Why it's time for IMF to change course
June 17, 2011 10:46 IST
In the last one month there have been several commentaries on who should or would be the next managing director of the International Monetary Fund.
An IMF press release dated May 20, 2011 stated that the "nomination period (for the next MD) shall commence on May 23, 2011 and will close on June 10, 2011" with the objective of "completing the selection process by June 30, 2011".
These tight deadlines have shifted the focus to support for individual candidates, rather than on the development of an impartial process by which a widely acceptable candidate would be appointed as MD.
The chief executives of the IMF and the World Bank have always been European and US nationals, respectively, since the two institutions were set up in the mid-1940s.
In the light of the rising shares of Asian and Latin American countries in global gross domestic product, commentators have suggested that the heads of the IMF and the World Bank should no longer necessarily be European and American.
However, according to the May 20 IMF press release, shortlisting of candidates will take into account the Fund's "weighted voting system" and the final selection could be by a "majority of votes cast" even though the objective would be to reach a consensus.
The IMF projections show that by the end of the next MD's five-year term, i.e. by 2016, the US and EU shares in global GDP would be substantially lower.
However, under Section 2(c) of the IMF's Articles of Agreement, members can block any proposed change in quotas (voting percentages are directly proportional to quotas) with just 15 per cent of the vote.
Europe and the US together command nearly 50 per cent of the votes in the IMF and if they agree on the choice for the next MD, the views of the other members would probably not matter.
In this respect, the IMF and the World Bank are more like corporations where the views of the majority owners tend to prevail.
Effectively, the consensus decisions in these two institutions are implicitly driven by the voting strengths of the member countries concerned.
Developing countries have played along with the polite fiction that the IMF and the World Bank are equitable across all members since they receive development funds and financial support at times of balance of payments crises.
In the past, these institutions also had widespread influence because of the high quality of analysis carried out by their professional staff.
There was, however, valid criticism that their thinking
tilted towards the "Washington consensus" and that recruitment of staff favoured those who have a finishing degree from the US.
On balance, given the multiple constraints imposed by member governments, the research and lending policies of the IMF and the World Bank have been usually impartial.
However, their positions on issues tinged by political sensitivities have been invariably driven by "North Atlantic" considerations.
To that extent, these two institutions could be categorised as the economic counterparts of the North Atlantic Treaty Organisation except that their membership has gradually become global.
For instance, China joined in 1980, about eight years after Nixon's trip to China in 1972, and Russia became a member in June 1992 after the break-up of the Soviet Union in 1991.
In the last one year, the IMF's loan portfolio has grown sharply due to its lending in Europe. And, about a third of the funds committed to Greece, Ireland and Portugal are to come from the IMF.
It is not clear, despite the negative global implications of potentially disruptive sovereign defaults in Europe, that this is an efficient use of the IMF's resources.
It is also not apparent that the current mix of policies prescribed for the debt-strapped countries in Europe, to which the IMF subscribes, is a sustainable way to address their comparative lack of competitiveness.
Based on their difficult past experience with the conditions that accompany loans from the IMF or the World Bank, wherever possible, developing countries have built up large stocks of foreign exchange reserves as a form of self-insurance.
Consequently, in the last 10 years, the IMF and the World Bank have come to be less needed in Latin America and Asia.
It follows that if the IMF's diminishing imprint in developing countries is to be addressed, the process by which its MD is selected should be transparently credible with all member countries.
Since late 2008, the G20 has replaced the G7 as the group to which the international community looks to articulate policies that balance the economic interests of different parts of the globe.
Therefore, a G20 approach towards the selection of the next IMF MD should have wider acceptability. Alternatively, if it remains business as usual, we should expect the emergence of other multilateral arrangements that better represent the new world economic order.
The author is India's Ambassador to the European Union, Belgium and Luxembourg.
Views expressed are strictly personal
j.bhagwati@gmail.com
In the last one month there have been several commentaries on who should or would be the next managing director of the International Monetary Fund.