This column focuses on the governance issues facing the IMF due to the fact that its present governance structure and decision making, dominated by a few developed countries, are badly outdated. These yet to be resolved issues raise questions about the legitimacy and effectiveness of the IMF, notwithstanding its laudable efforts to reinvent itself by learning from its mistakes. The IMF's current efforts to double its financial resources to $500 billion cannot be divorced from its governance issues.
The second G-20 economic summit on April 2 in London should emphasize the urgent need for reforming the IMF's governance. The IMF's governance structure, reflecting the disproportionate power of the US and Western European countries, has not changed much since its founding in 1945, when those countries heavily dominated the world economy. This archaic lopsided dominance by a few developed countries, whose relative shares in the global economy have been falling as the shares of major emerging market economies (EMEs) such as China have been rising, has impaired the legitimacy and effectiveness of the IMF. The IMF has often been perceived by developing countries seeking its help as the tool of a few developed countries.
Although the IMF's Board of Governors, on which each of its 185 member countries is represented equally, officially has the ultimate decision-making power, it is the 24-member executive board, chaired by the IMF's managing director, that runs the IMF. Members of the executive board are appointed or elected either by individual member countries or groups of member countries. It is the current structure of this board that is controversial, especially due to the excessive power of five developed countries.
Those five members -- with their percentage of voting power shown in parentheses, the US (16.77 percent), Japan (6.02 percent), Germany (5.88 percent), France (4.86 percent) and the UK (4.86 percent) -- have their own appointed directors. Among those five, the US is the only member that has veto power since any major decisions, such as amendments to the Articles of Agreement and changes in quotas, must be approved by an 85 percent majority. Turkey, along with Austria, Belarus, Belgium, the Czech Republic, Hungary, Kazakhstan, Luxembourg, Slovakia and Slovenia, is represented on the board by an elected director from Belgium, which has the largest vote among these 10 countries, and his alternate from Austria, which has the second largest vote in the group, whose total voting power is 5.14 percent.
Most critical to a member country's position in the IMF is its quota, which determines its: (1) contribution of financial resources; (2) weighted voting power; (3) share of special drawing rights (SDR) allocations; and (4) level of access to IMF financing. The IMF's Articles of Agreement do not specify a formula for determining a member's quota. Neither has the executive board adopted or endorsed a specific method for determining or revising quotas. Over the years, however, the IMF has developed multiple evolving formulas, based on economic variables such as gross domestic product (GDP), official reserves, imports, export variability and the ratio of exports to national income, with varying weights, merely as guides. Each quota is denominated in the IMF's unit of account, SDRs, a currency basket of four major currencies. Each IMF member has 250 basic votes plus one additional vote for each SDR 100,000 of its quota.
In the last three years, the IMF, as part its ongoing self-assessment, has focused on reforming its governance structure, which is determined largely by its quota distributions. They are supposed to reflect the relative global economic weight of the members. But the minor changes in the quota distributions have failed to keep up with the changing relative economic weights of its members, especially the increasing weights of major EMEs such as China. The IMF needs an entirely new formula to reallocate quotas to reflect the tectonic shifting of global economic power from developed countries toward EMEs. It is that shift which accounts for the displacement of the G-7 by the G-20 in global economic governance (see my columns "The G-20 economic summit (1)" published on Nov. 17, 2008, and "The G-20 economic summit (2)" published on Nov. 24, 2008). The new quota distributions should be accompanied by an amendment to the Articles of Agreement to prevent any one country from having veto power over major IMF decisions. The IMF also needs to change its tradition of choosing its managing directors from Western European countries, which is matched by the equally obsolete World Bank tradition of choosing its president from the US.
The IMF also needs to increase its lending capacity significantly to match the rising borrowing needs of its members, especially amid the deepening global crisis. The IMF's urgent efforts to double its financial resources to $500 billion are related to the governance issues because its lending capacity has been restricted over the years by those members that have dominated its governance. For example, in 1997, the Board of Governors authorized a special one-time allocation of SDRs, to double the cumulative SDR allocations to SDR 42.8 billion, through a proposed amendment to the Articles of Agreement. This allocation would enable all members to participate equitably in the SDR system. Specifically, it would allocate SDRs to countries that joined the IMF after 1981, more than one-fifth of all members, but never received any SDRs. This amendment required the approval of the three-fifths of IMF membership with 85 percent of the total voting power. This amendment has yet to be approved by the US Congress. With 16.77 percent of the total voting power, the US is the only country that is preventing the enactment of this amendment since 131 members, with 77.68 percent of the total voting power, have already approved it.
Another aspect of the IMF's anachronistic governance that affects its resources is the extreme underrepresentation of China, which has the world's third-largest GDP at market exchange rates and second largest, after the US, at purchasing power parity rates. It is no wonder that China, with the world's largest foreign exchange reserves, refuses to allow the IMF to borrow from its reserves unless its voting power, now at only 3.66 percent, which is less than that of France or the UK, reflects its relative weight in the global economy. Well, now it is the IMF that confronts conditionality!
