IMF 2010 Reform PDF

The IMF 2010 reform Angel Saz, Hugo Cuello 2015 Introduction The International Monetary Fund (IMF) reform has always been one of the most controversial cases of international financial governance. The IMF was created in 1945...

The IMF 2010 reform Angel Saz, Hugo Cuello 2015 Introduction The International Monetary Fund (IMF) reform has always been one of the most controversial cases of international financial governance. The IMF was created in 1945 as an organization working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The fund now has 188 countries making up its near-global membership. Each country pays a quota based broadly on its relative size in the world economy, although the formula is very complex. The quota is the proportion of funds contributed by any given member to the IMF, and also corresponds to that country’s voting power. Quota formula The Board of Governors is the highest decision-making body of the IMF, consisting of one governor and one alternate governor for each member country. However, the Board of Governors delegate all the day-to-day business of the IMF to the Executive Board, establishing this institution as the central body of the financial organization. The Executive Board is composed of 24 directors, who are appointed or elected by member countries or by groups of countries. Big countries such as the US, Japan, Germany, France and China have their own seat on the board while others have to share their voting power to form a constituency and appoint a director to represent their countries’ interests. The seat is normally held by the country with the largest voting share of the constituency. In this regard, wide-ranging governance reforms have always been demanded to reflect the increasing importance of emerging market countries and to ensure that smaller developing countries will retain their influence. The IMF has long been accused of being too Eurocentric, with Europe having 9 of 24 Executive Board members and 30 percent of total voting power. Europe produces 20 percent of world GDP, making it overrepresented on a GDP basis. Many say that to be effective, the IMF must be seen as representing the interests of all its 188 member countries. And for this reason, it is crucial that its governance structure reflect today’s world economy. The main reason why it is difficult to reform the governance of the IMF is that it is a relatively inflexible organization. Like many other clubs, it is designed to provide the 1 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. Ultimately, the distribution of “chairs and shares” within the Executive Board gives the US and other advanced industrialized countries overwhelming influence over IMF decision-making. As a matter of fact, the US, with 16.74 percent of the vote, holds a power of veto, as decisions have to be made by at least 85 percent of the voting share. However, some countries, especially in Africa and Asia, have been trying to put pressure on Europe for many years. The usual European answers have been to accept that a change is needed, but without any mention of a reduction in quotas or seats. There has been an enormous precedent of calling for IMF reform. At the IMF Annual Meetings in Singapore in 2006, members 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”. 1 However, even with the ratification of the April 2008 quota reform, the quota share of emerging markets and developing countries increased by only 1.1 percent and quota misalignments continued to pose a challenge for the organization. China ranked number six in the world in terms of IMF quota shares. But Italy, with less than half the share of world GDP than India (in PPP), had a quota share which is 11 percent higher. Indonesia, which ranks fifteenth in world GDP share, ranked twenty-first in terms of IMF quota share. 1 Maslennikov, Nikita: “The Case for IMF Quota Reform”. Council on Foreign Relations. October 11, 2012. 2  Voting shares IMF MEMBER VOTES % IMF MEMBER VOTES % COUNTRY SHARE % IMF Votes after 2010 Reform World GDP 2010 IMF Votes before 2010 Reform 1. US 16.74 1. US 16.47 1. US 20.15 2. Japan 6.01 2. Japan 6.13 2. China 13.02 3. Germany 5.87 3. China 6.07 3. Japan 5.92 4. UK 4.85 4. Germany 5.30 4. India 5.22 5. France 4.55 5. UK 4.02 5. Germany 3.91 6. China 3.65 6. France 4.02 6. UK 3.03 7. Italy 3.16 7. Italy 3.02 7. Russia 3.00 8. Saudi Arabia 3.16 8. India 2,63 8. France 2.96 9. Canada 2.88 9. Russia 2.59 9. Brazil 2.88 10. Russia 2.69 10. Brazil 2.22 10. Italy 2.44 11. NL 2.34 11. Canada 2.21 11. Mexico 2.09 12. Belgium 2.69 12. Saudi Arabia 2.01 12. Korea 1.94 13. India 1.88 13. Spain 1.92 13. Spain 1.88 14. Switzerl. 1.57 14. Mexico 1.80 14. Canada 1.83 15. Australia 1.47 15. NL 1.76 15. Indonesia 1.40 16. Mexico 1.43 16. S Korea 1.73 16. Turkey 1.25 17. Spain 1.38 17. Australia 1.47 17. Australia 1.16 18. Brazil 1.38 18. Belgium 1.30 18. NL 0.92 19. Korea 1.33 19. Switzerland 1.17 19. Saudi Arabia 0.86 In September 2008, Dominique Strauss-Kahn, the managing director of the IMF, laid out a four-pillar approach to reforming the governance structure of the IMF. He claimed that there is a majority of industrialized countries, with 60 percent, over the 40 percent for emerging markets and developing countries. He helped to achieve a mention in the 2009 IMF Annual Meeting that promised a “shift in quota share to dynamic emerging market and developing countries of at least 5 percent from overrepresented to underrepresented countries”. 