Governance of the International Monetary Fund (IMF) : Decision Making, Institutional Oversight, Transparency and Accountability

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2002
• eBook ISBN: 9781589061309

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List of Abbreviations

BIS	Bank for International Settlements
EMS	European Monetary System
ESAF	Enhanced Structural Adjustment Facility
DDS	Data Dissemination Standard
FSAP	Financial Sector Assessment Program
GAB	General Arrangements to Borrow
HIPC	Heavily Indebted Poor Countries
IAIS	International Association of Insurance Supervisors
IBRD	International Bank for Reconstruction and Development (World Bank)
IEO	Independent Evaluation Office
IMF	International Monetary Fund
IMFC	International Monetary and Financial Committee
IOSCO	International Organization of Securities Commissions
NAB	New Arrangements to Borrow
NAFTA	North American Free Trade Area
NGO	Nongovernmental organization
OECD	Organization for Economic Development and Cooperation
PDR	Policy Development and Review Department
PFP	Policy Framework Paper
PIN	Public (formerly Press) Information Notice
PRGF	Poverty Reduction and Growth Facility
ROSC	Report on Observance of Standards and Codes
SDR	Special Drawing Right
SRF	Supplementary Reserve Facility
WTO	World Trade Organization

I. Introduction

Remarkable efforts were made at international institution building toward the end of World War II. In addition to the establishment of the United Nations, the global political organization, they involved the creation of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the General Agreement on Tariffs and Trade, the forerunner of the World Trade Organization (WTO). They became the key institutions in the financial, developmental, and trade fields. Today, nearly six decades later, the world’s trade and financial systems have been fundamentally transformed with the pervasive postwar controls abandoned in favor of a system closer to one of globalized free markets. At the same time, the community of nations has become vastly more diversified. The number of independent countries has tripled or quadrupled and these countries demonstrate remarkably different cultural identities, levels of development and welfare, and experience with self-determination.

As global integration progresses, there will be a growing need for regional and international cooperation and for institutions to ensure the availability of public goods and services. The case for an International Environment Organization, as well as that for strengthening the International Labor Organization, has repeatedly been made. The recent establishment of the Financial Stability Forum was a step toward much needed collaboration to improve the soundness of financial systems worldwide. In addition, the case has been put forward for creating an Economic Security Council within the United Nations, as an overarching body to consider the global aspects and interlinkages among economic, financial, and social issues.¹

However, the political constituency and public support for new or stronger international organizations is not large. While it is generally agreed that the international financial institutions made a major contribution over the past decades to the unprecedented integration and growth of the world economy, the question has increasingly arisen in the 1990s whether the institutional arrangements and rules of the game have developed sufficiently to give all countries a fair opportunity to participate effectively in equitable trade and financial organizations. A key issue is whether the mandates of the existing organizations remain relevant, and their legitimacy and governance structure are adequate to serve the needs of the global community in the early twenty-first century. This is not universally accepted: many leaders in developing countries, and in civil society groups, decry the perceived lopsidedness of international financial governance, in the IMF and the World Bank as well as in the WTO, which they see as instruments of the rich countries. Moreover, the Asian crisis of 1997-98 raised questions regarding the benefits of financial globalization, particularly for emerging market economies, while the perception—right or wrong—that the IMF’s adjustment remedy caused social suffering put the searchlights of official and academic circles and of the media on IMF governance and accountability.

One group of IMF critics essentially argues that, in the present globalized environment, the community of nations does not need the regulatory function and the surveillance of the IMF and that IMF advice and financing are often misdirected and a source of “moral hazard.” The report to the U.S. Congress of the Meltzer Commission (see p. 41) published in 2000, essentially proposed to eliminate the muscle of surveillance and the IMF’s authority to negotiate policy reform.

