U.S. and Europe Battle to Continue Dominating IMF

 

Credit: Bretton Woods Project
Credit: Bretton Woods Project


IDN-InDepth NewsAnalysis

TORONTO (IDN) - The much-awaited governance reform of the International Monetary Fund (IMF) has been thrown into disarray by a battle of attrition between the U.S. and Europe over reducing European board seats. Other promised reforms, including voting shares and leadership selection, also appear to be going backwards. As a result, wealthy countries, which currently hold almost two-thirds of the vote, would most likely continue to dominate IMF.

The current term of the IMF board expires on October 31 and, according to analysts, the time is tight if new members are to be elected. "The U.S. seems set on holding out for a concrete concession from Europe, which may mean that the board will revert to 20 members until a new agreement can be reached. This threatens to temporarily disenfranchise the four chairs with the lowest voting share: Brazil, India, Argentina, and Rwanda," says the Bretton Woods Project (BWP) in an analysis of the current situation.

The dice was cast when the U.S. finally made good on previous threats and vetoed the decision in August. As a result, unless it changes its position, the IMF board will shrink to 20 seats by the end of October. However, in mid September, the German finance minister Wolfgang Schaeuble aimed at the U.S. weak spot by demanding that it abandon its veto in return for Europe giving up seats.

Paulo Nogueira Batista Jr, the Brazilian IMF executive director said the current situation represented a "fully-fledged, possibly unprecedented crisis". Domenico Lombardi of UK think-tank the Oxford Economic Policy Institute called it "an aggressive move generated by a strong sense of frustration at what the U.S. sees as a European inability to foster the process of IMF reform".

Maintaining the IMF board size at 24, rather than the 20 stipulated in the Fund's articles of agreement, requires an 85 per cent majority vote every two years, meaning the U.S., with nearly 17 per cent of the vote, can block this, explains BWP.

Continued resistance to change by rich countries has in fact led to increasing frustration on the part of developing countries. Trevor Manuel, head of South Africa’s National Planning Commission, and author of a 2009 expert committee report on governance said in September that IMF and World Bank governance reform has "proceeded at a snail's pace".

In August, African finance ministers increased the pressure on the Europeans by demanding a third seat for Africa, in recognition of the large number of countries represented by its current board representatives, and the heavy engagement of the continent with the IMF through lending, advice and technical assistance.

However, BWP analysts expect that the current quota negotiations may push China into the top five shareholders for the first time. As a result, France would probably fall out and have to give up its permanent seat allotted to the big five by the Fund's Articles of Agreement.

Smaller European countries with board seats, including Belgium and the Netherlands, are also fighting to protect their positions, keen to maintain control as the IMF grows in size and influence, including in eurozone countries such as Greece, notes the BWP analysis.

The voting power struggle with the U.S. is indeed putting significant pressure on the Europeans to finally consolidate the nine seats they currently hold. Independent experts who put together the 'fourth pillar' report on IMF reform have previously recommended a reduction of European seats to three or four.

IMF managing director Dominique Strauss-Kahn said in June that he supports a single seat for eurozone countries. In September, the benefits of consolidation were spelled out by European Central Bank president Jean-Claude Trichet who said that Europe needed to speak with a united voice to ensure it retains its influence in the IMF.

BWP points out that in the past, as Germany, France and the UK have had single-country permanent seats, they have been obstacles to European consolidation. Strauss-Kahn highlighted the old-fashioned power politics that are at play by admitting that as a French finance minister in the late 1990s, he had tried to merge the French and German seats "until the French minister of foreign affairs stepped in, explaining it was a very interesting idea, but that if we started that, we'd have to do the same thing at the Security Council of the UN and there was no way".

Meanwhile, says BWP, in September the World Bank appointed Egyptian investment minister Mahmoud Mohieldin as its new managing director without an open, transparent process for his selection. News agencies reported a German official as saying that Europe is still planning to use its antiquated privilege of appointing the head of the IMF as a bargaining chip in negotiations.

This together with reports that the U.S. still wants to nominate the head of the Bank, has left observers wondering if public commitments made in 2009 and repeated regularly since, to select all senior management positions in the IFIs (International Finance Institutions) through an open, merit-based and transparent process will ever be honoured.

OTHER REFORM STALLED

According to BWP, the public spat over board seats has overshadowed continuing negotiations over quota share and associated voting rights. These continue to back away from existing commitments to a shift of "at least" 5 per cent to developing countries and a reform of the quota formula.

Current proposals in a July IMF paper, and an August Australian government paper for a G20 working group would result in shifts to emerging market and developing countries of less than 3 per cent, says BWP, adding that even a 5 per cent shift, if it all went from developed to developing countries, would leave the IMF dominated by wealthy countries, which currently hold almost two-thirds of the vote.

It is also not clear if the commitment to "protect the shares of low-income countries" will be upheld, BMP analysts say. Current proposals favour classifying low-income countries as those eligible for funding from the IMF's Poverty Reduction and Growth Trust, which includes some lower-middle-income countries such as Armenia and Georgia.

In July, IMF managing director Strauss-Kahn said he hoped to boost the Fund's lending resources by $250 billion from $750 billion to $1 trillion. This would represent a doubling of total quotas, the position previously backed by the G24 group of developing countries. This, BWP analysts say, would allow more space for shifting voting shares to developing countries, give countries greater access to IMF resources, and also make the Fund less reliant on ad hoc lending from rich countries through the New Arrangements to Borrow.

In July, the IMF released a paper examining non-quota aspects of governance reform, which seemed to indicate little impetus for change, in part because of unhappiness with wrapping these reforms into quota discussions.

It is not surprising, therefore, that civil society groups have expressed concern about the snail's pace of reform and called for more radical options to remain on the table. Pamela Gomez, of NGO Oxfam International, said "governance reform at the IMF is long overdue".

In the UK, nine NGOs, including Christian Aid and ActionAid wrote to the UK finance minister calling for more substantive reform on voting and board seats, and supporting the introduction of a double majority voting system.

Similar letters were sent by NGOs in other European countries and a leading group of academics and experts wrote an open letter to IMF governors urging that reform be extended to encompass a "comprehensive package" including improved transparency and an end to the U.S. veto.

One leading expert, David Woodward in an article in 'Development' went further, arguing that "economically-weighted voting in the IMF and World Bank should be abolished, and replaced with a system based on democratic principles -- somewhere between one-country-one-vote and one-person-one vote". (IDN-InDepthNews/30.09.2010)

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