World Bank

More responsibility for developing countries

04/03/2011 – by Mario Stumm

Essays

Robert Zoellick, the World Bank president, with Wen Jiabao, the Chinese prime minister

Robert Zoellick, the World Bank president, with Wen Jiabao, the Chinese prime minister

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Last year, the World Bank reformed its voting rights system, shifting voting power from industrial to developing countries. That move has already brought about major changes – for one thing, emerging market countries such as China are assuming more responsibility and increasing their financial contributions. Germany and its European partners played a crucial role in bringing about reform at the World Bank and achieved some important goals. By Mario Stumm

2010 was a year of institutional reform for the World Bank, which had to reposition itself in the wake of the economic and financial crisis. At its 2010 Spring Meeting, shareholders approved a capital increase, a new strategy and the launch of an internal reform agenda designed to make the World Bank more efficient and legitimate. The World Bank serves as an important forum for dialogue between industrial and developing countries on global issues. It is crucial for the legitimacy of this forum that developing countries assume a more prominent role in decision taking. As an important part of the reform agenda the “voice reform” had to give more voting power to developing and emerging market countries.

Germany’s view was that the required reform also needed to deliver a mechanism for distributing votes according to clear principles. It needed to be:
– universal – membership in the group of industrial or developing countries is not relevant for assigning voting rights, the same standards apply to all,
– independent – a voting rights system developed independently by the IMF or other organisations underlines the autonomous mandate of the World Bank,
– rule-based – indicators should be objective and clear, not only taking into account the size of members’ economies but also their contributions to the World Bank mandate; for instance in terms of funds granted to the International Development Association (IDA), the branch of the World Bank Group that gives soft loans and grants to the least developed countries,
– transparent – the voting rights system should be simple and transparent to enhance the legitimacy of the institution,
– dynamic – voting power should be reviewed at regular intervals (five years) and adjusted if necessary, and finally
– permanent – to preserve continuity, the voting rights formula should remain unchanged for a long time.

What developing countries wanted most was to increase their voice, which is why they called for parity on the Board of Governors – 50/50 representation for industrial and developing countries. Such an arrangement would have meant a 7.4 % shift in voting power from industrial to developing countries, but on no traceable foundation. The distribution of votes, moreover, would have been totally inflexible and would have fostered the group-thinking between industrial and developing countries in the World Bank.

Negotiations took place in two phases: the first for discussing the assignment of basic votes, the second for shareholder votes (see definitions in box on page 120). At the 2008 Annual Meetings of the World Bank and the IMF, governors decided to double basic votes and fix their share at 5.55 % of the total voting power. This step boosted the developing countries’ voice by 1.4 %. In an additional step, a third African seat was created on the World Bank’s Board of Executive Directors.

The G20 countries wanted to see the second phase completed at the 2010 Spring Meetings. Germany and other industrial countries agreed that shareholder votes – and thus each member’s share in the capital stock of the International Bank for Reconstruction and Development (IBRD, or World Bank for short) – should be assessed individually. For a long time, however, the developing countries refused to discuss principles, insisting on achieving parity. Accordingly, the final communiqué of the G20 summit in Pittsburgh in September 2009 assured that, in sum, developing countries’ voting power would rise by at least three percent and the voting power of the smallest low-income countries would be protected. In order to facilitate the debate on prin­ciples, moreover, a complete and clearly calculated model for a voting rights system was needed to make the mathematics and the final outcome transparent for all negotiating parties.

The pooling model

Based on a Finnish idea, Germany’s Federal Ministry for Economic Cooperation and Development (BMZ) came up with a “pooling model”. It starts by determining global economic weight on the basis of GDP figures for 2006 to 2008, which is considerably simpler than using the complex IMF formula. The GDP figures are calculated on the basis of a 60/40 blend of market prices and purchasing power parity. Making purchasing power parity such a large part of the mix was a considerable concession to developing countries, and this was the only way to redistribute at least 3 % of voting power from industrial to developing countries. In a second step, the industrial countries assign a certain percentage of their votes (10 %, 15 % or 20 %) to a pool.

Those votes are then redistributed in a third step among all IDA donors on the basis of their contributions to the last three IDA replenishments. This mechanism makes it possible to reward large contributors to IDA, without undermining the voting power of developing countries. Even developing countries will get extra votes from the pool by making financial contributions to IDA. In a fourth step, all small low-income countries receive 250 additional votes without having to deposit capital. Shareholding will be reviewed every five years and the distribution of votes could be adjusted accordingly.

Germany first presented its model to the EU countries (plus Iceland, Norway and Switzerland). Despite some different interests, the Europeans were united in their vigorous support for the World Bank. They have been major contributors to IDA replenishments since the organisation was established: they have accounted for a total of 53.75 % of all IDA funding. After intense debate, the entire European group agreed to back the pooling model.

Successful reform

The World Bank accepted the European model and presented a compromise proposal. It included a lot of principles of the pooling model. Though the proposal was quite complex and contained lots of exceptions to satisfy individual interests, it paved the way for a speedy compromise between industrial and developing countries as well as between Europe and the USA.

The Europeans accepted the compromise proposal in order to complete the negotiations successfully by the Spring Meetings in April 2010. They did not want to put the World Bank’s ability to reform in jeopardy, but achieved several goals at the same time:
– The developing countries accepted that the assignment of voting power be based not only on a country’s economic size but also on its IDA contributions.
– The World Bank now has a voting rights formula that is independent of the IMF, which corresponds to its development mandate.
– The pooling model shows that it is pos­sible to develop a transparent, rule-based, universal model based on objective criteria despite differing political interests.
– The pooling model has given Europe a common profile and hugely enhanced its reputation at the World Bank.

Another achievement was the commitment in the communiqué of the 2010 Spring Meetings to develop a permanent, transparent, rule-based, universal voting power model by 2015. A work programme – in which Germany and Europe intend to remain active participants – should be presented at the 2011 Annual Meetings.

Besides the 1.46 % the developing countries received from doubling the basic votes, their voting power increased by an additional 3.13 % in the second reform phase. Accordingly, they have assumed greater responsibility at the World Bank. This came at the right moment. In the recently completed IDA 16 replenishment, many of the more developed emerging market countries – notably China, which overtook Germany as the third largest shareholder – have stepped up their financial contributions. However, it remains to be seen whether these countries will also participate constructively in World Bank policymaking in the future. Only then will the reform of the voting rights system have achieved the aspired long-term goals.

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