Bringing together some of the foremost authorities in their fields, this book is the result of work carried out on behalf of the G24, the world's only research effort devoting to furthering the interests of developing countries and bringing their needs to global attention. The book gives a voice to the developing nations of the world through its powerful essays and its fresh perspective.
About the Author
Ariel Buira is Director of the G24 Secretariat. He has been Special Envoy of the President of Mexico for the UN Conference on Financing for Development, Ambassador of Mexico, Member of the Board of Governors of the Bank of Mexico and Executive Director of the IMF.
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Challenges to the World Bank and IMF
Developing Country Perspectives
By Ariel Buira
Wimbledon Publishing CompanyCopyright © 2003 Ariel Buira
All rights reserved.
THE GOVERNANCE OF THE IMF IN A GLOBAL ECONOMY
The chapter reviews the elements that constitute the power structure (basic votes, quotas and the qualified majorities) by which the IMF is governed, following the commitment made by all participants in the Monterrey Consensus to increase the voice and participation of the developing countries and transition economies in the Bretton Woods institutions.
It finds that the small economies have been marginalized as a result of the relative erosion of basic votes and that quotas are far from representative of the size of members' economies. As a result, developing economies are under-represented while certain industrial countries, notably those in Europe, are over-represented. It finds that the governance of the IMF does not meet the standards of transparency and accountability needed to ensure the legitimacy of its decisions and the proper use of the resources at its disposal.
Finally, the question is addressed of how the decision-making process can be reformed to attain political legitimacy without weakening the credibility in financial markets.
Following the commitment of all participants in the Monterrey Consensus to increase the voice and participation of developing countries and transition economies in the Bretton Woods Institutions, the issue of governance has come to the fore of the IMF and World Bank. The Monterrey commitment was renewed in the IMFC and Development Committee communiqués of 12–13 April 2003, and has been reflected in recent administrative steps to strengthen the capacity of African constituencies.
Moreover, since 1997, following the Executive Board's approval of the Guidance Note on Governance, the IMF has increased its attention to governance issues among its member countries. The promotion of transparency and accountability are at the core of the IMF's efforts to ensure the efficient use of public resources, as well as the domestic ownership of IMF-supported reform programs. In recent years the IMF has developed instruments to help countries identify potential weaknesses in their institutional and regulatory frameworks that could give rise to poor governance, and to design and implement remedial measures well beyond the extent envisaged in 1997.
With resources of over $300 billion and an expanded mandate, the IMF is possibly the most powerful of all international institutions. In view of its great influence, two questions on the quality of its own governance arise:
1. How to attain the adequate voice and representation of all members in the decision-making process of the institution?
2. Does the IMF meet the standards of transparency and accountability needed to ensure the legitimacy of its decisions, the ownership by member countries of the programs it supports and the proper use of the public resources at its disposal?
Since the power structure of the World Bank closely parallels that of the IMF, the fundamental question to be addressed, in this connection, is this: how can the decisions of these international financial institutions (IFIs) attain political legitimacy and help secure a greater ownership of economic programs without weakening their credibility in financial markets or their efficiency in attaining their policy goals?
To answer these questions, one must first understand the IMF's voting structure and the rules by which it is governed. This requires a review of the role of basic votes and quotas in the determination of the current distribution of voting power and the requirements of special majorities and how they affect political control and accountability.
2. Votes and decision-making
At the Bretton Woods Conference in 1944 a compromise solution was adopted between two proposed approaches for determining voting power: one that related it solely to members' contributions or quotas, and the other that based it solely on the legal principle of the equality of states. The compromise reached based voting rights on a combination of the two: it gave each member country one vote for every $100,000 of quota plus 250 basic votes. Basic votes, and the voice in decision-making they give smaller countries, were also considered to be necessary in view of the regulatory functions of the IMF in certain areas.
But, with the nearly 37-fold increase in quotas since then, the share of basic votes in the total has declined from 11.3 to 2.1 per cent, despite the quadrupling of the IMF's membership. This has substantially shifted the balance of power in favor of large-quota countries, away from the compromise agreement contained in the IMF's Articles of Agreement that sought to protect the participation of small countries in decision-making. With the passage of time, inflation and growth have combined to increase the size of quotas, but as the number of basic votes has remained constant, small countries' participation in the total has declined; indeed, the basic votes of original members fell to 0.5 per cent of total votes. Today, as a result, quotas ('shares' in the case of the World Bank) are virtually the sole determinant of voting power, and basic votes have little significance. Consequently, the voice of small countries in discussions has been substantially weakened and their participation in decision-making made negligible. The developing countries have advocated the need to increase the number of basic votes to maintain a better balance in decision-making, to no avail.
Box 1 reviews two extreme options for the reform of the 'voting' structure of the IMF.
