A Change Of Governance At The IMF?

From The Economist Free Exchange blog:

Intrigue at the IMF

THINGS are hotting up at the IMF, and it doesn’t have anything to do with bail-outs (or with the heat wave in Washington, DC). Instead, the chatter at the fund is about America’s decision to abstain in a routine vote on the size of the body’s executive board, news of which crept out into the world beyond 19th Street at the end of last week. This may sound arcane (and in a way it is), but it is something that could force the Fund’s members to make a more serious effort to ensure that the long-promised shift in decision-making power at the IMF towards big, fast-growing emerging economies (like China, India and Brazil) materialises.

This has been brewing for a long while, and it took the US siding with emerging economies, ironically, to push the process forward.

So why does this matter? For years (decades actually), one of the key criticisms of how the IMF was run was that policy was weighted too heavily towards the advanced economies in the West, and not enough in the developing East. The structure of the IMF is basically that of a credit union – a cooperative for us in Malaysia – where members contribute financial resources which could then be used to obtain liquidity in case of trouble. During the days of the US dollar standard (1944-1972), this meant handling balance of payments crises in the West, due to the fixed parities in which western currencies were traded.

After Nixon suspended gold convertibility of the USD, heralding the floating rate era, IMF operations gradually shifted locus to developing countries which for the most part still clung to soft or hard pegs to the major currencies. For instance in much of the British Commonwealth, the pound continued to anchor the currencies of many members; similarly for the French Franc bloc. But despite this shift, voting power at the IMF was still held largely by the US and Europe – an inequitable state of affairs, though tolerable considering who actually contributed the most in terms of funding.

That excuse doesn’t hold anymore, with the rapidly growing BRIC economies gaining weight and influence in the global economy, yet having virtually no say in the running of a major multilateral institution whose role has expanded far beyond its original mandate. The promulgation of the Washington consensus, opened up accusations that the IMF and its sister institution, the World Bank, were exporting Western policy and economic norms without due consideration of aid recipients’ economic sovereignty (remember Indonesia, Suharto and 1998?).

Changes in the Fund’s governance structure have been debated for years now, but no real substantive change has yet occurred.  But this new move by the US signals a recognition that reform is both inevitable and desirable, and should be expedited. I won’t rule out geopolitical considerations here – maybe a quid pro quo with China on a faster revaluation of its exchange rate, or rapprochement with Russia.

Whatever the cause, this is both welcome and overdue.