A much broader spectrum of critics has argued that the IMF charter and its purposes remain relevant in the context of the progressive global integration of the early twenty-first century but that, nevertheless, the IMF should be reformed to make it more democratic, more transparent, more accountable, and more participatory. The following are some of the main themes of recent literature on the governance of the international monetary system:

• The IMF is considered undemocratic because the large majority of the membership, the developing and transition countries, who are in practice the borrowers from the IMF, are minority shareholders, while the relatively small group of industrial countries holds 60 percent of the voting power.
• The selection process for the Managing Director should be reformed because it has been shown to lack procedural guidelines and transparency.
• The industrial countries are seen to be dominant in the oversight of the IMF through the Executive Board, while there is perceived to be inadequate representation of the developing countries.
• It is difficult to grasp how the IMF's rule of decision making by consensus works and whether it adequately protects the rights of minority shareholders.
• At the political level, there is no effective counterweight to the power of the Group of Seven major industrial countries, and the oversight role of the International Monetary and Financial Committee (or of its predecessor, the Interim Committee) should be more participatory and more effective on systemic issues.
• In its relations with the developing countries, the IMF does not give adequate attention to the objective of growth and to equity issues, including the protection of the poor from the burden of adjustment policies.
• Apart from its accountability to member governments, the IMF should strengthen its dialogue with civil society and show a greater sense of accountability to public opinion.

This pamphlet is intended to provide an overview of the major aspects of governance of the International Monetary Fund. It is structured as follows.

• Section II deals with the structure and evolution of quotas and voting power in the IMF and reflects on the need to reduce distortions in the system and to make it more equitable, as well as on the importance for the IMF as a financial institution to maintain the confidence of its creditors.
• Section III examines the checks and balances in the governance of the IMF and reflects on the importance of harmonious collaboration among the Executive Board, the Managing Director, and the staff for the effective functioning of the institution.
• Section IV focuses on the work methods and decision making of the Executive Board and highlights the origin and rationale of the rule of decision making by consensus through which Board members seek to find common ground in their deliberations. Several instances of consensus building are described to illustrate this collaborative work method, which plays a key role in safeguarding the rights of the minority shareholders who are the vast majority of the members.
• The political oversight of the IMF by the Board of Governors through the Interim Committee and its successor, the International Monetary and Financial Committee, is examined in Section V. The effectiveness of—and the deficiencies in—this political oversight need to be seen in conjunction with the activities of groups of member countries—both from industrial countries and from developing countries—as well as the influence that individual member countries and regions attempt to exert on the agenda and decision making of the IMF.
• A case study of IMF governance in a financial crisis, specifically the Mexican crisis of 1994-95, is presented in Section VI.
• Section VII deals with strengthening the architecture and the transparency of the system, collaboration with civil society, and the refocusing of the IMF in the aftermath of the crises of the 1990s.
• Finally, an appraisal of IMF governance is contained in Section VIII.

II. Quotas and Voting Power in the IMF: A System That Calls for Greater Equity

Role of Quotas and the Debate on the Quota Formula

Each member country is assigned a quota, which is its participation in the capital of the IMF and determines its voting power. In addition, quotas determine each member’s share in any allocations of SDRs. The original formula used at Bretton Woods for the calculation of the quotas of the 45 countries that participated in the conference included as economic variables national income, reserves, external trade, and export fluctuations. The quota formula was, and continues to be, directed in the first place at meeting the capital requirements of the institution.

On the occasion of the first reexamination of the Bretton Woods quota formula in the early 1960s, a multi-formula method was devised that included the choice of assigning differing weights for national income, on the one hand, and for current external payments and the variability of current receipts, on the other. With the flexibility that this provided, national income became a major weight in the formula for most industrial and other large countries, while current payments and variability of current receipts became important components for small open economies and for most developing countries. Since the early 1980s, the variables in the quota formula have included GNP, official reserves, current external payments and receipts, the variability of current receipts, and the ratio of current receipts to GNP.

The IMF’s Articles of Agreement provide for general reviews of quotas at intervals of no more than five years. The key issues in these quinquennial reviews include (1) the size of the overall increase, which needs to be considered in the light of the medium-term outlook for the world economy and the role of the IMF in the financing of payments imbalances that may arise; and (2) the distribution of the overall increase between equiproportional increases for all members and selective increases for certain countries—typically rapidly growing economies for whom the “actual quota” is seriously “out of line” with the “calculated quota.”

