Will the IMF survive to 100?

WASHINGTON, DC — The International Monetary Fund (IMF) has been operating for almost 80 years, yet its decision-making still reflects the era of Western colonialism in which it was founded. Although virtually all sovereign states are formally represented in its governance structure, a small cohort of Western nation-states, representing 15 per cent of the global population, calls the shots.

Yet the world has become much more “multipolar” over the past decade, and China has begun to challenge America’s longstanding hegemony by building “infrastructure alliances” with many developing countries. In a deepening new cold war, the United States is going all out to “contain” China, even as the two maintain a high degree of economic interdependence (making this conflict fundamentally different from the one with the Soviet Union).

The US and Europe, for their part, are determined to preserve their dominant positions within powerful international organisations like the IMF and the World Bank, which they intend to use as geopolitical instruments. Countries that comply with their wishes will be rewarded, whereas those that show resistance or hostility will struggle to unlock financial support, even if they are willing and able to pursue robust macroeconomic-stabilization and structural-adjustment programs.

For example, after Russia’s annexation of Crimea in 2014, the IMF extended Ukraine a very generous financing package on terms that many saw as overly lenient. Likewise, Argentina has benefited massively from the IMF’s serial forbearance. As for the IMF’s withholding assistance from countries hostile to the West, little public information is available because these cases are never brought to the Board, they are decided backstage; and the countries themselves have no incentive to speak about it in public lest it hurt their standing in financial markets. But it has come to be known that Syria, Venezuela and Mali (after it ousted the French) were recently all turned down (a staff agreement reached with Mali earlier this year has not yet been approved).

The long-term consequence of these trends is that the IMF’s decision-making has become increasingly inconsistent with advanced economies’ own desire to maintain the Fund’s global standing. After decades of proclaiming universalist principles, its legitimacy is now on the line.

To keep under-represented countries engaged, the IMF must reduce the imbalance between the relative “weight” of a country (or set of countries) in the world economy and the relative weight of a country within its governance structure. The most glaring case, of course, is China, given the massive gap between its (large) share of world GDP and its (small) quota, which determines a country’s voting power and allocation of Special Drawing Rights (SDRs), the IMF’s international reserve asset. While China’s share of world GDP (in terms of purchasing power parity) is estimated at 19 per cent for 2024, its quota (and vote share) has remained at 6.4 per cent since the 14th General Review of Quotas in 2010 – though its “calculated quota” under the current IMF formula is 14 per cent.

While this is an extreme case, the entire bloc of emerging markets and developing countries (EMDCs) is also underrepresented relative to their GDP share. If the imbalance were corrected, China and EMDCs would gain significantly more influence at the expense of European countries, in particular. The big question, then, is how a rebalancing could ever be achieved, given that the Americans and Europeans wield veto power. If the US and Europe see China as an existential threat to the “international rules-based order,” why would they let it call the shots in an international financial organisation that they have controlled for the past 80 years?

In fact, neither US nor European officials can spell out exactly what they mean by the “international rules-based order.” The concept remains only vaguely defined, as does the “existential threat” from China. Both claims serve as glue for the ruling Western coalition, which now takes the form of a “stop China” project. As Giordano Bruno exclaimed while he was being burned at the stake in Rome in 1600: “To ask power to reform itself, how naive!”

Weights and measures

The single most important variable here is the quota. A country’s quota determines how much it must contribute to the IMF’s capital base, how much it can borrow from the Fund, and how many votes it has on the Executive Board. While formal votes are rarely taken, the chairperson (almost always the managing director or a deputy managing director) will offer a “sense of the meeting,” and this assessment is inevitably shaped by the skewed voting distribution on the board.

Under the so-called rule of silence, those who do not object to (or abstain from) a decision proposed by management are counted as being in favor. Thus, while some commentators argue that changing the vote distribution would make little difference, the truth is that a significant enough rebalancing would alter the board’s decisions beyond recognition.

In the Fund’s formula to determine each country’s calculated quota, GDP (60 per cent assessed at market exchange rates, and 40 per cent at PPP exchange rates) accounts for 50 per cent of the weighting, scores of openness to the global economy and economic variability (volatility) account for 45 per cent, and international reserves for the remaining 5 per cent. (A compression factor is applied to benefit smaller countries.)

The significant weight given to openness and variability helps to skew the allocation in favor of developed countries. EMDCs on the board have long pressed for a change to increase the weight of GDP (specifically as measured by PPP) and to remove or lower the weight of “openness” and “variability,” but to no avail. Moreover, the actual quota can be adjusted ad hoc – allowing it to diverge from the calculated quota – and there are no codified rules for this process. Hence, the allocation has varied from quota review to quota review.

