EUROPE MUST MAKE WAY FOR A MODERN IMF / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

Europe must make way for a modern IMF

By Paulo Nogueira Batista

Published: September 23 2010 21:47

A power struggle is intensifying within the International Monetary Fund. The organisation’s resources have grown sharply in recent years, funding much-needed emergency lending during the financial crisis. Capacity may soon reach around $1,000bn, against $250bn in 2007. But such increases only enhance the value of the positions and voting power held by different nations – and have created a battle between the established economic powers and the developing world.


The latest developments in this fight confront the IMF with a full-fledged crisis. The main difficulty is the over-representation of Europe – and the willingness of European countries to block needed reforms. The last round of changes, in 2008, barely changed the balance of power from advanced to emerging market and developing countries. But last month, impatient with European inertia, the US did something unprecedented.


Since 1992, when the number of IMF members increased substantially as the Socialist bloc dissolved, the Fund’s governors – generally finance ministers or central bank presidents – have voted to keep 24 places on its executive board. Some of these chairs are held by individual nations, while others represent groups of countries. But IMF rules actually stipulate that 20 chairs should be the norm, unless 85 per cent of those voting decide to change this number. Because it holds 17 per cent of the votes, the US has the power to veto the continuation of the 24 chairs arrangement. That is just what it decided to do.


This might not sound dramatic, but the move justified its internal description as “the nuclear option”. It also came as a complete surprise; the Europeans, in particular, simply did not believe America would go for such an extreme measure. The US justified the move as a spur to increasing representation of developing countries – although it is also likely to reflect long-standing frustration with the fact that the American director on the IMF board has to face eight (sometimes nine) Europeans.


Even so, the dramatic gambit has given new impetus to reform negotiations that had ground to a halt. European nations had previously sent signals that they would block substantial reforms to make IMF decision-making better reflect the new world economy, with the large and growing importance of countries such as China, Brazil and India. Today, emerging markets have too little influence over the IMF’s lending decisions and the way it monitors the world economy. Even agreements adopted by consensus occur in the shadow of this unequal voting power.


It is also undeniable that Europe is over-represented. The European Union accounts for roughly 20 per cent of global gross domestic product but almost a third of IMF votes. European countries currently hold nine of the 24 executive board chairs. The IMF’s managing director has always been a European, while Europeans are also over-represented among IMF staff, especially at higher levels.


America’s bold gambit, therefore, creates pressure for change, but it also poses risks for developing countries. If no agreement is reached the number of chairs could fall back from 24 to 20. This would cut out the four smallest in terms of voting power. The smallest is the chair of francophone African countries; the second smallest is led by Argentina; the third is headed by India; and the fourth by Brazil, of which I am the director. The risk that all four will disappear is small, but the consequences of their doing so would be dire.


An IMF without India or Brazil on its executive board would be a laughing stock. Having no chair for Argentina and other major South American countries such as Chile and Peru should likewise be inconceivable. And having only one chair for sub-Saharan Africa (as only the chair of the English-speaking African countries would remain) would rightly be seen as a retrograde step. But it is quite possible to imagine fewer European chairs, and with a considerably lower voting power given to European countries. In fact, exactly this can make the IMF more balanced and representative.


Adopting these reforms would also be an important step in reforming global governance more broadly. Advanced countries talk loftily of shifting power to emerging markets, but we now need more than speeches and noble declarations. Real IMF reform is a critical test of these countries’ willingness to adapt to a changed world. The likeliest outcome remains the loss of some European chairs and a transfer of voting power to emerging market and developing countries, although that outcome is by no means certain. The Europeans will drag their feet. But they must not be allowed to block the very changes that will ensure this vital institution represents the world economy of this century, not the last.


The writer is an economist and sits on the executive board of the IMF representing Brazil and eight other countries. The opinions are personal views

Copyright The Financial Times Limited 2010.