IMF reform: A late (and incomplete) diplomatic victory for the BRICS grouping
After waiting for the implementation of IMF quota reforms for more than five years, the BRICS grouping can finally celebrate an important victory: Now implemented, the reform shifts six percentage points of total IMF quota to developing countries. With 6%, China is now the third largest quota-holder at the Fund (second only to the US and Japan), and Brazil, Russia, and India (increasing from 2.3% to 2.6%) all become top-ten quota-holders, along with the U.S, Japan, France, Germany, Italy, the U.K., China and Russia. U.S. voting power decreases slightly but Washington maintains its veto. In addition, in reforming the Fund's Articles of Agreement, the change moves two of the 24 IMF directorships from European to developing countries.
IMF quota reforms were approved by the IMF Board of Governors in 2010. At the time, the IMF rightly hailed these steps as "historic" and pointed out that they represented "a major realignment in the ranking of quota shares that better reflects global economic realities, and a strengthening in the Fund's legitimacy and effectiveness." Yet the reforms were subject to approval by national governments, including a deeply partisan U.S. Congress, which took until last December to ratify the move.
Despite a 5-year delay, the implementation of IMF quota reform shows why the BRICS grouping matters: The 2010 reform was the first tangible example of how the five countries could increase their leverage in international negotiations by working together. The need to adapt global institutional structures to today's distribution of economic power was the central demand in the BRICS grouping's communiques at the time. While skeptics may argue that the reforms would have been agreed on even without the existence of the BRICS grouping, it can hardly be denied that their capacity to speak with one voice and coordinate their call for change at the height of the financial crisis enhanced their influence.
The implementation of the 2010 reforms is also a victory for the IMF, which is set to gain legitimacy in the eyes of policymakers in Beijing, Delhi and Brasília. It reduces the chances of a rival institution emerging, as has been the case with the New Development Bank and the Asian Infrastructure Investment Bank, which reduce the role of the World Bank and the Asian Development Bank.
And yet, the BRICS' victory is incomplete, for a key demand to democratize the IMF remains unanswered. At the G-20 Summit in 2009, global leaders announced that the heads of international financial institutions "should be appointed through an open, transparent, and merit-based selection process." In 2011, however, European leaders failed to honor their promise and insisted on a European to replace Dominique Strauss-Kahn as director of the IMF -- at the time, using the spurious argument that a European would be most adequate to address the financial crisis in Europe.
The French government has now nominated Christine Lagarde for a second 5-year term, maintaining a gentleman's agreement, in existence since 1946, that a European should always lead the Fund. Great Britain, Germany and Italy have already endorsed her renewed candidacy, and even China, Mexico and South Korea have signaled they would probably endorse the 60-year old former French Minister of Finance. A French man or woman has been at the IMF helm for 41 of its 69 years of existence. Unless Lagarde stumbles over a scandal at home (she will stand trial for a controversial settlement she authorized between with a convicted businessman in 2008), France will hold on to the IMF directorship until 2021.
Aware of this anomaly, Lagarde has actively defended emerging powers' interests at the Fund. Most notably, she built consensus for China's yuan to be added to the major reserve currencies used to calculate the Special Drawing Rights (SDRs) in which the IMF lends to member countries.
Several policy makers and commentators have argued that Lagarde is likely to be the last European to lead the IMF for some time, since political pressure by emerging powers will be too great to maintain Western control of the selection process. Yet that was already true in when Strauss-Kahn was ousted from the fund. Of course, with the reforms implemented, emerging powers now have an unprecedented degree of influence, which should make ending Western control of the selection process fairly easy. Still, unless policy makers in Brasília, Moscow, Delhi, Beijing and Pretoria build a broad alliance and agree on one name, Europeans won't think twice before promoting their candidate. Given Lagarde's legal troubles at home, it may be wise to start the discussion at the next BRICS Summit in India.
Photo credits : AFP