40TH ANNIVERSARY OF BANK OF MAURITIUS

LECTURE BY DR. PAUL A. ACQUAH, GOVERNOR, BANK OF GHANA

TOPIC:

GOVERNANCE AT THE INTERNATIONAL MONETARY FUND: QUOTAS, VOICE AND ALL THAT DEBATE

MAURITIUS, DECEMBER 4, 2007

  1. It is a pleasure to be here to participate in the 40th Anniversary celebrations of the Central Bank of Mauritius. I thank Governor Bheenick for inviting me. It is indeed a great occasion; and I can share the sentiment because the Bank of Ghana is also celebrating this year its 50th Anniversary. Ours coincides with the 50th Anniversary of Ghana’s Independence. An Anniversary such as the Bank of Mauritius is marking this year is indeed historic and a moment of pride.
  1. My lecture today is on the International Monetary Fund (IMF). In our part of the world, in African countries, the IMF conjures painful Structural Adjustment Programs and stringent conditionalities and financing of balance of payments problems, post-conflict economic recovery, and debt relief. It means that the Fund has had to be involved in most of Africa for much of its post-independence period in programs and policy-based lending. This has sought to assist in coming to grips with macroeconomic problems that have kept African countries mostly behind in the race towards accelerated growth and development.For over a decade now, Mauritius relations with the Fund have been confined to policy advice under Article IV consultations. Mauritius usually ranks highly on the list of countries with sound economic management, competitiveness, and governance ratings. The indications are that economic policies have been broadly successful over the past years; and the Bank of Mauritius has indeed much to celebrate for being an integral part of the record of accomplishment. I should say that your experience offers useful lessons for Africa that is seeking to achieve the Millennium Development Goals.
  1. Now to the topic today-“Governance at the IMF”. This is a raging debate going on about the role of the Fund. The focus and the nature of the issues involved tend to shift over time as the international financial system and the nature of the participants and stakeholders evolve. But the issue of Quota and Voice has been always, historically, fundamental in the discussions on governance, decision-making, and operations in the Fund as a cooperative institution.Quota and voice in the Fund is central to the debate because it is about power-sharing; it is about burden-sharing, and it is about the legitimacy, relevance and effectiveness of the institution. And, it has its genesis in the Articles of Agreement and in some of the informal understandings reached at Bretton Woods.
  1. It is important to recall that the IMF and the World Bank, its sister institution were conceived during a conference in Bretton Woods, New Hampshire in July 1944 by 45 governments who sought a framework for reconstruction after World War II and for economic cooperation in order to avoid a repetition of the economic policies that contributed to the Great Depression of the 1930s. In December 1945, 29 member countries signed up to the Articles of Agreement which led to the establishment of the Bretton Woods system of fixed exchange rate regime. Africa was represented by only these countries, Ethiopia, Union of South Africa and Egypt. The rest of Africa was under colonial rule at the time.
  1. The governance of the Fund, in terms of its organizational structure, shareholding and decision-making, financing model, and its monetary character, was built as a result of skillful negotiations to reconcile members’ interest in the pursuit of a common purpose. And, indeed, the outcome has influenced the Fund’s operations even as it has evolved and adapted to changing circumstances in the global economic and financial system.
  1. Two examples illustrate this point. First, the fact is that the United States and the United Kingdom were the principal architects of the plans for post-war monetary cooperation at Bretton Woods. And in creating the Fund and the World Bank, they agreed that the United States would have the ‘right’ to appoint the President of the Bank, as well as the Deputy Managing Director of the Fund (there was only one DMD until very recently when Michel Camdesus thought the complexity of managing the institutionjustified the appointment of two additional DMDs).Under this informal agreement, Europe would appoint the Managing Director of the Fund.
  1. The US promptly proceeded to nominate Mr. Eugene Meyer, a businessman and owner of Washington Post as the first President of the World Bank and the European Union nominated Mr. Per Jacobson, an Economist steeply involved in multilateral economic and monetary cooperation at the BIS as its first Managing Director.
  1. This agreement contrasts with the provisions under the Articles of Agreement itself that the Executive Board “selects the Managing Director” and can dismiss a Managing Director.Moreover, the Articles of Agreement specify that the Managing Director should operate under the general direction of the Executive Board.
  1. The informal agreement in practice prevails today. The Executive Board’s power in this matter remains on paper only. The current debate ostensibly turns on the need and desireto bring transparency and participationin the selection of the most qualified person for the position without restriction of national origin. The main underlying concern is that the power of influence and the interest of the key architects of the Fund continue to be prominent in this vital process and that this aspect of the Fund’s governance creates a democratic deficit in voice and representation at the Fund.A related issue in fact is how effectively the direction of the institution is exercised and evaluated by the Board with no effective appointing authority.
