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Important Milestone Reached to Reinforce IMF Legitimacy

In order to be effective, the IMF must be seen as representing the interests of all its 187 member countries (photo:IMF)

IMF GOVERNANCE REFORM

Important Milestone Reached to Reinforce IMF Legitimacy

IMF Survey online

March 03, 2011

  • Reform package on country representation in IMF, agreed in 2008, comes into force
  • Strengthens influence of dynamic emerging markets and low-income countries
  • Paves the way for approval of 2010 reform package

A package of measures, agreed in 2008 to strengthen the representation of dynamic economies in the IMF, has entered into force. The reform provides for quota increases for 54 countries, with the largest gains going mainly to dynamic emerging market countries, ranging from Korea, China and Turkey, to Brazil and Mexico. The reform will also enhance the influence of low-income countries in the IMF’s decision-making, including in its 24-member Executive Board.

Following calls by IMF Managing Director Dominique Strauss-Kahn for member countries to formally ratify the agreement, which was backed by the IMF’s Governors in April 2008, the package has now been signed into law in 117 member countries, representing 85.04 percent of total voting power in the IMF. This pushes the package above the required 85 percent majority of voting power and approval by at least 113 member countries, which are needed for approval of these types of reforms.

“I commend our members for taking the required action to ratify this package of reforms adopted in 2008,” said IMF Managing Director Dominique Strauss-Kahn. “The implementation of this reform reflects the membership’s commitment to strengthening the IMF’s effectiveness, credibility, and legitimacy.”

The 2008 reforms were followed by another governance reform package agreed by the IMF’s membership in December 2010 that, once effective, will lead to a combined shift of about 9 percent of quota shares to dynamic emerging market and developing countries. It will also protect the quota shares and voting power of the IMF’s poorest member countries.

Once both packages are implemented, IMF representation will better reflect the world economy as it looks today.

“It means we will have the top 10 shareholders that really represent the top 10 countries in the world, namely the United States, Japan, the four main European countries, and the four BRICs,” Strauss-Kahn said.

The term “BRICS” collectively refer to Brazil, Russia, India, and China.

Road to reform

In order to be effective and legitimate, the IMF must be seen as representing the interests of all of its 187 member countries. The 2008 reform package, and the subsequent 2010 agreement, followed extensive consultations involving member governments and outside stakeholders to find a way to give dynamic emerging market countries a greater say in the running of the institution, which was created in 1944 to further global economic cooperation.

Unlike the General Assembly of the United Nations, where each country has one vote, decision making at the IMF was designed to reflect the position of each member country in the global economy. The current reforms are intended to reflect the larger role that emerging market and developing economies now play.



Agreement reached in 2008

Efforts to increase the voice and representation of emerging market and developing countries date back to 2006, when a process to realign member countries’ quotas and voting power received the backing of the membership at the IMF-World Bank Annual Meetings in Singapore. This process resulted in the 2008 agreement, which has three main building blocks:

Quota increases for 54 member countries amounting to about SDR 20 billion, equivalent to US$30 billion, come on top of initial increases of almost SDR 4 billion approved for China, Korea, Mexico and Turkey in 2006. Emerging market countries are the main beneficiaries of this aggregate shift in quota shares of 4.9 percentage points. For example, Korea will see its quota increase by 106 percent; Singapore by 63 percent; Turkey by 51 percent; China by 50 percent; India by 40 percent; Brazil by 40 percent; and Mexico by 40 percent.

The tripling of basic votes will enhance the voice and participation of low-income countries in the IMF. Basic votes were designed to reflect the principle of equality of states and give the IMF’s smallest member countries―many of which are low-income countries―a greater voice in the institution’s deliberations. IMF member countries also agreed that the share of basic votes in total voting power would be maintained in the future, thereby preserving the gains made in this reform and preventing an erosion of basic votes through future quota increases.

Flexibility for the African chairs at the IMF Executive Board to improve their representation by appointing a second Alternate Executive Director. The two chairs representing the countries of sub-Saharan Africa are by far the largest constituencies in the IMF, and this reform recognizes both the need to improve representation for this group of countries, and the demands placed on the offices of their Executive Directors.

Paving the way for the 2010 agreement

In October 2009, the IMF’s policy steering committee, the International and Monetary Committee, endorsed a call by the Group of Twenty (G-20) industrialized and emerging market economies for a shift in quota share to dynamic emerging market and developing countries of at least five percent from over-represented to under-represented countries using the current quota formula as the basis to work from. In addition, a commitment was made to protect the voting share of the poorest member countries.

In November 2010—following extensive consultations involving member governments and outside stakeholders—the Executive Board agreed on a doubling of total quotas and a shift of more than 6 percent of quota shares to dynamic emerging markets and developing countries.  As a result of the quota rebalancing, India and Brazil will join China and Russia as part of the top 10 shareholders of the IMF. Other emerging markets will also see their quotas increase.

The quota shift was made possible mainly by reducing the shares of a number of advanced economies and oil producing countries.

The doubling of quotas will preserve the IMF’s quota-based nature. The agreement also answers the call of the IMF’s steering committee, the International Monetary and Financial Committee, to protect the voice of the poorest member countries: an ad hoc quota allocation to this group of countries will preserve their voting shares.

The agreement also restructures the composition of the IMF’s Executive Board, paving the way for an increase in the representation of dynamic emerging market and developing countries in the day-to-day decision-making at the IMF. There will be two fewer Board members from advanced European countries, and all Executive Directors will be elected rather than appointed, as some are now. The size of the Board, which will remain at 24, will be reviewed every eight years. For these changes to become effective, the membership must accept an amendment to the IMF’s Articles of Agreement.

In addition, IMF Governors will consider further flexibility for other multi-country constituencies to appoint a second Alternate Executive Director, joining the two sub-Saharan African chairs, while taking steps to ensure that voting power at the IMF continues to reflect changing global realities.

The Board of Governors, the IMF’s highest decision-making body, ratified the package on December 15, 2010.

Next steps

Following approval by the IMF’s Board of Governors, the proposed quota increases and the amendment will have to be accepted by the membership. This requires acceptance by three-fifths of the IMF’s 187 member countries, having at least 85 percent of total voting power.

This acceptance process will in many cases involve parliamentary approval. Member countries have agreed to make best efforts to complete the process by the IMF-World Bank Annual Meetings in 2012.

“The next step in this process will be for governments to ratify speedily the 2010 Amendment on the Reform of the Executive Board and to implement the quota increases to further align representation in the IMF with global economic realities,” Strauss-Kahn said. “This will represent the most fundamental governance overhaul in the IMF’s 65-year history and the biggest-ever shift of influence in favor of emerging market and developing countries.”