As the managing director of the International Monetary Fund (IMF), Rodrigo de Rato, begins to publicly share his agenda for IMF reform in advance of the IMF and World Bank Annual Meetings in Singapore, it seems that the modest decisions that are likely to be taken at these meetings will be, at best, a first small step forward. 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. A discussion of quota shares is expected to take center stage at Singapore with the IMF management proposing to increase the shares of the four most under-represented countries, including China, South Korea, Mexico and Turkey. Since quota shares determine votes at the board of the IMF, as well as obligations to pay in and rights to draw on the IMF’s resources, this move has been billed as a first step towards making the IMF a more representative and legitimate global institution. In addition to this action however, 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 equitable representation of the smallest and poorest countries.
2. Rebalance the scales. A second potential, 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 by including GDP, trade and financial flows, and perhaps even population. This step would shift governance power in the IMF further to the emerging economic powers that deserve representation commensurate with their growth. For this to happen, many European countries will have to reduce some of 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. As part of this step, the Europeans might decide to unify the European Union members into 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 individually and as a group. 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 international financial institutions. For one, the U.S. should give up its claim to select the World Bank’s President. For another, 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 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 which provides important guidance to the international financial institutions.
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 to be 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. It is time for the U.S. to show its willingness to take an effective lead in global governance reform and allow the IMF, among other institutions, to reflect more accurately 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, of health and environmental risks, and of insecurity if anything require more inclusive, effective and cooperative global institutions.