IMF GOVERNANCE TURNS INTO GIANT SUDOKU PUZZLE / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

IMF governance turns into giant sudoku puzzle

By Alan Beattie

Published: September 26 2010 17:18

It is a gripping tale of high geopolitics and low cunning, and it is all about who gets to sit where. The saga of power within the International Monetary Fund, which has unfolded in infinitesimal increments for years in the manner of a Tolstoyan familial saga, has suddenly become a Stieg Larsson race-against-time thriller. The prizes at stake are the 24 seats on the fund’s executive board.


Governments have been talking for years about giving emerging market countries a firmer grasp on the steering wheel of global governance. Last month the US pulled off a neat procedural trick to force a decision about reorganising the constituencies of countries, each of which is represented on the board by an executive director, by November 1. The fund’s 187 member governments are now scrambling to act.


The losers will be mainly the smaller European countries. Europe now occupies nine seats, a share not matched by its portion of the global economy. Officials are wrestling with possible permutations, essentially turning the institution’s governance into a giant game of sudoku.


The episode underlines two things about global economic governance. One is the conflict between high abstract principles and messy bureaucratic reality. The other is the remarkable tendency of Europe, disorganised and disunited, to fail even to use the powers it has.


On the face of it the changes are largely cosmetic. Emerging markets will gain perhaps three or four seats. In accompanying negotiations over a shift in the “quotas” – each country’s financial contribution to the IMF, which also determines its voting rights – emerging markets’ share may increase by 5-6 percentage points. But most board votes take place by consensus, and the US’s 17 per cent share will continue to give it a veto over important votes, which require an 85 per cent supermajority.


Yet even cosmetic changes can have important symbolism. For years the IMF was regarded as a tool of the rich countries and hated across emerging Asia for the harsh conditions it imposed during the 1997-1998 crisis. Dominique Strauss-Kahn, the fund’s wily managing director, has recently managed to manoeuvre the organisation towards relevance. But it still needs to claw back more credibility.


It is hard not to feel sorry for those European countries – largely the Nordics and the Netherlands – likely to lose influence. In general they are good global citizens with generous aid budgets, sensible views on global economics and a consistent commitment to transparency. And if Europe could only organise itself better, it need not lose influence.


In theory, Europe should wield vast power over the IMF. Quite aside from (hitherto) having the de facto right to appoint one of their own as managing director, European countries between them hold approaching 30 per cent of the votes on the board. And yet the common complaint about the IMF is that its actions are dominated by the US, not Europe.


For example, Europeans always talked a good game about reforming the international financial architecture, particularly by creating a sovereign Chapter 11-style bankruptcy procedure. But it was an American deputy managing director, Anne Krueger, who proposed it in 2001, and it was the support of the US Treasury – for a while – that gave it legs. Meanwhile, Jean-Claude Trichet, then the Banque de France governor, undercut the campaign by proposing a voluntary code.


European leaders talk constantly of creating a single EU policy stance, if not a single seat, on the IMF board. It does not happen. On key issues Europe frequently splits. Many Europeans want to let the fund disburse crisis lending faster: Germany is reluctant.


When the Greek crisis hit earlier this year, the eurozone dithered and bickered for months, swung all round the compass on whether it wanted the IMF involved or not, and finally agreed a bail-out that could have been much smaller had it acted faster.


Emerging market governments should take note. Often it is not arithmetical representation that brings countries influence but competence, organisation and determination. That goes for the rising powers as well as the fading ones.


If the Brazils, Indias and Chinas of the world really want to control the international financial institutions, they need to start hammering out common positions on the issues that matter. Counting percentages and poring over organograms is not enough.

Copyright The Financial Times Limited 2010.