As finance ministers, bankers, and other interested parties from around the world flock to Washington for the semi-annual IMF-World Bank meetings, the Fund is experiencing its most serious infighting in decades. The fight is over how to give a bit more voice to governments representing the majority of the world’s people. Ironically, the quarrel is mostly between the United States and Europe.
Some background: the International Monetary Fund (IMF) was created in 1944, when the United States was the only industrial economy to emerge in one (much bigger) piece from the ruins of World War II. Washington has therefore had a veto and overwhelming influence over IMF decision making ever since, with Europe and Japan playing the role of subordinate partners. The borrowing countries – low-and-middle-income countries who were often drastically affected by IMF decisions – have had little or no say.
The decades-long struggle to change voting shares has so far produced only tiny results. Now the rich countries have agreed to shift possibly five percent of voting shares from rich to developing countries. But they can’t agree on who will give up some of their influence.
The struggle comes at a time when the Fund’s power has increased exponentially in less than four years. Since 2007, the IMF has tripled its resources from $250 billion to $750 billion, and is aiming for $1 trillion. It has also, for the first time in decades, extended its influence over macro-economic policy to some high-income countries – particularly the weaker economies of the Eurozone, such as Greece, Spain, Portugal and Ireland.
The IMF has also gained a lot of influence in Eastern Europe, where IMF loans to countries such as Poland, Hungary, Ukraine and Latvia have shaped their post-crisis recovery – or in some cases, non-recovery. Although it is subordinate to the European Commission and European Central Bank in this area, the combined influence of the IMF and European authorities has been overwhelmingly negative: the weaker Eurozone countries are adopting austerity policies that are pushing their economies back toward recession, while countries such as Latvia have suffered a world record loss of more than 25 percent of GDP.
This has been the problem for at least four decades: IMF loans have carried conditions that too often inflicted unnecessary pain on borrowing countries. This includes not only the inappropriate, pro-cyclical macro-economic policies (column on Europe; Spain paper) currently being implemented in Europe and in many other developing countries, but also IMF conditions that have made it difficult or impossible for developing countries to pursue the development strategies that made the rich countries rich.
What to do? The shift of a few percentage points of voting shares or executive board seats is largely “cosmetic,” as the Financial Times noted. The disenfranchised countries representing most of the world aren’t using the power that they already have within the IMF. For comparison, look at what these countries have done in the World Trade Organization (WTO). The rules of the WTO are also stacked against developing countries. But at the 2003 ministerial meeting in Cancun a group led by Brazil and India decided that enough was enough, the talks collapsed. The dynamic between the rich countries and the majority within the WTO was permanently altered.
If a sizeable group of the world’s low-and-middle-income countries got together and acted as a bloc within the IMF, they could really make a difference, just as they did within the WTO. Although many middle income countries – in Asia and Latin America, and also Russia – said goodbye to the IMF after its dramatic policy errors of the late 1990s – they all, including even China, have a collective interest in fixing IMF policy because it influences the world economy. It’s true that the WTO formally operates by consensus, but in reality no one country blocks consensus.
Similarly, the rich countries in the IMF could not simply outvote the majority of the world if that majority were willing to put up a real fight. The Fund’s legitimacy – which it has sometimes been on the brink of losing — depends on the acquiescence of the world’s majority within its membership. It is long past due for the excluded countries to hang together at the IMF – or, for many of them, to continue to hang separately.
MARK WEISBROT is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.
This article was originally published by NYT/ International Herald Tribune.