The IMF Board of Governors risks causing splits in international financial governance if it does not heed calls to rebalance its quota formula when it releases its latest General Review in December. The US is against radical change but emerging market experts have been sharply disappointed by its proposals.
Developing economies claim they are under-represented in the existing system and are calling for the lines to be redrawn in their favour to reduce the hegemony of Western states.
While the US has proposed some concessions, Mahmoud Mohieldin, an executive director at the IMF from Egypt, said: “Everybody was expecting much more than what’s being offered.”
“Today there are substantial risks of fragmentation at a global level,” Ignazio Visco, governor of the Bank of Italy, told GlobalMarkets. “This pushes the necessity to find a solution which also involves a more balanced approach in terms of representation at the IMF.”
Without greater representation, there is a significant risk that countries like China, Brazil and India could distance themselves from the Fund.
Consensus in emerging markets is that the quota system used to determine voting power in key Fund decisions no longer reflects the economic and demographic weight of its constituent members and must be amended.
However, this is a zero sum game. Emerging countries can only gain influence if rich countries lose it, and they are clearly reluctant.
Kristalina Georgieva, managing director of the International Monetary Fund, said: “We must continue to work towards adapting our governance structure to better represent our membership and the dynamic changes in the global economy.”
She suggested giving Africa a third seat on the executive board, raising it to 25 members, as the US Treasury suggested in September, could be “a welcome step in the right direction”.
The Treasury also offered creating a fifth deputy managing director and an “equiproportional” increase in IMF quotas, meaning enlarging contributions but keeping shares the same.
“In the absence of a new formula, an equiproportional increase is the only viable outcome that avoids arbitrarily picking winners and losers,” said US treasury secretary Janet Yellen this week. She said the Treasury was “exploring ways to give more voice to developing countries through changes in the management and board structure of the Fund”.
However, IMF watchers said these ideas failed to address EMs’ concern, because they would not increase their voting power.
It could be difficult for them to resist, however. “Because emerging markets do not have a common champion to coalesce around, they will not be able to have leverage, to be able to offer a credible alternative plan that achieves both greater representation for emerging markets as well as increased quotas,” said Reza Baqir, managing director at Alvarez & Marsal and former governor of the State Bank of Pakistan.
China’s economic heft means it would be likely to gain most, as it did at the last revision, which took effect in 2016.
Baqir said: “The fact that one big emerging market would benefit a lot more from any revision to their shares undermines the incentive of other emerging markets to rally behind a common cause.”
A bigger slice of the pie
“The challenge facing the IMF today is to make sure that it is fit for purpose and relevant for the 21st century,” Mohieldin told GlobalMarkets.
Since the last quota realignment was agreed in 2010, China has become ever more important, while India’s population is now the largest in the world.
While the IMF has evolved, it has not done so with “the pace and ambition” to match these changes, Mohieldin said, especially for countries that “depend on these institutions more than others”.
He said the US Treasury’s proposals were “a step in the right direction,” but not a particularly strong one, and had left much of the membership frustrated.
“However, it’s a process that we hope we can learn from. In the next review we hope to see adequate realignment and full realisation of the dynamics of today’s world, not yesterday’s world,” he said. “We need some sort of flexibility on both sides. Institutions that are based on pragmatism, not politics, would be very much appreciated.”
Chikumbutso Ngosi, programme manager for young urban women at ActionAid International, from Malawi, went as far as to call the existing system a “new form of colonisation”. With less than 4% of the votes, she said, Africa is severely under-represented.
“Most of the decisions are not in favour of African countries,” she said. “We talk about the loan conditions, the money that we are borrowing — even in the context of a crisis — we are either borrowing at a higher interest rate or an amount less than adequate to meet our needs, that comes with a large amount of austerity measures.”