  1. Take another historical example: the Fund currently operates largely on a financial model characterized as “The Mixed Bag of Currencies” proposed by White of the United States (Horsefield, 1968). Under this plan, the Fund sells the currency of member country in deficit for currencies of other member countries that are freely useable. This was a result of a long discussion and an eventual compromise that led the United Kingdom to abandon the Plan proposed by Keynes of Britain, which would have amounted to the creation of an international currency called the bancor to lend to member countries. Several arguments are reported to have been advanced in pressing for the White proposal (including difficulties of obtaining US congressional approval) but it has been noted that “the more weighty economic argument was that the potential US commitment to give balance of payments assistance to the rest of the world through the Fund would have been more than twice as large as under the Keynes Plan. The burden for the US could have been US$6 billion and US$2.75 billion under the Keynes Plan”(Polak, 2005). But this compromise also means that the ability of the Fund to provide balance of payments assistance was circumscribed. This example illustrates the inherent tendency to negotiate the best national interest even as a member seeks to promote the common goal of the cooperative institution. It is this tendency that is said to have come into play at the creation and it is part of the living history of the Fund; and it underscores the importance of being at the table.
  1. Today, the Fund, as it is commonly called, is made up of 184 member countries. Its membership jumped sharply in the 1960s, when a large number of former colonial territories many from Africa joined after gaining political independence and again in the 1990s when the IMF welcomed as members, the newly independent countries of the former Soviet block upon the dissolution of the Soviet Union.An institution of so many member countries requires a balancing of interests to be effective and relevant. And it should be accountable to all its stakeholders, be they creditors or borrowers.
  1. The world economy has gone through significant changes over the years. And there is a growing number of emerging market and developing countries that have become creditors to the IMF blurringthe distinction between creditor and borrower countries. The Fund has grown to extend the scope of surveillance beyond exchange rate policies and closely related issues. The increasing globalization of the World Economy with potentially significant spillover effects of members policies on other members irrespective of size make it important that all members have a say on policies of Fund. The authority of the Fund and its role would resonate to the extent that the Fund is seen as representing the entire membership.
  1. Voice and representation has been on the table for discussions over the past years. The fact that it has climbed up the scale of agenda at the Fund underscores how important the Fund views the need to adapt to the fast changing dynamics in the world economy and in corporate governance practices, and the need to safeguard the authority and relevance of the Fund.
  1. Obviously some member countries are frustrated with the pace of reform at the Fund. To quote South African President Thabo Mbeki at a recent gathering of G20 Finance Ministers and Central Bank Governors in Klienmond, South Africa, he said, “even when modifications to the international financial architecture became necessary, especially during periods of global financial turbulence, the outcomes have inevitably preserved the status quo”.
  1. The issue really collapses around quotas. The founding members have been reluctant in giving out portions of their control through quotas as new and stronger members join the Fund. Now the question is, as more and more countries become relatively stronger in the dynamics of global finance and trade, how the Fund should adapt to these new realities?The principle of equality of states was recognized at the inception of the Fund through the creation of equal basic votes for all members. The basic votes which peaked at 15.6 percent of the total voting power in 1956 has fallen precipitously thereafter to ahistoric low of 2 percent at present, as no mechanism was set to protect against erosion in successive quota increases.
  1. The reality is that quotas represent the anchor of influence in the Fund and the issue of legitimacy touches on the type of influence that members have on the Fund’s decisions and policies including the level of access to its resources. To put it in simple terms “we all need to be at the table to have the opportunity to influence decisions especially should these come to be based on votes”. A clear case is the design and modus operandi of the Multilateral Debt Relief (MDRI) and the HIPC initiatives. Those designing these facilities have had a very strong influence on shaping the facility with outcomes that are not necessarily neutral even if they serve the best interest of the organization (and the membership as a whole).
  1. It is not without reason that the quota formula has been a source of many contentious discussions because the metrics determines the size and distribution of quotas which is a source of the power-sharing debate in the first place. Currently quotas are calculated according to a member’s gross domestic product, current account transactions, and official reserves. The quota determines a member’s voting power in IMF decisions and is reviewed every 5 years with the next review duein 2008. If for example they were to be based on a measure of openness including or excluding intra custom union trade as currently under consideration,it would significantly affect the relative positions of European countries. Similarly, the use of PPP or market exchange rates in GDP measurementwould generate different distributions of quotas that would strongly affect the newly dynamic (emerging market) economies.
