Transcript of a Press Briefing by International Monetary Fund Managing Director Dominique Strauss-Kahn on Quota and Voice Reform

Washington, D.C.
Friday, March 28, 2008

MR. STRAUSS-KAHN: Well, thank you for being here especially on short notice. I just want to make a few comments at the beginning, and then I'll answer your questions, if any.

As you know, this morning, the Board completed as far as, at least at its level, the reform which has been launched in Singapore. Of course, what has been done this morning is only a first step, but I think it's a very important first step.

Singapore was two years ago, and for, I won't say most, but at least a lot of commentators during the last months, this reform was totally impossible to do, and they were not totally wrong because the interests at stake are so difficult to make compatible; some countries refusing to see their share decrease, some others complaining that they should increase, that a very possible outcome was that finally it won't be possible at all to change anything.

The problem, of course, is not a problem of finding a formula. Finding a formula is an easy task. Everyone can find a way to propose a new formula with a good argument to explain that in the formula, it should be taken into account this, or this aspect of the economic life, or another aspect of the economic life.

What is difficult is to find a formula which gives results which are acceptable to the membership because the most perfect formula when it's not acceptable to the membership, it's just nothing. The only thing which has a price, a value, is a reform which is acceptable first and, on the second hand, on the other hand, a reform which produces results today that will produce results in the future.

I think that the main results of what has been achieved today by the Board and prepared by David Burton and his team is that the change, the main change is the change in the formula and the fact that the commitment that every five years this formula will be used. So the change will be a change over time and in five, 10, 15 years. Of course, it takes a long time to shift, and quota shares and the voting shares will go and go increasing.

So, of course, there are some immediate results which are not negligible. For instance, as you know, in Singapore, there was requested that the share of the low income countries should not decrease. We deliver more because the share of low income countries is increasing, thanks to tripling in the basic votes.

The shift in voting share to those gaining from the reform is 5.4 percent which, on the one hand, is only 5.4 percent but, on the other hand, it's already 5.4 percent and will be at the next step, even more. One hundred thirty-five countries out of 185 benefit from that.

To obtain this result, we had the need to, for some countries, to accept to forego the increase they deserve because the trickiest thing in this problem is that it's not a shift from rich or developed countries to poor or emerging countries. The process is a shift from over-represented countries to under-represented countries, but you have some under-represented countries among the developed countries.

For instance, Spain is increasing a lot. Same thing for Ireland. On the other hand, you have some emerging or poor countries being over-represented. So the main result is the shift does exist from developed countries to emerging countries, and that's what we're expecting. But the mechanics of this is a shift from over-represented to under-represented countries so that the countries will be better in line with their real economic weight in the world, in the world economy. That's the reason why if some countries like the U.S., like Japan, like Germany, like I just called them, Ireland or Luxembourg, didn't accept to forego part of the possible increase, then they won't have room enough to increase the share of the emerging or the poor countries.

Another immediate result is the possibility for two constituencies, namely the two African constituencies, to benefit from the second alternate. You know that the Articles of Agreement have created an alternate executive director for each chair.

But then some of this constituency, namely the two African constituencies, have so many countries that they take care of, that it was very difficult for the executive director and his alternative to really work in the same condition than the other one having only a few countries in their constituency or for some having only one country in their constituency. So the decision to create a second alternate is very helpful for the two African constituencies which are the biggest part of the poor countries, and it's also an outcome of the reform.

So I will just stop here. My main comment is the following:

It's a first step. Others will follow. There is no other way to move, and I always think that the beginning of moving is better than staying where you are. What we did today and I hope what the governors will approve by their vote in the coming 30 days, it will make it possible to go on and to show that even international institutions like the IMF are likely to change over time.

But, of course, I'm now ready to answer all of your questions, please.

QUESTIONER: I wanted to ask you about today's vote, whether there were any votes against the plan.

Also, when you were considering the formula and the formula was more or less leaked and known beforehand, I asked some of my friends who are economists, unlike me, to look at that. What they told me was that basically under this formula even if Russia was growing at the same rate as it is growing now, which is pretty quick, it will still be -- I don't know -- under-represented, over-represented. These terms are not really like something I can be comfortable with. Basically, it will not increase its position in the Fund in a measurable way even within 10 or 15 years.

MR. STRAUSS-KAHN: For which country?

QUESTIONER: For Russia.

MR. STRAUSS-KAHN: For Russia?

QUESTIONER: For Russia, yes. I wanted to ask you, first, whether that is true and the second, if there is anything to be done about this, maybe by changing the formula. Thank you.

MR. STRAUSS-KAHN: Well, on the first point, some countries expressed reservations, or I would say all countries, all shared or expressed reservations, but some had so strong reservations that they prefer either to abstain or to be against. That's the case of Russia, explaining that, the Russian ED explaining that, well, the formula didn't represent what they were expecting which is perfectly respectable. So they were against.

