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FINANCE: Is the IMF Irredeemably Irrelevant?

Commentary by Paranjoy Guha Thakurta

NEW DELHI, Dec 8 2006 (IPS) - Has the International Monetary Fund become completely irrelevant? Is this world body, set up more than six decades ago to foster global economic stability and help countries facing financial crises, really reforming itself? And will it become more responsive to the aspirations of developing countries?

Has the International Monetary Fund (IMF) become completely irrelevant? Is this world body, set up more than six decades ago to foster global economic stability and help countries facing financial crises, really reforming itself? And will it become more responsive to the aspirations of developing countries?

Opinion is sharply divided on these questions as the IMF undergoes an exercise to change its “quota and vote” system that is linked to the financial commitments made by 184 countries that are its members. A member’s quota delineates basic aspects of its financial and organizational relationship with the Fund, including its powers to vote and its access to loans.

Three years ago, the IMF had loaned more than 100 billion US dollars to various countries to help them tide over problems including management of external balance of payments. This amount has now shrunk to less than 20 billion dollars a year. In fact, instead of primarily being a lender of funds, the IMF has become a net receiver of funds with an inflow in excess of 20 billion dollars in the form of repayments of past loans, much of it from developing countries.

“The IMF has today become completely irrelevant,” observed Prof. Jayati Ghosh who teaches economics at New Delhi’s prestigious Jawaharlal Nehru University, in an interview with IPS. Not exactly, argue officials of the Washington D.C.-headquartered organisation that was established in 1945 after the end of the Second World War in the wake of the historic Bretton Woods conference. “We should celebrate the fact that countries do not need the Fund in emergency situations,” an IMF official told IPS.

Addressing a conference of finance ministers of Commonwealth countries in Colombo on Sep. 13, India’s Finance Minister Palaniappan Chidambaram caustically remarked: “It is widely believed that the present quota formula of the IMF is hopeless flawed and outdated. Obviously, an ad hoc quota redistribution based on this flawed formula cannot provide a durable solution. We need a consensus on a new formula. And we need it quickly. There must be a deep commitment to fundamental reform and there should be no postponement of a comprehensive reviewàMy government firmly believes that any exercise intended to enhance the credibility and legitimacy of the IMF has to be based on fundamental reforms in the quota structure.”

Yet, five days later on Sep.18, much to India’s disappointment if not chagrin, the implementation of a comprehensive reforms package for the IMF was postponed after a meeting of the Fund’s main policy-making body that was held at Singapore. At the meeting, the 24-member international monetary and financial committee of the IMF decided to embark on a “second stage” of reforms for the Fund while simultaneously enhancing the quotas of four selected countries, China, South Korea, Mexico and Turkey.

When this decision became known, the finance ministers of India, Brazil, Argentina and Egypt issued a statement on behalf of themselves as well as representatives of “several other important emerging markets and developing countries representing a substantial share of the global economy and population” opposing the resolution send by the IMF managing director Rodrigo de Rato to the Fund’s governors on quotas and votes.

The statement read: “We reiterate that we support the increase in quota for the four countries (China, South Korea, Mexico and Turkey) who are the present beneficiaries of the ad hoc increase. However, the present quota calculation formula is opaque and flawed. We believe that fundamental reforms are possible only if the contours of a final outcome are defined a priori followed by genuine consultations amongst nations as equal partners. The picture that emerges at present points to a second stage that is by no means guaranteed to happen or, even if it happens, may not advance the Fund’s legitimacy.”

A “disturbing picture that emerges is that some developing countries will be given increases by reducing the shares of some other equally deserving countries”. ‘The finance ministers of India, Brazil, Argentina and Egypt were categorical that this position was ‘‘unacceptable” and “further erodes the credibility and legitimacy of the IMF”.

The four finance ministers urged the Fund management to “keep the current process in abeyance” and make a “genuine attemptàto work out a simple and transparent formula that is truly reflective of the economic standing of countries while also protecting the position of low income countries.”

