The Achilles Heel of Every Association – Voluntary Work

Dear friends and interested readers,

We’d love to share more of our interesting debates with you as we still consider ourselves as an association of progressive and young analysts of the political discourse. However, we are very constrained  by time and ressources. All our members dedicate their free time mostly on late evening and weekend sessions for our projects. Committment is a necessary base for voluntary work in general, but unfortunately it cannot guarantee numerous and feasible outcomes.

Hopefully you will accept our apologies for any inconvenience which may derive from this issue. We can assure you that our committment is still high and we will neither stop expressing our opinion nor we stop to help political interested people to improve their knowledge and skills.

We wish you all a great week. Last but not least we would like to add some inspiration to this letter and bring this exceptional documentary – “Food, Inc” by Robert Kenner (2008) – to your attention. Agricultural policies at its finest. Stay tuned!

Food Inc Robert Kenner

IMF Reform – What’s the Big Deal?

by Felix Moldovan – Former Vice President of the MEF Association

The IMF was created as a result of the Bretton Woods conference and was supposed to become a lender of last resort for countries that ran into financial difficulty. Together with the World Bank its main task was to reduce the adverse effects of cyclical downturns of the economy by introducing a fixed exchange rate mechanism and pegging the dollar to gold (which was later abandoned by President Nixon in 1971). Having as its main architects an English economist (John Maynard Keynes) and an American finance minister (Harry Dexter White) the power distribution within the organization, quite rightly, favored the western, developed nations.

Since its creation, the IMF has showed a remarkable resilience to modernize itself, the developed countries fiercely hanging on to the powers and influence within the organization that they received in 1944. Not trying to state the obvious, but the world economy has changed a lot since the 1940s. The past 30 years can best be characterized by an increasing shift in manufacturing and services from developed countries to developing countries. This has resulted in countries such as Brazil, Russia, India, China, and South Africa (BRICS) to produce such high levels of economic growth that in some aspects it resembles an economic miracle. Although the projections vary, some economists argue that the size of the BRICS economies might overtake that of the G7 as soon as 2027. The BRICS countries are the fastest growing emerging markets that encompass 25% of the world’s land and nearly 40% of the world’s population. The potential is enormous, the possibility is almost palpable, but the playing field is tilted in the opposite direction.

The three points I will discuss below have been talked about ad nauseam, but these are the key areas where the IMF needs reform. Please bear with me.

1) The executive board (Board) is comprised of chairs (one for each country represented on the board) and shares (voting power). Currently, the configuration of the Board perfectly represents the world economy of the 1940s. It is dominated by European countries and the only veto power belongs to the USA. This is clearly unfair and non-representative of our current global economy. That is why I think the following steps should be considered first in the reform of the executive board: (i) the European countries should send, with an equal voting share as the USA, one director to represent the European Union in front of the Board and (ii) the freed up seats should be distributed between heavily underrepresented areas of the planet (e.g. Asia and Africa). This would allow the developing nations to have a stronger influence on the decisions the IMF makes and possibly help change the unilateral and “universal” reform package defined by Washington Consensus and applied by the IMF.

2) The managing director should be appointed on merit and not on a political agenda. Since its creation, as a general rule, the USA and European countries have divided the role of Managing Director of the IMF and that of President of the World Bank between them. The World Bank was led by an American and the IMF by a European. It was and still is in fact a bullet proof way of defining the topics that make it to the discussion table and the topics that don’t.

3) Voting distribution. The voting power of each country is determined by the share it has in the capital of the fund. 15% of the votes are required to block any discussion in the Fund. The USA has always had a threshold that is higher than that (17%). Add to it the votes of France, Great Britain and other developed countries and you have a majority sufficient to push through any reform in the IMF. The latest crisis showed best how ill-equipped and ill-prepared the IMF actually is to combat the negative effects of a global economic downturn. The countries stuck in the periphery of the global economy were abandoned and disregarded because they did not have enough votes in the IMF to get the attention of the Fund.

There has been ample talk about reforming the voting system of the IMF and the 6% figure has become as big of a celebrity in the midst of economists as Paris Hilton in the midst of emotionally unstable teenage girls. The whole idea is to shift 6% of the voting rights that developed countries hold to developing countries (in this case mostly the BRICS). This would result in China having the third largest voting share and all of the BRICS countries making it to the top 10. A decision has been made on this effect during the G20 summit in Seoul of 2010 that would see the adoption and implementation of these measures by 2014. Whooohaaaa! Right? Wrong!

In order to implement major reform of the Fund an 85% majority needs to be reached. Do you know of any single country with voting rights exceeding the required 15% to unilaterally block any reform? That’s right, as the biggest contributor to the fund the United States of America has been blocking this initiative ever since the idea came under discussion. It is, rightly so I might add, afraid that it might lose its tight grip over the fund. Considering the alternatives I wonder if that would be such a bad thing. Here’s one alternative that might happen if nothing changes:

The veto power exercised by the USA with regards to the voting rights might please other western European countries, which have ratified the changes, but in the long term might prove to push the IMF, as a leading global financial institution, to the edge of a cliff. There have been rumors that the developing countries, led by the BRICS, are growing increasingly impatient with the USA and are discussing the creation of an alternative fund with similar scope and purpose as the IMF. China has started the business of lending money in 2001. The total volume of aid promised and given by China in 2001 was of USD 1.7 billion which a decade later has increased to USD 190 billion. Not only has China become a strong influence in the global market, it has the financial resources (it has foreign exchange reserves of 3.82 trillion dollars which is just above the GDP of Germany) and the increasing support of developing countries to create an institution that could financially as well as economically challenge the IMF.

Overall, if the IMF and western developed nations really want to put their money where their mouth is in terms of fighting economic inequality, then reforming the IMF will have to be the first step they take. Allowing developing countries to sit at the table where important decisions are made is not just an economic question but a moral and ethical one as well. Beyond the rhetoric of change, beyond all the numbers and statistics developed countries have a moral responsibility towards developing countries, ignoring it might come at a high price.

Please note that the views expressed are those of the author and do not necessarily represent or reflect the views of Munich European Forum e.V.