Governor’s Speech at the 40th Anniversary of Bank of Mauritius
Source: bank_of_ghana
Date: 2007-12-04

1 40TH ANNIVERSARY OF BANK OF MAURITIUS LECTURE BY DR. PAUL A. ACQUAH, GOVERNOR, BANK OF GHANA TOPIC: GOVERNANCE AT THE INTERNATIONAL MONETARY FUND: QUOTAS, VOICE AND ALL THAT DEBATE MAURITIUS, DECEMBER 4, 2007 1. It is a pleasure to be here to participate in the 40 th Anniversary celebrations of the Central Bank of Mauritius. I thank Governor Bheenick for inviting me. It is indeed a great occasion; and I can share the sentiment because the Bank of Ghana is also celebrating this year its 50 th Anniversary. Ou rs coincides with the 50 th Anniversary of Ghana’s Independence . An Anniversary such as the Bank of Mauritius is marking this year is indeed historic and a moment of pride. 2. My lecture today is on the International Monetary Fund (IMF). In our part of the wo rld, in African countries, the IMF conjures painful Structural Adjustment Programs and stringent conditionalities and financing of balance of payments problems, post-conflict economic recovery, and debt relief. It means that the Fund has had to be involved in most of Africa for much of its post -independence period in programs and policy -based 2 lending. This has sought to assist in coming to grips with macroeconomic problems that have kept African countries mostly behind in the race towards accelerated growth and development. For over a decade now, Mauritius relations with the Fund have been confined to policy advice under Article IV consultations. Mauritius usually ranks highly on the list of countries with sound economic management, competitiveness, and gove rnance ratings. The indications are that economic policies have been broadly successful over the past years; and the Bank of Mauritius has indeed much to celebrate for being an integral part of the record of accomplishment. I should say that your experienc e offers useful lessons for Africa that is seeking to achieve the Millennium Development Goals. 3. Now to the topic today - “Governance at the IMF ”. This is a raging debate going on about the role of the Fund. The focus and the nature of the issues involved t end to shift over time as the international financial system and the nature of the participants and stakeholders evolve. But the issue of Quota and Voice has been always , historically, fundamental in the discussions on governance, decision-making, and operations in the Fund as a cooperative institution. Quota and voice in the Fund is central to the debate because it is about power - sharing; it is about burden -sharing, and it is about the 3 legitimacy, relevance and effectiveness of the institution. And, it has its genesis in the Articles of Agreement and in some of the informal understandings reached at Bretton Woods. 4. It is important to recall that the IMF and the World Bank, its sister institution were conceived during a conference in Bretton Woods, New Hamps hire in July 1944 by 45 governments who sought a framework for reconstruction after World War II and for economic cooperation in order to avoid a repetition of the economic policies that contributed to the Great Depression of the 1930s. In December 1945, 2 9 member countries signed up to the Articles of Agreement which led to the establishment of the Bretton Woods system of fixed exchange rate regime. Africa was represented by only these countries, Ethiopia, Union of South Africa and Egypt. The rest of Africa was under colonial rule at the time. 5. The governance of the Fund, in terms of its organizational structure, shareholding and decision -making, financing model, and its monetary character , was built as a result of skillful negotiations to reconcile members ’ interest in the pursuit of a common purpose. And, indeed, the outcome has influenced the Fund’s operations even as it has evolved and adapted to 4 changing circumstances in the global economic and financial system. 6. Two examples illustrate this point. First, the fact is that the United States and the United Kingdom were the principal architects of the plans for post -war monetary cooperation at Bretton Woods. And in creating the Fund and the World Bank, they agreed that the United States would have the ‘right’ to appoint the President of the Bank, as well as the Deputy Managing Director of the Fund (there was only one DMD until very recently when Michel Camdesus thought the complexity of managing the institution justified the appointment of two additional DMD s). Under this informal agreement, Europe would appoint the Managing Director of the Fund. 7. The US promptly proceeded to nominate Mr. Eugene Meyer, a businessman and owner of Washington Post as the first President of the World Bank and the European Union nominated Mr. Per Jacobson, an Economist steeply involved in multilateral economic and monetary cooperation at the BIS as its first Managing Director. 8. This agreement contrasts with the provisions under the Articles of Agreement itself that the Executive Bo ard “selects 5 the Managing Director” and can dismiss a Managing Director. Moreover, the Articles of Agreement specify that the Managing Director should operate under the general direction of the Executive Board. 9. The informal agreement in practice prevails today. The Executive Board’s power in this matter remains on paper only. The current debate ostensibly turns on the need and desir e to bring transparency and participation in the selection of the most qualified person for the position without restriction of national origin. The main underlying concern is that the power of influence and the interest of the key architects of the Fund continue to be prominent in this vital process and that this aspect of the Fund’s governance creates a democratic deficit in voice and representation at the Fund. A related issue in fact is how effectively th e direction of the institution is exercised and evaluated by the Board with no effective appointing authority. 