T H E W O R L D J O U R N A L O N J U R I S T I C P O L I T Y IMF'S GOVERNANCE: IS INDIA A MERE NUMBER? Garima Garg

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1 IMF'S GOVERNANCE: IS INDIA A MERE NUMBER? Garima Garg Rajiv Gandhi School of Intellectual Property Law, IIT- Kharagpur International Monetary Fund and IBRD are two specialized institution of United Nations which were conceived post World War II for restructuring and to provide financial assistance to the countries which were affected most due to war. These institutions were brainchild of mainly two countries United States of America and Great Britain. IMF was created in 1944 at Bretton Woods Conference where most of the plan s suggested by Harry Dexter White, an American delegate was incorporated into final agreement. Since its inception USA has dominated this institution as it had maximum quota which meant maximum voting share. This affects the governance structure of IMF. The governance structure of IMF consists of twenty four constituencies. These constituencies comprises of either group of member countries or even single country. The single countries are USA, France, UK, Germany, and Japan and most recently China joined them. These countries appoint their single directors unlike other constituencies where group of countries have to decide on their representative director. India is a growing economy but still it stands seventeenth in the voting power together with other countries like Sri Lanka, Bangladesh and Bhutan. India is not in debt of IMF. In fact due to its growing economy in world and role in global trade the quotas were recently revised where India s quota was also increased with China. But unlike China, India did not get the sole representation in the executive board of IMF. Even with India s increased contribution in quota of IMF still it remains a mere number and does not have a major role in any policy decision of IMF. IMF should reform their quota system and provide adequate representation to developing countries in terms of voting power as well as it provides economic assistance to majorly developing countries. KEYWORDS- IMF, governance, quotas, voting power, countries. Introduction IMF has in general a well-thought out governance constitution and is a reasonably efficient institution that has been able to implement and adopt complex decisions in a timely and cooperative fashion. The constituency structure allows integration of the authenticity of an almost universal membership with efficient decision-making and coordinated Executive Board. Weighted voting based on relative economic power gives assurance to creditor countries to entrust financial funds to the IMF, while accorded decision-making confers various protection to the interests of minority countries, making weighted voting suitable 1 THE WORLD JOURNAL ON JURISTIC POLITY ALL RIGHTS RESERVED.

2 to debtor countries, and may guide to better decisions that are easier to execute. 1 There are, though, areas that need improvements and a number of significant governance deficiencies. The weight of developing countries in decision-making is less than required given the most important function played by the IMF in these countries and the increasing significance of such countries in the global economy. On the contrary, there is too much influence of a small group of large industrial countries. A big part of the membership does not really take part in a meaningful manner in the choice of the chief officer of the organization. 2 The G-7 countries exercise huge influence in the IMF decision-making method that has become unwarranted even considering the group s huge collective voting-share. Although, the G-7 countries remain rather short of a voting majority, it is extremely improbable that any issue either country matter or policy - would be agreed in the IMF if the countries firmly oppose it. The G-7 countries appear in a few instances to act as a self-appointed guiding committee of the IMF. It drives the policy program of the Fund, and often acts as a voting bloc. Decision-making in members of this group tends to be held in reserve in their finance, which gives rise to complex questions regarding accountability and governance. 3 Given its financial resources, mandate, and organizational structure, the IMF is amongst the most powerful specialized international bodies, perhaps second to the UN Security Council. Like the Security Council, this authority is, in practice, exercised regularly with respect to developing countries. The IMF takes decisions that have an effect on the lives of hundreds of millions of people living and working in developing countries. Developing and emerging market countries are playing a more and more significant role in the world economy and increasing their contribution to global trade and output. They also consist of the majority of the world s population. Yet, their influence in the IMF governance has not increased equally. The cumulative voting power in the IMF of transition economies, emerging market countries, and developing countries has been between 37 and 40%. 4 Quotas and Voting Power A country s quota determines contribution of the country to the IMF s resources, amount that a country can borrow from the IMF, allocation of SDRs (Special Drawing Rights) to the countries and, last but not least, it s voting power. The main components of voting power are Quotas, which are, associated to a country s relative economic power in the global economy. Quotas are calculated according to formulas, but for nearly all countries their actual quotas vary from their calculated quotas. After every five years the Fund is supposed to carry out a general evaluation of quotas to decide whether a quota increase is required. 1 Mkandawire, T., Good governance : the itinerary of an idea. Development in Practice, 17(4-5), pp Woods, N. and Lombardi, D., Uneven patterns of governance: how developing countries are represented in the IMF. Review of International Political Economy, 13(3), pp THE WORLD JOURNAL ON JURISTIC POLITY ALL RIGHTS RESERVED.