2 However, those with the most to lose, particularly Europeans, continued to block deeper reform. In October 2009, US Treasury Secretary Timothy Geithner urged the IMF to implement reforms that would give emerging market and developing countries more say in the financial institution. “A more representative, responsive and accountable governance structure is essential to strengthening the IMF’s legitimacy,” Geithner said in a statement. 3 He also noted that G20 countries had committed to shift some control in the International Monetary Fund from countries with strong representation to those 2 IMF Governance Reform: Update from Istanbul; IMF News, October 14, 2009. 3 Statement by Secretary Timothy F. Geithner at the International Monetary and Financial Committee Meeting; Press Center, U.S. Department of the Treasury. October 4, 2009. 3 with little input. These remarks followed a decision at a Pittsburgh forum in September 2009 that the G20 would become the world’s main economic decision-making forum, effectively taking over the role of the G7 group of rich countries. A group of 15 policy experts from the Brookings Institution, the Centre for Global Development and the Peterson Institute for International Economics also advocated Geithner. In January 2009, he received a letter urging the US government to reopen the IMF reform package starting with discussions with other governments in the G20 meetings. The US procedural trick The Pittsburgh summit communiqué stated that “we are committed to shifting at least 5 percent of the quota shares to dynamic emerging markets and developing countries, from overrepresented countries to underrepresented ones, using the current quota formula as the basis to work from”.4 The leaders also stressed their commitment to protect the voting share of the poorest in the IMF, although no agreement was ever reached on this matter. At the beginning of 2010 there was no reason to think it would be a significant year for governance reform either. In fact, in July 2010 the IMF released one of the many papers examining non-quota aspects of governance reform, which seemed to indicate low impetus for change, in part because of unhappiness with wrapping these reforms within quota discussions. On July 28, the regular Executive Board meeting on IMF reform finished with no consensus once again, claiming that “views remained divided on the package approach to governance and quota reforms”.5 However, thanks to United States action coupled with Asian and African political pressure, agreements on structural reforms were going to take place only a couple of months later. Some days after the Executive Board meeting, the US made an unexpected move that transformed the debate. In a regular Board of Governors meeting at the beginning of August, a proposed resolution for carrying out the 2010 election of executive directors did not secure the 85 percent majority needed to be passed. American officials abstained on this vote, blocking the board from being reconstituted in its current form for another two years. Under its founding charter, the IMF Executive Board is supposed to have 20 members, but the number was expanded to 24 under a succession of agreements starting in 1992. Over the past 20 years, member countries had voted every two years to allow an additional four seats. The US, with 16.74 percent of the vote, had threatened to veto this decision before. But this time, using what the media called a “procedural trick”, the US put in actual risk the election of the board. 6 This move directly threatened to disenfranchise the four seats of some of the lowest voting-share countries such as Brazil, India, Argentina and Rwanda. Considering that the term of the board expired on October 31, time was tight if new members were to be elected. In other words, the African member states and other developing countries were 4 G20 Leaders Statement: The Pittsburgh Summit; G20 Information Centre. September 24-25, 2009. 5 IMF Executive Board Discusses IMF Governance Reform; Public Information Notice (PIN) No. 10/ 108. August 2, 2010. 6 Beattie, Alan: “IMF governance turns into giant sudoku puzzle”. Financial Times, September 26, 2010. 4 threatened with losing one seat if an agreement failed to materialize before the end of October. However, on August 26, in the first press briefing after the meeting and the summer break, Gerry Rice, deputy director of the IMF’s External Relations Department, said that the Fund was confident that some sort of resolution could be reached before the deadline. Although this could have produced an unprecedented crisis on the board, Rice didn’t mention this issue in his brief until he was asked directly by a journalist. His intention to calm the situation down inferred that he may have known what strategy the US was following. During 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. It was quickly understood that the US was set on holding out for a concrete concession from Europe. The Treasury made clear that its abstention was no error