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IMF reform: Russia must step up



11 February 2013 13:30

Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.

On 30 January the IMF announced that it had failed to meet the self-imposed deadline of agreeing on a new quota formula by January 2013. This was the second failure to meet a deadline. The IMF also failed to meet a 2012 deadline to implement the package of quota and governance reforms agreed in 2010. Is this important?

In a technical sense, no. The changes in the distribution of the IMF's quotas associated with these reforms was small. But symbolically, the failure to meet the deadline matters.

Predictably, some emerging countries which feel under-represented in the IMF were highly critical. The Brazilian IMF Executive Director said 'the IMF is approaching what we could call a "credibility cliff"', and warned that countries feeling under-represented may 'distance themselves from the institution if the reform process stalls or proceeds much too slowly'.

Quotas are meant to determine the size of a loan that a country can get from the IMF, but this has not been a binding constraint; the IMF's loans to Greece are over 3700% of the Greek quota. It is also intended to reflect the capacity of a country to contribute to IMF resources. In addition, quotas determine voting power and representation on the IMF Executive Board. Ultimately, and perhaps most importantly, the distribution of IMF quotas is a symbol of the ranking of countries in the global economy.

The concern of the 'dynamic' (that is, fast-growing) emerging markets is that their quota share does not reflect their relative ranking in the world economy. For example, Brazil has about the same quota as Spain, yet the Spanish economy is about two-thirds the size of that of Brazil.

But changing quota shares is hard going. It is a zero-sum game. For every winner with an increased quota share there has to be is a loser, and national pride is such that no country wants to see a decline in its relative position in the global economy.

Reforming IMF quotas and governance has been one of the priority issues on the G20's agenda. In 2010 the G20 agreed on what the then IMF Managing Director called 'landmark' reforms. They involved a six percentage-point shift of quota shares to the dynamic emerging markets and the advanced countries in Europe giving up two seats on the Executive Board. This may not seem to be such a big change, but given the enormous difficulty in getting any reform to country shareholdings and representation in the IMF, it was significant.

However, even though the reforms were agreed by IMF members, in order to be implemented the measures had to be formally accepted by three-fifths of the members having 85% of the total voting power. For most countries this involves having the changes endorsed by their parliaments.

Implementation has been delayed because the US, with 17% of the voting power, has not accepted the reforms. There are many critics of the IMF in Congress and President Obama has numerous other battles, so he has not taken the reforms to Congress. The Obama Administration's position is understandable, but it does damage the credibility of the IMF.

Part of the 2010 reforms was an agreement to adopt a new quota formula by January 2013. The current formula, which guides the distribution of quotas, is complex. The push by the emerging markets, plus many other countries, is for a simpler formula with a higher weight on GDP.

But countries generally support a formula which gives them the highest quota allocation. Hence if a country benefits from the retention of an existing variable, they resist change. And it is not simply a case of the advanced European economies being over-represented; oil producing countries are significantly over-represented too.

Being a zero-sum game, countries will not agree on a new formula unless they have to. The Fund has tried to do this by setting deadlines, but this has not worked. While the G20 cannot solve the problem of getting agreed measures through domestic parliaments, it can be effective in getting reforms agreed. The pressure in 2010 was to settle reforms by the Seoul G20 Summit. To force agreement on a new quota formula, Russia has to set this as a priority outcome from the G20 St Petersburg Summit. 

Photo by Flickr user David Maddison

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