Annual meetings of the International Monetary Fund (IMF) and the World Bank are normally sedate affairs, gathering as they do ministers of finance and development, central bankers, CEOs and academics from the 188 IMF and World Bank member countries. But this year, will tensions between developing countries and the world’s wealthy economies over issues such as representation at the IMF and the amount of attention that the fund has been paying to Europe over the past two years boil over? Will there be fireworks when the grey-suited delegates converge on the headquarters of the IMF and the World Bank in Washington, DC, from October 11 to 13?
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Come what may, some drama is expected to be injected into the meetings by a possible (and highly probable) late-September deal in the US Congress on the US budget, to which a 2010 IMF reform is attached. This, among other things, increases the voting power of emerging economies on the IMF executive board, which are currently significantly under-represented relative to their growing importance in the world economy.
When the reform is implemented, China will become the third largest member country in the IMF, with Brazil, India and Russia also among the fund’s 10 largest shareholders. At the other end, Europe, whose individual countries remain heavily over-represented – holding almost one-third of total votes on the IMF board compared with their approximate 20% share in global gross domestic product – will see its votes decline slightly.
Hanging in the balance
Ted Truman, a senior fellow at the Washington-based Peterson Institute for International Economics, is hedging his bets as to the position that the US will take. He estimates it as “somewhere between conceivable and possible” that the US Congress will ratify the IMF reform in time for the annual meetings and, simultaneously with the passage of the US budget, avert a US government shutdown.
Furthermore, he is optimistic that if the fund’s 188-member reform is approved, after months of being held up by one country – the US, the IMF’s biggest shareholder and the only one with veto power over major decisions such as the 2010 reform, which needs 85% of the vote in its favour – then that “will take the steam out” of the next step: realigning IMF voting shares, agreeing to a new formula for allocating voting rights and a new round of voting increases for under-represented countries, before the January 2014 deadline.
“The Europeans, in particular, have been saying 'why should we bother to take this new round seriously if the US hasn’t approved the last one'. They have been using the delay by the US as a subterfuge not to confront the basic issues, which have to do with marginally reducing the European voting power in the fund for a second time. Even under the old [2010] quota formula, the European voting will go down a couple of percentage points,” says Mr Truman, who was a former assistant secretary of the US Treasury.
Greek division
Amar Bhattacharya, director of the secretariat of the Intergovernmental Group of 24, which is based in Washington, does not mince words when giving his explanation for the delay in the US approving the IMF reform. “There is little appreciation that having a strong IMF is the best thing that the US can have as an arsenal for strong and stable growth in the economic and financial system,” he says. However, he blames what he calls “the fundamental bottleneck” at the fund over attempts to make it a more representative, legitimate institution, on “the exaggerated role of Europe”.
“To any observer from Mars, they’d say the IMF needs to change," he says. "The only place where that change needs to come from is Europe. But I see no sign of that happening."
Meanwhile, Brazil, Russia, India, China and South Africa (the BRICS) have also been highly critical of the amount of time and money spent by the IMF recently in Europe – namely in Greece, Ireland, Portugal, Spain and Cyprus – and of the way that the fund has applied its debt sustainability guidelines in Greece.
“Basically, the BRICS would like to see the end of the tunnel before the fund commits any further resources; and that the fund should not be lending into a hole,” says Mr Bhattacharya.
Differences over Greece, moreover, could widen as the IMF has said that the rescue fund for Greece’s financial crisis is €11bn short and needs to be partially filled by the end of this year. It has also recommended more public debt relief for the country, which would be the sixth restructuring of both private and public Greek debt since 2010. The IMF will probably delay these new negotiations on Greece until after Germany’s September parliamentary elections. But that still means the topic will be on the radar screens of delegates at the time of the meetings.
“Criticism over the [continuing] heavy involvement and the heavy financial involvement of the IMF in Europe is there," says Mr Truman. "Has this reached boiling point? Not yet. I don’t think it’s something that’s going to blow up at the time of the IMF/World Bank meetings."
Changing times
Against this background, and notwithstanding the disagreements between shareholders over Europe and representation on the IMF board, changes have been taking place at the fund under Christine Lagarde, who was named IMF managing director in July 2011.
For instance, there has been a gradual but profound change in the IMF’s culture, culminating in approval of a new openness and transparency policy in July 2013. The 188-member IMF is now not only linking board recommendations to approve loan requests with a borrower’s willingness to publish accompanying IMF staff reports, it is also making more of its staff's work available earlier to the public and in more transparent ways. A striking example of this was seen in the June publication of analytical research that said there had been underestimates of the effects of austerity measures in Greece in the first €110bn IMF, EU and European Central Bank (ECB)-supported bail-out in 2010, in response to the Greek financial crisis.
“It amounted to saying, in effect, that the IMF, EU and ECB programmes in Europe had not been very salutary. The paper was issued by Olivier Blanchard’s research department. But I assume the greater openness is in part because Ms Lagarde is giving it the nod,” says Nancy Birdsall, head of Washington’s Centre for Global Development.
Taking the reins
A related change is that the IMF is now paying attention to public relations and has upgraded its communications department. The new director of the fund’s newly named communications department has been brought into the managing process, which was not the case before. And these changes are not just about public affairs.
“It's about communicating and interacting, and coming to terms with the need for stronger engagement with different actors [in member countries] for IMF policies to work, and also to have the sort of support that prevents the political upheaval some countries are experiencing,” says Bessma Momani, associate professor at the University of Waterloo, Canada, and a Brookings Institute senior fellow.
Underlining its increased responsiveness, the IMF has also started playing a role and speaking out about climate change, in addition to providing policy advice to member countries, when requested, on how to reduce income inequality. It is also carrying out new research on the links between job creation, labour market policies, unemployment and growth.
“Ms Lagarde made a speech at the Centre for Global Development a year ago that advertised and reinforced the concern of the IMF as an institution about the implications of climate change for long-term financial stability, and the need for countries to focus more on this and the logic of cutting carbon emissions. It was the first time the IMF had addressed the issue. I think that’s a sign of leadership on her part,” says Ms Birdsall.