Analysis: Lagarde's next battle at IMF: power shift

WASHINGTON Mon Apr 23, 2012 4:49am EDT

International Monetary Fund (IMF) Managing Director Christine Lagarde speaks at a news conference following the African Consultative Group (ACG) meeting in Washington April 22, 2012. REUTERS/Yuri Gripas

International Monetary Fund (IMF) Managing Director Christine Lagarde speaks at a news conference following the African Consultative Group (ACG) meeting in Washington April 22, 2012.

Credit: Reuters/Yuri Gripas

WASHINGTON (Reuters) - Fresh from a big victory in raising $430 billion for the International Monetary Fund, Christine Lagarde's tougher test as head of the global lender will be finding a way to give emerging economies more influence.

To do this, the former French finance minister will need to convince the Fund's dominant powers - the United States and Europe - to sign off on voting reforms agreed in 2010 and accept further changes by January 2014.

When Lagarde passed around the hat among finance ministers last week to raise funds to contain the euro zone's debt crisis, China, India, Brazil and Russia said they would be part of the effort but chose not to announce each of their contributions until a June summit of the Group of 20 leading economies.

Europe may have to yield something in return.

The crisis in Europe and a fragile recovery from recession in the United States has hastened the shift in world economic power towards the emerging markets, and they want their growing heft to be reflected in finance institutions like the IMF.

Brazil, the most outspoken of the big emerging economies, said the release of the money depended on winning firm commitments on more IMF voting power, although India's finance minister, Pranab Mukherjee, denied any link. He said other emerging heavyweights Russia and China would need time simply to get authorization in their capitals for providing the money.

Domenico Lombardi, a fellow at the Brookings Institution in Washington who follows the issue closely, said the decision to withhold announcing their funding for now gave emerging economies room to extract concessions on increased voting power in the months ahead.

"The delay provides a bargaining chip for these countries to strengthen their negotiation position on the next quota round (of negotiations) that has just started," he said.

"The BRICS have learnt that in order to be effective they need to act preemptively," he said, referring to the four emerging heavyweights plus South Africa. "Bargaining on the extra resources provides a valuable tool to further escalate the negotiation."

WAITING FOR REFORMS AND PUSHING FOR MORE

On Saturday, the IMF's governing panel called for the 2010 voting reforms to be ratified "expeditiously." But emerging countries say those changes do not go far enough and bolder steps are needed. A fresh set of negotiations has already begun.

Their frustrations have grown in recent months with the likelihood that the Obama administration will not seek needed congressional approval of the 2010 reforms before the U.S. presidential election in November.

Although it is Europe that stands to lose power at the IMF under the reforms, the Obama administration is reluctant to put the plan to Congress because Republicans might try to score pre-election points by opposing an increased U.S. financial contribution to the IMF, which is part of the shake-up.

The reforms, which were supposed to be completed by the next meeting of global finance chiefs in October, would make China the third-largest IMF voting member.

To keep faith with the emerging nations, Lagarde, who took over as IMF managing director in July, will need to be seen to be pressing the United States to pass the reforms.

She will also need to make sure Europe sticks with a commitment to reduce its over-representation on the IMF board by giving up two of the eight seats it currently holds, and hand them to emerging and developing countries.

Europe's dominance of the board has become a particularly sensitive issue because the IMF has been called upon to lend to crisis-struck euro zone nations. In addition, the Fund has always been run by a European.

"I take reforms one step at a time," Lagarde told reporters on Saturday. "Everybody wants to have a bigger share of the same pie, so there will have to be give and take."

Emerging economies have won assurances from G20 partners that they will be rewarded over time with more IMF voting power via an increase in their so-called membership quotas, an issue that is central to keeping them engaged in the IMF.

But demands for more influence go beyond voting power.

China is keen to see its currency, the renminbi, become part of the IMF's basket of international currencies, which is used as a reserve asset by central banks. Africa is demanding a third seat on the IMF's 24-member board.

The battle over the next round of voting reforms begins with the elaborate formula for setting the quotas that determine each nation's voting share, how much it must contribute to the Fund and how much it can borrow. The formula takes into account the size of each economy, foreign-exchange reserves and trade.

The current formula fails to capture the massive changes that have taken place globally since the IMF was founded after World War Two, especially the rise of emerging economic powers. Now that emerging markets are being asked to bulk up the Fund's coffers to battle a crisis centered in Europe, their leverage to push for more change has increased.

"Our demands are mostly for reforms, and those reforms are always finding obstacles," said Brazilian Finance Minister Guido Mantega. "It's very easy for the Europeans to get the money and not do any reforms."

(Reporting by Lesley Wroughton; Editing by Tim Ahmann, William Schomberg and David Brunnstrom)

(This story was refiled to fix the first name of Indian finance minister in paragraph 6)

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Comments (4)
The issue is really simple. Eurozone and China have common interests. The stronger Germany (and thus Eurozone)=the weaker US/UK = the better for China. Solution to Eurozone crisis means Printing Ben cannot proceed with more printing that means return to real economy for US with deep depression in the middle of the process.
Current China voting rights at IMF are 3.65%, a little more than such economic powers like Saudi Arabia or Canada, after reform it will be 6.0%.
Conclusion: China in this or other way will support Eurozone evn if US will continue its single blockage of voting rights reform.
Next reform is underway because BRICS want to show to other emerging nations the lack of LEGITIMACY of IMF.

Apr 23, 2012 7:04am EDT  --  Report as abuse
RK_France wrote:
If peace and prosperity of the world is to be assured, the emerging nations got to have a powerful seat at the table. Even the world bank whose major objective had been reduction in world poverty was a total failure! It doesn’t take long to understand why! It might be painful for the old rich nations but the world can’t progress without the emerging and developing countries! Serious reforms at IMF and the world bank got to be urgently on the table!!

Apr 23, 2012 12:39pm EDT  --  Report as abuse
WJL wrote:
It is rather pathetic of Europe and USA to block democratic reform of the IMF after all the trumpeting about democracy and sponsoring conflicts all over the world.

Apr 23, 2012 12:47am EDT  --  Report as abuse
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