Jaimini Bhagwati: IMF & World Bank: In a time warp?

The bias in favour of OECD countries is better understood if we think of the IMF and the World Bank as conservative financial firms.

An International Monetary Fund (IMF) press release dated 1 September, 2006, states that its Executive Board has recommended "a package of reforms on quotas and voice in the IMF to better align the current governance regime with members' relative positions in the world economy". This release also states that "it is expected the Board of Governors will vote on the package of reforms by its upcoming Annual Meeting in Singapore on September 19-20, 2006". In the run-up to the IMF and World Bank annual meetings, attention has been drawn to the inconsistency between the voting shares of IMF member countries versus their standing in the global economy [e.g. "Quo(ta) Vadis,"Business Standard, September 13]. There are no reports that the World Bank is carrying out a similar review of members' voting shares.

The table above provides a listing of voting shares, in descending order, and gross domestic products (GDPs), in nominal (N) and purchasing power parity (PPP) terms, of the top twenty-one economies in the IMF and the World Bank. The voting shares of member countries are proportional to their equity holdings in the two institutions. The developed countries, which were responsible for the setting up the two multilaterals in 1944, subscribed to larger proportions of equity at that time as compared to developing countries. Since then there have been periodic reviews of voting shares and if nominal GDP is used as a guiding principle, it can be seen that the current voting shares are reasonable for the top five countries except that China is clearly underweight. However, the voting shares of countries such as Belgium, the Netherlands, Canada and particularly Saudi Arabia do not seem to be justified. It is evident from the table that if PPP GDPs are used for comparison with their voting shares, the under-representation of some countries is even greater. In this context, it is not clear on what criteria it has been decided by the IMF that China, South Korea, Mexico and Turkey are the most "under-represented" and hence deserving of "initial ad-hoc" increases in their voting shares in what has been described as a two-year reform programme.

Some commentators have been caustic and even shrill that since the voting shares of developed countries are much higher than those of developing countries the IMF is "run by countries that are least affected by its policies" (George Monbiot's article in The Guardian, September 5, 2006, titled "Don't be fooled by this reform: the IMF is still the rich world's viceroy"). It is impractical though to suggest that the donor and other developed countries, which do not borrow from these two institutions and developing countries which do, should have equal voting rights. This would be equivalent to expecting the minority share-holders to have the same say in the management of a corporation as the majority share-holders. The continuing bias, in the allocation of voting shares, in favour of OECD countries is better understood if we think of the IMF and the World Bank as conservative financial firms.

The interests of the non-borrowing developed countries in these institutions converge more closely with each other than with even the largest developing economies. This came sharply into focus in the late 1990s when all developed country members voted together (recourse to voting is extremely rare on the Boards of both institutions) against all developing country members to push through significant increases in the lending rates and up-front fees on International Bank for Reconstruction and Development (IBRD), a predominant part of the World Bank group, loans. On other occasions it has been noted that political considerations creep into the "consensus" decision making in the IMF and the World Bank. It is likely, therefore, that the voting shares of those non-borrowing OECD economies, which have shrunk over the years relative to some borrowing countries, may not be adequately reduced to provide for compensatory increases to correct the latter's under-representation.

Essentially, the inconsistencies in the expectations of the respective member governments, the permanent staff and the various observers stem from the differing perspectives each group brings to bear in analyzing the two institutions. Assuming that all those working in and with these two institutions have the best interests of client countries in mind there are basic contradictions between the decision making structures of these two "financial firms" and their avowed development mandate. For instance, the IMF and the World Bank are intended to be global institutions. However, the top and most senior management positions are de-facto reserved for G-7 nationals or permanent residents of the US. The Articles of Agreement of the two institutions form the legal basis for the structure and the working of these two bodies and no basic changes can be made without at least 85 per cent majority of the voting shares. As can be seen from the table, this is unlikely to happen without the full cooperation of developed countries. Consequently, developing countries could suggest the holding of a second Bretton Woods conference to: review ownership proportions across countries; set transparent norms for selection to senior management positions from a genuinely global pool (unlike 1944, there are highly trained professionals in developing countries today); and over time relocate the headquarters of these two institutions in two separate countries. It is time member country representatives met, perhaps in a developing country location, to rewrite the Articles of Agreement for the IMF and the World Bank.

j.bhagwati@gmail.com