In the Monterrey Consensus, agreed at the 2002 International Conference on Financing for Development, held in Monterrey, Mexico, world leaders committed to broaden and strengthen the voice and participation of developing countries in international economic decision-making and norm-setting. This commitment reflected the perceived need to increase the representativeness of the Bretton Woods institutions, which operate within a governance structure largely defined six decades ago. It also reflected the need to adjust other multilateral financial institutions, such as the Bank for International Settlements, to a global environment characterized by the growing importance in the world economy of a dynamic group of developing countries and to give developing countries in general, some representation in policy-making and norm-setting bodies where they have no formal participation, such as the Basle Committee on Banking Supervision and the Financial Stability Forum.

This commitment has translated thus far into some actions and an ongoing discussion on the Bretton Woods institutions. The International Monetary Fund (IMF) and the World Bank have strengthened the offices of African Directors and some European countries have created an Analytical Trust Fund to support the African Chairs. These changes have been motivated by the evident concern to maintain the legitimacy of these institutions as representative global entities. The International Monetary and Financial Committee aptly summarized the major issue at stake in its communiqué of April 2005:

Abstract:

Accused of being secretive, unaccountable and ineffective, both the IMF and the World Bank are seeking to become more transparent, participatory and accountable. Yet, few attempts have been made to dissect the existing structure of accountability within the International Financial Institutions (IFIs). This paper critically examines the existing accountability of the institutions and offers some recommendations for making them more accountable. It also warns that the limits of their accountability should limit the legitimacy of their activities.

Introduction

During the 1990s, the International Monetary Fund (IMF) and the World Bank (the Bank) found themselves accused of being secretive, unaccountable and ineffective. Not only radical non-governmental organizations (NGOs) but equally, their major shareholders are demanding that the institutions become more transparent, accountable and participatory. Accountability became the catch cry of officials, scholars and activists in discussing the reform of the institutions. However, few attempts have been made to dissect the existing structure of accountability within the International Financial Institutions (IFIs), to explain its flaws and to propose solutions and is the aim of this paper.

The first section examines the structure of accountability planned by the founders of the IMF and the Bank. The second section discusses the defects in this structure. Section three analyses the recent attempts to make the institutions more accountable. The conclusion offers some recommendations for improving the institutions and a warning about the limits of accountability at the international level.

Abstract:

This paper discusses a proposal to include capital flows volatility as an additional variable in the quota formula. The motivation is to capture macroeconomic volatility associated with capital accounts shocks as well as countries' vulnerabilities to balance of payment crisis. A proposal to this effect was requested by the G-24 Ministers in the communiqué of October 2004 and also introduced in recent quota reviews at the IMF.

However, the methodology put forward by IMF staff papers measures capital flows volatility in dollar terms. This measure does not fully capture the vulnerabilities of balance of payment crises because it does not take into account the differential macroeconomic impact of volatility among developing and industrial countries. In particular, fluctuation in capital flows implies a bigger adjustment for developing countries since capital flows to these countries represent a larger share of their economies and tend to be more volatile.

We propose an alternative measurement of capital flow volatility based on the volatility of net capital flows as a proportion of GDP and argue that it is a more appropriate measure to capture the economic effects of capital flow volatility. We also measure volatility in exports and capital flows altogether as a share of GDP to capture countries' total vulnerabilities to balance of payment crisis arising not only from capital account shocks but also from current account shocks, i.e. commodity shocks.

Abstract:

Increasing IMF quotas (or changing their distribution) requires the approval of the United States, which maintains enough votes at the IMF to block such decisions. Any change in the US quota, in turn, must be approved by the US Congress—a feature of US law which gives Congress a central role in quota determination. In this paper, I analyse congressional votes on legislation to increase the US quota subscription to the IMF. I argue that legislators are more likely to support a quota increase (1) the more ‘liberal’ their ideology, (2) the larger the share of high-skilled ‘pro-globalization’ voters residing in their districts and (3) the larger the share of campaign contributions they get from banks that specialize in international lending. Statistical tests of congressional voting on requests for quota increases in 1983 and 1998 support these arguments.

Introduction

The United States is positioned at the International Monetary Fund (IMF or Fund) to unilaterally veto changes in the size or distribution of ‘quotas’. This is because altering quotas requires an 85 per cent majority in the IMF's Board of Governors, and the United States has never held less than 17 per cent of the votes. No matter how intensely other members feel about the need for increasing or redistributing quotas, opposition by the United States alone can block any quota adjustment. On quotas, the United States is predominant.

