International Institutions as Clubs

The IMF, World Bank, and WTO generally conform to the predictions of club theory. Their memberships have expanded several-fold since they were founded, and all have become more heterogeneous through the diverging interests of original members and the addition of new ones. Yet their governance structures and voting shares are relatively unchanged. Given the inflexibility of these institutions, alternative organizations have begun to develop around them. Regional development banks have been created in Latin America, Asia, Africa, and Europe. The various “G forums” cover some of the turf of IEIs as well as provide oversight for them. Regional forums, like the European Union (EU), Association of Southeast Asian Nations (ASEAN), and East Asia Summit, focus on common issues among closely interdependent countries. And some functions, including financial supervision, are being addressed with new institutions, such as the new FSB. These alternative organizations are attractive because they are (for now) smaller and more homogeneous.

3.1 Macroeconomic Stability

The IMF, originally charged with maintaining stability in a fixed exchange rate system, has become a more general agency for maintaining global macroeconomic stability. With rising international capital mobility, its work has shifted to short-term lending to countries with liquidity problems, usually as a result of balance-of-payments crises caused by capital outflows. The widespread failure of financial systems in advanced economies in the current global crisis is likely to transform, or at least expand, the IMF's mandate once again.

The IMF addresses its mission through surveillance, lending, and technical support.⁹ Surveillance involves monitoring economic and financial developments, and offering policy advice in order to prevent or manage crises. The results of global surveillance are published in the World Economic Outlook and Global Financial Stability Report. Bilateral surveillance involves annual consultations with member authorities based on Article IV.¹⁰ Its results are reported in Public Information Notices.¹¹ Recently, the IMF has begun to publish regional economic outlooks focusing on major regions of the world as part of its regional surveillance efforts. The IMF also provides technical assistance to help countries analyze issues and build capacity in macroeconomic and financial policy.

Until recently, IMF lending was accompanied by rigorous policy conditions on borrowing countries. These loans, made under stand-by agreements (SBAs) lasting for one to two years, were dispersed as borrowers met criteria for monetary, fiscal, and structural targets. The SBAs were backed up in 1997 with a supplemental reserve facility and other facilities designed to provide larger loans with shorter maturities to countries facing a capital account crisis and/or unusual shocks.¹² In the 2008 crisis, the IMF pushed the envelope a step further, introducing a new short-term liquidity facility (SLF) to offer quick, large-scale financing without explicit conditionality. But even the SLF proved ineffective, and in March 2009 it was superseded by a flexible credit line (FCL) facility, which assured pre-qualified countries large, flexible, upfront access to resources without ex-post conditions.¹³ The SLF and FCL are major departures for the IMF: they offer condition-free loans based on ex-ante qualification criteria.

The new facilities of 2008–2009 respond to a long-simmering fault line in the IMF. In the IMF's early years, many members were expected to be both contributors and borrowers, but over time sharp distinctions emerged. Advanced economies that control a majority of IMF shares are now almost exclusively contributors and view the IMF as a guardian of systemic stability (or less charitably, as a guarantor of investments) and a manager of the moral hazard associated with emergency lending. Borrowers, in turn, are middle- or low-income countries with little voting power that depend on the IMF as a financial backstop in a crisis.¹⁴ This division sharpened in the Asian crisis and many potential borrowers—particularly those in East Asia—became unwilling to seek assistance from the IMF. In response to the global crisis of 2008, the IMF's resources were expanded and some borrowing reemerged. This has further intensified the pressure on the IMF to make its facilities more attractive.

These tensions reflect, in part, the sluggish adjustment of IMF governance. Its highest decision-making body is the Board of Governors,¹⁵ comprising one governor and one alternate appointed by constituencies of one or more countries. This board is advised by two ministerial committees. The International Monetary and Financial Committee (IMFC) consists of 24 governors and meets twice a year to provide council on international monetary and financial issues, on amendments to the Articles of Agreement, and on systemic disturbances. Its communiqués guide the IMF's work program for the following six months. The Development Committee, with a composition similar to that of the IMFC, also meets twice each year, and advises the IMF and the World Bank on development, trade, and environmental issues.¹⁶

The IMF's day-to-day decisions are handled by an Executive Board, to which the Board of Governors has delegated most of its powers.¹⁷ The Executive Board consists of 24 executive directors, of whom five are appointed by countries with large quotas and 19 are elected by groups of countries.¹⁸ It selects the managing director and oversees the IMF's operations. The managing director has been traditionally European, but in 2009 the G20 agreed to a merit-based selection process.