Now, to your second, there are three chairs having strong reservations: Russia, Saudi Arabia, the Iranian chair also. Then you have chairs being just abstaining because they were divided among the constituencies. That's the Egyptian chair and the Argentinian chair.

QUESTIONER: Was it four against?

MR. STRAUSS-KAHN: No. Three. Three.

Now the point is will the formula help Russia to increase in the future or not? The first answer is I don't know because it depends upon the coming results. So depending on the rate of growth of Russia compared to the other countries, nobody can know exactly. Now you can forecast and try to see what may happen.

It's reasonable to say that as most of the big countries, Russia is not expected to increase, as France, as the U.K., as a lot of other countries, just because if you want to have something which is more linked to the real weight in the world economy and if you want to have the share of poor countries and emerging countries to increase, then some others have to decrease.

So the fact is that some countries expressed the fact that they were against because the change was not big enough for in favor of emerging countries. But if the change had been greater, then the countries losing -- I called some before -- France, U.K., Russia and some others, will lose more. So, it's difficult to say that you're not in favor of the formula because it doesn't give enough to emerging countries and, on the other hand, to complain because you are losing.

So I can understand each government. Nobody likes to lose. The total has to sum to 100. So no government likes to lose, but that's the cost for big countries to make it possible for small emerging countries or for big emerging countries like India, for instance, to have the room for increase.

QUESTIONER: Right, but will you be changing the formula in the future or is the formula is locked?

MR. STRAUSS-KAHN: No. No. What is good in the formula, this is not supposed to be changed, but the figures are going to be changed every five years depending on the results of the economy.

Yes, please.

QUESTIONER: Can you clarify what is the change from developed to developing countries and what is the share of both in the voting and quota? What would you expect in five years or ten years?

MR. STRAUSS-KAHN: Well, if you ask for the change at this first step, it can be given. The figures are well known now.

If you're asking me what will be the change from developed to emerging countries in five years or ten years, I just can't answer. I can't answer because I don't know which of the emerging countries will be a developed country in 10 years. But, moreover, even if you don't change the classification and all emerging countries are still emerging countries in 10 years, we just don't know how big will be the growth.

But look, look at a country like some countries increase a lot: India, China, Brazil, some others. Some countries, emerging countries, don't increase. Even, they lose because they were previously over-represented. The previous system had nothing to do with the reality. So some were over-represented for historical reasons.

Now we have a system which is closer to the reality. I'm not saying that it represents perfectly the reality, but it's closer to the reality. So some appear, even being an emerging country, appear as being over-represented. So they decrease, but they know they're going to win in the future. That's the reason why, at the end of the day, even if they decrease, they're in favor of the formula.

The example, a good example for this is South Africa. South Africa is a country which does not benefit from the reform today and even not only does it not benefit, but it loses a small amount of voting power today. But the South African Government knows very well that this new formula is very well shaped for a country like South Africa because the rate of growth they expect in the five, 10 coming years will make that they will benefit usually from the reform.

So most governments are able to understand that the reform is not be seen only as one shot, even if I can understand that everybody is interested in the results for today, but it has to be seen as a result over time, as a reform which will have results over time.

Yes, please.

QUESTIONER: Mr. Strauss-Kahn, if one stands back and looks at the broader issue at hand here, it's the legitimacy of the Fund. Right now, that is in question and so is its relevance. The question is: Do you think that what has happened today improves that legitimacy or puts it on the road to that?

The other question is: If you say that everybody, including the U.S., has said that they did have reservations about it, would it not have been better to work at it until it was better?

MR. STRAUSS-KAHN: Okay. On the first point, on the first point, there are several ways to try to assess the legitimacy of the Fund, and the quota is only one of them. There's a lot of other problems which have to be addressed: the way the different countries are represented in staff, for instance; the way the management is listening to what is said in different categories. There's a lot of different points to take into account, the advice and the voices of the different parts of the world.

But you're right in saying, obviously, that quota and the representation at the Board is one of them.

So what is an improvement? It's an improvement when the countries are closer to the correct representation than less close.

Does the reform make the countries closer? Yes.

Does it make them close enough? No, of course not. I'm not pretending at all that the reform is done and that now it's perfect and that the representation of the different countries is exactly what we should expect. No, not at all. It's a process.

But, obviously, the process goes in the good direction and that's the reason why you have, as I told you before, 135 countries will gain voting share. And so, it's an improvement in legitimacy. Not enough, absolutely not, but it's obviously an improvement.

