The Hindu Business Line : Reforming IMF/World Bank — G-20's narrow but understandable agenda

By limiting the scope of reform to only the World Bank/IMF, the G-20 has skipped the examination of the International Monetary and Financial System. This is understandable, perhaps, because the group, representing systemically important countries, would be averse to agreeing to a reduction in its voting strength. However, it could have spent some energy on the issue of corporate governance of the two multilateral agencies to improve their credibility, says A. Vasudevan.

THE recent meeting of the Group of Twenty (G-20) finance ministers of industrialised and emerging market economies in China ended, among others, with a resolve to reform the two Bretton Woods Institutions (BWIs) — the International Monetary Fund (IMF) and the World Bank. The Group also made a statement on the reform of the BWIs.

It agreed that the BWIs have contributed significantly to growth, poverty reduction and improved functioning of the international monetary systems. The Group, however, felt that the evolution of the international economy and global financial markets requires a continuing review of the representation, operations and strategies of the IMF and the World Bank.

By limiting the scope of reform to only the BWIs, the G-20 has skipped the examination of the broader issue of reform of the International Monetary and Financial System (IMFS). The word reform, as used by the G-20 is, thus, an euphemism for advocating a medium/long-term corporate/organisation strategy for improved effectiveness. The G-20 has, perhaps, deliberately chosen to limit its attention, given the history of the IMFS reform efforts.

It is well-known that the IMF, through its Executive Board had, for the first time, prepared a report, "Reform of the International Monetary System," and submitted it to the Board of Governors in August 1972, which led to the formation of the Committee of Twenty.

The Committee, after deliberations for about 16 months, had abandoned efforts at full-scale reform of the international monetary system. Instead, it settled for a new system to evolve out of the existing arrangements. The Committee had, however, succeeded in setting up a number of institutional mechanisms such as the Interim Committee (now called the International Monetary and Finance Committee), the Development Committee, the now defunct Oil Facility, and the Extended Fund Facility in the IMF.

The issue of reform of the IMFS is now a closed chapter, notwithstanding the enormous literature on the establishment of a new financial architecture at the end of the last century following the outbreak of financial crises in East Asia. When it became clear that the BWIs could not be replaced, interest has shifted to examining their roles. The Meltzer Commission is a classic case of limiting the issue of system reform to that of the institutions. Such a narrow approach shows that practical global political economy is critical for promoting international economic cooperation rather than some theoretical framework of international finance. Does it imply that system reforms would be facilitated by undertaking institutional reforms first?

The G-20 has a perfectly understandable agenda. As it represents systemically important countries, it would like to have larger representation in the two institutions — larger quotas/paid-up capital so that the voting strength of its members improves.

The rest of the membership would have to give in to accommodate the G-20 ambitions. Will this happen without changing the quota formulas? How would the Group of 24, representing the interests of the developing countries, react?

Will European countries, outside of the EU (and of the G-20) that are members of the OECD, agree to such a proposition? Would the UN be content in case the representative strength of developing countries as a group is reduced?

In general, the industrialised countries as a group have managed to hold high voting strength not only because of their performance in terms of growth, inflation control and openness but also because of their economic flexibility. This flexibility has given them enormous influence in and on international capital markets. The expectations of market participants were met by the skilful handling of monetary policies. There was, therefore, no case of financial instability in the industrialised countries despite the many corporate scandals and frauds.

It is, therefore, difficult now to expect the industrialised countries to agree to a reduction in their voting strength. They as a group would at best agree to stabilisation of the share in view of the growing interdependence of the economies and the growing consensus across membership on market-oriented reforms for growth, stability and social sector improvement. This would, in effect, mean that, of the remainder of the shares, emerging market economies would gain in terms of voting strength at the cost of other developing countries. Would the G-20 efforts to reform yield different results?

The G-20 has not been as specific on the operations and strategies of the BWIs as it should be. After all, the operations emanate essentially from the objectives as outlined in the Articles of Agreement and from their inherent financial strength. Unlike the World Bank, the IMF does not, and perhaps legally cannot, borrow from the international capital markets. Quotas, therefore, matter most in the case of the IMF. And the responsibilities on the World Bank for poverty reduction, control of environment degeneration, and social sector and infrastructure development would necessitate raising the capital base of the World Bank and the International Development Association (IDA), even if there is some scope for higher leveraging.

The responsibilities placed on the two institutions on account of the Millennium Development Goals (MDGs) and the need to foster financial stability in all systemically important countries along with openness have brought pressure on the BWIs in their traditional functions of promoting economic adjustment and development. In addition, issues such as debt sustainability have always been a part of surveillance and to the extent debt burden affects prospects of growth and of poverty reduction, the BWIs have provided assistance to countries in need (for example, aid to poorer countries in Africa under the HIPC — Heavily Indebted Poor Countries — initiative).

The areas of work could well expand as global economic circumstances change and world economic growth goes up. The Articles are flexible enough to allow for the creation of lending facilities and strategies to meet financing problems of member-countries, but the conditions of access could be limited by the liquidity position of the BWIs.

This is why one needs to have a larger capital base/quota. For example, it is possible to institute oil facility, but if the oil markets are rendered volatile by the actions of a few suppliers and middlemen, there would be no certainty in closing the financing gaps with the pre-committed loans by the BWIs. It would not be appropriate to resort to use of reserves and gold whenever the institutions find themselves in a liquidity bind.

The G-20 should have spent some energy on the issue of corporate governance of the BWIs to improve their credibility and accountability. It is important to ensure that markets do not get the impression that the managements of the BWIs are able to handle their executive boards the way the chief executive officers of private corporate business houses manage their boards of directors!

Finance Ministers, on their part, must give confidence to the international community by appointing persons of high standing in matters of international finance as executive directors and their technical personnel. Such an approach would facilitate selection of persons for senior management positions in the BWIs on merit.

It could also help improve transparency practices in the decision-making processes and communication policies. Also, it would make sure that the public could access information about the work of different committees in the BWIs and their accountability to the management and the Executive Board.

(The author, a former Executive Director of the Reserve Bank of India, can be reached at asurivasudevan@hotmail.com)

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