The scope for selective increases is limited because an increase in the share of total quotas—and, hence, in voting percentage—for one member will automatically reduce the voting power of all other members. Most members—and particularly the developing countries—are anxious not to see their quota share in the total IMF decline and have tended to favor equiproportional increases in quotas.

Over the years, the equiproportional element has averaged about 70 percent of the overall quota increases. An important argument for selective increases—in addition to the matter of equity that is associated with “out-of-lineness”—is the capacity of the candidates for such increases to provide liquidity to the IMF. This was a priority under the Seventh Review in 1978, when the quota share of the major oil-exporting countries was doubled at the expense of that of the industrial countries, that is, without infringing on the quota share of the other developing countries.

Total quotas have diminished rapidly in relation to the size of the world economy and world trade; actual quotas also have trailed increasingly behind calculated quotas. Among the reasons for these developments were (1) the growing access to world capital markets and the increased recourse to floating exchange rates, which have obviated the need for industrial countries to use the IMF’s resources; (2) the rapid dismantling of controls over international capital transactions in advanced and in emerging market economies, together with the expanding access to international capital markets by a growing number of countries; (3) the creation in the late 1980s of a special financing window, separate from the IMF’s quota resources, the Enhanced Structural Adjustment Facility (ESAF), now the Poverty Reduction and Growth Facility (PRGF), which strengthened the IMF’s ability to assist poor developing countries and became the principal instrument for financial assistance—at low cost and for longer terms—to a group of about 80 IMF members.

Since the late 1970s, the quota share of the developing countries has averaged about 37.5 percent and their voting share around 40 percent. The difference is accounted for by the provision in the Articles of Agreement (Article XII, section 5) of 250 basic votes for each member in addition to one vote per SDR 100,000 of its quota. Until the mid-1970s, basic votes as a percentage of total votes remained above 10 percent; since then, however, successive general increases in quotas have reduced the share of basic votes to barely 2 percent in 2002. In the meantime, the number of developing countries in the total IMF membership has continued to grow to 85 percent of the total membership, that is, 159 versus 24 industrial countries.

The developing countries have, repeatedly, urged that a new quota formula, including such elements as population and a poverty index, be devised that would give them a larger voice in the IMF. Moreover, as the industrial countries have ceased using IMF resources, this has diminished the characteristic of the IMF as a “credit union” where members are at times lenders and become borrowers at other times and the rules of the credit union are set by all and for all. This development has affected the balance in the relationship between the two groups of members and—as will be seen in Section IV—it has accentuated the importance of decision making by consensus to protect the interests of the developing countries that are the minority shareholders.

The creditors, from their side, have emphasized the importance of the quota formula in the financing of the IMF, while the IMF’s policy on access to its financial resources was designed to be responsive to the financing needs of members.² They have also noted that the application of the quota formula had favored the developing countries, as demonstrated by the fact that aggregate “actual quotas” of the developing countries equaled about 60 percent of their “calculated quotas,” while the aggregate “actual quotas” of the industrial countries were only about 32.5 percent of their “calculated quotas.” The industrial countries have further observed that their share in global GNP continues to rise and that variables such as capital movements and access to capital markets, which favor them, should be captured in the quota formula. The developing countries have countered that imprudent lending by financial institutions of industrial countries and myopic reactions of the markets played a big role in the financial crises of the past decade and the ensuing contagion.

Further Work Toward Correcting Distortions and Enhancing Equity in Voting Power

While the developing countries have not formulated a target share of quotas and voting power for their group, it is realistic to assume that they will aim for the highest share that would be compatible with the maintenance of a modest overall majority of voting power in the hands of the industrial countries who are the predominant group of creditor countries. Since the IMF is a financial institution and needs to maintain the confidence of its creditors, it is generally agreed among the membership that the industrial countries, which are the predominant creditors of the IMF, should remain majority shareholders.

The work of the Quota Formula Review Group, a group of external experts that was established in 1999 at the urging of the developing countries, and the further work of the staff have demonstrated that it is not possible, on the basis of the existing quota fo...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Preface
• List of Abbreviations
• Footnotes