Box 1. Extreme options for the reform of the IMF Voting structure
One country one vote
Applying the principle of the legal equality of states, which is the rule in most international institutions, there would be no weighted voting; all members would have the same say in the affairs of the institution. However, states differ greatly in size and economic power. Thus, if all financial contributions to the IMF were equal, they would have to be set at a very low level – a minimum common denominator – to be accessible to all members. Consequently, the resources of the IMF would be insufficient for it to attain its purposes, which would further reduce market credibility of IMF decisions. This could in turn aggravate the adverse effect of the inadequacy of financial resources on members needing IMF support.
If, despite members having equal votes, financial contributions were not equal (but, rather, based on the size of their economies), larger countries that make larger contributions would tend to condition these on the adoption of certain policies, as in the case of the United Nations (UN) and several UN agencies and programs, for example UNESCO, International Criminal Court, Kyoto Protocol on Global Warming, etc. Thus, while politically representative of the membership, the one member one vote principle would not permit the effective functioning of the IMF.
Voting power solely determined by voluntary contributions
If a pure market approach were adopted and voting power were based entirely on voluntary contributions, the control of the institution would be in the hands of a small number of rich member countries. Consequently, the system of decision-making could not be considered representative of the interests of the membership as a whole. The legitimacy of IMF conditionality and its other policies, recommendations and regulatory functions would therefore suffer, as policies would appear as unlikely to take into account the needs and interests of smaller members and of potential debtor countries.
Two possible lending policies could ensue:
If the goal of shareholders with a controlling majority were the pursuit of profits, the cost of lending could be sharply increased to discourage borrowing by higher-credit-risk members or, more likely,
loans could be made at 'below market' rates of interest, subject to the acceptance by debtors of certain economic and/or political conditions of interest to the controlling members, but not necessarily in the best interests of the borrowers. Of course, the amounts disbursed would be the minimum necessary to attain their policy objectives.
Rather than a rules-based institution of monetary cooperation to which all members could turn to for assistance in dealing with their payments difficulties, such an IMF would simply be a foreign policy tool of the countries in control.
Given the limitations of the extreme options presented in the box, it appears that extreme solutions are to be avoided if the IMF is to attain a degree of representativeness that would provide the necessary legitimacy and transparency, as well as the market credibility required for international monetary cooperation. This requires voting structures with a fine balance between creditors and potential debtors. To achieve greater representativeness and credibility, certain principles seem to be necessary:
1. The institution should not be seen to be dominated by creditor countries. This seems necessary to ensure accountability, representativeness and legitimacy of decisions and a sense of ownership of programs essential to their success.
2. Debtor and potential debtor countries should have a considerable voice but not an assured majority in decision-making. Leaving aside other considerations, this seems indispensable to secure market credibility of IMF-supported programs.
3. Consequently, the total voting power of creditor and potential debtors should be in approximate balance. This would enhance the probability of each case being judged on its merits.
4. Contributions to the IMF and access to its resources should be closely related to the size of members' economies.
5. The size of the IMF should expand in keeping with the potential need for its resources, that is, related to the expansion of world trade and the growth of international capital movements.
3. Consensus and qualified majorities
Most IMF decisions are taken without a formal vote, simply by interpreting the opinion (or 'sense') of the Executive Board. The IMF's Secretary arrives at this opinion by taking an informal tally of the 24 Executive Directors for or against a decision and their voting power. In practice, this often means an additional loss of influence for the many developing countries represented on the Board by a developed country Director, since the Director's position will normally reflect that of his own country or the majority of the votes in his constituency.
The Articles of Agreement stipulate that some decisions require a qualified majority of the votes cast, that is, a particular proportion of votes. At the Bretton Woods Conference, it was initially proposed that qualified majorities should be required in only two cases (one being quota adjustments). The subsequently accepted Articles of Agreement, however, required qualified majorities, either a 70 per cent or an 85 per cent majority, for decisions in nine areas. With the First Amendment to the Articles of Agreement, the number of these decisions rose to 18; with the Second Amendment, the number rose to 53. 40 of these are Executive Board decisions; 13 are Board of Governors' decisions.
The obvious explanation for the increase is the desire to protect a particular interest that might be affected by such decisions, as decisions subject to a qualified majority can be taken only with the consent of the members having a high proportion of the total votes. Currently, the USA has 17.35 per cent of the total vote, Japan has 6.22 per cent, Germany 6.08 per cent and France and the UK 5.02 per cent each. The Group of Seven (G7) industrial countries have a combined total vote of 47.7 per cent, and together with the votes of the Swiss Director, they account for 50.34 per cent. If the votes cast by the Dutch and Belgian Directors which include those of a number of non-industrial countries are also added, the G7 countries' combined vote exceeds 60 per cent.
The concentration of voting power in the hands of the major industrial countries ensures that they have a controlling influence on IMF policies. Nevertheless, some of them have, in addition, sought actual veto power, either for themselves or for a few countries with similar interests. The result is that decisions on 18 subjects require 85 per cent of the total vote, and can thus be vetoed by the largest member country. 21 other questions must be decided by a 70 per cent majority, and can thus be vetoed by the five countries with the most voting power.
