Funds high table

One of the issues up for discussion at the G-20 summit in London is the reform of the International Monetary Fund. There are reasons for optimism that there may be progress on this. For one,the world economy desperately needs a stronger IMF at this time of crisis. The IMF was almost declared irrelevant a couple of years ago,but with a series of economies in dire trouble and in need of external financial support Iceland,Ukraine,Hungary,to name just three it has re-established its core purpose. But in order to be effective,the Fund needs more money the US wants to double the funding from 250 billion to 500 billion,the Europeans want to triple it. But neither the US nor Europe has the cash at hand to pump in such large amounts at this point in time. So who does? The surplus economies largely in Asia.

However,these countries are unlikely to consider giving any money unless the antiquated governance structure of the IMF,which was framed in the aftermath of World War II and which reflects the economic power structures of that time,is reformed. Unlike other international organisations,the IMF and the World Bank do not function on a one-country-one-vote principle. The power of a countrys vote is directly proportional to their financial contribution to the Fund the US holds 17 per cent of the total voting share,the EU holds 32 per cent,China 3.9 per cent and India just under 2 per cent. Interestingly,all major decisions at the IMF have to pass with an 85 per cent voting majority,which in effect gives the US veto power on all decisions. The phenomenal rise of China which has actually financed the Wests consumption and the rise of India,Brazil,South Africa and other emerging economies warrant a complete change in the governance structure of the IMF. Real reform would require an immediate dilution in the stakes of the US and EU countries and an increase of voting power for emerging economies. Quite obviously,any emerging economy which wants greater power in the IMF must be willing to put its money where its demands are. China,with its huge surpluses,is best positioned to pump money into the IMF. India,fighting huge deficits,is in a position of relative weakness on this front,which perhaps explains but doesnt excuse our relative silence on the issue.

Still,the current circumstances provide the best opportunity for fundamental reform and expansion of the IMF. There even seems a broad consensus on it. If G-20 wants to show one concrete result,the three letters IMF are of crucial importance.