Strengthen IMF’s Legitimacy

 

Indications are such that the international community will still find the reform in quota shares allocation of the International Monetary Fund (IMF) agreed to in 2010 an illusory endeavor. In the aftermath of G-20 summit in April 2009 when the global economy was under the grip of recession, there was some thin hope that the world leaders would take steps to change the architecture of the global financial institutions to conform to current situation.

With the momentum generated in London G-20 (group of industrialized and emerging market economies) meeting when the U.S. president Barack Obama and his Chinese counterpart Hu Jintao had met for the first time, many believed that there would be a credible gentlemen’s agreement to reform the inflexible institution like the IMF. The global recession forced the leaders of economically powerful countries to decide to amend the rules of financial governance. Such decision, however, requires to be approved by national parliaments before coming into effect.

This understanding was materialized in 2010 when the world leaders agreed to increase the IMF quota shares allocated to emerging economies like China and India, among others. At a time when the international financial institution like the IMF needed additional financing to better cope with the recession, China, Brazil and a few other emerging economies have rescued the fund offering enhanced contributions. The composition of Bretton Woods Institutions (International Monetary Fund included) does not reflect the present economic realities. Therefore, suitable reform in the institution’s governance has become an overdue concern.

Daniel Gros of the Center for European Policy Institute (Brussels) has recently remarked “The most glaring challenge faced by the IMF is the “continued over-representation of European economies, and in particular that of Euro-area economies,”

Similarly, voicing pessimism Oliver Stuenkel of the Getulio Vegas Foundation in Sao Paulo has said, “the U.S. leaders are to be blamed for being largely unwilling to constructively engage new actors and allow them to assume leadership within the existing institutions.” His frustration is attributable to the failure of the annual meeting of the IMF and the World Bank in Tokyo (October 2012) to implement the governance and quota reform agreed to in December 2010.

Articulating on the merits of emerging economies’ assumption of greater responsibilities that come with higher quota shares of the IMF, Nikita Maslennikov of Moscow-based Institute of Contemporary Development has stated, “a greater responsibility for developing countries on the IMF could relieve some pressure on developed countries navigating the difficult path of budget consolidation.”

The current structure of the IMF Executive Board presents a picture that disregards corresponding fact on the ground. There are 24 Executive Board members in the IMF of whom 10 are from Europe. 19 of the total are elected and 5 are appointed. Of the 5 appointees 3 are European countries viz UK, France and Germany. No more evidence is needed to prove European over-representation in the policy-making body of the IMF.

Looking back at what the world leaders had decided at G-20 summit in London (April 2009) and the status of the implementation of the decisions, one feels disappointed. Then the summiteers announced that the heads of international organizations “should be appointed through an open, transparent, and merit-based selection process”.

The above words were really soothing. In 2011 the whole developing world was watching with earnestness the selection of a qualified representative from the emerging economies to fill the vacancy of the post of managing director of the IMF. They were shocked to see the repetition of the old precedent applied for years in case of appointing the IMF chief. Justice would have been done if the Executive Board had selected a competent candidate from the developing world. Despite some hopes raised at the London G-20 summit, the IMF has been headed by a French woman, who of course is believed to be a qualified person on account of being the country’s finance minister.

The hopes of seeing reformed international organizations were again dashed when the president of the World Bank (the bank’s chief has traditionally been an American as French national has been heading the IMF) was not selected on the basis of meritocracy in contravention of past precedence.

Jim Yong Kim though a world class medical doctor involved in HIV/AIDS program, captured the post of World Bank president as the U.S. bulldozed as a country exercising heavy influence in global financial governance. Many pundits in the related field feel that Nigerian candidate Ngozi-Okanjo-Iwela would have been a deserving head of the World Bank both in terms of her professionalism and representation from the developing world.

The above examples suggest that genuine reform in international financial organizations is far away. Furthermore, current presidential election in the U.S., which holds preeminent position in Bretton Woods organizations since their inception in 1944, becomes a barrier to instituting any reform now because of fear of possible backlash.

The ground reality in present global economic scene is that a handful of emerging economies, particularly partners of BRICS (Brazil, Russia, India, China, and South Africa) have dominance in providing extra funds to the IMF and the most recent evidence of which is their agreement to contribute more than $70 billion to the fund during the G-20 meeting held four months ago at Los Cabos, Mexico.

Quite rationally the same group of countries has been clamoring for the early implementation of 2010 reform plan of the IMF, which would grant greater rights to them in the field of global financial governance. The present scenario shows unfair practices. Italy having half as GDP of India’s is allocated IMF quota shares 11% higher. Indonesia in unfairly represented in terms of such allocation and so are emerging economies like Brazil and others.

BRICS countries cover 40% of world’s population, 20% of global GDP and 43% of world’s foreign exchange. Should the reform plan of the fund be implemented as agreed earlier, it would represent a major realignment in the ranking of quota shares that better reflects global economic realities. Once this is done it would also strengthen fund’s legitimacy and efficiency.

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