Brave New World Emerges from IMF / World Bank Istanbul Meetings (October 2009)

Rethinking Bretton Woods | Thu, Oct 15, 2009

By Aldo Caliari

Brave New World Emerges from IMF / World Bank Istanbul Meetings

The IMF /World Bank 2009 Annual meetings were, as every three years, held outside of Washington, this time in the city of Istanbul. The meetings came on the heels of the recent summit of the Group of 20 in Pittsburgh, giving follow up to several of its decisions.

Some of the outcomes were perplexing. Around this same time last year, the world was grappling with the potentially catastrophic consequences of a crisis in which developing countries had no responsibility but that would significantly set back their progress towards the MDGs. Several leaders spoke of a “New Bretton Woods,” anticipating a shake-up of  global governance structures. But to take the global governance results from Istanbul as a benchmark, there is little progress and, some might say, even some signs of retrogression.  


In its statement the International Monetary and Financial Committee supported “a shift in quota share to dynamic emerging market and developing countries of at least five percent from over-represented countries to under-represented countries using the current quota formula as the basis to work from. We are also committed to protecting the voting share of the poorest members.”

The commitment follows up on the G20 resolution achieved in Pittsburgh. Also in line with the G20 language, the review is supposed to be implemented by January 2011, when the next review of quotas of members will take place.

However, there is no repetition of the pledge formulated in the IMFC communiqué as recently as Spring of this year that the elements of the quota formula will be reviewed before the next quota review.[1] This would have actually been the most promising aspect of the reform package. A quota review simply reviews whether quotas of members are consistent with what the quota formula prescribes. A review of the quota formula, on the other hand, means going into examination of what the quota formula should prescribe in the first place.

The exercise that, after 6 years of debate, ended in 2008 merely tinkered with the archaic quota formula of the institution. The variables of the current quota formula contain significant biases against developing countries and, in particular, low income countries. This was clear when the exercise that ended in 2008 showed that enlarged quotas would correspond to some of the developed countries. It is because these countries—the US being one of them— “waived” the increases they could have had with this quota formula that it was possible to have increases in voting power of 2.7 percentage points that went from developed to developing countries.[2]

It is positive that the IMFC commitment pre-determines an amount of quota of 5 per cent would change to developing and transition countries. However, the ambiguous language does not speak about developed and developing countries, but of “under” and “over” represented countries. These concepts, obviously, have a meaning in reference to certain principles for what the “right” representation is. There are no signs, yet, that the principles for determining the “right” representation are up for reform.

This understanding is reinforced by the statement that the shift in quota is supposed to go to “dynamic emerging markets and developing countries” but without offering guarantee that it will not come at the expense of other developing countries. For instance, in April 2008 the Fund presented the governance reforms at the time as “an aggregate shift of 5.4 percentage points to underrepresented countries” but a closer analysis reflected that only 2.7 per cent of voting was going from developed to developing countries. The IMFC only commits to ensure that “poorest countries” will not be affected, but interpreting this concept as equal to “Low income countries” or even narrower interpretations,  would allow part of the shift to take place at the expense of other developing countries.

There is also a visible setback in the debate when a staff paper prepared for Istanbul asserts that “Although consensus is formed in the shadow’ of voting rules, which is partly why quota reform is so important, a robust process of give and take has evolved to develop proposals that command broad—not merely requisite—majorities.” This greatly underestimates the role of voting power in the institution and seems to go back to the long debunked notion of “consensus” as the basis for decision-making in the institution.[3]


At first sight, the debate on World Bank reform would appear to be going in a more encouraging direction. For one, the review of shares in the institution—the parallel of IMF quotas-- is on an “accelerated timetable” that means the deadline for agreement is Spring 2010. Also, a staff paper prepared for Istanbul has dared to suggest that “Parity in voting power between developed and [Developing and Transition Country] members could be seen as the ultimate objective, to be achieved through subscriptions by DTC members to sufficient IBRD shares to reach 50% of total voting power.“[4] This is more consistent with longstanding civil society demands that the reform should take as a point of departure a political agreement on the desirable shift of votes, and work backwards towards a formula, rather than start with the existing formula.[5] So far the principles and criteria being considered include, besides economic weight, the contribution to the World Bank’s development mandate.


The Development Committee resolution committed to “a significant increase of at least 3% of voting power for developing and transition countries.” Unlike the decision on IMF quota, the language is, therefore, clear on the need for the resulting outcome to boost the percentage of voting for the aggregate of developing and transition countries only. But, having said that, the target of 3 per cent is a rather limited one that, if fulfilled, would take the vote of developing countries from 44.6 to 47.6.



The IMFC welcomed the Framework for Balanced Growth emerging from the G-20 Summit in Pittsburgh. In conformity with the Pittsburgh mandate, it committed the IMF to  “Building on the IMF’s central role in bilateral and multilateral surveillance… assist the G-20 mutual assessment by developing a forward-looking analysis of whether policies are collectively consistent with more sustainable and balanced trajectories for the global economy.”

But the G20 outcomes look dangerously similar to the 2006 decision to carry multilateral consultation on surveillance which, in turn, resembled the decision in the late 1990s to have Art. IV consultations on “advanced economies” reflect “macroeconomic spillovers.”[6] All in all, the IMF has been at this exercise for over 10 years now, and there is no tangible signal that it has improved its capacity to lead the exercise to better outcomes.

