Reforms in global financial system — Finally

The reforms at International Monetary Fund(IMF) has meant better voting share for India and a voice in global financial system

The IMF’s reform package of quotas and governance became effective on January 26, 2016. As a result of this, India, Russia, China, and Brazil gain entry into the club of 10 largest economies of the world. This review was long pending since December 2010. The delay was attributed to approval by the US Congress which finally gave its nod in December 2015. What do these reforms exactly mean?

First, it is essential to know the origin of IMF. It is an international organisation of 188 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world. To summarise — it is the lender of last resort for the all the countries in the world. It was formed at the end of World War II as part of international financial system led by the US.

Second, what exactly is ‘quota’? Each member country is assigned a quota — which is a value of its share in the IMF financing system. This is proportional to that country’s impact on the world economy. A country’s quota in the IMF determines its voting power, the amount of financial resources it must provide to the IMF, and its access to IMF financing. It then goes without saying that larger a country’s quota, greater will be its say in the governance of IMF. Quotas are based on a weighted average of GDP, openness, economic variability and international reserves. They are expressed in Special Drawing Rights (SDR), an international reserve asset determined by the value of the US dollar, euro, Japanese Yen and pound sterling. The increase in quota has meant enhanced resources for IMF.

The IMF’s capital has nearly doubled from $ 329 billion to $ 659 billion. Much of this has come because of funding from member countries, especially of G-20, contributed after the financial crisis of 2008. As a result, more than 6 percentage points of quota have been transferred from developed to the the emerging market countries. India and China have increased their voting shares by 0.292 and 2.265 percentage points respectively. India’s increase, though marginal has been enough to place it in the top 10 countries. The developed countries have had a decrease in their voting share from 0.2 to 0.5 percentage points. This redistribution has catapulted China from sixth to third position behind US & Japan. Saudi Arabia’s decrease by nearly a percentage point has placed it below India, Russia and Brazil. This reform will also affect the selection process of Executive Directors,i.e., the governance.

Once the reforms are in place, all positions on the board will be determined by election. In the earlier system, member countries with five largest quotas each appointed an Executive Director. This invariably meant a European as the head of IMF. It had been a common refrain among the developing countries that IMF would always be headed by an European and World Bank by an American. The reforms are reflective of the emerging economic order in the world and reinforce IMF’s legitimacy as a global financial institution.

Guru Aiyar is a Research Scholar at Takshashila Institution and tweets @guruaiyar

Featured Image: IMF by Javier Ignacio, licensed by creativecommons.org

 

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