Reforming the International Monetary Fund

Dominique Strauss-Kahn, Managing Director of the IMF

Dominique Strauss-Kahn, Managing Director of the IMF

There’s a showdown brewing at the International Monetary Fund (IMF). The organization, which is responsible for overseeing the global financial system, stabilizing exchange rates and balance of payments, is at a standoff over the appropriate size of its executive board. The board is arguably the most powerful body within the fund, as it is responsible for conducting the day-to-day affairs of the IMF. By tradition, the Managing Director of the IMF is a European, while the First Deputy Managing Director is an American (similarly, the World Bank President has traditionally been an American). Constitutionally, there are 20 members of the board, though a series of ad hoc decisions which must be renewed every couple of years, the number of seats was expanded to 24.

There’s the rub. The European Union, which currently holds 9 of the 24 seats on the board, wants to renew the agreement. The United States, arguing in favor of a more streamlined decision-making process, objects. Due to the voting procedures in the IMF, the United States effectively holds a veto over the body’s decisions. All decisions of the IMF must be made by an 85 percent supermajority, and the United States holds 16.74 percent of the votes. (The voting structure and board composition is detailed on the IMF website).

The likely losers in the reform process are the small European states, like Belgium and the Netherlands, which would see their seats merged with a larger European power, most likely Germany. “Musical deck chairs,” as the Global Dashboard describes it. And given the ongoing controversy over Germany’s push for fiscal austerity, this would not likely be well-received.

The United States, however, gains in other ways. According to a report by the Economist’s Free Exchange, the reforms would also give the United States greater clout with developing countries, which have been pushing to reform the voting structure of the IMF for years.

America also gains subtly by taking the side of emerging economies. They might be less likely, for example, to make a big fuss about America’s effective veto at the fund. This is something some have been highlighting as a rule that needs to change—but perhaps now that America is using its veto to make emerging countries’ case, they might prefer to pipe down about what a terrible thing it is. Which would probably suit America just fine.

The current voting structure of the IMF gives Belgium (2.08% and the Netherlands (2.34%) greater input than Mexico (1.43%), Brazil (1.38%), and South Korea (1.38%). Not to mention the fact that many IMF members have less than 1/10 of a percent of a vote. Zambia, for example, has 0.23 votes, Vietnam 0.16 votes, Uganda 0.09 votes, and so on. Even South Africa—the largest economy on the African continent—has just 0.85 votes. (For a complete list of the IMF weighted votes by country, see the IMF website).

And that is, of course, the tragic irony: the countries most affected by IMF policy have the least input in its decision-making processes. The countries most likely to need IMF assistance, and therefore most likely to be subject to the austerity measures imposed as a condition of receiving that assistance, have virtually no input in crafting the nature of those conditions, let alone influencing broader IMF policy.

Some redistribution of seats is certainly necessary. As David Bosco notes, Europe is over-represented and the developing world, particularly East Asia, is under-represented in the current IMF voting system. But does reducing the size of the board address this inequality? Not really. Even with the changes, the developing world continues to lack real input into the decisions of the IMF. The United States continues to have its de facto veto. The position of the other major powers in the IMF (Japan, Germany, France, the United Kingdom) remains unchanged. European control of the Managing Director position remains intact. And the developing world continues to be affected by the decisions of the IMF without having any real input into making those decisions. Under these conditions, the “failure” of developing countries to take “ownership” of the economic reform process—a criticism widely cited as the reason for the failure of structural adjustment in IMF reports—is hardly surprising. Why take ownership of a process and policy you had little input in crafting?

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