More importantly, the macroeconomic imbalances have as much to do with a lack of coordination among major economies as with the he failure to rethink a world monetary system that continues to place excessive pressure on the US dollar as the primary currency for trade transactions and reserve accumulation.[7]


In another worrisome sign, the IMFC requested the Fund to prepare a study that “building on the success of the FCL and high access precautionary arrangements, …  should consider whether there is a need for enhancing financing instruments and whether this can offer credible alternatives to self-insurance, while preserving adequate safeguards.”

In the years preceding the crisis, many developing countries, disenchanted with the low performance of the IMF in providing emergency finance in crisis situations, had begun to rely on reserve accumulation as a means to prevent crisis and potential speculative runs on their currencies.

It is true that the accumulation of reserves cost countries dearly in terms of foregone development opportunities. In addition, self-insurance, that is, accumulation of reserves by each country is –other things being equal—less efficient than the accumulation of reserves in a collective pool from where countries can draw. But other things are not equal, as developing countries discovered the hard way through several major crises. Access to Fund lending was not guaranteed, limited, slow and, particularly, prone to put the country’s economic policy framework under outside interference with oftentimes disastrous results for which the Fund would not accept to be held accountable later.

It is laudable that the Fund wants to study how to enhance its financial instruments, but the decision seems to imply that the FCL and high precautionary arrangements are a significant change that would no longer make necessary resort to self-insurance by members. That may be premature since the FCL has only been accessed by three countries so far. Moreover, there is no guarantee that the facility or the conditions for access to it cannot, in the letter of the policy or in its application, become harder in the future.

Ultimately, the judgment as to whether the Fund offers enough guarantees to make the resort to reserve accumulation unnecessary is one that each member country should make. The best way to evaluate the Fund’s performance would then be, in the best market-based tradition, one where countries decide whether the Fund’s service is good enough that they will want to rely on it.

Moreover, an intermediate alternative between self-insurance and the IMF are regional or South –South insurance mechanisms, which several countries have been exploring. However, the “either or” approach given to the terms of reference of the study most likely will preclude consideration of this option. At the very least, it is surprising that glaring conflicts of interest were ignored in requesting the Fund to make this study. The institution would, certainly, be ill-positioned to make judgments on the relative value of self-insurance or regional insurance mechanisms given the institutional vested interests it has at stake.

There is, indeed, a risk that the study being commissioned might attempt to pre-empt member countries’ free judgment and rig the field towards an outcome. It could become the basis of an institutional decision to be reflected in IMF public statements, surveillance, and even conditionality, that puts pressure on developing countries who continue to rely on reserve accumulation to reduce their holdings. A hint on where such exercise is going could be gleaned in a recent article by the IMF Research Director, Mr. Olivier Blanchard, that downplays the impact that reserve accumulation strategies had on the better performance of developing countries in this crisis.[8] The article foresees there may be a ratcheting up international reserves in the aftermath of the crisis but this, “while understandable, … could well dampen the recovery.”[9]

Summing up, last year by this time, developing countries were expected to be hit by a crisis not of their own making in an economic system that gives them little voice. Some expected a “Bretton Woods II” system would emerge. The least optimistic may have expected a return to the status quo at the first signs of recovery. But to have developing countries’ self-protecting measures on the bench of the accused – and ready to be scapegoated if the incipient recovery does not prove sustainable — surely challenges the most pessimistic forecasts.

It is a brave new world, indeed.

[1] In Spring of this year the IMFC said “The Committee also looks forward to further work by the Executive Board on elements of the new quota formula that can be improved before the formula is used again.”

[2] For a longer review of issues raised by variables used in the current quota formula and shortcomings of the Spring 2008 package on IMF governance reform see Caliari, Aldo 2008. IMF Fails to Heed Wake-Up Calls for Democratization. In South Centre Bulletin, Issue 16. June 1 2008.

[3] CIDSE 2005. Long Due Reform? The IMF, the World and Global Economic Governance 60 Years Later (available at (“While it is true that decisions at the Board never come to a vote, this does not mean that voting weight does not have an impact on the outcome. During Board discussions in the IMF and the World Bank, the Secretary keeps a tally of votes on particular decisions which assists the Chairman in formulating the ‘sense of the meeting’. That ‘sense of the meeting’ simply reflects the respective voting powers of those who favour and oppose a particular outcome”)

[4] World Bank/IMF 2009. Enhancing Voice and Participation of Developing and Transition Countries in the World Bank Group: Update and Proposals for Discussion. September 29. Para. 13.

[5] See CIDSE 2005. Long Due Reform? The IMF, the World and Global Economic Governance 60 Years Later (available at ( “Although the quota is allegedly supposed to represent economic size, the formula was originally developed to fulfil a political pre-determined outcome…”)

[6] For more on these consultations see Caliari, Aldo 2007. The IMF's ""multilateral consultations"":  were the skeptics right? (available at

[7] See for more detail on this aspect, Caliari, Aldo 2009. Can the G20 have it both ways? Addressing global imbalances without reform of the world monetary system. Available at

[8] Blanchard et al 2009. Did Foreign Reserves help weather the crisis? (available at

[9] Ib.