Is there a democracy deficit at IMF?

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.