IMF: A Powerful Representative Financial Institution and a Vital Economic Security Provider
A deficiency in member state representation within the International Monetary Fund (IMF) inhibits legitimacy in its role of providing economic security to its members. This deficiency is a result of Western hegemonic thought surrounding the creation of the IMF as part of the Bretton Woods Conference in 1945. Alternatively, developing economies may overcome this lack of state representation by considering the utility of regionalism through utilization of regional lending institutions more attuned to the needs of developing economies.
This essay begins by looking at the IMF’s effectiveness, based on state representation, in providing economic security as the world’s formal lending institution through the lenses of liberalism, hegemonic leadership, regionalism and global governance. Then, definitions of economic strength and representation shall be introduced, followed by a deductive process of dividing the question into two parts, determining whether the IMF is indeed representative in relation to state members and whether state representation within the IMF affects its provision of economic security. The answers to these two questions would allow us to come to a logical conclusion. Literary arguments from Rajiv Biswas’ posit of a widening gap between developing countries’ GDP and voting rights of IMF policies being an indicator of a representation gap1 shall be assessed in tandem with John W. Head’s reference to ‘democratic deficiency’ within the IMF.2 A look at the reason behind any possible representation gap shall then lead us back to its post-Second World War mandate aligned to the original founding thought of global economic development by Western hegemonic means. Lastly, a regional based solution is considered in the form of the Asian Infrastructure and Investment Bank (AIIB) as a means to solving balance of payment deficits in developing countries. A comparative analysis of state representation between the IMF and the AIIB or with other international financial institutions such as the World Bank is not being conducted, however, such an analysis would inform a more detailed discussion of the importance of representation, legitimacy and provision of economic security.
We can view the IMF through the lens of ‘embedded liberalism’3 as it intends to promote cooperation and balanced growth of international trade through multilateralism while being led by a global hegemon. The idea of a hegemon in the form of an international financial organization sprung from the need to create a stable global financial system in a Post-Second World War scenario led by the United States4 in order to avoid the economic tragedy of the inter-war years, particularly the 1930s economic depression. Subsequently, good global governance was assumed as essential to inter-state cooperation in solving trans-border problems of economic shocks characterized by exchange rate manipulation and balance of payment deficits.
We refer to economic strength here within the IMF’s original objectives of providing solutions to temporary balance of payment deficits among members and monitoring exchange rate fluctuations.5 State representation, or the extent by which member states have a role to play in the norms, procedures and policies of the IMF, is inherently linked to legitimacy as an absence of the former discredits the latter.6 Legitimacy, in turn, is important to the IMF’s role as a lender to developing economies and is moreover a valuable determinant in borrowing when repayment conditions are imposed on economies which are often on the decline.
Are developing economies, therefore, given their due representation within the IMF? When considering the extent of state representation within the IMF, we must first note that the global economic standing of a member state determines its voting rights on IMF policies and executive decisions. However, Biswas sheds light on this controversial policy as he highlights the widening gap between member states’ Gross Domestic Product (GDP) and their percentage share of voting rights in the IMF. Biswas argues that, in 2014, the United States controlled 16.75% of voting rights in the IMF as compared to the BRICS countries which had a combined percentage of IMF voting rights of 11.04% despite its 21.2% share of World GDP.7 While Biswas’ argument does indeed demonstrate disproportion in representation based on his perception of unfair GDP-to-voting rights distribution, there exists a minor flaw in that a member state’s GDP is not the only determinant of voting rights within the IMF.
According to the IMF, a member state’s voting rights is determined by a quota which is calculated using a number of weighted variables such as GDP (weighted at 50%), openness (30%), economic variability (15%) and international reserves (5%).8 These variables demonstrate the IMF’s holistic methodology in determining a country’s voting power through its quota system. While Biswas appears to understate the influence of the non-GDP variables in determining quota levels, his original intention of highlighting a lack of state representation in the IMF is supported by John Head’s reference to the ‘democracy deficit’ summarized by a state of affairs whereby “…control over the IMF by supplier states… results in policies that the people in consumer states have no ability to influence”.9
Furthermore, this ‘democracy deficit’ is evident in the IMF’s governing norm, exercised since its origin in 1945, that its Managing Director must be a European national.10 With both Biswas’ and Head’s arguments complementing each other we can see some evidence of inequality in representation and governance within the member state economic spectrum . Biswas and Head appears to adopt an anti-hegemonic viewpoint of the IMF’s role by alluding to the great global economic North-South divide in their argument of unequal voting rights. Much less consideration is made in their writing about any beneficial utility of this imbalance in state representation.