Abstract:

In this chapter, we simulate the effect that a double majority decision rule would have on the relative influence of members of the IMF's Executive Board. We first discuss the logic of double-majority decision methods and discuss several alternative ways to implement them. We then explain the importance of relative voting power and define two ways to estimate it. We then turn to simulations of how voting power would be redistributed were the IMF to adopt a double majority decision rule. The results, as expected, indicate that the voting power of developing countries would be increased if a double majority decision rule was implemented. We conclude that the chief virtue of double majority voting in the IMF would be to compel the developed countries to take into consideration more seriously the views and preferences of the developing countries which are, after all, most consequentially affected by the decisions and policies of the organization.

Introduction

One of the most fundamental governance issues facing international organizations concerns the methods by which members' preferences are aggregated for purposes of deciding upon and implementing collective action. From a slightly different perspective, what is at issue is how to reconcile the principle of sovereign equality with the reality of a hierarchical international system marked by large power disparities across member states.

Abstract:

The governance of the IMF and the distribution of IMF quotas have come under much scrutiny in recent years, with a focus on the voting rights of member countries consistent with their relative size in, or contribution to, the world economy. Quota increases resulting from general quota reviews since the IMF came into being in 1945 have fallen far short of the amounts needed to maintain the relationship of total quotas to world GDP. At the same time, the distribution of quotas between the industrial and developing countries has been broadly maintained despite the enormous and disparate growth of the world economy over this period. On the basis of the formula that guides the IMF in deciding members' quotas in these reviews, giving prominence to GDP as the primary variable, the share of developing countries would be appreciably greater if GDP were to be converted by Purchasing Power Parities (PPPs), rather than at market exchange rates. For many purposes, inter-country comparisons of GDP converted by PPP are seen as the preferred approach, a view which has received increased support in light of the expected strengthening of the quality of PPP data compiled under the International Comparison Program. Market exchange rates, which continue to serve as the conversion factor for GDP in IMF quota calculations, are regarded by statisticians and analysts alike as unsuitable for many applications because of their short-term volatility.

Abstract:

We discuss the nature of bloc voting and show that there is a fundamental distinction between voting weight and voting power. We analyse voting power, assuming that the G-7 countries form a bloc and find that it would disenfranchise all other countries while greatly enhancing the power of the United States, already more powerful than supposed. We consider some of the implications of a proposed reform of the voting system of the IMF in which EU countries cease to be separately represented and are replaced by a single combined European representative. The voting weight of the EU bloc is reduced accordingly. We analyse two cases—the Eurozone of 12 countries and the European Union of 25. We show that the reform could be very beneficial for the governance of the IMF, enhancing the voting power of individual member countries as a consequence of two large countervailing voting blocs. Specifically, we analyse a range of EU voting weights and find the following for ordinary decisions requiring a simple majority: (1) All countries other than those of the EU and the United States unambiguously gain power (measured absolutely or relatively); (2) The sum of powers of the EU bloc and the United States is minimized when they have voting parity; (3) The power of every other non-EU member is maximized when the EU and the United States have parity; (4) Each EU member could gain power—despite losing its seat and the reduction in EU voting weight—depending on the EU voting system that is adopted;

The United Nations Monetary and Financial Conference held at Bretton Woods sixty years ago led to the establishment of the IMF and World Bank. This was a foundational moment. As the most powerful financial institutions of our times were created, hopes ran high of a better world, in which international cooperation through the IMF would sustain economic activity and prevent the adoption of measures destructive of national and international prosperity. The Bank was to assist reconstruction of war ravaged countries and finance the development of the less developed world. For a number of decades, the institutions created in Bretton Woods and the system based on them seemed to work well.

Today, the Bretton Woods Institutions (BWIs) play a diminished role and suffer from a loss of legitimacy and credibility. Several factors account for this diminished role. Among them the expansion of financial markets, the rapid growth of emerging market economies and the rigidity of a governance structure which reflects the political accommodation reached at the end of World War II; an outcome that has become increasingly obsolete and dysfunctional. The current governance structure of the IMF and World Bank fails to take into account the fact that today, the developing countries and economies in transition account for half of the world's output in real terms, for most of the world's population, encompass the most dynamic economies and hold about two-thirds of all international reserves.

