GMF - The German Marshall Fund of the United States - Strengthening Transatlantic Cooperation

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What can be the outcome of the reform of the International Monetary Reform? What is its political sense?

At the last spring meetings in April of the International Monetary Fund (IMF) and the World Bank in Washington, DC, Rodrigo de Rato, Managing Director of the IMF, decided to make some proposals to reform his institution for the next annual meeting scheduled in Singapore in September 19-20, 2006.

The International Monetary Fund (IMF) faces an identity crisis. Many member governments feel that the IMF is not responsive to their needs and that they lack the voice and vote, in other words, the influence, to bring about the institution. 184 countries are represented through 24 constituencies. Five countries with the largest IMF quotas appoint a member (France, Germany, Japan, the United Kingdom and the United States) and three countries have a single chair too (China, Russian Federation, and South Arabia). The remaining 176 governments form constituencies and elect another 16 members!

This comes from an increasing pressure from emerging countries notably from Asia. Asian countries did not forget the crisis of the 90’s and the controversial recommendations adopted by the Fund. They decided then to increase their exchange rates reserves to establish their monetary independency. They are now in position to request more power. The fact that a threat of a creation of a temporarily regional IMF was announced shows their determination. The quotas for many fast-growing emerging market countries are much smaller than the IMF’s own calculations would suggest they should be. For example, Korea is 66 percent underweight, Mexico about 35 percent and Turkey about 32 percent.

The Fund’s ability to persuade our members to adopt wise policies depends not only on the quality of its analysis but also on the Fund’s perceived legitimacy. And the legitimacy suffers if countries of growing economic importance are not adequately represented. This means, in particular, increases in voting power for some emerging-market economies. Members in Africa, where so many people are affected by the Fund’s decisions, are also inadequately represented. The recent attempts under the topic “Voice and the representation of the poors” failed in the past negotiations, essentially because the “poors” – essentially African countries, had “only” the political legitimacy. The emerging countries have the economic power. The reform may be now unavoidable.

A country’s quota directly translates into voting power because the number of votes a country has in the Fund is based primarily on the size of its quota. The United States with the largest quota has 17,08% of the votes and therefore the US can block (veto) proposals that require 85% weighted majorities, which largely involve institutional issues and rarely day-to-day operational decisions.

The EU is under pressure because apparently overrepresented.
At present the 25 EU countries appoint 6 of the 24 IMF executive directors. If EU constituencies represent about 32% of the voting share, this figure does not have a lot of sense since many “EU constituencies” include non EU countries (For example Belgium shares its constituency with Kazakhstan or the Netherlands with Israel and Ukraine). Secondly, considering the GDP level of the EU25 countries (which is the first in the world), the European countries should have the largest quota (in other words a veto). The headquarter should move to Europe according to the Fund’s articles of agreement.

But the “Realpolitik” has its own rules: the US will not abandon its veto and the EU countries will not voluntarily reduce the size of their IMF quotas. At the end of the day, mixed solutions can be found (creation of 2 additional seats, an increase in total IMF quotas, constitution of regional constituencies, etc). But this reform is the tree which hides the forest.

Behind it, the debate raises a more important one: the future of the financial and economic global architecture and the world economic governance.
Because the IMF is not a single tool which is isolated from the other multilateral bodies. What can be the impact of the reform of the IMF on the World Bank, on the United Nations Development Program, the World Trade Organization, the Organisation for Economic Co-operation and Development and on other multilateral agencies? More broadly, the reform shows the first translation of the increasing political and economic weight of countries like China on the international scene.

The US is still the unique superpower in the World economically and politically but this is not sufficient to deal with all multilateral challenges. Emerging countries have an increasing economic power and are now in a position to request more influence and this is just a beginning. In terms of legitimacy, poor countries which are often the first affected by decisions made by the “donors” request a “voice” too. Europe is in the middle way of the road. It is potentially the first economy in the world (in terms of GDP considering the European Union) but the Europeans do not speak with a single voice yet.

Environmental, sanitarian, economic challenges – so called “globalization” -are becoming more and more transversal whereas approaches and interest remain national or to some extent regional. A new response to the economic global governance is now necessary.

Benoît Chervalier is a Transatlantic Fellow at the German Marshall Fund of the United States