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Options for democratising the World Bank and the IMF - Paul Ladd

3. Problems with the current system
 
Allocation of votes

It is widely perceived by many civil society groups, developing-country governments and academics that the IMF and World Bank are controlled and dominated by North America and Western Europe, while developing countries are marginalized. This is not simply a historical relic left over from a period when only a few countries were members of the IFIs. The root source of this power imbalance is the worsening inequality in the distribution of votes.

This inequality leads to two inter-related problems. Firstly, developing countries - which are directly affected by IFI decisions and are reliant upon them to address resource constraints - are unable to significantly shape IFI policies. Secondly, just one country, the United States, has a controlling share of over 16 per cent of the total votes in both institutions, giving it veto power for major decisions (which require an 85 per cent majority) and unrivalled influence. By contrast, the combined vote of 80 of the poorest countries eligible for the IMF's Poverty Reduction Growth Facility amounts to only 10 per cent.

More generally, this inequality means that G7 countries are relatively unrestrained in their pursuit of economic and foreign policy priorities through the IFIs. This small group of countries can agree policies outside the IFIs and implement these policies through them. Developing countries are continually adjusting to the latest economic fashions of the IFIs, which in turn are influenced by the needs of industrialised countries.

Inequality in the distribution of votes in the IFIs has worsened as the significance of the basic vote (250 votes) allocated to all members has declined in proportion to the number of votes allocated according to a country's economic strength.1 The failure to maintain the value of the basic vote has shifted the balance of power further to industrialised countries. As this 'equity factor' has diminished in significance, the allocation of votes has moved much closer to one-dollar-one-vote.

The IMF's quota formula (based on GDP, foreign exchange reserves and trade flows),2 is open to manipulation to the advantage of industrialised countries. For example, biases in GDP calculations lead to underestimation of the size of developing-country economies.3 Moreover, the quota formula is not applied as a fair and transparent means of determining a country's vote; instead, it is more generally used as a negotiating guideline. Thus, despite the increase in developing countries' share of world GDP and the decline of that of European countries, the allocation of votes has altered little. The failure to increase the votes of several Asian countries in line with their growing economic power, for instance, diminishes the credibility of the industrial countries' argument that the allocation of votes is equitable on the basis of economic size.

The lack of any substantive recommendations to improve the fairness of the quota formula in the recent Cooper report produced by the IMF's Quota Formula Review Group reflects the parameters of their terms of reference and the unwillingness of powerful shareholders to address the equality issue. Its conclusions offer nothing more than options to 'retro-fit' the quota formula better to the existing distribution of votes.

In the case of the World Bank, particularly the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), the major shareholders have traditionally argued that their greater contribution of resources justifies their greater share of the votes. Historically, industrial country guarantees were indeed important for the IBRD's credit rating. But today they contribute only a small, declining fraction of the IBRD's capital through paid-in capital subscriptions. The IBRD raises most of its capital from the markets and earns additional income to cover running costs from loan repayments from middle-income countries (as does the IMF). While these countries are generating a significant proportion of net income (which helps fund the IDA), it is typically the larger, non-borrowing shareholders who decide how to spend it. IDA is thus increasingly dependent on its borrowers rather than rich countries.

Major shareholders of the institutions have also argued that the IFI system of consensus decision-making increases the influence of developing countries beyond their meagre votes. In fact, informal decision-making which relies on behind-the-scenes negotiation is likely to magnify the inequality in resources at the disposal of the executive directors, with those members with more resources better able to win a crucial argument.

Moreover, decisions at the boards continue to be taken when a majority of votes (informally counted) is achieved, not a majority of executive directors. Perhaps even more importantly, the weight of a country's voice, judged by its voting power, is critical in determining which specific issues and potential loans are actually brought to the table for discussion. The underlying voting power profoundly influences decisions. Voting allocation is therefore crucial to a country's influence (Woods 1998).

Allocation of seats on governing bodies

The unequal allocation of votes is magnified by the system of allocating seats on the IMF and World Bank boards and on the Development Committee and IMFC. Seats on these bodies are allocated on the basis of one per constituency with the five largest vote holders allocated one seat each (the US, UK, France, Germany and Japan). A further three countries are in single-country constituencies and therefore have guaranteed seats on the boards (China, Russia and Saudi Arabia). The remaining 176 member countries share just 16 seats between them.

