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The last spring meetings of the World Bank and the International Monetary Fund (IMF) brought to conclusion the debate on reforms of the governance of the IMF. The reforms were a response to the Monterrey Summit agreement to call on the World Bank and the IMF to enhance the participation of developing countries and countries in transition in their governance. Unfortunately, in spite of legitimacy, credibility and an effectiveness crisis that saw two Managing Directors pass, and at some point raised hopes of a wake up call for the institution, the reforms were meagre and unsatisfactory.

The last spring meetings of the World Bank and the International Monetary Fund (IMF) brought to conclusion the debate on reforms of the governance of the IMF(1). Unfortunately, in spite of legitimacy, credibility and an effectiveness crisis that saw two Managing Directors pass, and at some point raised hopes of a wake up call for the institution, the reforms were meagre and unsatisfactory.

The reforms were a response to the Monterrey Summit agreement to call on the World Bank and the IMF to enhance the participation of developing countries and countries in transition in their governance. After protracted negotiations within the Boards of the two institutions, a resolution issued by the IMF Board of Governors at the annual meeting in Singapore in 2006 agreed to reform of quota and voice. The resolution stated that the two main goals of the reform were to ensure that the distribution of quotas adequately reflects member countries’ economic weights and roles in the global economy, and to enhance the voice of low-income countries, in a two-step approach. In the first step, the resolution made ad hoc quota increases for a group comprising South Korea, Mexico, China and Turkey. For the second step, it called for more fundamental reforms, including an agreement on a simpler and more transparent quota formula, a second round of ad hoc quota increases based on a new formula, and an increase in basic votes.

Last year, at the 2007 annual meeting, it was agreed that the reform should increase the voting share of emerging markets and developing economies as a whole. The importance of enhancing voice and representation of low income countries was also agreed upon. According to a staff paper at the time, there was significant convergence on the view that variables to be used in the formula "should be limited to updated and modernized versions of the four variables included in the existing formulas-GDP, openness, variability and reserves". It acknowledged, however, that there was little agreement on the precise definition and ways to measure such variables.

The size of the reform ultimately decided last spring depends on as to who reports. The Fund has been careful to stress in its communications that the end result of the formula represents an aggregate shift of 5.4 percent of voting to "underrepresented economies". However, from the perspective of the Monterrey Consensus commitment —increasing the voice of developing countries— the reading is different, as only 2.7 percent of voting has actually shifted from developed to developing countries. This includes the increase of a total 1.6 percent awarded in Singapore, which went, in three of the cases, to OECD-member countries.

To understand the insignificance of the change in the dynamics of the Board one must recall that developing countries entered the exercise holding roughly 38 percent of voting power, and they will now hold slightly over 40 percent. If one considers the effective power held by developing countries in the Board, the figures are even less impressive. Counting the amount of votes commanded by developing country Executive Directors is important given that they cannot split voting to represent different voting directions in their constituencies. Developing country directors used to command from 26 to 30 percent of the vote on the Board(2). Part of the 2.7 percent increase in developing countries’ voting has gone to developing countries seating in constituencies commanded by a developed country, further reducing the extent of the change.

The insignificance of the change was, however, probably inevitable when the process decided not to take as a point of departure a politically agreed outcome that should have been in line with the Monterrey Consensus, as independent analysts had recommended. Instead, it decided to start fiddling with the existing variables and tweak them around as if the existing quota represented anything more scientific than a politically agreed outcome dating back to 1945.

The source for the disappointing results can be found in several factors. First, the continued use of variables that overall continue to favour the rich countries. The variables are, except for openness, the same as in the existing formula: GDP, variability and reserves. As debate inside the institution progressed, other variables potentially more beneficial to developing countries were quickly eliminated (Zaidi and Mirakhor 2006). None of the variables on the table at this point are what an author has called "demand-oriented" variables —that is, variables that signal demand, and that may favour developing countries— but are, on the contrary, "supplyoriented" ones (Beltran 2005).

Second, the measurement of these variables continues to be done on a basis that systematically underestimates the weight of developing country economies, such as the measurement of GDP at market-based rates. It was agreed that GDP measured in Power Purchasing Parity terms (a less biased measure) will be accepted in the formula only to forty percent. The element of variability is potentially a powerful variable to capture developing countries need to access Fund resources. However, this will only happen if variability is measured as a ratio of GDP, as it is obvious that the same level of capital account crisis will affect a smaller economy much more than a bigger one. Consequently, the new measurement formula, which simply measures gross size of the volatility of capital flows, will be disadvantageous to developing countries.

