Is there a democracy deficit at IMF?

Sugeng Bahagijo, Deputy Executive Secretary, International NGO Forum on Indonesian Development (INFID), Jakarta, sugeng@nusa.or.id

Currently, reforms at the International Monetary Fund (IMF) are underway, including on the debt front. But for the developing and poor countries, the reforms are missing one big issue: The governance questions. The existing formal decision-making is far from democratic: it lets only the G-7 or G-10 steer the IMF; while developing and poor countries practically have no say in the design, policies and programs of IMF. Unless those democratic deficits are soon to be addressed, the current reforms do not have credibility.

After five years of financial crisis in 1997, and the failure of the IMF program to assist indebted countries on its economic recovery, the IMF is said to have gone under numerous reforms. How far have the IMF reforms genuinely assisted the poor and developing countries?

One way to check how far the reforms of the global financial infrastructure are, is to watch closely how the IMF proceeds. The benchmark to be used is the governance issue: Whether Jakarta or Buenos Aires or Istanbul has equal say in the IMF, as does Washington or Tokyo? The activist said that unless this democratic deficits are being solved, the ongoing reforms of the IMF are just another "old wines in new wineskins".

The IMF is one of the most important players in the crisis prevention and management business. The IMF is supposed to be able to detect the likely crisis. It should be able to function as an earlier warning system of the global financial world. It is supposed to inform the market and its members about impending crises. The IMF is also given the huge power and resources to deal with such crises. The market uses IMF as one of most important benchmark in decision-making. Its members expect that in time of crisis, The IMF will lend their hand at a minimal cost, not maximum.

The international community, G-7 in particular, and the IMF leaders have admitted the need to reform the institution. Recent UN conferences -- Financing for Development (FFD) in Monterrey and WSSD in Johannesburg -- all acknowledged the need for reforming global financial design and governance. The active participation by developing countries in Monterrey and WSSD in South Africa shows what is at stake.

How is the decision-making process being reformed so that "ownership" is not merely a slogan? How could the inclusive development be put into reality? The crisis in Turkey and Argentina is the latest case which shows the limits of IMF interventions and the current reforms.

Some progress is there, but they should be broader and faster than the current move.

It is true that we have seen several moves initiated by the IMF leadership, including the establishment of the Independent Evaluation Office, the proposal for a Sovereign Debt Restructuring Mechanism (SDRM) by Anne Krueger and the refocusing on poverty reduction as its goals, especially in the poor and developing world.

For the developing countries, there is a lot of hope on the three initiatives. The type of IMF programs, the debt crisis and the poverty impact of the crisis are all relevant questions.

Partly as a result of criticism from many quarters, the evaluation office is expected to provide the IMF with second opinions and critical input, i.e.: Whether the program and policies are working and successful, or are the Fund's policies and programs simply failing? Indonesia is part of the program being evaluated, together with Brazil and South Korea.

Krueger's SDRM proposal is basically recognition that the existing debt mechanism (Paris Club among others) is inadequate and therefore the world needs a better one. The Krueger proposal promised an efficient and predictable sovereign debt resolution.

One missing agenda of the current reform process at the IMF is the questions of governance. How much the poor and the developing countries steer the design and the policies of the Fund? Can the decision-making at the IMF could be reformed to reflect greater interest and needs of the developing countries? And finally, what would it entail for those changes to occur?

Voting systems at IMF are determined by the volume of capital contribution rather than a one-country-one-vote system like the UN. Neither does it take into account the size of the population, or the severity of poverty. This system is modeled on the 1940s economy. Because of the size of its economy, the U.S. alone holds 17.29 percent, and the G-10 industrialized countries as a bloc hold 52 percent. While the 172 other countries hold the other 48 percent. Indonesia, for instance, has less than two percent of the votes.

The decisions are made based on 85 percent of votes. It is obvious that the 10 industrialized countries can outvote the 172 poor countries. As Evans and Finnemore aptly stated, "voting power is structured so that the Fund is incapable of taking any action that industrialized countries feel contradicts their national interest or the interest of private actors based in their jurisdiction." (Organizational Reform and the Expansion of South Voice in the Fund, G-24 Discussion Paper, 2001).

The Executive Directors (EDs) are the day-to-day power- holders, while the Board of Governors at the top of the ruling body, meet only twice a year. The EDs, together with the IMF staff, decides programs and policy, including which countries are to be assisted, how much will be committed, and what kind of conditions will be applied. The Executive Directors consist of 24 members, 13 from rich countries and 11 from the developing world.

It is true that the developing countries are represented at the IMF and World Bank. But is insufficient in terms of their ability to meaningfully steer the direction of the IMF and the global economy.

Moreover, as the developing and poor countries will be the majority of IMF patients, and as such they will be the one to pay the risks and the costs. The policies and programs need to be fully shaped and endorsed by them. Otherwise, it would repeat the old paradigm where Washington (or London) consensus is the source of the economic doctrine. Again, the kind of economic reform being proposed is important. Yet, equally important is the issue of participation of the developing and LDC countries.

One may do well by reading a paper by Griffith-Jones and Ocampo's What Progress On International Financial Reform (2002). True that there is partial progress in few areas, but it convincingly shows the need for broader and deeper reforms than the current one.

It suggests that current reforms "suffer four serious problems": (1) there has been no agreed international agenda and the current priorities are mostly set by few industrialized countries; (2) progress is imbalanced, and most of it is on the level of developing countries, while less progress is on international and regional; (3) some of the progress could easily be stopped and reversed as a result of the opposition from developed countries; (4) insufficient participation by developing countries.

It is also clear that the weaknesses on the side of the developing countries' capacity in policy negotiation are also part of the problem. As in football, it is the time for Jakarta or Istanbul to stop playing a passive, defensive style. It is time to put more skill and effort into playing "total football" ala Holland or aggressive one ala British soccer.