Questioning the utility of a representation gap may benefit from a review of the origin of the IMF and its partner organization, the World Bank, as a concept within the structure of the Bretton Woods Conference in New Hampshire in 1945. The importance of promoting a liberal global economy by which open trade practices would benefit American Wheat exports had been clearly written by Henry Morgenthau, Jr. the U.S Secretary of the Treasury at that time when he further summarized the intent of the Bretton Woods Organizations’ approach as being based on ensuring favorable economic conditions in Wheat importing countries.11 His article titled “Bretton Woods and International Cooperation” written in 1945 for Foreign Affairs magazine describes the conceptualization of a Bretton Woods Conference aimed at stabilizing the Global Economy through hegemonic U.S leadership. Within the Bretton Woods Organizations, such as the IMF, there is evidence of Morgenthau’s ‘win-win’ attitude in achieving economic gain for the United Sates by liberalizing international trade with developing nations through the newly created institutions of the IMF and World Bank. From a hegemonic viewpoint this leadership was essential in a post-Second World War scenario to prevent the same economic hardship that preceded the War. Given the current inequality described by Biswas and Head and after looking at the origins of the IMF, we may posit that this lack of state representation is a result of its origins in the importance of hegemonic leadership in lieu of fair distribution of representation among member states. This hegemonic style of governance may have filtered down to a contemporary IMF where it pervades institutional governance today.
Is representation and hence legitimacy necessary to the IMF’s role of building economic strength? State representation is important to the IMF in achieving its aim of lending economic assistance to its members as a lack of representation in one area of IMF policymaking leads to a perception of flawed decisions and procedures in other areas.12 The IMF’s role within the global financial system requires it, as an international creditor, to levy stringent economic conditions on its debtors to solve balance of payment deficits. These conditions may involve structural adjustments such as re-alignment of government institutions or fiscal and monetary restrictions which may impact socio-economic instability and lead to the emergence of distrust in Western Institutions among debtor states. This effect, is evident in the latest IMF bailout of the Pakistani economy in 2019 which set conditions such as improved tax collection, government restructuring and ending utility subsidies.13 For countries such as Pakistan that has experienced political and military tension with the United States in the past, one can see how the IMF can be viewed as an imperialistic institution controlling a weaker economic state through set conditions of repayment or conditionalities. If we, however, don the hegemonic lens, as we have been doing thus far, we may see a requirement for Western economic leadership of the Global-South’s economies.
Conditions levied upon developing economies, as in Pakistan, such as better tax collection procedures, more efficient government machinery and increased independence in local industries after lowering subsidies may indeed be necessary to solving a balance of payment deficit and boosting economic growth. While the utility of legitimacy through state representation of developing economies within the IMF is important to its image as a fair lending institution from the viewpoint of developing economies, from a hegemonic viewpoint, the importance of legitimacy may be overshadowed by the technical expertise, economic leadership and facilitation that the hegemon may be able to provide to developing economies. In a global economy that is becoming more regionalized through the existence of regional lending institutions acting as an alternative to the IMF, the idea of a financial hegemon such as Morgenthau’s post-Second World War concept birthed in the Brettton Woods Conference may be outdated and no longer practical. Therefore, representation and hence legitimacy in the IMF are both important to maintaining competitiveness within a global economy facing increased regionalism. Regional alternatives to lending exist and developing economies may be better off borrowing from institutions which are perceived to be regionally attuned to their economic requirements. Therefore, we shall continue with the assertion that legitimacy is important to the IMF’s provision of economic security as a creditor.
We have now posited that the IMF lacks state representation as a result of its original hegemonic roots and is consequently not best placed to provide economic security due to a lack of legitimacy which is essential to its status as a creditor in a world of increasing regional lending alternatives.
So, what then is the alternative to a supranational global financial institution such as the IMF and if it is not well placed to provide economic security then which institution is? The answer lies in the concept of regionalism as a response to global governance gaps, more specifically the representation gap that is extant in IMF governance. A regional bank such as the Asian Infrastructure Investment Bank (AIIB) seeks to shed light on the Asian economies which have been previously underrepresented in the Bretton Woods organizations. The AIIB deals with the issue of representation by incorporating non-Asian members within its governance framework yet ensuring that the focus remains on Asian economic development.14 Also, while China remains the largest stakeholder of the AIIB, founding members are given equal voting rights. Lending institutions such as the AIIB act as a counterbalance to the Bretton Woods organizations in South- South representation and may, depending on further analysis, demonstrate a comparatively better alternative to global financial institutions in the provision of economic security.