It should be added to this that the one variable that has been added into the formula, openness(3), is highly biased against developing countries; so rather than balance the role of the other variables, it exacerbates it. It has been shown that openness is highly correlated with GDP measured in market-based exchange rates (Truman and Cooper 2007). Moreover, the way it will be measured (gross measures of receipts and payments) tends to be a distortive proxy for economic size. For example, re-importation and/or re-exportation of the same products will be added up (ibid). Intracurrency union trade will remain included in what is considered international trade, thereby substantially overestimating the share of the Eurozone members when it comes to measuring openness.

Basic votes are an important factor for addressing the voting power of low income countries. The diminished role of low income countries in the governance of the institution has become more evident in the last few years. As virtually all middle income countries have repaid their obligations to the Fund, the IMF’s main users are low income countries. These are exactly the countries that stand to be further marginalized in IMF voting power in the light of a formula that has mainly sought to align economic weight with voting power. Denying increases to them would have meant reproducing the imbalance whereby users tend to be stripped of access to voting. It is worth noting that formula reforms alone have been rather detrimental to this specific group of countries, especially because of the neglect of alternative measurements of variability, which would have stood to benefit these countries more. The agreement on basic votes hardly redresses this problem. Lifting the share of basic votes in total votes to its original share —a minimum requirement to undo the erosion of the weight of basic votes that had taken place after numerous increases in quotas had affected the quota-related voting power- would have taken a quadrupling of basic votes. However, only a tripling of basic votes was agreed upon. It is worth noting though that the reform includes an agreement to index the share of basic votes to total votes to keep it constant.

Conspicuously absent from the spring decision was the issue of double-majority voting, which would have a pragmatic and helpful proposal to give more influence in decision-making to developing countries, and encouraging broader and more diverse coalitions across the membership –thereby ensuring more ownership— in support of policy decisions. The double majority is an option that has been tested in similar contexts, such as in regional development banks, and would not require further changes to the quota or to the Articles of Agreement. This option no longer seems to be under consideration at the Bretton Woods Institutions, even though, if the political will existed, it could still be adopted by them.

Developing country reactions to the reform were generally negative. The Arab states stated their expectation that "an outcome of future quota realignments should be a further increase in the voting share of emerging markets and developing countries as a whole", a clear reference to the fact that this had not been the outcome of the reform package. South Africa, one of the emerging markets to actually lose with the reform, stated that the package had still "a considerable built-in governance deficit".

But the reforms of governance of the Bretton Woods Institutions should be assessed against the context of their changing roles and an important consideration in this regard that has emerged since 2002 deserves attention. It was indeed ironic that just as the decision on overhaul of quota was agreed to, a parallel change that would make it even less significant was taking place. This was that the decision on overhaul of quota was completed at the same spring meetings that witnessed a clear move by the IMF away from financing roles, which require funding capacity, and towards surveillance and monitoring, which, to be effective, require even-handedness and a greater emphasis on the advanced economies rather than the developing ones. Maintaining a formula so influenced by considerations about the funding capacity of members becomes, in this scenario, no longer justified, and further erodes democracy and effectiveness. One of the developing country constituencies made this clear in their statement: "The Fund’s governance structure is prepared for its lending role, but it is totally unfit for its progressively more important supervisory and regulatory role. We think that it would be appropriate for the Executive Board to use a double majority system (of weighted votes and members) to adopt policy decisions...".

Summing up, the voting reforms failed to live up to the requirements of democratization and legitimacy of an institution that is going through the worst crisis since its foundation. The Doha FFD Review Conference, in reviewing implementation of the Monterrey Consensus, should take the opportunity to denounce this lack of progress. Moreover, the changing role of the Fund is one of the "emerging issues", unforeseen in 2002, but one that should be addressed in the Doha Conference with a call for further, more significant, changes to its governance structure.

Aldo Caliari is the the Director of Rethinking Bretton Woods Project at the Center of oncern, Washington D.C.

Notes

(1) The World Bank has declared it will follow its own process, but it is expected that it will closely follow the lines of the IMF decision.
(2) The fluctuation responds to the fact that the constituency of Spain, Mexico, Venezuela and others, comprising —before the reform— some 4 percent of voting power, is rotatively chaired by one of those three countries.
(3) Openness has been introduced as an independent variable, but some of its elements –export volatility, trade— were already included in the old formula.

* Beltran, Gil S. 2005. Governance in Bretton Woods Institutions. Paper Prepared for the XX G24 Technical Group Meeting, Manila.
* Cooper, Richard N. and Edwin M. Truman 2007. The IMF Quota Formula: Linchpin of Fund Reform. Policy Briefs in International Economics. Number PBO7-1. Peter G. Peterson Institute for International Economics. February.
* Zaidi, Iqbal and Abbas Mirakhor 2006. Rethinking the Governance of the International Monetary Fund. IMF Working Paper. WP/06/273.

This article was first published by South Center at its South Bulletin: Reflections and Foresights (Issue 16, 01 June 2008). See full bulletin

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