Independent commentators have been far less polite in their remarks about the IMF than the finance ministers. George Monbiot, writing in ‘The Guardian’ newspaper of the UK on Sep. 26, stated: “Like most concessions made by dictatorial regimes, the reforms (in the IMF) seem designed not to catalise further change, but to prevent it. By slightly increasing the shares (and therefore the voting powers) of China, South Korea, Mexico and Turkey, the regime hopes to buy off the most powerful warlords, while keeping the mob at bay. It has even thrown a few coppers from the balcony, for the great unwashed to scuffle over. But no one – except the leaders of the rich nations and the leader writers of just about every newspaper in the rich world – could regard this as an adequate response to its (meaning, the IMF’s) problemsà”

The Fund’s critics like Monbiot point out that out of its 184 members, seven countries dominate the decision-making process – these are the US, Japan, Germany, Britain, France, Canada and Italy. A major decision by the IMF requires 85 percent voting support. This implies that one country, the US, has veto power since it has 17 percent voting power.

Whereas Japan’s share of the total vote is 6.1 percent, Argentina’s vote share is less than one percent while the tiny African country of Swaziland has a vote share of a niggardly 0.03 percent. The total vote share of the 80 poorest members of the IMF is barely 10 percent while four rich countries – Britain, Germany, France and Japan – together control 22 percent of the total vote and have permanent seats on the Fund’s governing board.

While Monbiot mocks at the mainstream media in America, certain newspapers have acknowledged the need to reform the IMF. The ‘Washington Post’ on Sep. 23 had editorialised that “to be legitimate, multilateral institutions must reflect the global distribution of power as it is now, not as it was when these institutions were set up more than half a century ago.”

Masood Ahmed, director, external relations, IMF told IPS during a recent visit to New Delhi that “the purpose of the reforms that the governors of the Fund are at present pursuing aims at realigning the weights of countries in the IMF’s quotas with their current economic weights based on a more transparent and simpler formula”. Asked whether the Fund had become irrelevant, Ahmed replied that the “more charitable” view would be that the IMF had “recognised that the needs of its members are changing and is responding to those needs”.

Speaking on condition of anonymity, an official of the IMF told IPS that the “pace of change” has to be acceptable to the Fund’s 184 members. “Even if the current formula for determining quotas is complicated and needs to be made transparent, there is an internal debate within the IMF on a number of key issues,” said this official. He added that there was an issue relating to how much weight should be given to particular variables, such as the gross domestic product (GDP) of a country. Further, there was a question as to whether GDP should be measured in nominal terms or in terms of purchasing power parity (PPP).

That is not all. There were questions relating to how much weight should be given to correlated factors such as the “open-ness of an economy”, a country’s foreign currency reserves and variability of growth rates. He pointed out that it was after a two year discussion that the quotas of China, South Korea, Mexico and Turkey were increased, that too, by only 1.8 percent. This was the first time in a decade that the IMF had altered the quotas of its members. The “second stage” of the reforms programme could go on till 2010, this IMF official conceded.

On the voting weights in the Fund not reflecting the economic positions of different countries, this official pointed that the US was “over-represented” since its 17 percent share was lower than its 25 percent share of the world economy and this was also true of poor African countries. At the same time, this official as well as Masood agreed that the voting rights of IMF members should better reflect their “relative economic strengths”.

Ghosh said that governments of developing countries were today less concerned about the IMF and more about what happens during the meetings of the World Economic Forum at Davos, Switzerland, “even if the two bodies espouse the same neo-liberal economic policies and conservative monetary and fiscal programmes”. She added that the irrelevance of the Fund was evident from the fact that current fund inflows through bond markets were far higher than funds disbursed by the IMF. Besides, a one-time lender of funds had become a net recipient of money.

She pointed out that the IMF’s own statements had of late become more “nuanced”, especially after the Asian financial crisis of the late-1990s that had affected countries that had “blindly followed the policies prescribed by the Fund”. “Working papers have been issued by the IMF that are critical of the Fund’s own past policies of financial liberalisation, including the movement towards capital account convertibility,” she said.

Ghosh said the IMF had a “huge history of failures”, one notable example being Thailand that had “diligently followed the prescriptions of the Fund”. “Between 1998 and 2006, after the 1997 financial crisis, no less than 35 letters of intent were signed between the IMF and the government of Thailand. Five letters of intent were signed in 1998 alone, but it became clear that the Fund’s policies were not working in Thailand. So they (meaning the IMF) kept on signing new letters of intent,” she told IPS.