By Preksha Krishna Kumar
The recent G-20 Summit in Los Cabos, Mexico, featured a pivotal change in the geopolitics of international finance. Emerging economies contributed billions to an emergency IMF (International Monetary Fund) fund designed to provide additional support to the Eurozone nations in case the debt crisis worsens. The BRICS nations agreed to contribute a sum exceeding 70 billion dollars with China making the highest pledge of $43 billion dollars. In a move that was as much political as it was necessary, the BRICS nations called upon the IMF to pass quota reforms agreed upon in 2010 to increase representation and voting shares for emerging economies, particularly BRICS. The current setup is anachronistic at best, failing to reflect the enormous changes in the global economy over the past few decades.
Governance at the IMF is largely determined by a quota system of allocating voting shares to member countries. The IMF gets its funding from two mechanisms, the General Agreements to Borrow (wherein contributions are directly linked to voting shares) and the New Agreements to Borrow (bilateral contributions that supplement existing funds). All major decisions must be made with a special majority of 85% of voting shares. In the current system, the US retains 17.4% of the total voting shares, giving it an effective veto. The EU 27 nations hold 30.9% of voting shares.
In the past few years, “emerging markets” like China and India have used their newly recognized economic prominence to make the organization more multilateral. Keeping in mind the need to increase their legitimacy in a changing economic climate, the IMF approved two rounds of reforms in 2008 and 2010. The 2010 reforms called for a 100% increase in quota resources and a realignment of quota shares amongst member states.
The proposed changes positively affect the BRIC economies. China’s voting shares would increase substantially, making it the third largest shareholder. India, Brazil and Russia would also increase their voting shares to join the top 10 biggest shareholders of the IMF.
At the moment, the reforms need to be ratified by member parliaments. The biggest hold out so far is the United States. With an upcoming presidential election, it seems unlikely that the US Congress will ratify the reforms anytime before the October deadline.
The quota reforms in themselves do little to shake up the existing imbalance of power. The G7 economies see their voting shares decrease from 43% to 41.2%. Asia registers the biggest increase in voting shares of 3.3%. China accounts for a majority of this increase (2.1%) with India, Singapore and South Korea experiencing modest increases as well. As a whole, the African continent would experience a decrease in voting shares from 6.2% to 5.6%. The goal of increasing representation doesn’t necessarily mean conceding power. Even within the BRICS nations, South Africa’s shares will be reduced by the reforms.
The decrease in representation of low income countries and other “developing” nations isn’t surprising. The goal of the last two rounds of reforms has been to appease “Emerging Markets and Developing Countries” (the former more than the latter). Rather than redistribute existing quota shares, the IMF increased their number and consequently, representation improved without shaking up the status quo.
BRICS governments have expressed their dissatisfaction over the pace of reforms. With the Euro debt crisis taking up the focus of the IMF, the BRICS nations may have an easier time figuring out the feasibility of a “BRICS Development Bank” than forcing any significant change within the IMF.
It’s important to note the different interests of each BRICS economy in pushing for reform. China’s claim to representation, within the current framework based on GDP, is much stronger than the other economies. The Chinese government is also moving towards internationalizing the renminbi, which is currently not part of the approved “basket of currencies” in which IMF loans are partially denominated. But the five countries did release a joint statement during the summit, stating that the contributions are being made with the understanding that reforms will be enacted.
As much as the IMF reiterates its commitment to changing the balance of power, institutional constraints regarding the quota formula will continue to favour “advanced” economies, even if their calculated share of the global GDP has reduced dramatically in the past three decade.
For the first time, IMF loans may be used to “rescue” the troubled Eurozone economies as opposed to cash-strapped “lower income” nations. The BRICS nations used the emergency fund to assert their economic prominence within the IMF, but their contributions will not even directly translate into voting shares, let alone a long term change in governance. For now, the focus remains on pushing the 2010 reforms, but the larger issue at stake is the legitimacy and relevance of the IMF. And for that, more comprehensive reforms are needed to make it a multilateral and representative institution.
(The writer is a Research Scholar at Observer Research Foundation)