Opinion - Editorials

Reforming in parts

The attempts by India and a number of other developing countries to reform the opaque governance system of the International Monetary Fund, though not wholly successful for now, may not be in vain. Finance Minister P. Chidambaram's articulation of India's stand on reforming the IMF at the recently concluded IMF-World Bank meetings at Singapore is both relevant and timely. The most significant development was the "rebalancing" of quotas. The quota is the money each country contributes to the IMF and is also reflective of that country's voting rights in the organisation. It is supposed to bear a nexus with a country's place in the world economy, its openness, and certain key variables such as the size of its external reserves. Some of those criteria are perception-driven and hence marked by subjectivity. The fact that India could not find a place along with China, Mexico, Turkey, and South Korea that were given larger quotas and hence increased voting rights, is no doubt a matter for some consternation. No valid explanation was forthcoming. It was however suggested that the just-approved first major overhaul of the IMF structure since its founding in 1945 will be followed by other measures in the next stage and they would presumably include a more accurate acknowledgment of India's economic strengths.

However, the first phase of reform overwhelmingly approved by the governing council notwithstanding, the case against ad hoc responses to the vexed issue of sprucing up IMF governance has never looked stronger. The basic flaws in the IMF structure remain, with not even a hint that some of them will be remedied in the next phase of reform. A largely Eurocentric organisation, the IMF has invariably had a European as its Managing Director. Although the organisation has 184 members, it is virtually run by just seven of them. The United States will continue to have a veto power over major IMF decisions. Its voting strength, though marginally reduced, is still above 17 per cent — enough to deny the 85 per cent support required for any proposal to go through. While the IMF's functioning has been made somewhat inclusive by increasing the share of basic votes, the first stage of reforms cannot be said to have succeeded in its mission of giving more voice to countries that now have a larger share in the global economy. The growing disconnect between those who have a say in IMF's policy-making and governance and those that depend on it for structural loans will be further accentuated. China and South Korea — the latter was ravaged during the late 1990s by faulty external sector policies partly attributed to the IMF — have by now strong external balances. For them and many other emerging economies including India, recourse to IMF funding to overcome balance of payments problems is highly unlikely. The IMF, on its part, has moved away from its past practice of micro-managing economies of countries that have had structural problems. Still, there is as much to be reformed in its surveillance and early warning practices as in its governing structure.

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