Day 50 – Q 2.The constitution and voting rights in the International Monetary Fund (IMF) doesn’t reflect contemporary global economic reality. Comment. What sort of reforms are needed to address this problem. Suggest.
2. The constitution and voting rights in the International Monetary Fund (IMF) doesn’t reflect contemporary global economic reality. Comment. What sort of reforms are needed to address this problem. Suggest.
अंतर्राष्ट्रीय मुद्रा कोष (IMF) में संविधान और मतदान के अधिकार समकालीन वैश्विक आर्थिक वास्तविकता को प्रतिबिंबित नहीं करते हैं। टिप्पणी करें। इस समस्या के समाधान के लिए किस तरह के सुधारों की आवश्यकता है। सुझाव दें।
The International Monetary Fund (IMF) was conceived at the Bretton Woods Conference mainly to help members during the Balance of Payment (BoP) crisis and to stabilize the currency exchange rates of countries, and giving practical/technical help to members by helping in framing economic or financial policies etc.
Given its unequal voting power mechanism and quota parameters IMF doesn’t always serve the interests of poor & developing countries:
- The 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.
- It is almost impossible to make any reform in the current quota system as more than 85% of total votes are required to make it happen. The 85% votes does not mean 85% countries but countries which have 85% of voting power and only USA has voting share of around 17% and G7 collectively own >40% while India and Russia have barely 2.5% each. BRICS, G20 and emerging market economies are against this scheme especially after Subprime crisis and declined economic strength of USA & G7.
- Currently in Executive board, 5 out 24 directors are permanently decided by five largest quota holders. 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.
- The 2008 and 2010 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.
Reforms needed to address this problem:
- Voting rules: At least 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 command unquestionable support.
- Participative decision making: The dynamic of decision-making has to be changed to decisively increase the input of developing and emerging economies.
- Quota reforms: Recently, the International Monetary Fund has made country quota reforms agreed by the G20 in 2010 a reality. Under this emerging and developing economies gained more influence in the governance architecture of the International Monetary Fund (IMF).
- Affirmative facility for borrowing: Borrowing capacity and raising fund resources must be determined through current economic positions and performance of member countries rather than on fixed norms.
If implemented, about 6 percent of quota shares will shift to emerging market countries. As a result, quota shares of traditionally strong economies such as the United States, Saudi Arabia and European countries will be diminished.
The IMF could turn irrelevant unless it reforms to keep up with rival global institutions and reflects contemporary global economic reality. With its core resources increased, IMF will be able to better respond to the ongoing financial crisis.