The West Must Allow a Power Shift in International Organizations, Part 1

Jakob Vestergaard and Robert H. Wade, Guest Bloggers

More than three years after the International Monetary Fund (IMF)’s governing body agreed to reform the organization’s governance so as to better reflect the increasing economic weight of dynamic emerging market economies in the world economy, only microscopic changes have been made. Emerging market and developing countries (EMDCs) have become increasingly frustrated with Western states as the latter have clinged to their inherited power in the IMF and other important international economic governance organizations. The emerging cooperation among the BRICS (Brazil, Russia, India, China, South Africa)—as seen in the advanced-stage negotiations to establish a Development Bank and a Contingent Reserve Arrangement—sends a “wakeup and smell the coffee” message. The West will carry a heavy responsibility for eroding global multilateral governance if it continues to drag its heels on the needed adjustments.

Part 1 of a two-part series.

Overview of the Current Stalemate

Everyone agrees, in principle, that the global governance organizations established after the Second World War—notably the IMF and the World Bank—must adapt their governance to the fact of a now more multipolar world. Everyone agrees, in principle, that member countries’ share of votes in the governing boards should reflect their present-day relative economic weight.

At first glance the IMF has already taken a big step towards raising the voting power of “emerging market and developing countries” (EMDCs). In 2010, its member countries agreed both to boost the lending power of the IMFand to shift 6.2% of quota shares, and hence voting power, in favour of “dynamic” EMDCs. In March 2010, then-Managing Director Dominique Strauss-Kahn hailed this agreement as “the most fundamental governance overhaul in the IMF’s 65-year history and the biggest-ever shift of influence in favor of emerging market and developing countries.”

However, more than three years later the shift has yet to be implemented, largely because the U.S. Congress has still not approved what the country’s executive branch agreed to (it remains an open question, though, whether the executive branch is using the Congress as an excuse for its own unwillingness to act).

Moreover, the key shift from developed countries to EMDCs is only 2.6%, the rest being shifts within the category of emerging market and developing countries from “over-represented” EMDCs to “underrepresented” EMDCs. Such a small change comes nowhere close to aligning share of votes with any plausible measure of economic weight.

If economic weight is measured by gross domestic product (GDP), then the agreed 2010 reforms will still leave very large discrepancies between share of economic weight and share of voting power. Voting power-to-GDP ratios vary five-fold, from 0.45 in the case of China to 2.15 for Belgium. India (0.6) and Brazil (0.7) remain at the underrepresented end, while the larger European countries remain at the over-represented end. On average, a dollar of EU4 (France, Germany, Italy, and UK) GDP is worth more than twice as big a share of votes as a dollar of GDP from the BRICs. This means that the aggregate voting power of the EU4 is higher (17.6 %) than the aggregate voting power of the BRICs (10.3 %), despite the fact that the GDP of the BRICs, as a share of world GDP, is almost twice as large (24.5 %) as the GDP of the EU4 (13.4 %).

However, while most member states agree that, in the interests of simplicity and consistency, economic weight should be measured by GDP, the Europeans are adamant that economic weight is not just GDP but also “openness.” Intra-Europe trade boosts Europe’s weight, while intra-U.S. or intra-China trade does not boost the weights of those countries. The BRICS argue that if measures beyond GDP are to be included in the determination of quota (and vote) shares, criteria of “contributions to global growth” should be among them.

The result is stalemate on the commitment made in 2010 to revise the quota formula in time for the next reallocation of quotas. The deadline for a new formula has been postponed several times, and the next deadline, in January 2014, will probably also be postponed. In fact, the quota formula negotiations have been put on hold until the U.S. Congress approves the 2010 reforms. Given the current paralysis in Congress it would be unwise to hold one’s breath in anticipation of the new formula.

So not only has the 2010 quota share reallocation—modest as it is—yet to take effect, but the IMF is continuing forward without a legitimate quota formula , despite repeated affirmations that a new formula must be agreed.  Lack of agreement suits the Europeans well, for it protects their current over-representation.

With this overview in mind, we will now elaborate on the discussion, even at the cost of some repetition of what has just been said.

The 2010 quota reforms

The voice reforms agreed in 2010 formed part of a larger post-2008-crisis compromise among representatives of the world’s largest economies. The G20 summit in London in 2009 agreed to a tripling of the financial resources of the IMF, including substantial contributions from Japan, China, and a number of other large emerging market economies. This took the form of New Arrangements to Borrow (NAB), which introduced a new funding channel for the IMF to supplement the standard channel of quota subscriptions paid by member states.

Unlike quota shares, these additional funds did not give contributing member countries a higher voting share in the Fund. But at the same time as they agreed the NAB, the G20 countries committed themselves to revise the governance of the Fund so as to shift quota share and voting power in favor of dynamic emerging market economies. Their communiqué from the summit in Pittsburgh in September 2009 announced that “[w]e are committed to a shift in International Monetary Fund (IMF) quota share to dynamic emerging markets and developing countries of at least 5%”.

Given their marching orders by the G20, the Executive Directors set out to negotiate the shift. In 2010 they announced a major success: an agreement to shift6.2 % in quota shares (hence voting power) from overrepresented to underrepresented countries.

But this was misleading, to put it politely. Less than half of the mentioned figure is what really matters: a shift of voting power from advanced economies to EMDCs. The G7 countries, as a group, concede only 1.8 percentage points of their voting power, in aggregate. Table 1 presents the voting power of 15 large countries, as it currently stands (December 2013) and as it will be if or when the 2010 voice reforms take effect.

As can be seen, most changes are microscopic. For only two out of 15 large countries will the change in voting power be larger than half a percentage point (China, with a 2.26 percentage point increase, and poor Belgium, with a 0.56 percentage point loss).

Table 1: Voting power, selected large economies

Note: A selection of 15 of the world’s 30 largest economies, based on a 50/50 GDP ‘blend’ (i.e. giving 50 % weight to GDP at market prices and 50% weight to GDP in purchasing power parity terms), World Development Indicators 2012 (November). Data for current voting power are July 2013 actual voting shares.

Triple crisis welcomes your comments. Please share your thoughts below.