Abstract:

The following article outlines reforms for the IMF so as to enhance financial crisis prevention and management through better surveillance and transparency. With the present quota regime, creditor countries command excessive voting power, resulting in skewed crisis analysis and resource distribution. Consequently, exploring the democratic deficit within the governance structure of the Fund reveals much needed changes in the quota regime and voting system of significant import. Expressly, the democratic deficit results from three factors, namely, (1) the decline of basic votes in the Fund's quota regime has reduced the voice of smaller countries in the governance of the Fund; (2) biases in the calculation of economic strength have caused the IMF to neglect the strength of emerging market economies; and (3) the needless complexity and opacity involved in the calculation of quotas. As the governance structure of the Fund is a product of the political and economic agreements embodied in the quota regime, addressing the quota bias, the variable measurement and specification problems will provide the route towards a Fund that is in tune with the growing contiguous democratic consensus. Quota adjustments alone prove insufficient towards this democratic end and therefore we will explore reassessing the Fund size, given the pressing need for a larger Fund as the present size is too small when compared to the global GDP; readjusting access to the resources of the Fund in accordance with the gross financing need of the concerned country; re-examining the voting system and the veto market; restructuring the Executive Board so that every member of the Board is an elected member and; the Fund as an Economic Security Council (ESC), promoting stability in the global economy.

Abstract:

The paper looks into the pitfalls and promise of double majority voting as one element of a comprehensive reform package to enhance the voice of developing countries and countries in transition in the governance structure of the World Bank. It is argued that in order to effectively fulfil a mandate that is dramatically different from the one envisaged when the World Bank was created, the Bank must refashion its decision-making structure. Since there are, however, tremendous obstacles and reservations to the introduction of double majority voting, notably the legal requirement to amend the Articles of Agreement of the World Bank, I argue that a two-year pilot phase approach should be pursued. This would leave time to inform others about the promise of the idea and to gather support from key constituencies. Very much like the Global Environmental Facility (GEF) in its initial phase, a pilot phase approach would lower the resistance against ‘definite’ commitments, while also leaving a chance for agreed upon revisions in the light of lessons learned after a defined number of years.

Double majority voting is essentially a concept pioneered in the GEF over the last decade in the sense of a true North-South partnership. Ownership and ‘voice’ of all sides involved are an inbuilt feature of this innovative voting structure. Different stakeholders' claims are appropriately respected, including donors without whom the GEF could not function and recipient countries whose cooperation and participation is required to enable the institution to achieve its objectives.

Abstract:

Sixty years after their creation, the Bretton Woods institutions face a crisis of legitimacy that impairs their credibility and limits their effectiveness. At the roots of this crisis lies the unrepresentative nature of their structure of governance, which places control of the institutions in the hands of a small group of industrial countries. These countries consider the developing countries and economies in transition as minor partners, despite the fact that they now account for half of the world's output in real terms, most of the world's population, encompassing the most dynamic economies and the largest holders of international reserves. Over time, the effects of the unrepresentative nature of the governance of the BWIs have become aggravated by two trends: First, a growing division among member countries, on the one hand, industrial country creditors who do not borrow from the institutions but largely determine their policies and make the rules and on the other, developing country debtors or potential debtors, subject to policies and rules made by others. Second, the rapid increase in the economic size and importance of developing countries, particularly, emerging market countries in the world economy. This has made the governance structure of the institutions, which reflects the political accommodation reached at the end of World War II increasingly obsolete.

The first part of the paper reviews the existing governance structure of the institutions, the foundations on which it rests, the main formal proposal to reform quotas, its shortcomings and major issues that were not addressed by it.

Speaking on ‘The Future of Indian Cities: National Issues and Goals’ at a 1960 conference organised by the University of California at Berkeley, Asoka Mehta, then a Member of Parliament, noted:

Since then, India has witnessed wide-scale urbanisation. The urban population has grown from 61.6 million in 1951 to 285.3 million in 2001. The proportion of the urban population to total population has risen from 17.6 per cent to 27.8 per cent during the same period, and the number of urban centres has increased from 2,795 to 5,161. The populations of large cities like Kolkata and Mumbai top 10 million. Indeed, the size of the urban population of India is more than the total population of the United States. According to United Nations' estimates, India will have an urbanisation level of 40.9 per cent in the year 2030.