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The Case for IMF Quota Reform

Authors: Daniel Gros, Director, Centre for European Policy Studies Oliver Stuenkel, Assistant Professor of International Relations at the Getulio Vargas Foundation in Sao Paulo, Brazil Nikita Maslennikov, Senior Analyst, Institute of Contemporary Development Pradumna B. Rana, Associate Professor, International Political Economy, S. Rajaratnam School of International Studies, Nanyang Technological University
October 11, 2012

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Editor's note: This roundup is a feature of the Council of Councils initiative, gathering opinions from global experts on major international developments.

IMF leaders failed to implement the governance and quota reforms agreed to in 2010 in advance of the October 2012 annual meeting in Tokyo, causing great consternation from many emerging markets and developing countries. Four international experts weigh in on the prospects for meaningful reform of the IMF's governing structure.

The "most glaring" challenge facing the IMF is the "continued over-representation of European economies, and in particular that of the euro-area economies," says Daniel Gros of the Center for European Policy Studies in Brussels. Similarly, Oliver Stuenkel of the Getulio Vargas Foundation in São Paulo, faults European and U.S. leaders for being "largely unwilling to constructively engage new actors and allow them to assume leadership within existing institutions."

Moreover, a greater responsibility for developing countries on the IMF could relieve some pressure on developed countries "navigating the difficult path of budget consolidation," suggests Nikita Maslennikov at the Institute of Contemporary Development in Moscow. Still, "the main reason why it is difficult to reform governance of the IMF is that it is a relatively inflexible organization," says Pradumna B. Rana, an associate professor at Nanyang Technological University in Singapore.

Daniel Gros, Director, Centre for European Policy Studies

The issue of IMF reform, and in particular the voting weights and Executive Board representation of emerging economies, has received new topicality because of the euro crisis. The new financial resources that Managing Director Christine Lagarde has secured, amounting to $438 billion as of June 2012, rely heavily on the contributions from several emerging economies, including China and Brazil, while excluding the United States. These new resources have been put at the disposal of the IMF to permit it to assist struggling eurozone countries that ask for assistance. There has subsequently been an understanding that the countries offering this money should be granted greater rights within the organization. Brazil has been the most outspoken in making this argument.

The most glaring problem is the continued overrepresentation of European economies, and in particular that of the euro area economies that share a common currency: the IMF Executive Board currently consists of twenty-four executive directors (ten European), five of whom are appointed (including France, Germany, and the UK) and nineteen of whom are elected. This overrepresentation has been only marginally corrected by the revision of the quotas agreed in December 2010.

Ironically, the continuing numerical overrepresentation of Europe does not automatically translate into a corresponding influence because the quotas and votes of individual euro area countries are not bundled in any systematic way. Euro area member states are supposed to coordinate their positions at the IMF. However, in reality, there has been limited coordination so far. The only direct representation of the euro area in the Executive Board is through the ECB, which, however, has only an observer status without any influence on the decision-making process.

The most glaring problem is the continued overrepresentation of European economies, and in particular that of the euro area economies.

A single euro-area membership in the IMF is still a long way off given the reluctance of the European states to relinquish potentially influential international positions. But change might come with the creation of the European Stability Mechanism (ESM).

A unified representation of the euro-area at the IMF could be achieved by using the ESM as the legal instrument to merge member state quotas in the IMF into a single euro-area quota. The ESM could thus bundle together the fiscal policy aspects of the IMF operations for its members. The euro area would then have a constituency of a similar size as that of the United States. As each constituency has two representatives, the practice from other countries suggests that one executive director could be nominated by the finance ministers of the eurozone (i.e. the person would be elected by the Managing Board of the ESM), and the second one could come from the ECB. As a result, both the ECB (on monetary issues) and a politically accountable institution on fiscal matters (the ESM) would be fully represented.

At the same time, a unified euro area quota would be significantly smaller than the sum of the individual euro area countries, allowing additional space for the emerging economies.

Oliver Stuenkel, Assistant Professor of International Relations at the Getulio Vargas Foundation in Sao Paulo, Brazil

At the G-20 Summit in 2009, global leaders announced that the heads of international financial institutions "should be appointed through an open, transparent, and merit-based selection process." In 2011, however, European leaders failed to honor their promise and insisted on a European to replace Dominique Strauss-Kahn as director of the IMF. In 2012, the Obama administration nominated Jim Yong Kim as its choice to be the new World Bank president. Obama's nomination of Kim essentially ensured his selection, causing exasperation among emerging powers for the United States' failure to consider the Nigerian candidate [Ngozi Okonjo-Iweala], who was widely thought to be more qualified.

A similar logic is likely to apply to quota IMF reforms, which were approved by the IMF Board of Governors in 2010. The IMF hailed these steps as "historic" and pointed out that they represented "a major realignment in the ranking of quota shares that better reflects global economic realities, and a strengthening in the Fund's legitimacy and effectiveness." Yet the 2010 reforms are subject to approval by national governments, including a deeply partisan U.S. Congress. Fearing a domestic backlash ahead of the presidential and congressional elections, the Obama administration has been unwilling to put the issue to a vote. Thus, as such, the reforms agreed to two years ago were not implemented ahead of the meeting. This is all the more paradoxical because the global economic developments during past two years have dramatically strengthened the case for better representation for the emerging powers. Only four months ago, at the G20 Summit in Los Cabos, Mexico, BRICS nations agreed to contribute more than $70 billion to the IMF, but not without voicing their concerns about the implementation of the quota reforms agreed upon.

