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January 31, 2013 6:49 pm
The International Monetary Fund has failed to agree on a new formula that would reduce European voting power, setting the stage for a high stakes negotiation in 2014.
The decision by the IMF executive board meeting on Thursday highlights the tensions between Europe – which has drawn heavily on IMF resources to support bailouts in Greece, Portugal and Ireland – and emerging markets that feel their power at the Fund does not match their growing share of the global economy.
The battle over the formula will be rolled into a broader review of quotas, due for completion in January 2014, in which Europe will come under pressure to give up votes and directorships at the institution that backs the global monetary system.
“This meagre result reflects fundamentally the resistance to change on the part of over-represented members, notably from Europe,” said Paulo Nogueira Batista, executive director for Brazil and 10 other countries on the IMF board.
EU members have around one-third of the total voting power on the Fund’s board although their share of the global economy is much smaller. For example, after the last review, China had 6.4 per cent of the votes and Germany had 5.6 per cent.
Developing countries also resent the European monopoly over the top job at the Fund, seen most recently when they pushed through the nomination of Christine Lagarde, to replace the previous French head Dominique Strauss-Kahn.
Voting power at the Fund is set by a complicated formula that includes four variables: gross domestic product, a country’s openness to the world economy, the variability of its trade flows, and the size of its foreign exchange reserves. That feeds into a political negotiation that sets the actual quotas.
A senior IMF official said that there was considerable support for two changes to the formula – an increase in the weight on GDP and dropping “variability” – but there were differences on how to measure GDP, whether to drop “openness”, and how to adapt the formula so it represents poorer countries.
In general, a greater weight on GDP favours big economies such as China and the US, while “openness” boosts the Europeans, because they have large trade flows, not least with each other.
Dropping variability would increase the voting share of most larger countries, including big European nations, at the expense of smaller rich economies.
“The relevance and centrality of the IMF is far from assured,” said Mr Nogueira Batista. “Countries that are under-represented at the IMF may distance themselves from the institution if the reform process stalls or proceeds much too slowly.”
He called for a greater weight on GDP at purchasing power parity in the quota formula. PPP would adjust for the lower price level in many developing countries and increase their voting power.
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