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ViewpointSeptember 3 2012

The IMF must reform or run the risk of irrelevance

Within the IMF, some members are more equal than others. Only when fast-growing development economies such as the BRICS nations are fairly represented in its decision-making processes can it be described as a truly multilateral organisation.
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The IMF must reform or run the risk of irrelevance

The International Monetary Fund (IMF) has a very important role to play in solving the current international crisis. Acknowledging this role, G-20 members raised $456bn in contributions for it at the G-20 Summit held in Los Cabos, Mexico, in June.

Added to the $600bn already raised for the IMF in 2010, this amount has considerably increased the power of intervention it has vis-à-vis the challenges that lie ahead for the institution. Many emerging countries participated in this funding effort, including Brazil and its BRICS partners (Russia, India, China and South Africa), showing that they are committed to finding a solution to the European crisis, which has had an impact on economies all over the world.

These developing country contributions, aimed at increasing the capability of the IMF to face the crisis, reflect the new reality of the global economy. Emerging nations are increasingly driving growth worldwide and are also becoming stronger players in the search for a solution to the world's problems and asymmetries.

The IMF must reform or run the risk of irrelevance

Partial participation

And yet, this new role is not reflected in the international governance system. The IMF is a clear example of this, as emerging economies need to be more represented in its decision-making processes. Developed countries must begin to support initiatives to reform the IMF so that it may better reflect this new and undeniable weight carried by developing nations, particularly those of the BRICS.  

In 2010, the G-20 agreed on a timeframe for reforms that would allow for the increased participation of emerging countries in the decisions made by the institution. However, countries with a higher share of participation today are clinging to privileges from the past, making the implementation of their commitments unviable.   

IMF quota reform is a necessity to ensure fair representation and coherence in modern times. The participation of BRICS countries to the world's gross domestic product (GDP) has increased from approximately 10% at the beginning of the 21st Century to about 20% now. According to predictions from the IMF itself, by 2017 the BRICS will account for one-quarter of the global economy (considering nominal GDP as well as purchasing power parity). In 2010, the BRICS were responsible for 40% of total global economic growth; in 2011, the figure was a still-impressive 33%. For 2012, projections from the IMF indicate that this figure will reach 42%.

The IMF will only truly be a multilateral organisation when it overcomes its asymmetries and starts to treat all its members more equally. Even with the already agreed upon reform, which has yet to be implemented, emerging countries will continue to be underrepresented. For example, after the implementation of the 2010 reform, the EU will have a voting power of 29.4%, more than double the 14.1% voting power of the BRICS, despite the two groups being very close in overall GDP terms.

Brazil believes that in addition to accelerating the timeframe of the changes to the IMF’s structure, GDP should be the basic reference for calculating each country’s voting power.

Power sharing

There is a clear resistance from European countries and others to IMF reform. People in Europe, from its leaders to the population at large, must consider sharing power as a route to a better future for Europe and the world more broadly. An IMF without proportionate representation in relation to the current world economy runs the risk of irrelevance. A resistant attitude toward the world’s modern economic situation prohibits advances in economic partnerships that could make valuable contributions to global wellbeing.

The IMF must reform or run the risk of irrelevance 3

At the moment, developed countries face an extremely difficult situation, resulting from the fiscal crisis in some European countries. Emerging economies have felt the impact of this crisis, even if their resilience and dynamic internal markets have partially mitigated these negative effects.

Sympathetic to the problem and concerned with helping to find a solution, the BRICS economies are collaborating to try to revert the crisis, with internal economic incentives and the commitment of contributing resources to the IMF (which today directs most of its loans to European countries). It is now up to developed countries to do their part and show they are committed to a world where power is more balanced by proceeding with reform to the IMF. 

Guido Mantega is the finance minister of Brazil.

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