisions requiring 85 percent of votes, such
as changes to the fund’s constitution. And an agreement by the United States
would open the way to changes that substantially cut Europe’s
overrepresentation, making space for increased representation for
emerging-market economies — a long-standing American objective.
2014 is
the 70th anniversary of the Bretton Woods conference at which the International
Monetary Fund and World Bank were founded. Breaking the deadlock in I.M.F.
governance reform would help to ensure that emerging-market and developing
countries see the fund as a cooperative of states — and no longer a device for
Western countries to impose their conditions on others. It also would boost the
prospects for international financial stability, and not incidentally,
constitute a triumph for President Obama and the I.M.F.’s current managing
director, Christine Lagarde.
Robert H.
Wade is a professor of political economy at the London School of Economics.
Jakob Vestergaard is a senior researcher at the Danish Institute for
International Studies.
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