Now, to your second question, I know that some people are arguing that you better have no reform than the wonderful reform you could expect. Well, I know very well this kind of argumentation. In all my political life, I listened to that, having people saying, okay, what you say is an improvement for the poor people but not enough, so you better not do it. I never follow this kind of line.

I think that an improvement has to be taken with pragmatism when you have a possible improvement. Of course, if the improvements will, the day after, induce something which is bad, then you have to look at it. When you look at the reform, we say that the improvement will be followed by other improvements. So there is no reason to refuse it.

The only outcome of waiting more will probably have been that there won't be any reform at all, which probably was the expectation by some but was obviously the expectation by most emerging countries who, this morning, voted in favor of the reform, from China to Mexico, from India to Brazil. Most of the emerging countries did, this morning, vote in favor of the reform.

Why? Because they think it was good for them. And, most, almost all developed countries voted in favor of the reform, not because they will increase their share -- they're decreasing their share -- but because they thought it was good for the legitimacy of the Fund.

Please.

QUESTIONER: When you say that the reform is not finished and there should be more changes, I mean is the formula now set in stone or is there any process to review the makeup of the formula or the changes that you are forecasting, not just a revision of the numbers in five years?

MR. STRAUSS-KAHN: Okay. As you said, there are two ways in saying that the reform -- in fact, there are three ways why the reform is an ongoing reform.

The first one is the obvious one, the one you put at the end. It's that every five years, the new figures will make new changes, okay, when I look at the rate of growth in the emerging countries, even in poor countries. Look at Africa. For instance, West Africa experienced a rate of growth of 5 or 6 percent over the last three years. In the coming five years, we'll still have in West Africa a rate of growth of 5 or 6 percent when in Europe, for instance, the rate of growth is 1 or 1.5 percent. Of course, in five years, it will produce new results. That's one way.

The second point, I think it's the one you are interested in, is the formula is defined as it's defined, but the way the variables are computed is going to evolve. It's in the report. There are several variables, and I don't want to be too technical, which are complicated to compute, for instance, the openness of the economy and the variability of the economy which are components of the formula. It has been accepted this morning, the commitment by the Board to go on and to work on a better definition of openness and variability.

Who were the countries asking for this work on openness and variability? The emerging and the poor countries?

Why? Because they consider that the way openness and variability is computed now, which is the traditional way, is not good enough for them.

So the revision, the future revision in the way openness and variability is going to be computed, there will be work on that during the coming years before the next computation. These changes in the way the variables are computed will also have a positive influence on emerging and poor countries. So that's the second answer to your question.

Then the third answer, when you ask is the reform completed or not, is that, as I said before, the reform on legitimacy is not only a reform in the quota. There are other things to do, other questions to be put in debate.

For instance, I have launched four months ago the idea that some decisions in the Board should be taken not only with a single majority coming from the quota but from a double majority where the second majority should be a majority of chairs like in the European Union, for instance. This question has not been discussed in the current reform because the current reform has been opened two years ago and has an agenda in which this point was not included, but it's still a question which can be discussed in the future -- so the third part of my answer to your question.

The first part is next new computation in five years, new results. The second part is new way to calculate the variables, new results. The third part is beyond the question of the quota, we have other reforms that we will implement over time to enhance the legitimacy of the institution.

Please.

QUESTIONER: I'm getting a bit confused by the figures actually.

MR. STRAUSS-KAHN: So do I.

QUESTIONER: My understanding was actually that the shift between developed countries and the others would be 2.7 percentage points if we are talking before Singapore and now and 1.6 if we're talking from yesterday to now. I just wanted to know if it's correct.

Then the second question, my second question was you've been talking about the double majority. There was another tool that was suggested by the U.S. which was reducing the number of chairs at the Board. Is it also something that is in the possible future discussion?

MR. STRAUSS-KAHN: On your first point, yes, the figures are, I'm just looking at David Burton who is the only guy who knows something about the figures so he said yes. So you're right. Why I am hesitating is just because there are several ways to compute this. As I said before the way which is my way as what was written in the Singapore Resolution, mainly to have a shift from over-represented countries to under-represented countries.

For the reason I told you before that you have a mixed situation between over-represented countries, developed and emerging and the same thing would be among the under-represented countries. The shift between a developed country to an emerging or poor country is not the same, that the shift between an over-represented country to an under-represented country. So if you are just looking at the point you were quoting, the shift between developed countries and emerging countries, the figures are the ones you just said.

QUESTIONER: (off mike)

MR. STRAUSS-KAHN: The shift is 2.7 between those developed countries defined the traditional way and emerging and low income countries.

Now the second part of your question?

QUESTIONER: Reducing the number of chairs at the Board.

