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The Case for IMF Quota Reform

From the Council of Foreign Relations:

The "most glaring" challenge facing the IMF is the "continued over-representation of European economies, and in particular that of the euro-area economies," says Daniel Gros of the Center for European Policy Studies in Brussels. Similarly, Oliver Stuenkel of the Getulio Vargas Foundation in São Paulo, faults European and U.S. leaders for being "largely unwilling to constructively engage new actors and allow them to assume leadership within existing institutions."

Moreover, a greater responsibility for developing countries on the IMF could relieve some pressure on developed countries "navigating the difficult path of budget consolidation," suggests Nikita Maslennikov at the Institute of Contemporary Development in Moscow. Still, "the main reason why it is difficult to reform governance of the IMF is that it is a relatively inflexible organization," says Pradumna B. Rana, an associate professor at Nanyang Technological University in Singapore.

Daniel Gros, Director, Centre for European Policy Studies

The issue of IMF reform, and in particular the voting weights and Executive Board representation of emerging economies, has received new topicality because of the euro crisis. The new financial resources that Managing Director Christine Lagarde has secured, amounting to $438 billion as of June 2012, rely heavily on the contributions from several emerging economies, including China and Brazil, while excluding the United States. These new resources have been put at the disposal of the IMF to permit it to assist struggling eurozone countries that ask for assistance. There has subsequently been an understanding that the countries offering this money should be granted greater rights within the organization. Brazil has been the most outspoken in making this argument.

The most glaring problem is the continued overrepresentation of European economies, and in particular that of the euro area economies that share a common currency: the IMF Executive Board currently consists of twenty-four executive directors (ten European), five of whom are appointed (including France, Germany, and the UK) and nineteen of whom are elected. This overrepresentation has been only marginally corrected by the revision of the quotas agreed in December 2010.

Ironically, the continuing numerical overrepresentation of Europe does not automatically translate into a corresponding influence because the quotas and votes of individual euro area countries are not bundled in any systematic way. Euro area member states are supposed to coordinate their positions at the IMF. However, in reality, there has been limited coordination so far. The only direct representation of the euro area in the Executive Board is through the ECB, which, however, has only an observer status without any influence on the decision-making process.

A single euro-area membership in the IMF is still a long way off given the reluctance of the European states to relinquish potentially influential international positions. But change might come with the creation of the European Stability Mechanism (ESM).

A unified representation of the euro-area at the IMF could be achieved by using the ESM as the legal instrument to merge member state quotas in the IMF into a single euro-area quota. The ESM could thus bundle together the fiscal policy aspects of the IMF operations for its members. The euro area would then have a constituency of a similar size as that of the United States. As each constituency has two representatives, the practice from other countries suggests that one executive director could be nominated by the finance ministers of the eurozone (i.e. the person would be elected by the Managing Board of the ESM), and the second one could come from the ECB. As a result, both the ECB (on monetary issues) and a politically accountable institution on fiscal matters (the ESM) would be fully represented.

At the same time, a unified euro area quota would be significantly smaller than the sum of the individual euro area countries, allowing additional space for the emerging economies.

Oliver Stuenkel, Assistant Professor of International Relations at the Getulio Vargas Foundation in Sao Paulo, Brazil

At the G-20 Summit in 2009, global leaders announced that the heads of international financial institutions "should be appointed through an open, transparent, and merit-based selection process." In 2011, however, European leaders failed to honor their promise and insisted on a European to replace Dominique Strauss-Kahn as director of the IMF. In 2012, the Obama administration nominated Jim Yong Kim as its choice to be the new World Bank president. Obama's nomination of Kim essentially ensured his selection, causing exasperation among emerging powers for the United States' failure to consider the Nigerian candidate [Ngozi Okonjo-Iweala], who was widely thought to be more qualified.

A similar logic is likely to apply to quota IMF reforms, which were approved by the IMF Board of Governors in 2010. The IMF hailed these steps as "historic" and pointed out that they represented "a major realignment in the ranking of quota shares that better reflects global economic realities, and a strengthening in the Fund's legitimacy and effectiveness." Yet the 2010 reforms are subject to approval by national governments, including a deeply partisan U.S. Congress. Fearing a domestic backlash ahead of the presidential and congressional elections, the Obama administration has been unwilling to put the issue to a vote. Thus, as such, the reforms agreed to two years ago were not implemented ahead of the meeting. This is all the more paradoxical because the global economic developments during past two years have dramatically strengthened the case for better representation for emerging powers. Only four months ago, at the G20 Summit in Los Cabos, Mexico, BRICS nations agreed to contribute more than $70 billion to the IMF, but not without voicing their concerns about the implementation of the quota reforms agreed upon.


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