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Options for democratising the World Bank and the IMF - Paul Ladd
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4. Options for reform
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Allocation of votes
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Increasing the basic vote
The IFI voting system was established as a compromise between one-country-one-vote and one-dollar-one-vote. With the decline in the basic vote the system has moved much closer to the latter. With the aim of moving to a system based on one-country-one-vote, an interim arrangement in which the basic vote allocated to all members was increased would serve to strengthen the voice of poorer countries (Woods 1997, Bradlow 2000, Buira 2002, Kelkar 2003).
Within that context, one proposal is to increase the basic vote to 18.3 per cent, giving each member country a minimum 0.1 per cent of the vote. This would result in a combined vote for developing countries (including votes linked to quotas) of 53 per cent, which would give them a slight overall majority. It would also reduce the US share to 14.74 per cent of total voting power and therefore remove its veto (Buira 2002).
A developing-country majority would seem particularly appropriate for the World Bank given that, unlike the IMF, developing countries are the Bank's sole clients. This would not be a precedent. The constitution of the Inter-American Development Bank (IADB) ensures that borrowers hold a majority of shares. At the Asian Development Bank (ADB) the basic vote amounts to 20 per cent of all votes. This proportion of the basic vote to the total vote is maintained in the ADB's constitution. Similarly, for the IFIs, once an increase in the basic vote has been agreed, the Bank and Fund's articles of agreement should be amended to ensure that future capital/quota increases do not erode again the proportion of the basic vote relative to the total number of votes, although the option should remain to increase the proportion of the basic vote (Buira 2002).
It should be noted that a substantial increase in the basic vote would increase the power of the smaller developing countries at the cost of the larger developing countries (such as India, China, Mexico and Brazil). To avoid the latter group blocking such a proposal, it would be necessary also to selectively increase the quotas of these countries and reformulate the quota formula to better reflect the relative weight of these countries in the global economy (Buira 2002).
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Double majorities
A complementary option would be to require a double majority for decisions requiring a special majority
(ie more than 70 or 85 per cent in agreement). The majorities of both developed and developing countries should
be in favour for a decision to be accepted. Alternatively, a vote could require a majority of EDs to support a
measure as well as a majority of votes/shares; the equitability of this option would be enhanced if more board seats
were allocated to developing countries (see below).4
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Reforming the quota formula
The use of the quota formula to determine amounts to be paid to the IMF,5
voting allocations and borrowing limits is no longer useful. This practice reflects a period when all members were expected both to contribute and borrow from the IFIs. To improve transparency, there should be separate mechanisms to determine:
- IFI contributions
A country's contribution to IFI resources should be based on its ability to pay.
- Borrowing limits
Access to resources should be determined on the basis of need, with an upper limit established to ensure sufficient resources remain for the use of other members.
- Voting allocations
Until a system of one-country-one-vote is introduced, allocations of votes additional to the basic vote should be determined according to a transparent formula based on economic size and population size. GDP should be calculated in relation to purchasing power parity (PPP) rather than market exchange rates, in order to more accurately represent the real size of developing countries' economies (Woods, 1998, Kelkar 2003). Whether a country is a borrower or a creditor to the IFIs could also be taken into account with the former receiving a higher weighting.
To ensure transparency and good governance, the formulas should be strictly applied so that each country's voting allocation is impartially derived from the formula rather than serving as a guideline for political negotiation. No country should have a voting share that would give it veto power, as this fundamentally contradicts the principles of multilateralism.
Increasing and/or reallocating seats
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Seats on the board
There has been some discussion about increasing the number of seats on the board (Griffith-Jones 2002, Evans and Finnemore 2001). Logically, this is appropriate since membership of the institutions has grown considerably more than the board, forcing constituency sizes to grow. Since 1944, the number of members has increased from 39 to 184 countries, while the number of EDs has only risen from 12 to 24. Griffith-Jones proposes that one new seat should be created for sub-Saharan Africa, while Evans and Finnemore advocate two more seats. However, not even this proposal fundamentally addresses the imbalance of power between developed and developing countries and fails to acknowledge the growing influence of Asian countries.
The conservatism of these proposals reflects the argument of industrialised countries that expanding the board will impede the decision-making process. Clearly this would not be desirable. But it should not be assumed that the marginalisation of developing-country interests in the current process achieves equitable or appropriate decisions.
Limited board size need not be an impediment to democratic representation if seats were reallocated in favour of developing countries and constituencies reconfigured to achieve an equal number of constituents.
It is tacitly accepted that the countries with most votes, that is the industrialised countries, should be represented on the boards of the IFIs. This tends to reinforce the existing voting inequalities. IFIs have negligible policy influence over these countries; as a group, they tend to hold similar positions and are at similar stages of development. Given the importance of the IFIs in developing countries, and their diversity, it is arguable that the majority of seats should be allocated to them. This would go some way to achieving a better balance of power and introduce a wider range of views into discussions.
The obvious candidates for a reduction in seats are the European countries which have the largest number of representatives on the boards (holding 8/9 seats out of 24), particularly since five of these countries (Belgium, Netherlands, France, Germany and Italy) are part of the Euro currency system.