10. Take another historical example: t he Fund currently operates l argely on a financial model characterized as “The Mixed Bag of Currencies” proposed by White of the United States (Horsefield, 1968). Under this plan, the Fund sells the currency of member country in deficit for currencies of other member countries that ar e freely useable. This was a result of 6 a long discussion and an eventual compromise that led the United Kingdom to abandon the Plan proposed by Keynes of Britain, which would have amounted to the creation of an international currency called the bancor to l end to member countries. Several arguments are reported to have been advanced in pressing for the White proposal (including difficulties of obtaining US congressional approval) but it has been noted that “the more weighty economic argument was that the potential US commitment to give balance of payments assistance to the rest of the world through the Fund would have been more than twice as large as under the Keynes Plan . The burden for the US could have been US$6 billion and US$2.75 billion under the Keynes Plan” (Polak, 2005). But this compromise also means that the ability of the Fund to provide balance of payments assistance was circumscribed. This example illustrates the inherent tendency to negotiate the best national interest even as a member seeks to promote the common goal of the cooperative institution. It is t his tendency that is said to have come into play at the creation and it is part of the living history of the Fund; and it underscores the importance of being at the table. 11. Today, the Fund, as it is commonly called, is made up of 184 member countries. Its membership jumped sharply in the 7 1960s, when a large number of former colonial territories many from Africa joined after gaining political independence and again in the 1990s when the IMF welco med as members, the newly independent countries of the former Soviet block upon the dissolution of the Soviet Union. An institution of so many member countries requires a balancing of interests to be effective and relevant. And it should be accountable to all its stakeholders, be they creditors or borrowers. 12. The world economy has gone through significant changes over the years . And there is a growing number of emerging market and developing countries that have become creditors to the IMF blurring the distinction between creditor and borrower countries. The Fund has grown to extend the scope of surveillance beyond exchange rate policies and closely related issues. The increasing globalization of the World Economy with potentially significant spillover effect s of members policies on other members irrespective of size make it important that all members have a say on policies of Fund. The authority of the Fund and its role would resonate to the extent that the Fund is seen as representing the entire membership. 13. Voice and representation has been on the table for discussions over the past years. The fact that it has climbed up 8 the scale of agenda at the Fund underscores how important the Fund views the need to adapt to the fast changing dynamics in the world economy and in corporate governance practices, and the need to safeguard the authority and relevance of the Fund. 14. Obviously some member countries are frustrated with the pace of reform at the Fund. To quote South African President Thabo Mbeki at a recent g athering of G20 Finance Ministers and Central Bank Governors in Klienmond, South Africa, he said, “ even when modifications to the international financial architecture became necessary, especially during periods of global financial turbulence, the outcomes have inevitably preserved the status quo”. 15. The issue really collapses around quotas. The founding members have been reluctant in giving out portions of their control through quotas as new and stronger members join the Fund. Now the question is, as more an d more countries become relatively stronger in the dynamics of global finance and trade, how the Fund should adapt to these new realities? The principle of equality of states was recognized at the inception of the Fund through the creation of equal basic v otes for all members. The basic votes which peaked at 15.6 percent of the total voting power in 1956 has fallen precipitously 9 thereafter to a historic low of 2 percent at present, as no mechanism was set to protect against erosion in successive quota increases. 16. The reality is that quotas represent the anchor of influence in the Fund and the issue of legit imacy touches on the type of influence that members have on the Fund’s decisions and policies including the level of access to its resources . To put it in simple terms “we all need to be at the table to have the opportunity to influence decisions especially should these come to be based on votes ”. A clear case is the design and modus operandi of the Multilateral Debt Relief (MDRI) and the HIPC initiatives. Those designing these facilities have had a very strong influence on shaping the facility with outcomes that are not necessarily neutral even if they serve the best interest of the organization (and the membership as a whole). 17. It is not without reason th at the quota formula has been a source of many contentious discussions because the metrics determines the size and distribution of quotas which is a source of the power-sharing debate in the first place. Currently quotas are calculated according to a membe r’s gross domestic product, current account transactions, and official reserves. The quota determines a mem ber’s voting power in IMF 10 decisions and is reviewed every 5 years with the next review due in 2008. If for example they were to be based on a measure of openness including or excluding intra custom union trade as currently under consideration , it would significantly affect the relative positions of European countries. Similarly, the use of PPP or market exchange rate s in GDP measurement would generate different distribution s of quotas that would strongly affect the newly dynamic (emerging market) economies. 