K Kanagasabapathy

Unfair process of picking IMF chiefs

Kanagasabapathy | Updated on June 17, 2011 Published on June 10, 2011

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Decision-making at the IMF is designed to reflect the power of each country in the global economy. This seems particularly undemocratic in the context of choosing a managing director.

With the unpleasant and premature exit of Mr Strauss-Kahn as the Managing Director on May 18, the International Monetary Fund (IMF) has initiated the process of selecting the next head, which is slated to be completed by June 30. The IMF has so far had 10 MDs, all of them from Europe and four from France (see Table).

The debate is on whether the next MD would be a non-European. In all likelihood, the post will be occupied by another European and, possibly, the French Finance Minister, Ms Christine Lagarde, will ultimately be chosen by so-called consensus by the IMF Executive Board, if we go by the track record.

Ever since the founding Bretton Woods conference, there has been an unwritten gentleman's agreement whereby the US would name the President of the World Bank and Western Europe the Managing Director of the IMF. This agreement held through the entire history of the Fund.

Without causing any aspersions on the quality of selections, the legitimacy and undemocratic nature of this process of selecting a MD mainly based on one's nationality had been debated as part of IMF governance reform, particularly after the recent global financial turmoil.

There have also been several attempts since 2000 to democratise the process, but multiple nominations, including that of Mr Stanley Fischer twice, proved to be more a symbolic than a real threat to the selection of an European national. Brazil, Russia, India, China and South Africa (BRICS) came out in the open on May 24 to oppose the notion that the next MD should be from Europe and argued that such a selection criteria undermines the legitimacy of the Fund.

But, unfortunately, they are yet to come out with a commonly accepted candidate for formal nomination.

The Fundamental Flaw

The fundamental flaw lies in the voting process and the weights assigned to countries based on their quotas. Unlike the General Assembly of the United Nations, or the World Trade Organisation, where each country has one vote, decision-making at the IMF was designed to reflect the position of each member country in the global economy.

The 2008 quota and voice reform — which provides for ad hoc quota increases for a group of dynamic emerging market countries, as well as measures to enhance the voice of low-income countries — became effective on March 3, 2011. The process of management selection had been discussed as part of the IMF governance reform. However, unfortunately, the 2008 and 2010 reforms focused mainly on other aspects of governance. Such reforms have no doubt resulted in redistribution of weights in favour of emerging market group, including countries such as China and India.

But, this has not altered the dominant position of the US and European countries in decision making. The US will still have the veto power over decisions requiring 85 per cent votes, and the Europe and the US, as a group, or the G-7, as a group, would be able to carry through all major decisions which would require absolute majority voting.

Correcting the Problem

While there is nothing particularly wrong in adopting the present weighted pattern of voting based on the design of IMF quotas, the real problem is applying these weights for all decisions of the Fund, including the selection of an MD. It is justifiable that the current distribution of weights based on various parameters such as economic strength is needed for major decisions affecting the financial position/sanctions of the Fund. But, applying these weights to all policy decisions and in the selection of a suitable head to lead the institution, representing 187 member countries, make the decision-making process totally biased against most of the countries.

One definite way of correcting this inherently biased governance mechanism is to introduce what is called a ‘double-majority' voting. Ms. Nancy Birdsall of the Centre for Global Development has been hard-selling this idea since early 2009. A system of double majority voting would entail two sets of criteria for assessing a majority, one based on the current weighted pattern and the other based on one-country-one-vote principle.

Indeed, in a September 2007 Wall Street Journal article, published shortly before he was named as the new head of the IMF, Mr Dominique Strauss-Kahn argued that to strengthen greater voice and more effective representation in the governance of the Fund, the dynamic of decision-making has to be changed to decisively increase the input of developing and emerging economies. To achieve that, new voting rules may be worth considering, so that for a handful of crucial decisions, a double majority of quotas and countries could be required, thus ensuring that those decisions affecting key aspects of the institution commanded unquestionable support.

If not double-majority voting, the IMF could switch over to a ‘dual-majority voting'— for certain crucial financial decisions, by applying the current pattern of weights and for policy discussions and selection of MD, a simple numerical country voting.

(The author is Director, EPW Research Foundation. The views are personal. >[email protected])

Published on June 10, 2011
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