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.

A Question to Answer – Iraq a Falling State?

by Marian Fritz

The State of Iraq is thrown in turmoil and the situation is highly dangerous for the security situation of the region and the entire world. After the international forces, under the leadership of the United States, and their coalition of the willing left Iraq the security situation of Iraq collapsed because there was no powerful, centralized government in Bagdad.

The forces of “the West” entered Iraq without knowing the regional characteristics of the country and tried to establish a Democracy like in the States of the “West”. While doing that they underestimated the power of the Tribalism. Because of this Tribalism many people will not accept any centralized government in Bagdad. This non-acceptance of the government is a reason why there was never an efficient security system which promoted the rise of terrorist organization like Al-Qaida. Another reason for the weak security system of Iraq are the neighboring countries: Syria, Saudi-Arabia and Iran.

Terrorist organizations are said to be supported with weapons and money by Saudi Arabia while the terrorists are using Syria as a safe harbor, because of the lack of centralized security due to the ongoing civil war.

Over the last years there was in particular one terroristic organization stronger and wealthier than most others: the ISIS (Islamic State of Iraq and Syria). ISIS is led by Ibrahim Awwad Ibrahim Ali al-Badri, who extended their activities from Iraq to Syria.

The ISIS declared openly war on the government in Bagdad and even seized whole regions in Iraq.  In these regions they seized ammunition depots, banks (approx. $480m) and heavy military equipment e.g. missiles, tanks and machine guns (worth approx. $1,5b). With this equipment they seized the city of Mosul and are holding the staff of the Turkish diplomat service in captivity.  On Monday, forces of the ISIS seized the city of Tal Afar, close to the Syrian border, which makes it easier for them to enforce their troops and move equipment to Syria unseen.

How powerful and feared ISIS is can be seen in the fact that two divisions of the Iraqi army fled instead of fighting them. Right now they are moving towards Bagdad and it is the inhabitants of the city who are preparing to defend their city against the ISIS and not the army.

A few days ago the ISIS posted a picture of a mass execution of approximately 170 Iraqi soldiers via twitter to show their opponents that they don’t have mercy for their enemies. The picture was already declared authentic by the chief military spokesman Lieutenant-General Quassim al-Moussawi of the Iraqi Army. The international community was deeply shocked by these happenings and called to stop ISIS but until now most of the members of the international community haven’t taken any action. There are some reports that Iran has sent some of their elite-forces to assist the government in Bagdad to reclaim their land and fight back ISIS, but there is no official press release of the government in Tehran to confirm these reports.

The next few weeks will show if the Iraqi government can manage to fight ISIS even though the terrorists are in part supported by certain segments of the Iraqi population. At the moment, Iraq is a failing state which makes it very difficult to stop this development.

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.