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IMF fails to agree reform deal

This weekend, the International Monetary Fund (IMF) and World Bank held their annual meetings in Washington.  Top of the agenda was the reform of IMF governance, and in particular the formula which determines the representation of each country in the IMF, which has been under negotiation since last spring.   No progress was made, despite high expectations and a need to push the reform programme forward prior to the end of the year.  

This is particularly disappointing as recent ODI research has demonstrated that the prospects for finishing a reform deal this year are much higher than next year because the political and economic conditions of reform deteriorate in 2008. 

We advanced six reasons to explain this:
1. the ‘honeymoon’ period of the new IMF Managing Director, Dominique Strauss-Kahn, which gives him the opportunity to convince recalcitrant European members that they should go along with a deal;
2. the move of the G20 chair from South Africa to a Latin American country, which will make compromise more difficult;
3. upcoming US presidential and congressional elections which will divert US political attention and make a reform package harder to pass through Congress (which exercises an effective veto);
4. general reform fatigue as the process stretches into a third year;
5. the release of new data used to calculate GDP at purchasing power parity (PPP) which could give more representation to large developing countries and especially China and India; and
6. the possibility that an economic downturn in Europe or other regions would reduce incentives for reform. 

Given these reasons, the research formally demonstrates that while compromise on a reform package is difficult in 2007, it becomes almost impossible in 2008. 

So does this mean that the IMF reform process is now doomed?  Fortunately, no.  There is still a small window of opportunity in 2007 to complete a deal, if the new Managing Director (who starts his post on 1 November) calls on members to finish their negotiations in a timely manner.  A G20 meeting is scheduled for November, and other ad hoc meetings could be convened as they were throughout the summer.  Developed and developing countries alike would do well to commit real effort in the remaining months of the year to find agreement: the impact of waiting might make a deal much worse, and therefore unacceptable.