Monday, October 25, 2010

The World Has Turned On Its Axis: Didn’t Notice, Did You?

From this weekend’s G20 meeting comes the news of a realignment in the IMF’s governance structure:

G-20 Ministers Agree ‘Historic’ Reforms in IMF Governance

Ministers of the Group of Twenty (G-20) industrialized and emerging market economies agreed on a proposed raft of reforms of the IMF that will shift country representation at the IMF toward large, dynamic emerging market and developing countries.

Meeting in Gyeongju, Korea, G-20 finance ministers and central bank governors agreed on a doubling of IMF members’ quotas—financial stakes that determine voting power in the institution that will shift voting shares toward dynamic emerging market and developing countries.

As a result of the quota rebalancing, the large, dynamic emerging market countries Brazil, China, India, and Russia move up to be among the top 10 shareholders of the IMF.

The ministers also agreed on a reshuffle of the IMF’s 24-member Executive Board that will raise the representation of dynamic emerging market and developing countries on the institution’s day-to-day decision-making body. There will be two fewer Board members from advanced European countries, and all Executive Directors will be elected rather than appointed as they are now. The size of the Board will remain at 24...

...Currently, there is roughly a 60/40 percent split in the shares at the IMF between advanced countries and emerging market and developing countries.

While the Pittsburgh summit targeted a quota shifts of 5 percent from advanced countries to dynamic emerging market and developing countries and from over- to underrepresented countries, the Gyeongju deal achieves a shift of more than 6 percent in both cases.

If you’re wondering what the significance of this is, you should know that the IMF is essentially structured as a credit union. Members are allocated a quota of contributions based on the size of their economies, and are allowed to draw from that quota (plus a bit) to address foreign exchange balance of payment issues and liquidity problems. But that meant that the biggest shareholders are also the one’s with the largest number of votes. The US had (and will continue to have) an effective veto as the largest voting bloc, with 17.25%.

During the Bretton Woods era (1944-1972), the IMF’s structure wasn’t particularly controversial. The countries going to the IMF for loans or assistance were mainly developed countries such as the UK and France. But in the floating rate era and the globalisation of trade, it was primarily developing countries and emerging markets that needed IMF help e.g. Turkey, Mexico, Argentina, and of course in the last decade, Indonesia and Korea. The recent crisis also saw assistance granted to among others, Iceland, Hungary and Greece.

Herein lies the dichotomy – the IMF’s resources are essentially controlled (or to be fair, influenced) by developed countries, yet the target of its assistance were mainly developing countries. The IMF has thus often been accused of being an agent of developing countries, especially because much of its assistance came with strings attached in the guise of structural reforms (see: The Washington Consensus; and this post for a further discussion).

That these reforms were often useful and helpful are beside the point; the fact that they were foisted on countries without regard to sovereignty and timing – the success of institutional development and market reforms are critically dependent on the state of development – is.

So the news that there will be a rebalancing of power within the IMF towards emerging markets is good news. About the only real issue here is regional economic hegemony – Malaysia for instance will have to pay a lot more attention to diplomatic and economic ties with China and India (and a little less with Japan), than it would otherwise have to. That’s the only way for our voice to be heard.

While there are the other regional economic groupings, these are mainly talk-shops over trade and other real economy issues. When it comes to reform of the global financial system, the forum is basically centred around the IMF, and to a much lesser extent, the BIS.

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