In the 14th review, some EMDCs, including China, did manage to increase their quota shares, and European member states agreed to give up two of their seats on the 24-seat board. But while these changes were considered forward-looking at the time, they now call for three points of clarification. First, China was still dramatically underrepresented given its share of global GDP. Second, the US Congress declined to ratify the quota changes, and its procrastination lasted until 2015. Third, Western European member states managed to ensure that the two seats they gave up went to EMDCs in Eastern Europe, leaving Europe overall with the same representation.

Nonetheless, compared to other quota reviews over the past two decades, the 2010 review, together with the 2008 Quota and Voice Reforms, was relatively successful in making small but meaningful changes in favor of under-represented countries. It also demonstrated that the ostensibly technical business of quota allocation is, in fact, highly dependent on geopolitics.

After all, there were two main reasons for EMDCs’ modest gains. First, because the North Atlantic bloc was still recovering from the 2008 financial crisis, it was hesitant to push back with its usual arrogance. Second, the Obama administration’s “pivot to Asia” created a rift in the North Atlantic world, and implied that the US was more supportive of various multilateral initiatives led by the BRICS (Brazil, Russia, India, China and South Africa) and other countries across the Global South.

Nothing like these two factors has been repeated since the 14th review. The 15th review, in 2017, sought to change the quota formula to give more weight to GDP; but no real progress was made. The 16th review, which concluded in December 2023, tried again, but failed to reach an agreement on any changes to the formula or other determinants of countries’ influence in IMF decision-making.

While the executive directors agreed on a 50 per cent “equiproportional” increase in overall quotas, the distribution between states remained unchanged. Moreover, this change comes with a corresponding “roll-back” in borrowing from member states, leaving the Fund’s total lending power (quotas plus borrowing) unchanged. More promisingly, the latest review added a third executive director position for Sub-Saharan Africa, bringing the size of the board to 25 seats. The 45 Sub-Saharan African member states will now be divided into three constituencies.

Listing dangerously

Still, with almost no change in the distribution of quotas in favor of EMDCs, the allocation has become increasingly detached from economic reality. To see just how over-represented Europe is, consider that Luxembourg, a minnow of a country, has a much higher calculated quota share than Colombia, the Philippines, or Egypt. Similarly, Argentina, South Africa and Nigeria each have smaller shares than Ireland, and Brazil and Indonesia have smaller shares than the Netherlands.

In fact, the European bloc is over-represented across all three dimensions of influence. First, in terms of quota shares and votes, the European Union’s 27 countries produce 15 per cent of world GDP (at PPP) and have almost 30 per cent of quotas and voting power. If the United Kingdom is added, Europeans have over one-third of quotas and votes. Second, European countries hold 7-9 positions on the 24-seat board. And third, the two top positions at the Fund, the managing director and the first deputy managing director, are de facto reserved for a European and an American, respectively (mirroring the US-European agreement that an American will always lead the World Bank).

Yes, legally speaking, the managing director and deputy managing directors are not national or regional representatives. Like the rest of the staff, they owe their loyalty exclusively to the institution. But nationality always counts, especially during crises. Since IMF managing directors are always Europeans, they will always be somewhat biased toward European preferences. That is just human nature.

How much does it matter that the 15th and 16th reviews failed to change the distribution of quotes, despite their (ambiguous) commitment to do so? The consequences depend on how EMDCs react. Should they keep trying to promote piecemeal reforms, pursuing marginal changes that avoid American and European vetoes? Or should they shift their attention to creating alternative financing mechanisms over which they have more control?

The BRICS-led New Development Bank and Contingent Reserve Arrangement, along with the Chinese-led Asian Infrastructure Investment Bank, already bypass Western-controlled institutions. Unless the IMF and the World Bank give EMDCs a greater say in their decision-making, we can expect their global influence to wane. However, if these countries are brought fully into the fold, we can expect that they will contribute more to both institutions’ lending capacity.

Evolution over revolution

For all the difficulties of changing the distribution of influence within the Fund, there are still incremental reforms that could improve matters. They would not challenge the US, European, and Japanese grip on influence, but they would improve how the Fund works in practice, as well as disproportionally benefiting smaller and poorer countries. Such a reform agenda might include the following elements.

