Rich countries are being warned that they will endanger the IMF’s legitimacy if they obstruct far-reaching reform of its voting system.
As Monday’s deadline for Fund governors to vote on the reform package nears, a loose alliance of developing nations is calling for the new system to be tilted radically in favour of the poorest.
The governors’ vote seems certain to ratify the reform package – although some protest votes could be cast. Then a year-long negotiation will follow, on the principles underpinning the new formula for calculating the quotas on which countries’ voting power is based.
In interviews with Emerging Markets, senior figures from Africa, Russia, south Asia and Latin America warn that if the overhaul fails the low income countries, the IMF’s relevance will suffer.
The board started the reform process at its 31 August meeting in Washington, where it recommended ad-hoc increases in the quotas of China, Turkey, South Korea and Mexico.
It also agreed to come up with a new quota formula by next year’s annual meetings; to ensure that developing countries’ quotas would not be further eroded; and not to make additional ad-hoc changes before the major overhaul.
These commitments were added to the package only after three executive directors (EDs) who represent Africa threatened to oppose the package outright. Abbas Mirakhor (Iran), Peter Ngumbullu (Tanzania) and Damian Mane (Equatorial Guinea), whose constituencies include all of sub-Saharan Africa, backed off from a “no” vote at the board after it made the changes.
Now the stage is set for the battle over how quotas will be determined. All sides agree that nations’ GDP should form the basis for quotas; the African lobby wants it to be calculated on the basis of purchasing power parity. They also want a mechanism for reflecting volatility, in particular to help countries heavily reliant on commodity exports, and an increase in the basic vote to which all nations are entitled.
Mane told Emerging Markets that the changes agreed by the board were “not enough”, but are only a basis from which to move forward. “We want a completely new formula to ensure low income countries have a pay off,” he said. “We want a formula that reflects improvements in a country’s economy. Africa is the continent of hope, and its economic position will improve in the near future. We need a new formula that reflects not just big shareholders but future big shareholders.”
Shamshad Akhtar, governor of the State Bank of Pakistan, said she did not anticipate difficulty getting the reform package adopted this weekend, but that “having taken one step together, trying to satisfy developing countries that are underrepresented, and advanced countries that are also underrepresented, is not an easy task”.
The developed countries “already have a voice in the international financial system”, and what ever their share of the vote “will always have a voice just through their size and political and economic significance”. The challenge was for them to exhibit a “level of maturity” on future principles.
Hector Torres, executive director for Argentina, said the country supported the upgrade of the four, but has “deep reservations” about future plans. The new method of calculating quotas favoured by the majority “would end up increasing the relative voting power of the most advanced countries at the expense of the less developed,” Torres said.
“For us, increasing the legitimacy of the Fund requires increasing, rather than reducing, the voting power of the developing countries taken as a group,” he added. This view was underscored when other industrial powers had failed to match the US’s public pledge not seek an increase in its quota.