3 If there is a universal quota increase, a part of such increase is done in a proportional manner, which is based on the existing allocation of actual quotas, and part is done in a selective manner, based on the calculated quotas with an intention of bringing actual quotas equal to calculated quotas. On average, the proportional part of quota increases has been approximately 70%. Proportional quota increases delay of the convergence of actual quotas with the calculated quotas, introducing a part of inertia favoring the existing quota allocation. 5 Basic votes are the equal for all members. Each country of the IMF receives on joining 250 basic votes. Basic votes are based on the inspiration of the equality amongst members and resemble the UN system of one country one vote. When the Fund was formed, basic votes represented 11.3 % of the total voting power. The fraction of basic votes peaked at 15.6 % in 1958, but presently is only about 2%. The decrease in the value of basic votes was effect of the increases of the Fund s quotas, which had a much bigger effect on the voting configuration than the increase in the number of countries. A rise in basic votes raises the voting power of small countries. 6 Developed countries represent about 60% of the voting power, while transition economies, developing countries and emerging markets account for about 40% of the voting power. The United States have the largest voting share with 16.53%. In terms of geographical balance, Europe has 39.1% of the voting power, the America have 29.6%, Asia accounts for 18.0%, the Middle East for 8.6%, and sub-saharan Africa for 4.4%. Increasing the influence of developing countries in the decision-making process would contribute to good governance. 7 India has a quota of 13,114.4 millions of SDR which is 2.76% of total IMF quota. Corresponding to this India has 132,608 numbers of votes which is a mere 2.64 % of total voting rights. 8 The quotas and basic votes determine the voting power of member countries. The quota shares of India do not adequately reflect their position in the world economy, as the case of emerging markets is more vital because their actual quotas are restricting their normal access to IMF resources, and forcing it to face shorter repayment periods, accept more demanding procedural rules and pay higher interest rates to receive IMF loans. Western Europe is with the highest aggregate quota. This was reasonable on historical grounds, since the Fund was formed mainly to finance and facilitate the adjustment process and the liberalization of the accounts of Western European countries after the World War II. However, since then, the circumstances have changed radically for the better. The last instance when a Western European country borrowed from the Fund was in Current and capital accounts in Western European countries have been completely and effectively liberalized. More significantly, European countries have adopted a lone currency to trade Copelovitch, M.S., Master or servant? Common agency and the political economy of IMF lending.international Studies Quarterly, 54(1), pp Supra 7 3 THE WORLD JOURNAL ON JURISTIC POLITY ALL RIGHTS RESERVED.

4 amongst them. The present quota formulas improperly overestimate the quota shares of the European Monetary Union member countries by treating trade conducted between them in a lone currency as foreign trade. The current European Union has an aggregate quota share of around 30%. This is much higher than the quota of the United States, with little economic justification, as both have GDP of a similar size. Any alteration in the quota shares of the European Union would have to be phased in regularly over a long period. The first step could be a small, ad hoc selective quota increase for a few developing countries whose actual quotas are not according to their growing economy. 9 In spite of what positions are with respect to increasing the voting power of developing countries, there is a strong technical case for altering the quota formulas, which are opaque and complex and have some explicit problems. There are a lot of formulas; they have too many variables; some variables are not directly correlated to the functions of quotas and generate unwarranted distortions; the specification of several variables seems inappropriate and biased; and the weights that are used, while being a matter of judgment, have been selected in a totally ad hoc manner and show difficulty to justify. The quota formulas discriminate against developing countries whose cumulative calculated quotas have tended to decline. 10 These issues go back to the conception of the IMF. the secretary of the Committee on Quotas in the Bretton Woods conference and the author of the original Bretton Woods formula, Raymond Mikesell, confessed in his memoirs that at the US Treasury his superior gave him the quota results for the four largest shareholders/countries, which had been agreed by the highest political ranks in the US, and that he had to go through numerous trials using diverse combinations and weights of trade data until the quota formula produced the predetermined results. He also acknowledged that the lack of honesty as regards to quotas was untoward as it created significant controversy and mistrust, and that assigning quotas had been the most divisive and hard job of the conference 11. Financial Transactions Plan (FTP) India agreed to contribute in the Financial Transaction Plan of the IMF in late Fifty three countries, including India, now contribute in FTP. By participation in FTP, India is agreeing to IMF to en-cash its rupee holdings as part of India s quota contribution, for hard currency which is then lent to other shareholders/member countries who are debtors to the IMF. From the year 2002 to 2016, India has made purchase transactions of SDRs 9 Wade, R.H., Emerging world order? From multipolarity to multilateralism in the G20, the World Bank, and the IMF. Politics & Society, 39(3), pp Buira, A., The governance of the international monetary fund. Providing global public goods: managing globalization, pp Mikesell, R.F. and Mikesell, R.F., The Bretton Woods debates: a memoir (Vol. 192). Princeton: International Finance Section, Department of Economics, Princeton University, pages 22, 35 and 38 4 THE WORLD JOURNAL ON JURISTIC POLITY ALL RIGHTS RESERVED.