In several constituencies, the executive director is appointed by the country with the largest number of votes, for example, Canada, Australia, the Netherlands, Switzerland, Italy and Belgium (in the IMF) head up their constituencies. In the remainder, which group together mostly developing countries who typically hold similar numbers of votes, the ED appointment is rotated amongst the members. Effectively, those countries with the greatest voting power also have a louder 'voice' since they can assume permanent membership of the board. Those countries most affected by IMF decisions are also most distanced from decision-making. These inequalities are replicated in the oversight committees of the executive boards, the Development Committee and the IMFC.

Although the seats on both boards and the oversight committees are allocated more or less equally between high-income countries (creditor countries) and developing countries (debtor countries), in practice high-income countries represent only 19 per cent of all member countries. If seats were allocated proportionately between high-, middle- and low-income countries, then high-income countries would head up only five constituencies. The under-representation of non-industrialised countries is seen even more starkly if one examines the ratio in terms of population. Low- and middle-income countries as a group comprise 84 per cent of the world's population, yet they have only 30 per cent of IFI votes and less than half the seats on the executive boards.

Constraints on capacity

The size of a constituency is significant in determining to what extent each country can be represented by its ED. The most striking example is that over 40 sub-Saharan African countries are represented by just two EDs, while five G7 countries, which no longer borrow from the Fund or the Bank, are each represented by a single ED. Not only, therefore, do developing country EDs have fewer votes and are themselves under-represented on the boards, they have the additional burden of representing more people.

This leads to a much greater workload for developing country EDs. Each ED must deal with the business of representing his/her constituents, negotiating and implementing adjustment and debt relief programmes in addition to daily board business. Typically, they have less support from civil servants and technical expertise from their members' countries. Since the ED position rotates frequently in developing-country constituencies, it also means that these EDs are handicapped by less institutional knowledge of the IFIs. The result is that developing country EDs tend to have less capacity to invest time and energy into formulating and advocating policy positions.

Board transparency

That developing countries are under-represented in the institutions both in terms of vote and voice is clearly a problem made worse by the fact that the decisions taken by the board are not transparent. Decisions are reached by consensus, requiring no formal vote; this process may open up discussions to all EDs, but it also serves to make decision-making opaque, obscuring responsibility.

Most citizens in developing countries are not able, through domestic political structures, to hold their politicians to account for policies agreed at the IMF board. Nor are IMF staff or management accountable through national judiciary systems. It is imperative, therefore, that there should be transparency in decision-making at the institutional level.

Significant steps have been taken to improve board transparency by, for instance, releasing board papers and summaries of board discussions. Although these efforts are welcome, they do not result in the degree of transparency necessary for members of the public to know who is responsible for the decisions that affect them - a lack which is even more important when the decisions under discussion may have an adverse effect on people in the developing world.

Selecting IFI leaders

Given the far-reaching influence of the IFIs in developing countries, the heads of the IFIs are often as important to the lives and livelihoods of people in these countries as their own leaders, sometimes more so. Millions of people depend on the quality of IFI leadership. Yet startlingly few countries have any involvement in senior IFI appointments. The lack of democracy in the selection process became abundantly clear following the US government's rejection of Germany's first candidate for the IMF leadership in 2000.

Apart from the practice of the executive boards appointing IFI leaders, neither the World Bank nor the IMF has formal selection procedures. This has allowed the US and Western Europe to maintain the outdated arrangement by which the European governments select the IMF managing director and the US government selects the World Bank president (and other senior IMF staff). This arrangement can no longer be justified given the growing importance of other countries in the global economy and the diverse needs of the IFI membership. Clare Short, who until recently was the UK Secretary of State for International Development, remarked to the Parliamentary oversight committee on development issues last November that:

    the US gets the World Bank and Europe gets the IMF…it cannot go on, surely. What about the rest of the world? The geographical carve-up is intolerable and the system for selecting is a kind of political fix system. [The present system] is an outrage …and it needs continuing pressure to make it transparent.


The current process is not only unfair and 'intolerable'; it is potentially inefficient. By limiting the pool from which leaders and senior staff are selected, the IFIs run the risk that inferior candidates may be appointed. In any event, by selecting the most senior staff from the US and Europe, it is virtually guaranteed that office-bearers will have insufficient insight into the problems and aspirations of the majority of the membership. Not only are non-European and non-US members unable to nominate candidates, there is no opportunity for them to make a selection between nominated candidates since a list of nominations is not presented.


Footnotes:
  1. Originally, the basic vote accounted for 11.3 per cent of total votes; today it accounts for only 3 per cent (Kelkar et al 2003).
  2. The quota formula is used to calculate the amount of capital paid in, access to IMF resources and the allocation of votes for each country.
  3. See IMF 2001; Woods 1998; Kelkar 2003.
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