First, the IMF can reform its macroeconomic adjustment programs so that they are more flexible, even-handed, and precisely tailored to financially distressed countries’ circumstances. This means avoiding the biases that are evident in the Fund’s current approach, such as its preference for sharply restrictive fiscal and monetary policies even in cases that call for gradualism. Overly harsh policies can trigger vicious cycles in which economic activity collapses and weakens the fiscal position further, leading to even more social hardship and political resistance.

Similarly, a morally tinged bias against overspending (typically expressed by the German government) often leads the Fund to intensify its prescribed austerity, as does Western hostility toward countries that are not deemed sufficiently deferential to Western wishes. And, as a more general matter, the Fund should bring in economists who are familiar with the weaknesses of standard macroeconomic models, then revise its adjustment policies and conditionalities accordingly.

A second reform would reduce surcharges, the higher interest rates that the IMF charges on larger, longer-term loans. Most people don’t realize that borrowing from the Fund is typically quite expensive for middle-income countries in crisis. Some countries have paid an annual interest rate of 8 per cent or higher, even when market interest rates are much lower (but which countries in crisis cannot access).

The Fund justifies high surcharges by pointing out that it is assuming additional risk when it lends large amounts on longer maturities to a country in crisis. But this argument ignores a key fact: the risk of lending to any one country is spread among a large number of creditor countries. In any case, the Fund holds large liquid reserves that can be quickly mobilised.

Here, at least, there is progress. On October 11, Managing Director Kristalina Georgieva announced that “the Executive Board has reached consensus on a reform of IMF charges and surcharges. This will lower borrowing costs for our members by 36 per cent, while preserving the IMF’s financial capacity …”. The reductions are due to come into effect on November 1.

A third reform is to increase concessional finance for low-income countries. If Western member states cannot be persuaded to increase their financial contributions to the Fund’s Poverty Reduction and Growth Trust for low-income countries, perhaps middle-income countries like China, Indonesia, Brazil, and Mexico could do so in return for a larger share of votes.

Fourth, the IMF should expand its lending resources. True, as matters stand, any proposal to do so will face opposition from US authorities (both the Treasury and Congress). Americans have long been suspicious of international public bureaucracies, and there is also a strong desire to preserve the US Federal Reserve’s powerful role as an emergency lender to friendly client countries (such as South Korea during the East Asian financial crisis in 1997).

But remember that the 16th review delivered a 50 per cent equiproportional increase in quota contributions, matched by a corresponding reduction in the amount the Fund could borrow, leaving its total lending resources unchanged. If this rollback in borrowing was rescinded or at least mitigated, the result could be a significant increase in the Fund’s lending resources. Precisely because this method of increasing the Fund’s lending capacity is so obscure, it is possible that the US Congress could go along with it.

Fifth, IMF management can try to raise the proportion of basic votes to total votes. Basic votes are allocated in the same number to each member country, and thus can reduce the bias in favour of larger, wealthier countries. Giving them more weight would seem to be an obvious way to integrate smaller, poorer countries into the Fund. Of course, there are constraints: an increase would require a change in the IMF’s Articles of Agreement; and it could not be done on a scale that would bring the US share anywhere close to the veto threshold of 15 per cent. Still, this leaves ample room for an increase.

Sixth, the IMF needs to ensure that the third board chair for Sub-Saharan Africa represents a sizable number of countries. That means avoiding what happened at the World Bank, when an additional seat for Africa was seized by three big countries, with the other two African board members representing almost as many countries as before (a burden that leaves them overworked and stretched too thin).

Lastly, there should be a fifth deputy managing director. After the managing director (always a European) and the first deputy (always an American) are deputy positions filled by Japan, China, and one EMDC. The last post should be divided into two, with one held by a low-income country and the other by a middle-income country. This particular proposal is unlikely to face much resistance from the Western member states, considering that it has been advanced by none other than the US Treasury.

Do or die

The IMF’s management should take these proposals seriously, if only to compensate partly for the failure to achieve the 15th and 16th reviews’ quota-related goals. The Fund’s shareholder governments, its management, and everyone who values multilateral economic cooperation should bear in mind the fate of the World Trade Organisation. Even though the reasons for the WTO’s loss of effectiveness are different, its fate is a preview of what awaits the IMF if the US and Europe continue to resist common-sense changes to give voice to the developing and emerging economies that now represent 85 per cent of the world’s population.

Paulo Nogueira Batista, Jr., is a former executive director at the International Monetary Fund and a former vice president of the New Development Bank. Robert H. Wade, Professor of Global Political Economy at the London School of Economics, was awarded the Leontief Prize for Advancing the Frontiers of Economic Thought in 2008.