Are IMF Reforms Favouring LDCs Truly 'Historic'?

So it has finally been agreed upon: In addition to the much-ballyhooed ceasefire of sorts on the international currency war front [1, 2], G-20 participants at the recently concluded finance ministers meeting in Gyeongju, South Korea also finalized plans to reallocate Executive Board seats and thus contributions to the International Monetary Fund. In effect, European countries that were prominent in the postwar world will vacate two seats at the IMF's Executive Board that developing countries will now occupy. The IMF write-up summarizes these changes and how it believes its legitimacy will be enhanced by virtue of representing more voices from the developing world that are undeniably gaining clout in the world economy:

Ministers of the Group of Twenty (G-20) industrialized and emerging market economies agreed on a proposed raft of reforms of the IMF that will shift country representation at the IMF toward large, dynamic emerging market and developing countries.

Meeting in Gyeongju, Korea, G-20 finance ministers and central bank governors agreed on a doubling of IMF members’ quotas—financial stakes that determine voting power in the institution—that will shift voting shares toward dynamic emerging market and developing countries. As a result of the quota rebalancing, the large, dynamic emerging market countries Brazil, China, India, and Russia move up to be among the top 10 shareholders of the IMF.

The ministers also agreed on a reshuffle of the IMF’s 24-member Executive Board that will raise the representation of dynamic emerging market and developing countries on the institution’s day-to-day decision-making body. There will be two fewer Board members from advanced European countries, and all Executive Directors will be elected rather than appointed as they are now. The size of the Board will remain at 24.

IMF Managing Director Dominique Strauss-Kahn, speaking to reporters after attending the Gyeongju meeting, said the move was “historic” and the most important decision on the governance of the IMF since its creation in 1944. “There will be other reforms, but what we did today puts an end to a discussion on legitimacy that had lasted for years, almost decades."

The Gyeongju ministerial meeting was held to prepare the agenda for the full summit of G-20 heads of state and government in Seoul, Korea, on November 11. The agreement reached at Gyeongju still has to be approved by the IMF’s Board. The target date for completion of the changes to IMF governance is the IMF-World Bank Annual Meetings in October 2012.

At their summit in Pittsburgh, United States in September 2009, G-20 leaders provided political support for a shift in country representation at the IMF. Leaders backed “a shift in quota share to dynamic emerging market and developing countries of at least 5 percent from over-represented to under-represented countries using the current quota formula as the basis to work from.” The leaders also stressed their commitment to protect the voting share of the poorest in the IMF. Currently, there is roughly a 60/40 percent split in the shares at the IMF between advanced countries and emerging market and developing countries.

While the Pittsburgh summit targeted a quota shifts of 5 percent from advanced countries to dynamic emerging market and developing countries and from over- to underrepresented countries, the Gyeongju deal achieves a shift of more than 6 percent in both cases.

The IMF head honcho is saying that his expectations were thus surpassed by what was achieved over the weekend:

Strauss-Kahn said the decision on IMF governance had responded to the mandate given in Pittsburgh in a way that exceeded expectations. "The 10 biggest shareholders in the IMF are those who deserve to be in the top 10 as they are the 10 most systemically important countries in the global economy," Strauss-Kahn stated. He also said the IMF’s Executive Board would be a "more democratic Board as will be an all-elected Board".

It's a welcome move, but shifting two seats out of 24 may better be portrayed as a gradual shift than an earth-moving, historic event. As always, I am keener on observing the follow-through. Should developing countries gain an even larger share of world economic activity, then there should be an even more pronounced shift in the membership of the Executive Board forthcoming. Moreover, it certainly would be nice if the IMF managing director were elected rather than appointed by a group of European countries as has been the convention at the IMF since its inception. With the Socialist Dominique Strauss-Kahn being ahead of Nicolas Sarkozy in the polls, DSK coming home to contest French elections in 2012 may be the first opportunity to see if this club has truly changed when matters come around to choosing the next IMF chief.