Ultimately, it would be desirable to move to a structure where there:
- are no single-member constituencies
- are no more than eight countries per constituency (originally EDs represented no more than five countries)
- is no permanent representation by any one country of a constituency, with terms fixed for a maximum of three years.
Constituencies could be reallocated in a number of different ways, any of which would mark an improvement. For example, constituencies could be grouped:
- into an equal number of low-income, middle-income and industrialised country constituencies
- so that each constituency includes an even spread of countries at different stages of economic development
- according to population size, so that each constituency represents a roughly similar number of people
- by region.
It would be preferable if constituencies could include a number of these features (Wood 2001).
In addition, since the executive boards are supposed to oversee the management and staff of the IFIs, it is inappropriate that the chairs of the boards are the managing director and president. This leads to the perverse position that the board tends to be dominated by the staff. It would be more appropriate if the chairs were rotated amongst the EDs with each serving a six month or one year term. This would ensure that the executive board rather than the managing director or president set the board's agenda.
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The IMFC and Development Committees
There is no convincing reason why the IFI oversight committees should have more developed-country than developing-country members. The current allocation of seats simply replicates existing inequalities. A better arrangement would be to allocate seats equitably between industrialised, emerging-market, middle-income and least-developed countries, with an equitable regional spread. To expand representation, those countries with representatives on the executive boards should not be allowed to appoint representatives to the oversight committees. Terms of office should be fixed and rotated every three years.
Changes also need to be made to the election of the chair. The chair of these committees is an important position offering significant opportunities to set priorities for discussions and influence debates. Unlike the chair of the Development Committee, which rotates every two years, the chair of the IMFC can be held for as long as s/he maintains the support of the committee. Also unlike the Development Committee, the chair has never been held by a developing country. This practice should be revised so that the chair rotates among all members of the committee.
There has been some discussion of transforming the IMFC into a council that would have greater formal involvement in key IMF decisions. The same should be considered for the Development Committee. At present, both committees have an advisory role, and help direct the IFIs, but they have no formal role in decision-making.
Increasing resources to address capacity
IFI resources allocated to ED offices are distributed equally, regardless of how many countries the office represents. This gives a greater benefit to the single-country constituencies and to those who do not represent programme (borrowing) countries, both of which have a much smaller workload compared to those ED offices which represent large groups of programme countries. This system should be replaced by one in which resources are allocated according to the number of countries in each constituency and whether these are programme countries. Developing-country constituencies would thereby receive more resources. One way to achieve this objective would be to transfer staff from single ED offices and smaller constituencies to the larger ones.
Transparency of board decisions
The IMF must be more open about its proceedings and give a greater voice to developing countries when discussing issues of direct relevance to their economic well-being. Hence we believe there is a case for publishing both the agenda and minutes of the executive board meetings.
UK Treasury Committee Third Report, 1999-2000 session
Transparency of board decisions must be improved. The board should hold formal votes and publish the results of how each country or constituency voted. A second-best option, should consensus decision-making be retained, would be to require EDs to publish the statements they make to the board. In both cases, detailed minutes of board meetings should be published within two weeks.
Making public the minutes of IMF board meetings would help to clarify the positions of both board members and management. Objections to making minutes public may be raised on the grounds that discussions would be less frank. However, the UK government's experience of publishing the minutes of Monetary Committee meetings is that the benefits of transparency outweigh the costs. The minutes should specify which executive directors have expressed support for a decision, and which have withheld support or proposed amendments.
Selecting IFI leaders
In all of these [international] institutions, the UK government favours open and competitive processes for the selection of top management. This could include a definition of the competencies for the post, selection and search committees and a clear process for taking the final decision, in which competence would be put above considerations of nationality.
UK government, 2000
The report by two ED committees investigating the IFI leadership selection process following the appointment of Horst Kohler as IMF managing director in 2000 made useful recommendations on the search and selection process. But the report failed to tackle the fundamental issue of the nationality of candidates.
The following proposals would go some way in moving towards a more fair and equitable appointment procedure:
- the establishment of a search committee to assist and oversee the whole process, formed from a grouping of knowledgeable outside experts
- that all IFI members should be able to nominate candidates, with no limitation on nationality
- that candidates are interviewed by the ED committee, with proceedings open to all EDs (who attend in an observer capacity)
- that selection is made in a two-stage voting process whereby the first two candidates from the first round are shortlisted for a final round of voting. The winners of the first round are made public prior to the final vote
- that each member has one vote.
In addition, it is inappropriate that the US should appoint the deputy managing director at the IMF. All senior management posts should be appointed in accordance with transparent, competitive procedures.
Footnotes:
- In the Global Environment Facility (GEF), a double majority is required for decisions that cannot be reached by consensus. A vote requires that a majority (60 per cent) of the total number of participants in the GEF must be in favour as well as a majority (60 per cent) of contributions to the fund (Woods 1998).
- The World Bank does not adhere to a formula but allocates shares according to market size, roughly paralleling the allocation in the IMF.
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