In April, after several years of negotiation and discussion, the member states of the International Monetary Fund (IMF) approved a governance reform package. The impetus for the reform was to ensure that the IMF maintains credibility and legitimacy with fast growing developing countries. It is, therefore, envisioned as a first step in a longer process of reform for the representation of developing countries in the IMF.
There were two primary changes in the IMF governance structure that benefit developing countries. The first is a change in the way that representation is allocated on the basis of economic size (quota votes). The formula used to determine representation has been simplified and made more transparent and now includes several aspects that should increase the representation of large developing countries. This includes measuring gross domestic product (GDP) partially in purchasing power parity (PPP) terms (40% weight), and adding measures of volatility and foreign exchange reserves held in a country’s central bank.
The second is an increase in the number of votes each country receives, simply for being a member (basic votes). This favours the representation of small, poorer countries, whose representation is limited if based on economic size. In particular, the tripling of basic votes will provide a small benefit to the representation of low income (e.g. African) countries.
In all, 135 countries benefit from the reform as the result of a combination of quota and basic vote increases. The largest gains are for big, fast-growing emerging market countries such as Brazil, China, India and Mexico. However, the net effect is still a very small 2.7% increase in representation shared across all developing countries.
Is it a good deal?
Given the low overall impact of the reform, the answer is ‘not really’. However, it is probably as good a deal as could have been achieved given the numerous political and economic constraints facing the negotiations (see my recent ODI Briefing Paper "Closing the deal: IMF reform in 2007" for more on these constraints).
It also remains to be seen whether this reform will increase the credibility and legitimacy of the IMF among the public, middle income countries and low income countries. The reaction from the academic community has been strongly against the reforms, which are generally considered as insufficient given the scope of challenges facing the IMF. And despite the fact that the member states voted in favour of the package by a large margin, it is unclear whether marginal increases to representation for developing countries will either change their ability to guide the strategic direction of the IMF, or their propensity to borrow.
This deal should be seen as the beginning of a process of reform to the governance of both the IMF and its sister institution, the World Bank. In addition to the next steps put in place through the reform deal (e.g. the review of representation on a five-yearly basis), the IMF should pursue better representation of developing countries at the management level. The current opening in the chairmanship of the International Monetary and Financial Committee (IMFC) could ideally go to a Finance Minister from a developing country, and a better, more open, succession process could be put in place for the selection of a new Managing Director in the coming years.
In addition, Europe must pursue its own internal reforms to ensure that its representation becomes more unified, thus creating space for further reforms in the governance structure. Finally, additional thought must be given to ways to increase the voice of low income countries – and African countries in particular – outside formal quota vote representation.