IMF: WHEN NOTHING IS BETTER THAN SOMETHING (BAD)

By Jomo Kwame Sundaram Reprint | | Print |

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NEW YORK, Apr 8 2008 (IPS) - On Sunday, the International Monetary Fund called for governments to rise together to face the challenges posed by the ongoing financial turmoil. Unfortunately, most developing countries do not feel the IMF belongs to them, which may adversely affect their willingness to accept Fund leadership, writes Jomo Kwame Sundaram, United Nations Assistant-Secretary-General for Economic Development. The 31 March proposal goes for approval to the Board of Governors at the annual Spring meetings this weekend. A reform of voting shares is long overdue, as the changed global economic landscape has accentuated the gross under-representation of developing countries. At the IMF’s inception in Bretton Woods, New Hampshire, in 1944, all countries got basic votes in order to ensure voice and representation even for the smallest economies, while quota votes were allocated roughly in proportion to each country’s economic clout. Basic votes made up almost 12 per cent of the total at the outset, rose to 16 per cent at its apex, but have decreased to a meagre 2.2 per cent since, as quota votes have increased in relative weight. Meanwhile, the Fund’s membership has more than quadrupled from 44 to 184. If the weight of each country’s basic vote had been preserved from the outset, and not been diluted by more than 95 per cent, the total basic votes today would come to about half. Instead, the proposal will treble the basic votes’ share of total votes from 2.1 per cent to 5.5 per cent.

The 31 March proposal goes for approval to the Board of Governors at the annual Spring meetings this weekend. A reform of voting shares is long overdue, as the changed global economic landscape has accentuated the gross under-representation of developing countries.

At the IMF’s inception in Bretton Woods, New Hampshire, in 1944, all countries got basic votes in order to ensure voice and representation even for the smallest economies, while quota votes were allocated roughly in proportion to each country’s economic clout. Basic votes made up almost 12 per cent of the total at the outset, rose to 16 per cent at its apex, but have decreased to a meagre 2.2 per cent since, as quota votes have increased in relative weight.

Meanwhile, the Fund’s membership has more than quadrupled from 44 to 184. If the weight of each country’s basic vote had been preserved from the outset, and not been diluted by more than 95 per cent, the total basic votes today would come to about half. Instead, the proposal will treble the basic votes’ share of total votes from 2.1 per cent to 5.5 per cent.

But the proposed total increase in share of developing countries’ votes would amount to only 1.6 per cent! Such a change would be all but cosmetic, as developed countries fifteen per cent of IMF member countries would maintain about sixty per cent of total votes. The “formula” underlying the proposed compromise falls short of a meaningful reform for several reasons.

First, the weight attached to GDP in terms of purchasing power parity (PPP) is too small at twenty per cent. GDP at market prices, with a weight of thirty per cent, still outweighs GDP at PPP.

Second, “openness”, measured by averaging five years of a country’s current account, is not scaled to country GDP nor does it exclude intra-currency union trade, thus favouring large economies and small EMU (European Economic and Monetary Union) members respectively.

Third, “vulnerability”, represented by the “variability” of an average of current receipts and net capital flows over a thirteen year period, gauges a country’s potential need for IMF financing support, but has a small weight of only fifteen per cent.

Fourth, the twelve month average of official reserves indicates the degree to which a country is actually able to provide monetary support in the event of a global crisis, but with only five per cent weight in the formula, it is marginal at best.

While incorporating some features favoured by developing countries, the new formula would actually decrease developing countries’ total voting share compared to the status quo ante. The intended increase can only be achieved with a number of arbitrary add-ons. A compression factor reduces the increases that large and rich countries would gain under the formula by five per cent; some developed countries also agreed to forego their calculated increases, while a few developing countries have received one-time voting share boosts.

While a few developing countries will see a marginal increase in their voting shares, the much touted “reform” effectively preserves the status quo favouring the West, especially Europe, at least for a few more years.

Who loses? The IMF risks losing more of its legitimacy and relevance at a time when more and more developing countries are opting for regional monetary cooperation or reserve accumulation, rather than trust IMF-led international cooperation. As the world needs to cooperate more effectively in the face of financial crisis and economic slowdown, narrow self-interest and short-termism threaten to undermine the credibility of the Fund and its new Managing Director and their ability to provide much needed leadership at this time of urgent need.

Already, several prominent Western veterans of Washington institutions and a host of other Western academics and observers have denounced the proposal on the table, urging the IMF Board of Governors to reject it. They join the Intergovernmental Group of Twenty Four (G24) and others from the developing countries who have criticized the proposal and the process, suggesting a variety of more equitable and democratic alternatives such as a double majority voting system. (END/COPYRIGHT IPS)