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Too little, too late?

by Sachin Chaturvedi


Motorcycle production in India: recent IMF reforms benefit rising economic powers

Motorcycle production in India: recent IMF reforms benefit rising economic powers

In early May, the governors of the International Monetary Fund approved reform of that institution. In the view of developing countries, the step was urgent – but did not go far enough in making the IMF inclusive and accountable. [ By Sachin Chaturvedi ]

Initially, the World Bank and the International Monetary Fund (IMF) were designed in line with the framework and spirit of the United Nations; but over the years, their mandate, scope and modalities changed drastically. As a result, the G7 – and particularly the USA and EU – dominate both institutions. The United States alone accounts for around 17 % of the votes in the 185 member IMF. Tellingly, a US citizen was appointed head of the Bank last year, and a citizen of EU member France became head of the Fund.

In the case of the IMF, a mandate for change emanated from the Singapore meeting of Bank and Fund in 2006, but it was implemented only half-heartedly. However, the growing attempt for coalition building by developing countries, particularly through the G24, has helped to block several proposals.

In the past two decades, the debate on the nature and extent of globalisation went through two distinct phases. The first phase was largely dominated by the Bretton Woods institutions with an emphasis on including developing countries in the global economy. That pressure was resisted at various levels in the developing countries. The arena for the second phase of the debate, however, is largely confined to the capitals of the key OECD economies where policymakers are grappling with the entry of developing mega-economies in the global market place. If the recent US primary elections are any indication, it is obvious that neo-nationalism may thrive in the general public of the very economies that started the first phase of the globalisation. If one takes a dispassionate view, one gets the impression that global governance is at critical crossroads and that immature reactions may derail the global economic growth process itself.

Manmohan Singh, India’s prime minister, recently said at Oxford: “Developed countries should not allow short-term national interests to prevail at the cost of promoting freer trade and combating poverty. The prosperity of so many cannot be sacrificed for protecting the interests of so few.” The issue not only has profound moral dimensions, as the prime minister accurately warned, but “the price of myopia is heavy on the exchequers of the developed world”, too.

However, the developing countries will have to make more pro-active proposals for change, rather than just blocking G8 ideas. In this regard, India and others were right to press for the use of purchasing power parity (PPP) to measure GDP for the IMF quota formula, as has now been accepted as the norm. This decision will help several emerging economies. The main impact of the reforms agreed at the Spring Meeting in Washington will be to increase the voting shares of major developing countries like India, China and Brazil. However, IMF reform will also need approval from the USA, and that may not be had before the new US president is sworn in early next year.

In this interregnum, India as a responsible leader in the international community should carry on with efforts to address inequalities and promote collective growth of fellow countries. While parts of India bask in the glory of new-found prosperity and fast economic growth, we must not under-estimate the pains of poverty being experienced more intensely by fellow developing countries. The fact that the 45 IMF members from sub-Saharan Africa have just
4.4 % voting share means that more needs to be done to change the system.

Moreover, we must not forget that independent thinking and huge foreign-exchange reserves can serve to create better options than the IMF offers. Alternative approaches are under consideration in Asia and elsewhere. Examples are
– the Chiang Mai Initiative for pooling resources in the wake of the financial crisis that some of the Asian countries went through in the late 1990s,
– the idea for a regional sovereign wealth fund in Asia for assisting development of the Global South, or
– the recently founded Banco del Sur in Latin America.
Such initiatives show that, if IMF and World Bank do not change in time, they may become irrelevant for the developing world.