IMF Reform Effective: There Is Quite a Fight Ahead

IMF Reform Effective: There Is Quite a Fight Ahead

The 2010 IMF quota and governance reforms took effect on January 26. Approved by the IMF's Board of Governors in 2010, they will double the IMF's quota and reallocate quota and voting shares. This will better reflect the changes in relative weights of the IMF member countries in the global economy.

On December 15, 2010, the Board of Governors, the Fund’s highest decision-making body, completed the 14th General Review of Quotas, which involved a package of far-reaching reforms of the Fund’s quotas and governance.

Having become effective, the Review will: 

- double quotas from approximately SDR 238.5 billion to approximately SDR 477 billion (about $659 billion at current exchange rates);

- shift more than 6 percent of quota shares from over-represented to under-represented member countries (dynamic emerging markets and developing countries).

The under-represented group includes the states with emerging economies, first of all China and other BRICS members (Brazil, Russia, India, and South Africa). The over-represented category comprises the so-called developed countries, especially G7.

The Fund had been ripe for revision of the rules since a long time ago. The IMF introduced no changes regarding the two groups in a quarter of century (1985-2010). The BRICS capital share in the IMF was 9.8 percent in 1995. By 2010 it had insignificantly increased to 10.6 percent. 

The 2010 IMF governance reforms did not come into force because the United States – the main shareholder – refused to ratify the Review. With the voting shares exceeding 15 percent (holding just over 15% of the votes can block IMF decisions) Washington exercised effective control over the International Monetary Fund. It did not want to lose this leverage. Besides, the United States easily found “allies” to team up with when it came to simple majority vote. The G7 group member states made up the backbone of this cordial understanding. All in all, the voting rights of the leading capitalist states had exceeded 45% of total number of votes before the reform. Australia, New Zealand, Saudi Arabia, Israel and many other states easily sided with Washington. There was another reason behind the reluctance of the US Congress to ratify the document. The G20 reforms plan calls for the IMF’s capital base to increase twofold (by about $350 billion with around $60 billion coming from the US). Congress did not want to pay.

Washington’s reluctance to support the changes gave rise to growing tensions inside the Fund. By and large, the quota and voting shares for IMF members did not correspond to their growing contributions into the global economy. 

Until recently, G7 had commanded 45-50 percent (never less than 2/5) of voting power. The group accounted for less than 32 percent of the GWP in 2014.

The glaring injustice took place regarding the BRICS group. Until the recent reform, BRICS aggregate share in the IMF vote accounted for only 11.5 percent with the aggregate voting power of the BRICS countries making up 11.03%. At the same time (2014) the BRICS share in the GWP was 30.94%. Actually, the contribution of the BRICS group into the global economy became comparable with the share of the seven leading states of the West while for many years it controlled four times less votes that the G7 group.

The fight for the IMF reform has been waged for five years. At annual IMF and World Bank summits Christine Lagarde, the Managing Director of the International Monetary Fund, never missed an opportunity to tell the United States it was time to ratify the 2010 reform plan. The same thing took place during G20 summits. The further delay in implementation of the reforms began to imperil the very existence of the International Monetary Fund. Washington has appeared to realize that the collapse of the IMF as an instrument of US foreign policy would further weaken American global power. Unexpectedly, last year the US Congress changed its mind on the issue. In December, 2015 US lawmakers approved changes to International Monetary Fund governance that were included into the federal budget appropriations.

On January 21, the IMF executive board put an end to the process of governance reform: 149 states (out of 188 members) having 94.04 percent of total voting power voted for the implementation of the International Monetary Fund's 14th General Quota Review. According to the IMF rules, the approval required 60 percent of the votes. The next step is doubling quotas.

The information offered by media on new quotas and shares has not been made officially confirmed as yet. The IMF publications included economic indicators as of 2010. 5 years have passed since then, and the positions of many countries with emerging economies have significantly strengthened. In 2016 their IMF quotas and shares are to be reviewed. It’s not known how this decision will be executed. Either the quotas will be calculated on the basis of the 2010 indicators to be recalculated afterwards according to the indicators of 2015, or the changes will take effect immediately.

In any case, the current reform will not rectify IMF imbalances. Of course, it will be easier for the BRICS member-states to block IMF decisions that run contrary to their interests. Finding a couple of allies would be enough to guarantee they got the needed voting power to block an unfavorable decision. But these are only defensive actions. The BRICS group still lacks power for an offensive to promote the decisions it needs.

The struggle will continue both inside and outside the IMF. This year the battles will be fought over the revision of the IMF quota formula. The one currently used serves the interests of the West. Those who represent the capitalist periphery will fight for simple and easily understandable formula predominantly based on GDP (calculated according to purchasing power parity) and also international (gold exchange standard) reserves. 

Outside the IMF the countries representing the world capitalist periphery will fight to bolster their global financial positions. It will increase the role of the new international institutions: the BRICS Development Bank and the Asian Infrastructure Investment Bank. If the United States will further hinder the IMF reforms, the countries with emerging economies and developing states will use these institutions according to their back-up plans.