5 of about USD million 12 and repurchase transactions amounting to USD 84.2 million. 13 Lending resources of IMF In the London Summit of the Group of Twenty (G-20) countries, a decision was taken to triple the IMF s lending capacity to upto US$ 500 billion. In pursuance of this conclusion, India decided to invest its funds, initially up to US$ 10 billion through the Notes Purchase Agreement (NPA), and then to upto US$ 14 billion through New Arrangement to Borrow (NAB). The IMF s expanded and amended New Arrangements to Borrow (NAB) became effective on March 11, India had committed to give resources up to SDR 8, million to the IMF under this arrangement. Consequent to the payment of quota raise to IMF in February 2016 under the Fourteenth General Review of Quotas, India s commitment under NAB has been decreased to SDR 4, million in February Reserve Bank of India has subscribed to Notes equivalent to SDR million under NAB till end - September, 2016, as part of Government of India s Contribution. In terms of the Note Purchase Agreement (NPA) 2012, entered into between RBI and IMF, RBI has contracted to invest an amount equivalent to USD 10 billion in SDR denominated Notes issued by IMF. 14 The Executive Board at IMF consist of 24-member. Currently the countries with the five largest quotas appoint an Executive Director each, while the rest of Executive Directors are elected by member countries or group of countries. However, the reforms of the Executive Board would facilitate a progress towards a more all-elected Executive Board, representative, ending the category of appointed Executive Director. To this end, there has been an agreement to reduce the number of Executive Directors representation advanced European countries by two in support of EMDCs (Emerging Market Developing Countries). The amendments are part of a package of reforms on governance and quotas in the IMF. Along with the recent quota reforms in IMF ( i.e. Fourteenth General Review of Quotas), these amendments shows a major overhaul of the Fund s governance and quotas, and help in strengthening the Fund s effectiveness and legitimacy. Conclusion India is one of the founding members of the IMF. India has not taken any financial assistance from the IMF since Repayments of all the loans taken by India from International Monetary Fund have been completed on 31 May, India s current quota in the IMF is SDR (Special Drawing Rights) 5,821.5 million, and giving it shareholdings 12 RBI-27th Half Yearly Report on Management of Foreign Exchange Reserves April-September RBI- Half-Yearly Report on Foreign Exchange Reserves Jan Supra 4 5 THE WORLD JOURNAL ON JURISTIC POLITY ALL RIGHTS RESERVED.

6 of 2.44% making India the 13th largest quota holding country at IMF. However, India (together with its constituency countries Viz. Bangladesh, Bhutan and Sri Lanka) based on voting share, is ranked 17th in the list of 24 constituencies at the Executive Board. As part of the Fourteenth General Review of Quotas (2010), India s total quota has been increased to SDR 13,114.4 million from SDR million. With this increase, India s share increased to 2.75 % (from 2.44%), making it the 8th largest quota holding country in the IMF. Significantly, the reforms will lead to a realignment of quota shares of member countries, with the shifts to dynamic Emerging Market and Dynamic Countries (EMDCs) and from over- to under-represented countries both exceeding 6 percent, while protecting the voting share of the poorest member country. But even these reforms did not bring a substantial change in India s position in IMF- governance. It still has very less percent of voting shares which makes it a minority country in the Funds decision making body. Hence it is true that even though India is considered amongst Emerging Market and Dynamic Countries with China and Brazil but still it is a mere number in IMF s executive body. 6 THE WORLD JOURNAL ON JURISTIC POLITY ALL RIGHTS RESERVED.