Five Steps to Further IMF Reform

Source: The Next Step of IMF Reform, Washington Post

Following the International Monetary Fund (the “IMF” or the “Fund”) and World Bank meetings in Singapore last week, the IMF announced reforms that aimed to alleviate the inequality of voting power within the Fund. The reform gave China, Mexico, South Korea, and Turkey increased voting power in order to recognize the growing clout these countries have in the international economy.

IMF’s Managing Director Rodrigo de Rato has announced that further, more liberal reforms will be enacted in 2008. Financial experts advise that these new reforms should take place in the following five steps:

1. “Go Back to Basics.” This first step would increase quota shares of all member countries, regardless of their economic weight in order to give smaller and poorer countries a greater share in the voting power and more access to finance.

2. “Rebalance the Scales.” This second step would change the criteria of allocating voting shares among the member countries so they reflect the reality of changing economic and financial weights of countries. This would further place power into the emerging countries that deserve greater representation in the Fund.

3. “Streamline the Seats.” This third step would decrease the number of IMF board members from 24 to 20 by consolidating the European Union seats, which would allow seats to open for African countries.

4. “Give Merit a Chance in Leadership Selection.” This fourth step would ensure that leadership in the Fund is transparent and merit-based and unrestricted by nationality. This would mean that European countries would have to give up their “claim” to the position of Managing Director.

5. “Look for a Real Bargain.” Because the first four steps to this reform would disperse IMF power to the emerging and poorer member countries and thus decrease the role of European countries, this final step would focus on decreasing U.S. power in the IMF to appease the European nations who have voiced concerns about losing their power. Examples of the “bargains” include the U.S. giving up its claim to selecting the World Bank president, the U.S. forgoing its veto power in the IMF and World Bank boards, or the U.S. agreeing to broaden the G8 Summit to include leading emerging economies, especially Brazil, China, India, Mexico and South Africa, as members.

The U.S. has given support for the first four steps of the new reform, but has not offered any of its own power to appease the European nations. Financial experts are concerned that failure to move towards the new IMF governance structure will likely mean a progressive weakening of the current global institutions, including the IMF.

Question: Why do you think the U.S. is hesitating in relinquishing some of its power in the IMF and the World Bank so that European countries will support the new reforms?