As a counterargument, however, China can be viewed as a ‘regional-hegemon’ within the Asian region as it has the largest stake in the AIIB. One may argue that the AIIB is simply another hegemonic IMF working at a regional level, however one counter argument to this is that the AIIB does not allow political deliberations to interfere with its decisions on development projects.15 The AIIB may therefore be viewed as a regional solution to the lack of global representation faced by developing economies in a global financial institution such as the IMF.
As we had initially divided our main question into two parts, we may now consolidate a response. In reference to whether there is state representation in the IMF, the ‘democracy gap’ referred to in the literature supports a lack thereof. This is evident in the gap between amalgamated GDP of the BRICS and their percentage of voting rights in the IMF. The ‘democracy deficit’, if viewed from an anti-hegemonic lens may indicate a legitimacy gap and a reduction in capability in providing economic strength. However, if perceived from a hegemonic viewpoint we may see that the lack of legitimacy is overshadowed by the importance of necessary leadership which is essential to hegemonic control of the global financial system. The importance of state representation in the IMF’s provision of economic security can be supported by the existence of a competitive economic arena wherein regionalism introduces alternatives to the IMF. Competitiveness among lending institutions within the global economy requires the IMF to be more representative in its norms, procedures and policies.
Therefore, state representation is important to an international organization such as the IMF. With the growth of regionalism in the global financial system, there is less need for a hegemonic financial institution such as the IMF as regional institutions such as the AIIB may be able to compensate for the lack of representation faced by developing economies. The IMF’s lack of state representation, stemming from its 1945 hegemonic origins, therefore does not heed well in providing economic security given the regional alternatives that exist in our global economy.
Footnotes
1 Rajiv Biswas, “Reshaping the financial architecture for development finance: the new development banks,” (St. Louis: Federal Reserve Bank of St Louis, 2015 2015), 2. https://search.proquest.com/docview/1698364752?accountid=11862.
2 John W. Head, “Seven deadly sins: an assessment of criticisms directed at the International Monetary Fund,” University of Kansas Law Review 52, no. 3 (2004): 540.
3 Eric Helleiner, “The life and times of embedded liberalism: legacies and innovations since Bretton Woods,” Review of International Political Economy 26, no. 6 (2019/11/02 2019): 1112, https://doi.org/10.1080/09692290.2019.1607767, https://doi.org/10.1080/09692290.2019.1607767.
4 Jr. Henry Morgenthau, “Bretton Woods and International Cooperations,” Foreign Affairs 23, no. 2 (1945): 182-94,
Jan 1945, https://www.foreignaffairs.com/articles/1945-01-01/bretton-woods-and-international-cooperation.
5 Ngaire Woods, The Globalizers: The IMF, the World Bank, and Their Borrowers (Place of publication not identified: Cornell University Press Bibliovault, 2014), 48.
6 David P. Rapkin, Jonathan R. Strand, and Michael W. Trevathan, “Representation and Governance in International Organizations,” Politics and Governance 4, no. 3 (2016
2019-02-13 2016): 78, https://doi.org/http://dx.doi.org/10.17645/pag.v4i3.544, https://search.proquest.com/docview/1816872905?accountid=11862
7 Biswas, “Reshaping the financial architecture for development finance: the new development banks,” 3-4.
8 “IMF at a Glance,” IMF, updated 2017, 2020, accessed 11 Oct 2020, 2020, https://www.imf.org/external/np/sec/memdir/members.aspx (IMF Members’ Quotas and Voting Power, and IMF Board of Governors).
9 Head, “Seven deadly sins: an assessment of criticisms directed at the International Monetary Fund,” 540.
10 Biswas, “Reshaping the financial architecture for development finance: the new development banks,” 187.
11 Henry Morgenthau, “Bretton Woods and International Cooperations,” 187.
12 Rapkin, Strand, and Trevathan, “Representation and Governance in International Organizations,” 544. 13 “IMF Will Either Make Or Break Khan’s Pakistan,” Forbes, 2019, accessed 13 Oct 2020, 2020, https://www.forbes.com/sites/panosmourdoukoutas/2019/07/25/imf-will-either-make-or-break-kahns- pakistan/#72007bb43703.
14 “Out of Bretton Woods: How the AIIB is different,” Foreign Affairs, 2015, accessed 16 Oct 2020, 2020, https://www.foreignaffairs.com/articles/asia/2015-07-27/out-bretton-woods.
15 Liao, “Out of Bretton Woods: How the AIIB is different.”
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