The Next Phase of IMF Reform

At the meetings of the International Monetary Fund (IMF) and World Bank in Singapore last week, a modest, but important first step was taken to improve the governance structure of the IMF by increasing the shares given to the four most under-represented countries on the IMF’s Board of Directors: China, South Korea, Mexico and Turkey. Since quota shares determine votes at the board of the IMF, as well as obligations to pay into and rights to draw on the IMF’s resources, this move has been billed by the Fund’s Managing Director, Rodrigo de Rato, as a first step towards making the IMF a more representative and legitimate global institution. To truly repair what has become an ailing global financial institution, the members of the IMF should move forward quickly with the managing director’s longer term agenda and even go beyond it by agreeing on an action program that would comprise the following five steps.

1. Go back to basics. In addition to the increase in quota shares of the four most under-represented countries the IMF should increase the “basic” quota allocations for all countries—unrelated to economic weight—in order to give the smallest and poorest member countries a greater share in voting and better access to finance. While real influence at the IMF would still be wielded by the bigger economic powers, this simple step is an important one towards more effective representation of the smallest and poorest countries, who are in fact most dependent on and affected by the IMF’s decisions.

2. Rebalance the scales. A second necessary, though more difficult, step would be to alter the criteria for allocation of “shares” of the IMF so they reflect the reality of changing economic and financial weights of countries. This could be accomplished by including GDP, trade and financial flows, and perhaps even population. This step would further shift governance power in the IMF to the emerging economic powers that deserve representation commensurate with their growth. For this to happen, many European countries would have to reduce their currently over-weighted shares.

3. Streamline the seats. A third step of meaningful IMF reform would be to reduce the number of IMF Board “chairs” to 20 (from the current 24) by consolidating and streamlining the European seats on the board. One way to achieve this is for the European Union members to agree on filling one board seat, which would make the EU the largest member. As part of this reform, the IMF could then offer one or two more board chairs to African countries as a way to increase their voice in the international financial institutions.

4. Give merit a chance in leadership selection. A fourth and long overdue step would be to make the selection of the IMF’s Managing Director transparent, merit-based and unrestricted by nationality. This would require the Europeans to give up their customary claim to select the Managing Director.

5. Look for a grand bargain. Taken together the first four steps would amount to a real change for the better in IMF governance by making it into a more representative, effective and hence legitimate global institution. But most of the steps involve a reduced role for the European countries. Not surprisingly, European officials at the Singapore meetings were quoted as objecting to a significant reduction of their historic weight in the international financial institutions. To get them to agree to this painful, although justified change most likely will require a grand bargain under which the U.S. would also yield some of its traditional, but exceptional prerogatives in the same institutions. One contribution would be to not claim the increase in shares that the U.S. would likely be entitled to under most revised quota allocation formulas. Another should be for U.S. to give up its claim to select the World Bank’s President. And, as a third, the U.S. could boldly give up its veto right at the IMF and World Bank boards, which it at the moment holds exclusively among members. Finally, the U.S. could show real global leadership by agreeing to broaden the G8 summit to include leading emerging economies, especially Brazil, China, India, Mexico and South Africa, as full-fledged members. This would give these pivotal countries a much more visible and effective role in this global forum that provides important guidance to the international financial institutions and it would show to all, including the Europeans, that it is time for all to embrace a fundamental realignment of the multilateral global governance system.

Rodrigo de Rato has shown a serious commitment to IMF reform by advancing and pursuing new ideas in the face of resistance to deeper change. However, to break the logjam in global governance reform, which has been building for decades, an ambitious grand bargain will have to be struck, going even beyond Mr. de Rato’s long-term agenda—not to mention the baby steps taken in Singapore. The U.S. administration has broadly supported the first four steps above, but it has failed so far to offer up any serious contribution of its own, aside from likely being willing to forgo a quota increase. It is time for the U.S. to show its readiness to take an effective lead in global governance reform and allow the IMF, among other institutions, to more accurately reflect today’s global economy by giving all key players rights and responsibilities shared roughly in line with their shifting economic weight.

Failure to move now towards such a governance structure will likely mean a progressive weakening of the current global institutions, including the IMF, the World Bank and WTO. In their stead we would see the possible rise of competing power centers and regional institutions that would leave a fractured world at a time when the growing global threats of financial imbalances, health and environmental risks, and insecurity, if anything, require more inclusive, effective and cooperative global institutions.