Missing Reform Deadline, IMF Nears “Credibility Cliff”

By Carey L. Biron Reprint | | Print |

WASHINGTON, Jan 31 2013 (IPS) - The International Monetary Fund (IMF) has announced that it will miss an internal deadline to agree on a new formula by which to apportion voting rights in the 188-member institution.

According to a report by the Fund’s Washington-based executive board made public on Thursday, discussions over the past year “have provided important building blocks for agreement on a revised quota formula that better reflects members’ relative positions in the global economy.” But a deadline to agree to a new formula by this month has now passed.

The announcement marks a potentially significant stumbling block in a two-year campaign to increase the voice of emerging economies, rebalance the institution’s governance structures to take into account a new global economic order, and re-establish a level of legitimacy that many observers say the Fund has lost in recent years.

The results of those two years of work have been “meagre”, Paulo Nogueira Batista, IMF executive director for Brazil and 10 other countries, said Thursday in a statement sent to IPS.

“Since 2011, IMF reform has practically ground to a halt,” Batista warned, speaking in his own capacity. “Now, we have an attempt to paper over the fact that the review of the quota formula has not been completed either. The IMF is approaching what we could call a ‘credibility cliff’.”

He places particular blame for the hold-up in the reforms process on European members of the Fund, noting in addition that “the fundamental problem in IMF governance is the glaring overrepresentation of Europe.”

Emerging economies are calling on the Fund to rework its voting shares to be based more on gross domestic product (GDP) and less on a vague notion of an economy’s “openness”, as pushed by Europe.

The European Union’s share of GDP is around 20 percent “and falling”, Batista notes, even though EU members continue to hold nearly a third of total voting shares. More specifically, he points out that under the current formula, the Netherlands and Spain, for instance, both have voting shares similar in size to Brazil’s, despite the fact that the Spanish economy is less than two-thirds the size of the Brazilian.

“We are disappointed that an agreement on the quota formula has not yet been reached,” Amar Bhattacharya, director of the Group of 24 (G24) bloc of developing countries, told IPS from the group’s Washington secretariat.

“The reform formula must reflect changes that are taking place in the global economy. It must be equitable in that it enhances the voices of emerging markets and especially of the poor, and that it should not produce the kind of outcome as in the past where a significant part of the adjustment came on the back of other emerging countries.”

Bhattacharya suggests that the current deadline is far less important than the final cut-off date for putting the new formula into effect, in January 2014. Still, he stresses that the failure to reach agreement by this month underlines that much work – both technical and political – remains to be done in proving that the IMF remains a relevant institution.

“Quota and governance reform is certainly central to the effectiveness, legitimacy and credibility of the IMF, and this quota issue has become a litmus test as to whether the Fund can adapt its governance structure to the new economic world,” Bhattacharya said.

“The important thing for all of us is to strive to achieve a goal that ensures that the Fund is a truly multilateral institution of the 21st century.”

Politicisation potential

Still, breaking the recent deadline – which had already been pushed off once – could have lasting consequences. Although around 75 percent of the IMF’s member countries have agreed to a new quota formula (out of 85 percent required for passage), some of those votes may now need to go back before national legislatures to get new approval.

That process could delay the agenda by six months or more, warns Bessma Momani, an associate professor of political science at the University of Waterloo, in Canada, and a senior fellow with the Centre for International Governance Innovation (CIGI), a think tank.

“We won’t be completely starting from scratch, but this means that the political bargaining that had to happen as precursor may now have to be renegotiated, and that means setting back the schedule quite a bit,” Momani told IPS.

Of particular interest over coming months will be whether there is any movement on the issue in the U.S. Congress. While the administration of President Barack Obama is widely seen as supporting the IMF reforms process, the president had not wanted to risk raising the issue in the midst of the tight election campaign that ended with his re-election in November.

As such, the United States, which has nearly 17 percent of IMF voting shares, has not formally approved the quota reforms. If it had, the Fund’s 85 percent requirement for approval would likely have been easily met and the governance changes would now be pending policy.

“Ultimately, of course, this comes down to different Congressional interests. But the problem is that the longer the IMF is in the media, particularly over the troubles in Europe, the more difficult it will be for many members of Congress,” Momani says.

“So, if we were now at the point we were a year ago, where few constituents had much interest in talking about the IMF, this provision could have passed more quietly. But every day the issue of the IMF generally is in the news, the more potential there is for politicisation.”

Still, she suggests that over the past two decade the IMF has indeed been changing, and that this process is potentially being stepped up today.

“Reform is the only way forward to reinstate the legitimacy the Fund has lost over the years, and quota reform is actually only a small measure. But with the IMF we have to recognise that it is reforming, it’s on that path – it’s slow, because institutional change will always be slow,” Momani says.

“At the end of the day, it’s not just about leadership and quotas but about the content of policies themselves, and the Fund is becoming more open to accepting unorthodox ideas. In particular, the more it listens to the experiences of people, to ensure it’s not just promoting textbook policies but rather programmes that can work in each individual country, the better.”