MR. STRAUSS-KAHN: Oh, yes. Yes, the Americans - it's not something new, they already had this idea arguing that there's too many chairs around the table and you already know that the rule is to have 20 chairs and we have 24 because the Americans agree periodically to accept for four more chairs even if the rule should be 20 chairs and they argue that there should be less than that. Plus, that can be part of the reform of course.

Some Americans, maybe some others, I'm not sure they will have a lot of people with them, but it may happen, may argue that we should reduce the number of chairs. But look, for instance, Jean-Claude Juncker, one month ago, six weeks ago, came back with this idea of having only one chair for the Euro Zone. Of course, if he can convince his colleagues in the Euro Zone to have only one chair for the Euro Zone and if the Board of Governors made the change in the Articles of Agreement which makes that possible, it means that the total number of chairs will of course decrease a lot having only one chair for France, Germany, Italy, the Netherlands, and Belgium so four chairs will collapse in only one.

So there are different ways in reducing the number of chairs and of course, that can be part of a future reform. Please.

QUESTIONER: What sort of change do you think reform will bring to the usefulness of IMF?

MR. STRAUSS-KAHN: That's a very good question. The first change is that if the reform is adopted it shows that this institution is likely to find compromise which is not obvious. You have a lot of multilateral institutions, I'm not quoting anyone, but there's a lot of them, in which probably this kind of move will be impossible. At least, we didn't contemplate any kind of move like this one for developing countries. So it's the first institution born after World War II, and under the umbrella of the U.N., that shows itself able to organize a change. Again, the change is not enough. Again, the change has to come over time but nevertheless we are the only ones doing that.

So that's the first point that means it means change for the institution. It shows that the institution is likely to evolve and to adapt. The second change is that as a first step it doesn't mean a lot. The fact that Brazil for instance, jumps from 1.4 to 1.7 doesn't change the face of the world. But on the other hand if after several changes in five years, in 10 years, it goes at the same pace then the change will be really strong. Third, it will change the life for the poor countries because the second alternate in Africa is something which will really change the efficiency of the Board concerning those countries. And fourth, a lot more has to be done in the legitimacy - the main.

I made several trips to South America since I'm in office. One big trip to Asia. Asia because of bad memories of the Asian crisis, South America because of bad memories of the (inaudible) crisis are somewhat reluctant to be totally, to feel total ownership of the Fund. I think this is beginning to change. I feel among the head of state of governments in South America, as among the head of state of government in Asia, more will to work with the Fund than before and since reform it's part of the process. Again, it's only part of a process but it's a very important stone in the road which will allow us to have a more legitimate Fund.

So as itself it's not enough but without that step it will have been totally impossible to go on rebuilding than the legitimacy of the multilateral institution like the Fund. Yes?

QUESTIONER: The Americans kept saying that they will forgo all of the increase that they were entitled to. Ultimately they didn't according to the figures that we have.

MR. STRAUSS-KAHN: It's always the difference between the quota and the voting shares. What we ask Americans to do was to forgo the increase they were entitled to in the voting shares so they remain at the voting share that they have post-Singapore while the initial demand were to go back to the pre-Singapore situation. But if we had accepted the U.S. to go back to the pre-Singapore then there were no room anymore for any kind change for emerging countries. So one difficult task was to convince the United States to remain at post-Singapore in voting share but to remain at post-Singapore in voting shares it needs some increase in the quota shares.

I'm sorry it's a bit technical, but the result is that as for voting shares are concerned and that's the voice of the different countries, the U.S. remains at the situation they had post-Singapore which is if my memory is good 16.73 percent. Please.

QUESTIONER: I just had a question about the process -

MR. STRAUSS-KAHN: About?

QUESTIONER: About the process of putting this quota reforms into practice. Does this need to be approved by national legislatures?

MR. STRAUSS-KAHN: It depends upon the country. It depends upon the countries. The process is the following: Now that the Board has approved the transmission to the governors, the governors will have to vote on an individual basis, 185 countries according to their quota - a previous quota.

We need to reach 85 percent of votes for the decision to be approved. I think we will get it, but it's not done before the last voter has voted. And then on the 28^th of April, one month from now, if the total of 85 percent of votes is reached then most countries, but not all of them depending on their own legislation, will have to go their own Parliament and they will have a period of six months to go to their Parliament to have it approved.

Last question. Yes, please.

QUESTIONER: On the 85 percent, I mean if the positions stay where they were today with the three opposed and the two abstentions, then you hit the 85 percent?

MR. STRAUSS-KAHN: Well, we have 86-point-something but I think it will improve because in some chairs abstaining you have some countries in the constituency that were in favor, some were not, so they abstained. But at the individual vote we may expect that those countries being in favor will vote so it's a forecast and I won't say more than that. But we can expect that finally the result will be higher than the result of today.

Well, thank you very much for coming.