The complete lack of agreement among G20 Finance Ministers on crucial global governance issues at their meeting at Gyeongju in South Korea has been underplayed by presenting their decision to go ahead with marginal adjustments of quotas and voting rights in the IMF as a breakthrough. The agreement at the meeting on this matter had two components. The first was to double the quotas held by IMF members from their current level of $340 billion. The other was to use the quota expansion to shift the structure of quota holding in favour of some emerging market economies such as China, India and Brazil. This in turn would marginally alter the voting structure in the IMF that is heavily biased in favour of the developed countries in general and the United States in particular.
A member’s quota determines three features of its participation in the IMF: (i) the contribution it will have to make to the Fund’s resources; (ii) the amount of financing it can access in normal circumstances and at different levels of conditionality, though there are many other financing facilities available in exceptional circumstances; and (iii) its voting power at the IMF with each country provided 250 basic votes and an additional vote for each quota tranche of SDR 100,000 it holds.
Quotas are supposed to reflect a country’s position and influence in the world economy, determined by a formula based on GDP (computed using a weighted average of market and purchasing power parity exchange rates), openness, economic variability and international reserves. Though these components of the formula sound “scientific”, in practice quotas and vote shares are determined by a negotiating process in which components and weights are adjusted to ensure control by the developed. In particular, every effort is made to ensure that the US retains its right to veto crucial decisions. Since 85 per cent of votes are required for major decisions to be taken by the IMF Board, the US with a 16.7 per cent vote share wields a veto. And in return for being granted this position it has accommodated Europe’s implicit “right” to nominate the Managing Director of the International Monetary Fund through a “selection” process that is neither transparent nor fair.
The US would not lose its veto when the Gyeongju decision is implemented and according to one estimate may even see an increase in its vote share. The real change is a shift in vote shares from Europe to the emerging market economies. According to Reuters (http://in.biz.yahoo.com/101023/137/bawfjs.html), more than 6 percent of voting shares at the Fund will shift to emerging economies like China, which will become the third-most important member of the 187-strong IMF. It would move ahead of Germany, France and Britain, with its share in quotas rising to 6.19 percent from 3.65 percent. India will rank 8th, Russia 9th and Brazil 10th. Together, the BRICs will control 14.18 percent of IMF quotas, and emerging markets as a whole will have a 42.29 percent share. Europe will also give up two of the 8 to 9 seats in tends to occupy at different points in time in the 24–member IMF board, though it is unclear which countries will agree to make that sacrifice.
All this notwithstanding, fundamentally the structure of IMF governance will not change. The US would still have a veto over crucial decisions. Europe is likely to retain the right to choose a Managing Director given the sacrifice it is being called upon to make in terms of quota- and vote shares. The poorest developing countries will have no voice. And the emerging economies while increasing their presence and influence still cannot fundamentally alter the way the organisation functions, if they do want to push for any change. What we have is a marginal shift in the structure of influence with fundamental change having to wait if it is to occur at all for the next (fourteenth) general review of quotas scheduled for January 2013. But given the slow pace at which change occurs in global economic governance, and the fact that this ad hoc quota review has been agreed upon now, little is likely to change in the short period before 2013.
Given these features of the Gyeongju agreement, it is unfortunate that the Communiqué of the Meeting of Finance Ministers and Central Bank Governors held on October 23, 2010 declared that the reforms would make the IMF "more effective, credible and legitimate". But it is not difficult to source that perception. IMF Managing Director Dominique Strauss-Kahn has immediately after the summit declared that the move was “historic” and one of the most important decisions 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 decades." Do not miss the “we” reference. It is another matter that this historic decision to change voting shares marginally had already been taken at the G-20 summit held in Pittsburgh more than a year back in September 2009, with only the details of the “at least 5 per cent” transfer of vote shares to emerging markets having had to be worked out.
Mr. Strauss-Khan has reason to opt for hyperbole. The doubling of quotas not only increases the resources the IMF can leverage but enhances the “official” legitimacy of an organisation that had been in political and financial decline prior to the financial crisis. An IMF that had lost its relevance before the current crisis has won itself a new lease of life and substantial influence after the London G20 summit, even though it still advocates the same policies that drove it to near-irrelevance. The crisis and the role that has been given to selected emerging markets in the G20 have given the organisation a new lease of life, as it has the World Bank. This too is a reflection of the fact that power still resides with the US and its allies. The fact that the Presidents of the IMF and the World Bank are ex-officio invitees to the G20 and that the IMF serves as the Secretariat to the G20 is obvious evidence that the agencies that implement the decisions on global economic management are entities controlled by the US, UK and EU. This needs to be taken into account by the financial media when it celebrates the enhanced voice that India would have in the functioning of the IMF because of a less than half of a percentage point increase in its quota share.