This is all the more paradoxical because the global economic developments during past two years have dramatically strengthened the case for better representation for the emerging powers.

While European and U.S. leaders have asked emerging powers to act as "responsible stakeholders," they are largely unwilling to constructively engage new actors and allow them to assume leadership within existing institutions. One of the consequences is growing support in Brazil and other emerging markets forthe creation of a BRICS Development Bank.

The dithering and hesitation of established powers is remarkably short-sighted: While clinging to the status quo produces only tiny short-term benefits for Europe and the United States, it increases the trust deficit between the "Global North" and the BRICS, strengthening the hand of those in Beijing, Delhi, and elsewhere who argue that existing institutions are too rigid and therefore need to be undermined.

If the United States and Europe truly want to strengthen global governance, they will have to exercise leadership at home and convince their constituencies that engaging emerging powers is the only way of assuring that international institutions remain functional once the traditional powers are no longer in control. The difficult process of adapting to a new reality has just begun. In the coming years and decades, far more extensive IMF reforms will have to be implemented if the institution is to maintain its legitimacy in the twenty-first century.

Nikita Maslennikov, Senior Analyst, Institute of Contemporary Development

The decision adopted in 2010 by IMF members to reform the organization's quota distribution by increasing it by 9 percent to reflect the growing presence of developing countries, while moving towards a fully democratically-elected Executive Board, should be implemented in full.

At the same time, in the process of preparing decisions regarding the next round of quota reviews (possibly from 2015), it would be prudent to adjust the approach to developing criteria. The global economy is rapidly changing not only along quantitative parameters but also in substance. Changes in the relative proportion of certain countries in global GDP, as a rule, anticipate the equitable, and thus, optimal complementarity of these countries' responsibility for global sustainable development. This is most apparent in the irregularity (in terms of both time and substance) of the execution of tasks to rebalance global demand as a main driver of the reconstruction of the global economy.

Changes in the relative proportion of certain countries in global GDP, as a rule, anticipate the equitable, and thus, optimal complementarity of these countries' responsibility for global sustainable development.

To no small degree, this concerns developed countries, which are navigating the difficult path of budget consolidation, complemented with measures supporting economic growth such as adaptive monetary policy and structural reforms. But to no lesser degree, this also concerns developing countries (primarily those which will join the top ten IMF shareholders following the current round of quota reforms), carrying out their missions to transition to new economic models oriented towards the development of domestic demand, while reliably insulating from potential secondary effects from other regions of the world.

In other words, any new decision on quotas should take into account the degree to which the measures adopted and reforms undertaken correspond with the established objectives. The distribution of quotas among IMF members must correspond to their contribution to sustainable growth of the world economy. No less important is taking into account the level of openness of national economies on the basis of trade and investment liberalization, the role of market factors in forming currency rates, and the influence on volatility of world prices for energy, resources, and food.

A window of new opportunities for developing countries vis-à-vis the IMF's governance structure should arise with the implementation of the recommendations of the Triennial Surveillance Review and Consolidated Multilateral Surveillance Report (in October 2011 and April 2012).

It seems that the next important step could be the ongoing monitoring of progress on structural reforms (particularly in the social sector) of IMF members, as well as a process for evaluating the contribution of national economic policies in strengthening the global system of financial protection.

Pradumna B. Rana, Associate Professor, International Political Economy, S. Rajaratnam School of International Studies, Nanyang Technological University

The target was to make the 2010 Governance and Quota Reforms effective by the 2012 IMF/World Bank annual meeting in Tokyo this week. This is unlikely to happen, as there are still lingering differences over the formula to be used for the quota distribution, while the United States has yet to ratify the proposals. The Board Reform Amendment has also not yet been accepted by the required three-fifths of the members representing 85 percent of IMF's total voting power.

The governance of the IMF was designed in the interest of the like-minded original core members (led by the United States) in 1944.These core members placed strict limits on change as membership expanded.

It is not that the IMF has not made the effort. At the IMF annual meetings in Singapore six years ago, the members had agreed to a package of reforms to be completed over a two-year period. This resulted in the April 2008 quota and voice reform, which was announced by the IMF Board as "far-reaching reforms" of the institution aimed at rebuilding its "credibility and legitimacy." Again on November 2010, as part of the Fourteenth General Review of Quotas, the IMF Board announced the "biggest ever" quota and voice reform comprising a 6 percent quota shift to dynamic emerging markets and developing countries. Advanced European countries were also to give up two chairs on the IMF Board.

The main reason why it is difficult to reform governance of the IMF is that it is a relatively inflexible organization. Like many other clubs, it is designed to provide the founding members with firm control, while not allowing new members into its governance system. The governance of the IMF was designed in the interest of the like-minded original core members (led by the United States) in 1944.These core members placed strict limits on change as membership expanded. In comparison with the forty-four countries that participated at the Bretton Woods Conference, the membership of the IMF now stands at 188. Furthermore, the world is also becoming multipolar with the rise of emerging markets, especially those in Asia (principally China and India).

However, even with the ratification of the April 2008 quota reform, the quota share of emerging markets and developing countries will increase by only 1.1 percent. Another 2.8 percent reallocation will occur when the 2010 agreement is ratified. Although lesser than before, quota misalignments will continue to pose a challenge for the organization. China would rank number three in the world in terms of IMF quota shares. But Italy, with half the share of world GDP as India (in market exchange rates), would have a quota share, which is 11 percent higher. Indonesia, which ranks fifteenth in world GDP share, would rank twenty-firstin terms of IMF quota share.

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