18. I believe that a powerful voice and representation on the part of developing countries in the Fund will influence the methodology of determining qu otas. This would bring a fundamental adjustment to quota s to take account of the major changes that have occurred in the relative economic and financial positions of member countries, with a large dose of fairness for those currently under -represented. This would also require changes to the size and composition of the Executive Board. 19. I am sure you would appreciate why countries like China and India are asking increases in their quotas and the African constituency is asking for higher representation at th e top level of management such as Deputy Managing Director. This is not 11 immaterial because you can then have influence and shape facilities and also how they are implemented and administered. To put it more bluntly, the debate on quotas is a manifestation of the inner struggle for control”. 20. What is clear is that nobody disputes that voting power in the Fund should take account of the capacity and willingness of members to support the Fund’s activities and to contribute to its financial resources. Consensus seem to have emerged that the vote and quota structure should take into consideration a number of factors including:  Significant growth in the size and structure of emerging economies.  The changing functions of the Fund particularly in the provision of global public goods (GPG), in which emerging economies can be very instrumental and feature prominently as potential in dealing with various global financial issues.  The increased willingness on the part of emerging markets to support the Fund, both in its day-to-day activities as well as in its crisis management.  The low voting rights of African countries and other newly independent states in Eastern Europe despite their numerical strength in the Fund . In particular, these 12 countries perceive the current st ructure as under - representing their importance in global financial relations which makes it difficult for them to articulate and promote their interest through the traditional IMF structures. 21. The Fund is currently reviewing the issue of voice and quota and seeking the fundamental changes that will address the imbalances between the current quotas of member countries and their relative economic and financial positions in the global economy. The international financial architecture, of which the Fund continu es to be a major player, thrives on its international legitimacy and the ability to act quickly. The Fund has universal membership and so its charter provides it with the mandate to take coordinated action in world affairs, especially in times of crises. B ut its historical development has unfortunately bestowed on it a structure that needs urgent review to make it acceptable and legitimate to move to the new design of international financial architecture. 22. As indicated earlier, a ddressing the Governance iss ues at the Fund will also require changes in the size and composition of the Executive Board which brings with it the issue of the organizational structure of the Fund. 13 23. The IMF’s structure as constituted in the Articles of Agreement makes it ultimately accountable to the governments of its member countries . The issue is in the function of the institution.  At the Apex of its organizational structure is its Board of Governors, which consists of one Governor from each of the IMF’s member countries and an Al ternate Governor. All Governors meet once each year at the IMF- World Bank Annual Meeting; 24 of the Governors sit on the International Monetary and Finance Committee (IMFC) and meet twice each year.  The day -to-day work of the IMF is conducted by its 24-member Executive Board, guided by the IMFC and supported by the IMF’s professional staff. The Executive Board usually meets three times a week, in full sessions, and more often if need be, at the IMF’s headquarters in Washington D.C. Of the 24 Executive Directors on the Board, 8 are appointed by single countries – the IMF’s largest quota -holders (The United States, Japan, Germany, France, the United Kingdom, China, Russia and Saudi Arabia). The other 16 Executive Directors are elected for two -year terms by groups of countries known as ‘constituencies’. 14  The Managing Director is head of the IMF staff and chairman of the Executive Board, and is assisted by three Deputy Managing Directors. 24. The Executive Board of the Fund has extensive and different responsibi lities from that of an ordinary Corporate Board. The Executive Board takes virtually all the key decisions within the Fund and is more or less an operational body. In principle, it decides what financial instruments the Fund has at its disposal and even re commends key decisions on quotas, SDR allocations, gold sales, etc. to the Board of Governors. 25. Thus the Fund’s Executive Board is not simply an oversight body. I t is central to the operational decisions taken in the Fund. So it is directly involved in what it is supposed to oversee, blurring the issues of assignment of responsibility and accountability. Moreover, the individual Executive Director is a representative of the country or group of countries that appoint him, at the same time he/she is also an official of the Fund. His is the voice of a constituency and shapes the voice of the institution. In this dual role, the Executive Director’s effectiveness depends upon his intellectual force and powers of his argument, skill and representation. Some argu e that he 15 seeks both the best interest of the Fund as a staff of the Fund and that of his constituency and that t his dual role can affect the judgment of an Executive Director and compromise his basic responsibility to protect the resources of the Fund . This may be so when dealing with matters of specific interest to a member (e.g. loan decisions) , which raises the issue of responsibility and accountability. The essence of this all is that the quality of representation matters a great deal, irrespective also of quotas. This means that small countries could exercise strong voice by the quality of their representation on the bodies of the institution. This includes representation on the staff of the Fund. For example, Jacque Polak, Kafka, and Mirhakor all from developing countries have exerted strong influence on the Executive Board. 