Among the issues that the IMF Executive Board must resolve by qualified majority are: decisions on quota size, rates of charge, exchange-rate arrangements, matters related to special drawing rights (SDRs), policies on access to IMF resources, payments to the IMF, use of the IMF's gold holdings and reserves, management of the IMF's investment accounts, publication of reports, remuneration of creditor positions and temporary suspension of IMF operations. Thus, all significant decisions – those related to the size of the IMF and the use of its resources, to SDRs, gold and the international monetary system – are subject to the will of one or a few countries.
Special majorities have been used to block decisions supported by an absolute majority of votes on increases in the size of the IMF (that is, quota increases) and on SDR allocations, sales of the IMF's vast gold holdings and policies on access to IMF resources. The special-majority requirement has often had the effect of inhibiting the discussion of even the important and difficult issues.
Since voting itself is weighted – and favors the industrial countries in decision-making – special majorities should not be necessary. For various reasons, however, the countries that have favored such majorities have not been prepared to do away with them. But even if these are retained, should any one country have the power to veto decisions on 18 subjects in a multilateral institution for monetary cooperation?
4. Review of quota formulas
Since quotas are the major determinant of voting power in the IMF, any review of the subject must consider the appropriateness of current quota formulae in terms of transparency, the relevance of variables included and the weight given to these, and whether their results reflect the relative positions of countries in the world economy.
The discussion of quotas is necessarily complex, since at the time of the Bretton Woods Conference quotas were assigned several important roles:
the determination of countries' contributions to the IMF
that of access to IMF resources
determination of relative voting power
The logic of having only one formula for determining these different roles has often been questioned. As Raymond Mikesell suggests, and in keeping with the well-known postulate of Jan Tinbergen of having one policy instrument for each policy objective, it makes considerable sense to separate the three functions performed by quotas. However, since at Bretton Woods the membership saw merit in having contributions and access to resources based on the same formula, such a far-reaching departure from the traditional definition of quotas might make change considerably more difficult.
The formula developed by Mikesell in 1943 had the political objective of attaining the relative quota shares that the US President and Secretary of State had agreed to give the 'big four' wartime allies, with a ranking that they had decided. Thus, the USA was to have the largest quota, approximately $2.9 billion; the UK, including colonies, about half the US quota; the Soviet Union a quota just below that of the UK and that of China somewhat less again.
The formula produced by Mikesell to determine each country's quota share, was based on: 2 per cent of national income, 5 per cent of gold and dollar holdings, 10 per cent of average imports and 10 per cent of maximum variation in exports, these last three percentages to be increased by the ratio of average exports/National Income (NI)! With variations in the weight given to these variables, and some changes in the definition (e.g., GDP for NI) of the main variables, the IMF continues to use the original formula to determine quota shares, which is combined with four others that give different weights to the same variables. An element of discretion is used in selecting the formulas to be applied in each case for determining members' quotas and other considerations come into play. Consequently, the determination of quotas lacks transparency and over time has become increasingly unrepresentative of the relative importance of member countries' economies.
Not surprisingly (see Table 1), current quotas do not accurately represent the actual sizes of economies, their ability to contribute resources to the IMF or their importance in world trade and financial markets. Moreover, as quota increases over the years have been predominantly (70 per cent) across-the-board or equiproportional, a large element of inertia has tended to perpetuate the initial quota structure. While current quota formulas are difficult to defend by any reasonable criteria, strong vested interests make change difficult.
Excerpted from Challenges to the World Bank and IMF by Ariel Buira. Copyright © 2003 Ariel Buira. Excerpted by permission of Wimbledon Publishing Company.
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Table of Contents
Contributors to this Volume; Foreword; Introduction; 1. The Governance of the IMF in a Global Economy; 2. Who pays for the IMF?; 3. An Analysis of IMF Conditionality; 4. Achieving Long-Term Debt Sustainability in Heavily Indebted Poor Countries (HIPCs); 5. The Poverty Reduction Strategy Paper Approach: Good Marketing or Good Policy?; 6. Capital Management Techniques in Developing Countries; 7. International Reserves to Short-Term External Debt as an Indicator of External Vulnerability: The Experience of Mexico and Other Emerging Economics; 8. Mechanisms for Dialogue and Debt-Crisis Workout that Can Strengthen Sovereign Lending to Developing Countries; 9. Developing a Global Partnership for Development; 10. International Public Goods: Operational Implications for the World Bank; Index
What People are Saying About This
'Nowhere is the voice of the developing nations expressed as cogently and powerfully as in these fresh and controversial essays.' —Dani Rodrik, Professor of International Political Economy, John F. Kennedy School of Government, Harvard University
'Incisive and powerful… "Challenges to the World Bank and IMF" is a unique book, providing the reader with a collection of highly professional papers from the perspective of developing countries, covering their economic problems and their relations with International Financial Institutions.' —Claudio M. Loser, Inter-American Dialogue
'This is a very refreshing and thorough critique of today's development orthodoxy represented by the World Bank and the IMF. The combination of iconoclastic perspectives and detailed knowledge of the subject matter makes it particularly powerful.' —Ha-Joon Chang, Director of Development Studies, University of Cambridge