US pressures IMF to expand role of growing economies

The move could shape the governance of the fund, which has taken a more prominent and stronger role after the financial crisis.

Since the onset of the crisis, the IMF’s lending commitments have soared to $195 billion from less than $2 billion in 2007, and total capital on hand is set to rise to about $850 billion from $250 billion.

Though the timing of Washington’s push surprised some European officials, it is part of an effort to realign the World War II-era financial architecture to reflect changes like China’s emergence as the world’s second-largest economy.

Interests of members

European countries occupy nine of the 24 seats on the IMF’s executive board, which represents the interests of all 187 members under a complex voting process that dates to the Bretton Woods system of economic cooperation, established in 1944.

Last month, American officials used a procedural maneuver to block the board from being reconstituted in its current form for another two years. Under its founding charter, the IMF board is supposed to have 20 members, but the number was expanded to 24 under a succession of agreements starting in 1992.

“The underlying problem is that the Europeans are overrepresented relative to the size of their economies, and the developing countries are underrepresented,” said Mark S Copelovitch, a political scientist who studies the IMF at the University of Wisconsin, Madison.

But the American push has met resistance in some European capitals. “As things are, the number of directors from European countries exactly reflects the weight of European countries in the IMF, and there’s no case to be made for European countries being overrepresented,” Bertrand Benoit, a spokesman for the German finance ministry, said.

Voting power

That may be true for now, but the world’s biggest economies tentatively agreed last September to shift 5 per cent of the voting power at the IMF to developing and fast-growing economies. Details of that shift, which follows previous, slight changes in vote distribution, are expected to be negotiated at a summit meeting of leaders of the Group of 20 nations in Seoul, South Korea, in November.

European officials discussed the composition of the IMF board in Brussels this week but reached no consensus. They hope to arrive at a common position before G-20 finance ministers meet for two days in Gyeongju, South Korea, starting October 22. “Finance ministers touched on this question over lunch this week, and we are looking forward to more converging views,” said Amadeu Altafaj Tardio, a spokesman for the European Union’s economic and monetary affairs commissioner.

With 16.7 per cent of the fund’s voting power, the United States is not only the most powerful IMF member, but the only one that can unilaterally block changes to the fund’s governing structure, which require 85 per cent of total votes. The fund’s loan programmes, used in recent bailouts of Greece and Iceland, require a simple majority.

The United States, Japan, Germany, Britain and France each have a permanent vote on the board. Several other board members represent blocs of countries. For example, India casts its vote on behalf of Bangladesh, Bhutan and Sri Lanka, while Sierra Leone and Rwanda, the two sub-Saharan African countries on the board, also represent 41 other countries on the continent.

There has been talk of creating a consolidated seat on the board to represent the 27 nations of the European Union, or the 16 countries in the monetary zone that uses the euro. Under such a reconfiguration, Belgium and Switzerland, and possibly the Netherlands, are seen as being among the most vulnerable to losing their seats.

Cautious approach

European leaders have taken a cautious approach to the problem. At a news conference last week, European Central Bank President Jean-Claude Trichet, said it was “very important for the Europeans to be united and to have a clear, united position.”
Dominique Strauss-Kahn, the French politician who leads the IMF, has been similarly circumspect, though he has expressed support in the past for governance changes.

Natalie Wyeth, a spokeswoman for the United States Treasury secretary, Timothy F Geithner, said he supported “reforming IMF governance structures to better reflect the realities of today’s global economy.”

She added, “The United States is pressing for this change to advance multilateralism, to make the IMF more representative and strengthen its legitimacy, and to enhance the voice of dynamic emerging market and developing countries.”

Domenico Lombardi, who represented Italy and several smaller European countries on the IMF board from 2001 to 2005, said that changes in the board’s structure were inevitable but should be phased in over as long as two years, to complement the 5 per cent change in voting power.

“In the end, the Europeans will come up with a plan if they really see no alternative,” said Oxford Institute for Economic Policy President Lombardi. “Everybody concurs that the IMF has to overhaul its governance and become a global institution, not just a trans-Atlantic institution. The US policy move came about out of a sense of frustration.”