Sunday, September 26, 2010

IMF Restructuring to Reflect Changing World Economy


Financial Times: Europe Must Make Way for a Modern IMF

Germany Asks US to Give up Its IMF Veto

New York Times: I.M.F. Host Sees Good Chance for Agreement at G-20 Meeting

The Washington Post: U.S. Calls IMF Too Eurocentric

The International Monetary Fund (“IMF”)is undergoing a structure change to increase the power of emerging nations in the IMF. The IMF has long been accused of being too Eurocentric, with Europe having 9 of 24 executive board members and 30% of total voting power. Europe only produces 20% of world GDP, making it overrepresented on a GDP basis.

An 85% supermajority is required to maintain current composition of the 24-member council, which is actually 20 members, but the extra four slots are always approved. The United States essentially vetoed the proposed 24-member council in August, an action which surprised Europeans, by not approving the renewal of the incumbent 24-member council with its 17% of the vote. The four members set to lose their seats were: Brazil, India, Argentina, and francophone African countries sharing a seat. Not having Brazil or India on the executory board will undercut the IMF’s authority as a world financial institution, one economist said, going so far as saying the IMF would be a “laughing stock.”

United States action, coupled with Asian and African political pressure, has resulted in structural reform manifested in a 5% quota shift (voting and contribution) from Europe to Asia, Africa, and South America to be approved in the G-20 meeting in Seoul, Korea on Nov. 11-12. The quota in the IMF is the proportion of funds contributed by a certain member which corresponds to voting power. For example, the United States contributes 17% of total IMF funding and, thus has 17% of the vote.

The terms of the reform are not certain, as the G-20 approval is the first step in reform, and many nations are still clamoring for more change. Accompanying the change in representation within the IMF is a massive increase in funding from its members. The G-20 agreed to triple the IMF’s resources to $750 billion, with some thinking it likely the IMF will increase to $1,000 billion soon. Thus, emerging nations will receive more votes at a time when the IMF could quadruple its resources, a combination sure to greatly increase the flow of IMF money to the emerging world.

Also, the reforms have been privately resisted by some European members. They argue the IMF has done a good job, especially in the 1990’s, of admitting and incorporating new members. The German Finance Minister, Mr. Schauble, demanded the U.S. give up its veto power in exchange for decreased European voting power, an “opening gambit” the U.S. quickly declined. With so many parties involved, the negotiations are bound to be lengthy and tedious.

The IMF reforms reflect a shift in world economic power; a shift the World Bank recognized earlier this year by changing its own board to increase emerging market influence. The financial crisis, coupled with general economic trends, has left the United States and Europe growing slowly, while the recovery elsewhere has largely been more successful. Emerging markets warrant their claims to power with the reality of the world; a claim Europe is finding hard to deny.


1. What interest(s) does the United States have in using its veto to help emerging economies and reduce European power in the IMF?

2. Will this shift in power make any difference if the U.S. and Europe still have a veto (having more than 15% of voting power)?

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