Following what the IMF managing director Dominique Strauss-Kahn called the ?biggest ever shift of influence in favour of emerging market and developing economies? in the history of the IMF, the response of developing countries to the IMF?s decision to rework country quotas should have been euphoric. However, they have hardly expressed much delight.
The IMF has proposed quick completion of the 14th general review of quotas with an increase in the size of the quotas and also a more favourable redistribution in favour of developing and emerging market economies. There will be more than 6% shifts in quotas from the over-represented to under-represented members and from developed to emerging and developing countries. Since IMF quotas determine the voting capacities of its members, the proposed changes in quota shares will result in changes in voting shares of members. The shift in voting share towards emerging market and developing countries is expected to be around 5.3%. The voting shares of the poorest members are to be preserved. All these changes are expected to take effect after January 2013 when the 14th quota formula review will be completed.
There are several reasons why the recommendations have failed to excite developing countries.
First, arithmetically, advanced economies will continue to have the majority of quotas and voting shares in the IMF even after the reforms. The advanced countries currently have quota shares of 60.5% in the IMF?s total quotas. These are proposed to be reduced to 57.7%. The corresponding reduction in voting power is expected to be from 57.9% to 55.3%. The G7?s quota and vote shares are to drop to 43.4% and 41.2% from 45.3% and 43.0%, respectively. On the other hand, emerging market and developing country quota and vote shares are to increase from 39.5% to 42.3% and 42.1% to 44.7%, respectively. Thus the balance of power in the IMF?both in terms of quota and votes?will still remain with advanced countries.
Second, none of the proposed changes will happen immediately. It will be more than two years before the changes take effect. By that time, there might be further changes in the world economy making the recommendations less relevant. The IMF quotas are expected to reflect the dynamic realignments in the world economy, particularly in terms of increasing influence of emerging market economies. Unfortunately, they have hardly succeeded in doing so.
Third, the developing countries are yet to be convinced about the political neutrality of the IMF. There are two dimensions to the neutrality. The first is under-representation of developing countries. Second, and more specific, is under-representation of Asia. The Executive Board comprising 24 directors is the most important decision-making body of the IMF. The composition of the board is tilted in favour of advanced countries and is unfavourably disposed towards Asia. All the G8 members (Canada, France, Germany, Italy, Japan Russia, the UK and the US) are part of the Board along with Belgium, Denmark, the Netherlands and Switzerland. Apart from Australia, Japan, Korea, China and India, the Asian directors of the board include Iran, Saudi Arabia and Thailand. Going by indicators of dynamic reflection of the changing world economy that the IMF is supposed to convey, Europe is over-represented on the Board. This might change in future as advanced European economies might reduce their combined representation by two chairs by the time the first election after quota reforms takes effect. There is also the proposal that the Board will no longer have appointed directors like it has now (e.g., the US, Japan, Germany, France and the UK?the top five quota and vote holders) and all directors will be elected. However, at present, no such radical changes are in the offing.
Four, the IMF is probably no longer as important in global financial matters as it was earlier. Developments after the latest financial crisis has put the G20 in a far more commanding position as far as taking important decisions in global economic matters is concerned. Indeed, IMF reforms have also been largely dictated by the G20. The IMF is at a stage in its existence where it has to accept the fact that G20 will call the shots in deciding the future course of action in global finance as well as on currency and exchange rates. With the G20 accommodating concerns of emerging market and developing economies more generously, the IMF stands a good chance of becoming increasingly irrelevant in emerging market and developing country calculations.
?The author is a visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views