  1. I believe that a powerful voice and representation on the part of developing countries in the Fund will influence the methodology of determining quotas. This would bring a fundamental adjustment to quotas to take account of the major changes that have occurred in the relative economic and financial positions of member countries, with a large dose of fairness for those currently under-represented. This would also require changes to the size and composition of the Executive Board.
  1. I am sure you would appreciate why countries like China and India are asking increases in their quotas and the African constituency is asking for higher representation at the top level of management such as Deputy Managing Director. This is not immaterial because you can then have influence and shape facilities and also how they are implemented and administered. To put it more bluntly, the debate on quotas is a manifestation of the inner struggle for control”.
  1. What is clear is that nobody disputes that voting power in the Fund should take account of the capacity and willingness of members to support the Fund’s activities and to contribute to its financial resources. Consensus seem to have emerged that the vote and quota structure should take into consideration a number of factors including:
  • Significant growth in the size and structure of emerging economies.
  • The changing functions of the Fund particularly in the provision of global public goods (GPG), in which emerging economies can be very instrumental and feature prominently as potential in dealing with various global financial issues.
  • The increased willingness on the part of emerging markets to support the Fund, both in its day-to-day activities as well as in its crisis management.
  • The low voting rights of African countries and other newly independent states in Eastern Europedespite their numerical strength in the Fund. In particular, these countries perceive the current structure as under-representing their importance in global financial relations which makes it difficult for them to articulate and promote their interest through the traditional IMF structures.
  1. The Fund is currently reviewing the issue of voice and quota and seeking the fundamental changes that will address the imbalances between the current quotas of member countries and their relative economic and financial positions in the global economy. The international financial architecture, of which the Fund continues to be a major player, thrives on its international legitimacy and the ability to act quickly. The Fund has universal membership and so its charter provides it with the mandate to take coordinated action in world affairs, especially in times of crises. But its historical development has unfortunately bestowed on it a structure that needs urgent review to make it acceptable and legitimate to move to the new design of international financial architecture.
  1. As indicated earlier, addressing the Governance issues at the Fund will also require changes in the size and composition of the Executive Board which brings with it the issue of the organizational structure of the Fund.
  1. The IMF’s structure as constituted in the Articles of Agreement makes it ultimately accountable to the governments of its member countries. The issue is in the function of the institution.
  • At the Apex of its organizational structure is its Board of Governors, which consists of one Governor from each of the IMF’s member countries and an Alternate Governor. All Governors meet once each year at the IMF- World Bank Annual Meeting; 24 of the Governors sit on the International Monetary and Finance Committee (IMFC) and meet twice each year.
  • The day-to-day work of the IMF is conducted by its 24-member Executive Board, guided by the IMFC and supported by the IMF’s professional staff. The Executive Board usually meets three times a week, in full sessions, and more often if need be, at the IMF’s headquarters in WashingtonD.C. Of the 24 Executive Directors on the Board, 8 are appointed by single countries – the IMF’s largest quota-holders (The United States, Japan, Germany, France, the United Kingdom, China, Russia and Saudi Arabia). The other 16 Executive Directors are elected for two-year terms by groups of countries known as ‘constituencies’.
  • The Managing Director is head of the IMF staff and chairman of the Executive Board, and is assisted by three Deputy Managing Directors.
  1. The Executive Board of the Fund has extensive and different responsibilities from that of an ordinary Corporate Board. The Executive Board takes virtually all the key decisions within the Fund and is more or less an operational body. In principle, it decides what financial instruments the Fund has at its disposal and even recommends key decisions on quotas, SDR allocations, gold sales, etc. to the Board of Governors.
  1. Thus the Fund’s Executive Board is not simply an oversight body. It is central to the operational decisions taken in the Fund. So it is directly involved in what it is supposed to oversee, blurring the issues of assignment of responsibility and accountability. Moreover, the individual Executive Director is a representative of the country or group of countries that appoint him,at the same time he/she is also an official of the Fund. His is the voice of a constituency and shapes the voice of the institution.