The IMF’s Overlooked Revolution

Mexico City – As the turmoil swirling through global financial markets continues, there is a growing realization that global economic problems require global solutions and improved global governance. This March, amid the latest financial twists and turns, a significant achievement in this regard went largely unnoticed: an agreement by the executive board of the International Monetary Fund on a new quota formula and increases in quotas for under-represented members, particularly emerging-market and developing countries.

With that move, the IMF gave these countries a stronger voice in the main international organization charged with ensuring financial stability – and thus in the global economy itself. The decision, taken after nearly two years of highly technical and sometimes arcane negotiations, involved a set of measures that change the way quotas (which determine voting power in the IMF) are distributed.

Of course, at the end of the day, the total shift in voting power from developed to developing countries was only about 2.7%. So why is it important?

Speaking as someone who has witnessed this process as an insider (as a former member of the IMF’s executive board) and an outsider (in my current capacity as Mexico’s finance minister), I see three main points that merit attention.

First, a large number of countries – 54, to be exact – will see their representation in the IMF increase. Korea’s quota share, for example, will increase by 106%, and that of China and Turkey will double. Brazil, India, and Mexico will gain a 40% increase. This is an important signal that the enhanced role of dynamic emerging countries in the global economy has at long last begun to be recognized. At the same time, the participation of small countries, many of them poorer nations, is not being overlooked: the IMF agreement calls for a tripling of so-called “basic votes,” which ensures that these countries’ voices will be better heard.

Second, the quota deal is just the beginning, for it recognizes that countries’ representation will need to adjust to changes in the global economy further down the road. The agreement provides that realignments of quotas and voting shares will take place every five years, which will result in a further increase in the share of under-represented countries. So, unlike many past international agreements, this one is dynamic, not static.

Finally this agreement is notable for the spirit of compromise by which it was reached. Several developed countries, including Germany, Ireland, Italy, Japan, Luxembourg, and the United States agreed to forego part of the quota increase for which they were eligible. At the same time, a longstanding wish of developing countries – to use purchasing power parity exchange rates as a criterion for calculating quotas – was met. To be sure, no country got everything it wanted; but every country got a stronger, more globally representative institution.

Critics have argued that the agreement does not go far enough in terms of reflecting the new realities of the global economy. They have a point. The new head of the IMF, Dominique Strauss-Kahn, has acknowledged this, describing the agreement as a “major step” but also a “first step.” He is right: it is both.

Of course, it is easy to imagine a quota reform that would lead to more ambitious results, but it would be difficult to have it approved. I know from my time at the IMF, as well as from many years working in international circles, how difficult it is to achieve any kind of change in our multilateral institutions – especially, as is true of some elements of this agreement, the first such change in 63 years. The most difficult thing is to start.

In fact, I believe that this agreement provides an appropriate example for other multilateral institutions, such as the World Bank, that need to begin their own process of reform aimed at giving emerging and developing countries greater voice and representation. For that reason, above all, the IMF’s new agreement should be given its due.

Agustín Carstens is Mexico’s Minister of Finance and Chairman of the IMF-World Bank