Global financial crisis and the International Monetary Fund - Part III :

Geopolitical realities and IMF reform

Jayatilleke DE SILVA

The geopolitical reality today is much different. The bipolar world that emerged since the Second World War is no more. The unipolar world that emerged after the demise of the USSR and other socialist states has undergone significant changes. What is emerging today is a multi-polar world where China and India are emerging as new giants. In another two decades, China is to replace the US as the world’s biggest economy. Already, real production has shifted from the developed world to the BRIC nations

Though the IMF is indirectly linked to the United Nations (UN) system, it is actually independent from and far distant to the IMF. While the UN system is based on the principle of ‘One member one vote’, the IMF is entirely structured on a different basis. There, the members’ votes are proportional to their subscription quotas which

are assigned according to their size in the world economy.

Therefore, the voting system is highly unfavourable to the majority of its members who are developing nations. In September 2009 the percentage share of its leading members were as follows: The US - 16.77, Japan - 6.02, Germany - 5.88, the UK and France - 4.85 each, China - 3.66, Italy - 3.19.

This means the US has a virtual veto power as important decisions require a majority of 85 percent of votes. In comparison developing nations such as Sri Lanka (which has 0.2 percent of the votes) have no say at all. So, they are forced to seek the patronage of the US, Japan and the EU. This is the big democratic deficit of the IMF (and other Bretton Woods institutions).

Use of soft power

It is again a moot point whether the US would be ready to give up its privileged position? Though the US is heavily indebted and is facing a severe crisis, its geo-political strength as the world’s only super power and its unrivalled and unparalleled military strength give it a leverage to avoid relinquishing its position.

The US Congressional Research Service, in a report in July 2009 noted that “The combination of US military power, extensive economic and financial clout, its diplomatic clout, and its veto power in the IMF put the United States at the centre of any resolution to the global financial turmoil. (Nanto, 2009). However, the same report said that now “US policy makers are turning more toward the use of soft power (or what has is sometimes termed ‘smart power’) as “the ability of the US to induce other countries to coalesce around US goals may be diminished”.

This increases the opportunities for newly-emerging economic powers such as those grouped together as BRIC or BRICS (Brazil, Russia, India, China and South Africa) to demand a greater say for them and the developing nations at the IMF.

Another reason that favours the building of a consensus on IMF reform is the security threat posed to the US by the financial turmoil. The same report said: “...on February 12, 2009, the US Director of National Intelligence, Dennis Blair told Congress that instability in countries around the world caused by the global economic crisis and its geopolitical implications, rather than terrorism, is the primary near-term security threat to the United States.”

There is another aspect of IMF reform. It is in the area of policy. If, as Greenspan admitted, the theory was flawed, the IMF too should share the blame as it aggressively promoted the theory of neoliberalism at the behest of the US and other leaders of the West. In fact, it is the main instrument which governs the international finance architecture. The IMF, the World Bank and the World Trade Organization (WTO) taken together constitute the triumvirate of neo-liberal globalization.

Need new changes

The global financial crisis has demonstrated the folly of developing nations following neo-liberal globalization. The latter has been associated with lowering of living standards of the poor and transfer of wealth from the poor to the rich. In the international arena it was a corresponding process of transferring wealth from poor nations to the rich. The crisis has made the attainment of Millennium Development Goals less possible. It has thrown millions more to poverty and destitution. The struggle against Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome (HIV/AIDS) will suffer greatly.

A necessary corollary to these developments is the need to move away from the traditional policy framework of the IMF. This requires, above all a change in its voting structure, the elimination of the veto power enjoyed by the US and the US direct involvement in IMF activities.

However, a change in the voting structure requires the amendment of the existing Articles of Agreement of the IMF. This requires approval of the United States Congress. That means it is not possible without arriving at a consensus with the US.

Another pre-requisite is a change in the composition of the staff at the IMF. Majority of its members are those who dogmatically adhere to the tenets of neo-liberalism. Since it had been the dominant ideology, even most of the apparatchiks from developing countries share US vision on most of the matters that come up within the Fund. It is necessary to staff the Fund with members belonging tooter schools of thought too.

Besides, leading members in the Executive Committee, such as the Chairman and the Managing Director should be elected on a merit based system and it should be open to all member nationalities.

Another desirable reform is to limit IMF to its original function as a mechanism to monitor and ensure financial stability in the world. It should shed its political function of directing political and economic development in client states with neo-liberal prescriptions.

An analysis of IMF loan disbursements shows that it was easier for countries with good relations with the US to obtain loans. This may be due to the commanding role it has in the Fund. Very often, the developed countries take political issues, such as human rights to deny IMF facilities to member states. Yet, history shows that even dictatorial regimes which openly violated all norms of democratic governance and engaged in most brutal repression of the population, such as Pinochet’s Chile, got IMF facilities. Such political considerations should not be the basis for loan disbursement.

The geopolitical reality

Conceived at the Bretton Woods Conference in the US, the IMF was formally established in 1945. Though a result of consultations between the UK and the US, the IMF is mostly a US project. It reflected the geopolitical reality at the end of the Second World War when the US emerged as the world’s most powerful state economically and politically.

The geopolitical reality today is much different. The bipolar world that emerged since the Second World War is dead and gone. Also the unipolar world that emerged after the demise of the USSR and other socialist states has undergone significant changes. What is emerging today is a multi-polar world where China and India are emerging, as new giants. In another two decades, China is to replace the US as the world’s biggest economy. Already, real production has shifted from the developed world to the BRIC nations. Eventually, the centre of gravity of the world economy will shift to China which would generate tectonic shifts in the world balance of forces.

These developments are likely to have their repercussions on the world financial architecture. The crisis has already made the G -7 an anachronism. The G-20 is increasingly filling the vacuum, but it is the G-192 which should ultimately take the control at the helm.

In the short-term, we could see a relaxation of IMF conditionalities in loan disbursement. This will be proportionate to, the strengthening of the developing nations in geopolitics and the growing strength of their position in the world economy.

In the long-term, whether IMF would discard its neo-liberal policies or not would depend on the economic and political developments in the world. The reform of the IMF would also be protracted and long just as it would be a long process for the world economy to get out of the present crisis.

Concluded

Courtesy: The Economic Review