of omission. Treasury Department spokeswoman Natalie Wyeth sent an email to journalists confirming that US Treasury Secretary Timothy Geithner “supports reforming IMF governance structures to better reflect the realities of today’s global economy […] This includes reform of the IMF Executive Board to strengthen the representation of emerging market and developing countries.” Wyeth added that “The United States is pressing for this change to advance multilateralism, to make the IMF more representative and strengthen its legitimacy, and to enhance the voice of dynamic emerging market and developing countries.” Timothy Geithner, speaking at a congressional hearing in mid-September, confirmed the strategy saying that the IMF “still has a very unbalanced governance structure,” with Western European countries enjoying a “disproportionate share” of spots on the Executive Board. 7 Europe’s late response while US gains support Washington’s push surprised many European officials, who accounted for no strategy or plan, as the US abstention on the voting was not expected. Jean-Claude Trichet, president of the European Central Bank, said European leaders had taken a cautious approach to the problem, but it was “very important for the Europeans to be united and to have a clear, united position”. At the beginning of September European officials held the first meeting on the issue in Brussels. However, they reached no consensus. Their plan was to arrive at a common position before the G20 finance ministers met at the end of October. “Finance ministers touched on this question over lunch this week, and we’re looking forward to more converging views,” said Amadeu Altafaj, spokesman of the economic and monetary affairs commissioner, Olli Rehn. Some positions were solid, as Bertrand Benoit, a spokesman for the German finance ministry, made clear. He claimed that “as things are, the number of directors from European countries exactly 7 Schneider, Howard: “U.S. calls IMF too Eurocentric”. Washington Post, September 23, 2010. 5 reflects the weight of European countries in the IMF and there’s no case to be made for European countries being overrepresented”. 8 Internal negotiations continued, with some trying to take the opportunity to discuss the possibility of a single European seat on the Executive Board, or at least a single Eurozone seat. However, on September 14 Wolfgang Schäuble, the German finance minister, suggested publicly that Europe would have to accept fewer seats. “I agree that representation of developing and emerging countries at the board will have to increase over time and that other countries or regions will have to reduce their representation as their quota shares are reduced,” he told the Financial Times. However, Schäuble said that in return, “we should consider lowering the special voting majorities for the most important IMF decisions so that in the future we can do without a blocking minority for a single country or a very small group of countries”. 9 In other words, Germany was asking the US to give up its veto power in exchange for reducing the European seats on the board. Schäuble said Berlin had informed other European countries of its proposal but it did not represent a common European position. During September and October, many other countries publicly voiced their position on the issue. Amar Bhattacharya, director of the Group of 24, a coalition of finance ministers from developing countries, defended the role of Asia leading the global recovery in both population and economic growth. He said “the issue is where within the developed world should the adjustment take place, and when you look relative to the world economy—population, other indicators—the spotlight really is on Europe.”10 On September 23 Paulo Nogueira, member of the Executive Board representing Brazil and eight other countries, published an article in the Financial Times asking Europe to be responsible and reach an agreement before it was too late. “Adopting these reforms would also be an important step in reforming global governance more broadly. Advanced countries talk loftily of shifting power to emerging markets, but we now need more than speeches and noble declarations,” he claimed. Nogueira pointed at the EU by saying that “It is also undeniable that Europe is overrepresented. The European Union accounts for roughly 20 per cent of global gross domestic product but almost a third of IMF votes. European countries currently hold nine of the 24 executive board chairs. The IMF’s managing director has always been a European, while Europeans are also overrepresented among IMF staff, especially at higher levels.” 11 The US proposal increased internal tension between European countries too, as big European countries would likely retain their seats. Instead, a reduction of seats would clearly affect countries like Belgium and the Netherlands, who were representatives of each constituency. Whatever reorganization took place would likely leave them to be 8 Chan, Sewell & David Jolly: “U.S. Pressures I.M.F. to Expand Role of Growing Economies”. The New York Times, September 9, 2010. 9 Beattie, Alan: “Germany asks US to give up its IMF veto”. Financial Times, September 14, 2010. 