26. The composition of the Executive Board, as that of the Board of Governors, changes through what is essentially a political process. No one can say that it consists of a group of like-minded people who cannot but act as representatives of their governments or the Fund. 27. There are also various bodies charged with responsibility for managing the institution, which also raise issue s of 16 responsibilities, and accountability and complic ates governance. 28. This relates to the roles of the various groupings (G3, G7, G10, G24, G70, civil society groups etc), all of which seek to promote certain interests in order to shape and influence decisions at the Fund. These bodies have evolved over tim e to have an influence on the way the Fund is run. For about the past 15 years or so, the G7 deputies have been in constant touch with each other, and also with the Fund Management and staff d iscussing issues relating to the IMF . Now it has become institut ionalized for the deputies to meet prior to the IMF ministerial meetings , and their meetings are growing in importance. The result is that there is gradual dilution of the influence of the Executive Board. This is reason for discomfort on the part of member countries that are not represented on these bodies. For the practice is serving to pull issues for consideration and decisions by agenda-setting bodies like the G7/8 etc outside the established structures of the Fund , which impairs good governance. 29. A typical example is the formulation of a Fund facility such as the Multilateral Debt Relief Initiative ( MDRI). T he very detailed proposals adopted by the Finance Ministers of the G8 17 were formulated not by the Executive Board of the Fund or other affected ins titutions but by G8 deputies amid differences of view s about what should be done. We all know that the MDRI decision benefited many African countries who have undertaken a program of reforms, while this was seen by other countries to have departed from the principle of uniformity of treatment in the use of Fund’s resources. 30. Other multilateral institutions also have to contend with bargaining processes and maneuvering within diverse stakeholder interests in seeking solutions to global public good problems. The World Trade Organization (WTO) negotiations are the clearest example. Take the issue of tariff reductions. The US, the European Union, and Japan proposed in Hong Kong in 2005 to provide billions in foreign aid to eliminate duties and quotas or exports from the world’s poorest countries. Officials of developing countries described this , as reported by the Herald Tribune, December 15, 2006 as “looking a gift horse in the mouth, and they are not sure they like what they see because they see the offer (nego tiating positions) littered with obscure exemptions, murky calculations, and special conditions ”. They thought the offer would rather hurt than help. It is interesting to hear wh at one Foreign and Trade Minister is quoted to have said “ it would be difficul t for us to 18 be party to an agreement that will make us lose our markets”. This is Dulloo of Mauritius who spoke as the leader of a 79 -member country coalition of the conference of low - income African Caribbean and Pacific Countries. Two years earlier, the l ast WTO ministerial meeting had collapsed, over complaints by West African countries over two issues: (i) US cotton subsidies; (ii) Botswana’s objections to streamlining customs regulations. The WTO practices broad engagement with stakeholders, which provi des scope for each member to show the power of voice when no single member has a veto on the basis of quota which is characteristic of the WTO. Surely a powerful voice and representation at the negotiating table matters a great deal. Of course the trade ne gotiations are notoriously tedious. 31. I must say that the inherent problems in the power sharing structure of the Fund and the rigidities in effecting changes within the system pose challenges of relevance at a time when other private financial institutions within the international financial system are growing in relevance . If the issues of representation and voice are not addressed effectively, this will reinforce the doubts being expressed in certain quarters about the continued relevance of the institution. 19 32. As was noted in the Financial Times of February 22, 2006 and I quote “If the International Monetary Fund did not exist, we would not re -invent it. This is not because it is useless but because today’s world lacks the courage and vision to create powerful multilateral institutions. The fact alone makes those we have inherited more valuable and even so they must be kept up to date, otherwise they risk suffering a lengthy senescence. This danger now threatens the IMF”. 33. The IMF will need to work hard on r eforms that will restore the confidence of emerging markets in particular, in the Fund. That will almost invariably mean increasing their role in Fund decision making process and also improving the confidence that potential lenders among them will have tha t the provision of such resources will lead to a commensurate increase in their voice in the decisions of the Fund. 34. The Fund does and can continue to play a powerful role in providing analytical framework and a forum for policy coordination, and advice t o member countries and the international community on global financial issues. It has adapted to the times. The entrenched issue of voting rights , voice and representation certainly has to be resolved to strengthen its power and credibility to secure its p lace as a 20 cooperative multilateral institution in the international financial architecture. Thank you for your attention.