Much attention of late has been focused on the underdeveloped governance structure for managing the euro zone, which has been trapped in an ongoing economic and financial crisis for some time. This attention is deserved, as good governance establishes clear delineation of responsibilities and accountabilities and provides for clear decision-making rules. Europe’s failure in recent years to address its governance gaps has significantly contributed to its inability to come to grips with the economic challenges it faces today. It provides the world with a painful example of the costs associated with neglect and inaction.

But alas, Europe is not alone in its failure to evolve its governance mechanisms to deal with current economic realities. The failure of the International Monetary Fund (IMF) to modernize its governance framework was identified some time ago as an impediment to allowing it to enjoy the broad support and play the central role envisaged for the organization when it was established. At a time when the IMF could be exercising a leadership role in ensuring the policy coordination and implementation among major economies necessary to achieve economic growth and financial stability, the failure to address its governance issues is denying the Fund (and the world) such an opportunity — at a cost to all of us.

In 2008, the IMF’s Independent Evaluation Office (IEO) issued a report on IMF governance that called for “major changes in the governance of the Fund to strengthen its relevance and accountability and allow it to continue to play a central role in global financial and monetary matters into the future.” The report went on to say that “Improving its governance is widely recognized as a critical element in enhancing the Fund’s relevance, legitimacy, and effectiveness.” A report prepared the following year by a high-level panel chaired by Trevor Manuel, then minister of finance of South Africa, echoed most of the conclusions and recommendations of the IEO report.

The G20 picked up the challenge and at its 2010 meeting in Seoul pledged to implement a two-step reform of the IMF’s governance. In their communiqué, leaders stated: “Today, we welcomed the ambitious achievements…on a comprehensive package of IMF quota and governance reforms. The reforms are an important step toward a more legitimate, credible and effective IMF, by ensuring that quotas and Executive Board composition are more reflective of new global economic realities, and securing the IMF’s status as a quota-based institution, with sufficient resources to support members’ needs.”

While many observers questioned whether the agreement reached was sufficiently ambitious (particularly as it failed to address at all many of the reform suggestions identified in the IEO and Manuel reports), many considered it at least a small step forward. The reforms reached were:

  • Shifts in quota shares (individual country shares in the IMF) to dynamic emerging market and developing countries and to under-represented countries of over six percent, while protecting the voting share of the poorest, to be completed by the annual meetings in 2012.
  • A doubling of quotas (IMF financial resources).  There was, however, to be a corresponding rollback of a back-up facility (the New Arrangements to Borrow [NAB]), when the quota increase became effective.
  • Continuing the dynamic process aimed at enhancing the voice and representation of emerging market and developing countries, including the poorest, through a comprehensive review of the quota formula by January 2013, to better reflect the economic weights, and through completion of the next general review of quotas by January 2014.
  • Greater representation for emerging market and developing countries at the executive board, by reducing the number of advanced European chairs by two, and the possibility of a second alternate for all multi-country constituencies.
  • Moving to an all-elected board, along with a commitment by the IMF's membership to maintain the board size at 24 chairs, and following the completion of the 14th General Review, a review of the board’s composition every eight years.

While these details may seem (and are) highly technical, the net effect was to have been a significant shift of voting power and representation (and therefore influence) away from the developed countries to the emerging markets and other developing countries, thereby engendering a broader sense of ownership and trust in the IMF.

However, the impact of the euro crisis distracted policy makers from making progress on the reforms, and by the time the subsequent 2011 summit in Cannes took place, leaders were humbled to simply saying, “We will expeditiously implement in full the 2010 quota and governance reform of the IMF.”

A complicating factor in making headway on IMF reform is that many of the proposed changes require parliamentary approval in most IMF member countries. At their spring meetings in April, the IMF was reduced to simply stating that these governance reforms were behind schedule and experiencing significant delay. The necessary approval has not been forthcoming (nor even requested) in many countries. The laggards include most European countries (including Germany) as well as the United States and Canada. In fact, only nine of the core 19 members of the G20 have taken action on the approval process.

Some cynical observers have said Europe is dragging its feet because it doesn’t want to dilute its influence at a time when it has become the biggest borrower from the IMF. This argument obviously does not apply to the non-European countries. Why then this failure to implement agreements? Whatever the reasons, is it any surprise that the credibility of G20 governments is found wanting? 

Once again we have seen the appointment of a European head of the IMF, and many are questioning whether the IMF has played an appropriate role in the ongoing European crisis (or simply fallen in line with European wants). Even the Canadian Minister of Finance, Jim Flaherty, has publicly raised the question of whether the IMF voting rules should be radically changed to temper current European dominance, which the stalled governance reforms were, in part, meant to address.

The IMF governance reform project has not progressed and, in some aspects, may have gone backwards. This leaves the Mexican G20 hosts in an unenviable situation. These reforms cannot remain in a state of limbo, as this will only continue to sap the legitimacy of the IMF. At the same time, simply repeating their continuing commitment to do what they have already said they would do, and haven’t, strains credibility at a time when the global economy can least afford it. Perhaps some honesty and straight talking should be the order of the day — it may be better for the G20 to recognize its failure to achieve the progress to which it had committed, and instead pledge to make real progress on a realistic time frame — perhaps by the end of 2014. But this should only be done if leaders are serious. More hollow words will only engender more cynicism. And more wasted time will only delay the strengthened, independent and unbiased global institution that the world economy requires.

 

 

 

Europe is not alone in its failure to evolve its governance mechanisms to deal with current economic realities.
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  • Thomas A. Bernes

    Thomas A. Bernes is a CIGI Distinguished Fellow. After a distinguished career in the Canadian public service and at leading international economic institutions, Tom was CIGI’s executive director from 2009 to 2012. He has held high-level positions at the International Monetary Fund, the World Bank and the Government of Canada. He became a distinguished fellow in 2012.

As leaders of the G20 nations prepare for their summit at Los Cabos, Mexico June 18-19, CIGI experts present their perspectives and policy analysis on the most critical issues, such as strengthening the architecture of the global financial system, food security, climate change, green growth, global imbalances, and employment and growth.