10 Schneider, Howard: “U.S. presses for fewer Western Europeans on the IMF board”. Washington Post, September 22, 2010. 11 Nogueira, Paulo: “Europe must make way for a modern IMF”. Financial Times, September 23, 2010. 6 represented by someone else, like France or Germany, or at best Italy. The smaller European countries were hoping that they could agree to give up some votes in return for keeping their places on the board. IMF Executive Board Composition (April 2010) APPOINTED DIRECTORS % of fund total Representing country Director 16.74 US Meg Lundasager 6.01 Japan Daisuke Kotegawa 5.87 Germany Klaus D. Stein 4.85 France Ambroise Fayolle 4.85 UK Alexander Gibbs ELECTED DIRECTORS % of fund Country representing Number of Other countries in the constituency total the constituency countries (in order of votes) 5.13 Belgium 10 Austria, Turkey, Hungary, Czech Republic, Belarus 4.77 Netherlands 13 Ukraine, Romania, Israel, Bulgaria, Croatia, Bosnia 4.44 Spain 8 Mexico, Venezuela, Guatemala, El Salvador, Costa Rica 4.10 Italy 7 Portugal, Greece, Malta, Albania, San Marino 3.65 China 1 3.63 Canada 12 Ireland, Jamaica, Bahamas, Barbados, Belize, St. Lucia 3.52 Thailand 13 Indonesia, Malaysia, Philippines, Singapore, Vietnam 3.44 Korea 13 Australia, New Zealand, Papua New Guinea, Vanuatu 3.43 Denmark 8 Sweden, Norway, Finland, Lithuania, Latvia, Iceland 3.19 Egypt 13 Kuwait, Iraq, Libya, UAE, Syria, Qatar, Yemen, Lebanon 3.16 Saudi Arabia 1 3.01 Sierra Leone 20 South Africa, Nigeria, Zambia, Angola, Kenya, Tanzania 2.78 Switzerland 8 Poland, Serbia, Uzbekistan, Azerbaijan, Tajikistan 2.69 Russia 1 2.42 Iran 7 Algeria, Pakistan, Morocco, Ghana, Tunisia, Afghanistan 2.42 Brazil 9 Colombia, Trinidad, Ecuador, Dominican Republic 2.35 India 4 Bangladesh, Sri Lanka, Bhutan 1.95 Argentina 6 Chile, Peru, Uruguay, Bolivia, Paraguay 1.34 Rwanda 23 DR Congo, Côte d’Ivoire, Cameroon, Senegal, Gabon A September document from the Bretton Woods Project, an academic monitoring platform, highlighted the possible gains from a tough negotiating position, including a rewriting of the IMF quota formula, double majority voting, more developing country seats on the board, and even the end of the US veto. However, in mid-September Sakong Il, a South Korean senior official who was coordinating the programme of the G20 meetings for the South Korean president, claimed that leaders from the G20 should be able to sign off on agreements only to bolster the weight of developing economies at the IMF, while also increasing the fund’s resources. According to him, the accords should be approved at a summit in Seoul. But he also clarified that such agreements would not compromise the US’s pivotal role at the fund. Germany was unlikely to get an end to the US veto from that meeting. At the end of September, IMF Managing Director Dominique Strauss-Kahn supported the change, saying that it would be “fair” to give emerging countries more say on the board, naming Turkey as an example. But he also considered that the US could have 7 acted in a “smoother way” to allow more time for Europeans to come up with a proposal. 12 He was scheduled to meet European finance ministers on September 30 to reach a final agreement that protected their clout at the IMF while making room for emerging economies such as Turkey on the Executive Board. European officials involved with the talks said that, under the plans being discussed, the advanced European economies would share access with Poland and Turkey. Mexico and Venezuela would split a board seat that they previously shared with Spain too. Europeans were also seeking to make the 24 seat board a permanent format. Under their plan, Belgium and Turkey would take turns on the board to represent a group of countries. Switzerland would do the same with Poland. Spain, which then rotated with Venezuela and Mexico to represent a group of Latin American members, would join another group represented by the Netherlands. At the beginning of October, the Finance Department of the IMF published a document to support the change, looking for possible elements of a compromise on the review of quotas, with no mention of seats or vetoes. On the other hand, on October 8 and only a couple of weeks prior to the G20 meeting, US Treasury Secretary Timothy Geithner came out with some open remarks on the 2010 Annual Meeting of the IMF and World Bank on behalf of President Obama in Washington DC. He explained that progress towards agreement on important reforms was being made, especially to give the fastest growing emerging economies greater weight and share of seats on the board. One day later, he drafted a statement in the Financial Committee of the IMF confirming this progress on governance and quota reform. The G20 meeting and IMF approval Finally, the US found the best ground to achieve its goals in the G20 Finance Ministers and Central Bank Governors Meeting in the city of Gyeongju, Korea, on October 23. The role of emerging economies on the US side was also relevant. As a G20 official confirmed later, Brazil, Russia, India and China settled on the plan after a disagreement between the US and Europe over how to change their role on the board. The South Korean president joked that he was prepared to close the airports until they reached a solution. The final agreement among the G20 finance ministers and central bank governors was a clear victory for the US delegation and the developing countries. It resulted in a doubling of IMF members’ quotas that would shift voting shares toward dynamic emerging countries. The ministers also agreed on a reshuffle of the Executive Board that would raise the representation of dynamic emerging market and developing countries in the institution’s day-to-day decision-making body. Germany’s Deputy Finance Minister Joerg Asmussen finally spoke in favour of an agreement and Dominique Strauss-Kahn, speaking to reporters after attending the Gyeongju meeting, said the move was “historic” and the most important decision on the governance of the IMF since its creation in 1944. “There will be other reforms, but what we did today puts an end to a discussion on legitimacy that had lasted for years, almost 12 Rastello, Sandrine: “European Finance Ministers Discuss Plan to Keep Clout at IMF”. Bloomberg Business, September 30, 2010. 8 decades.” He admitted that “the change in the composition of the Board was not expected at all three months ago,” and he recognized the role of the advanced economies in the negotiations by saying: “I must pay tribute to the United States for having triggered the system and to the Europeans for having answered positively to this. The Europeans committed themselves to reducing their presence on the Board by two chairs, which is a huge effort.” 13 Some days after the Gyeongju meeting, on October 31, an IMF document prepared by the Finance, Legal and Strategy, Policy and Review Departments was published with the concrete elements of the agreement. It mentioned the 6 percent shift in quota, as well as the commitment to maintain the size of the Executive Board at 24, with the reduction of two European chairs. The original aim of the Gyeongju ministerial meeting was to prepare the agenda for the full summit of G20 heads of state and government in Seoul, Korea, on November 11. However, it became the main scenario for the clinching of an important deal. In fact, the Seoul declaration specified the Gyeongju agreement as the basis for indicative guidelines on IMF progress. On November 5, the Executive Board meeting approved the proposals that would lead to a major overhaul of the Fund’s quotas and governance: “This historic agreement is the most fundamental governance overhaul in the Fund’s 65-year history and the biggest ever shift of influence in favour of emerging market and developing countries to recognize their growing role in the global economy,” Strauss-Kahn stated. He confirmed that “the negotiations have not been easy, but our members have shown a willingness to compromise and to demonstrate the flexibility needed to reach an agreement for the greater common good. For that I thank each and every member country—all the various national authorities that have made great efforts in advancing these discussions, including Korea which played an important role in bringing together the G20 two weeks ago.” 14 As was mentioned in the working paper of October 31, the Executive Board proposed completion of the 14th General Review of Quotas with a doubling of quotas to approximately SDR 476.8 billion (about US$ 755.7 billion at current exchange rates) and a major realignment of quota shares among members. It would result in a shift of more than 6 percent from overrepresented to underrepresented countries, while protecting the quota shares and voting power of the poorest members. The board also endorsed proposals that would lead to a more representative, all-elected Executive Board. The Executive Board also recommended the reform package to the Board of Governors, which was required to approve the proposed quota increases, and a proposed amendment of the Articles of Agreement that would eliminate the category of appointed executive directors. The Board of Governors approved the package on December 15. When voting ended, governors representing 95.32 percent of the total 13 IMF Managing Director Dominique Strauss-Kahn and First Deputy Managing Director John Lipksy at the conclusion of the G20 Finance Ministers and Central Bank Governors’ Meeting in Gyeongju, Korea; Transcript. October 23, 2010. 14 IMF Executive Board Approves Major Overhaul of Quotas and Governance; Press Release No. 10/418. November 5, 2010. 9 voting power had cast votes in favour of the Resolution on Quota and Reform of the Executive Board, exceeding the 85 percent required. Following the Board of Governors’ acceptance, the proposed quota increases and the amendment had to be approved by the membership, which in many cases involved parliamentary approval. In the document presented by the Board of Governors, members committed themselves to do their utmost to deliver by the 2012 Annual Meetings. In fact, Strauss-Kahn’s original plan, as he mentioned in the Gyeongju meeting, was that implementation of the norm would take as long as a year or a year and a half. After the Board of Governors’ approval, he said: “I urge all our members to proceed rapidly with the steps required to implement this package within the agreed timeframe.” 15 15 IMF Board of Governors Approves Major Quota and Governance Reforms; Press Release No. 10/477. December 16, 2010. 10