The voting powers of individual countries depend on quotas, which also determine financial commitments and ability to borrow.¹⁹ Quotas are negotiated when a country enters the IMF and depend on variables such as gross domestic product (GDP), international reserves, current payments, current receipts, and the variability of the receipts.²⁰ Members are allocated 250 basic votes plus one vote for each 100,000 special drawing rights of quota.²¹ Quotas have been increased several times (see Table 1 [ PDF 70.9KB | 1 page ]), while basic votes have remained constant, increasing the voting shares of larger countries. Many decisions require simple majorities, but major decisions, including the amendment of the Articles of Agreement, require an 85% majority.²²

As a result, IMF decisions are controlled by a small number of countries, most of which are original members. Quota revisions have not kept pace with economic change.²³ As Figure 1 [ PDF 43.2KB | 1 page ] shows, only nine of 185 countries control a majority of votes (sufficient for most decisions), up from only three at the launch of the IMF in 1945. Now, as then, the US alone can veto a major decision that requires an 85% super-majority vote as its voting share is 17%.

Voting shares today are especially low for rapidly growing emerging market countries, such as Brazil, People's Republic of China (PRC), and India. Kelkar et al. (2005) note, for example, that these three countries had 19% fewer votes than Belgium, Italy, and Netherlands collectively, although they had 21% more nominal GDP, 400% more purchasing power GDP, and 2,800% more population than the second group.

Figure 2 [ PDF 43.3KB | 1 page ] shows the evolution of the shares of developing and emerging economies in IMF quotas, and in global trade and GDP (in terms of purchasing power), two rough indicators of their importance in the world economy. After an early period of decline (a period dominated by the acceleration of European growth), the trade share of developing and emerging economies has risen more rapidly than their share in IMF quotas. This contrast is even clearer for their share in world GDP. Figure 3 [ PDF 46KB | 1 page ] shows similar data for Asia's rapidly growing economies. The figure clearly suggests that their rising weight in the global economy has not been reflected in IMF quotas.

Reform proposals have centered on changing the quota formulas (Cooper 2000, Bryant 2008a, Kelkar et al. 2005). In April 2008 the IMF Board recommended increasing quotas for 54 members (mostly emerging-market countries),²⁴ tripling basic votes, fixing the ratio of basic votes to total votes in the future, and adding two more alternate directors for African countries. But the effect of these changes will be modest: for example, while the combined voting share of the PRC, India, Republic of Korea, Brazil, and Mexico will rise from 8.2% to 10.7%, it will still lag behind their combined 11.9% share of world GDP.²⁵

Sub-global cooperation in macroeconomics is emerging in two ways. One path involves “variable geometry” within the IMF: in a sharp break with practice, in 2008 the IMF involved several stakeholders in designing and negotiating programs in Eastern European and Nordic countries (Takagi 2009). These partners, including the European Central Bank (ECB), EU, and Nordic countries, roughly matched the IMF's lending commitments. The full implications of this approach are unclear; they could represent special cases, reflecting Europe's dominant role in the IMF, or, if systematically applied, could offer a new model for building flexible partnerships for delivering broader services.

A second path involves cooperation outside the IMF. The ECB, of course, has taken over managing key macroeconomic functions for the Eurozone countries. But in addition, several countries have provided liquidity support bilaterally (notably the US to Mexico in 1994, and to Brazil, Republic of Korea, Mexico, and Singapore in 2008). Finally, parallel multilateral institutions are also emerging. The most prominent is the Chiang Mai Initiative (CMI), encompassing bilateral swap agreements of US$84 billion among the ASEAN+3 countries²⁶. In recent meetings, these economies agreed to convert CMI into a multilateral, self-managed, reserve-pooling arrangement, called the CMI Multilateralized (CMIM),²⁷ to provide US$120 billion for the CMIM, and to establish a surveillance unit to monitor economic developments in participating countries. For now, a country must participate in an IMF program to draw on more than 20% of the facility, but the link could be relaxed once the surveillance unit gains experience and credibility.

3.2 Development Finance

The World Bank Group supplies the global public good of development through low-cost loans and technical assistance to middle- and low-income countries. It comprises the International Bank for Reconstruction and Development; the International Development Association, for assisting the poorest countries with interest-free, long-term loans;²⁸ the International Finance Corporation, for investing in private projects; and the Multilateral Investment Guarantee Agency, for providing political risk insurance. The World Bank's “investment operations” provide loans (market-based or concessionary) to sectors based on agreed outputs and performance targets. The World Bank's “development policy operations” provide untied budget support for policy reform. The World Bank also lends in the case of adverse developments²⁹ and, through special development policy loans, for reforms in countries approaching or in crisis. Like the IMF, the World Bank provides technical support and drafts periodic Country Assistance Strategies to identify development challenges, especially as they affect poverty.

The World Bank's governance parallels that of the IMF. The World Bank is owned by the same 185 countries and is run by a Board of Governors appointed by them (usually ministers of finance or development). The Board of Governors delegates many responsibilities to executive directors, who oversee policies, lending operations, and the administrative budget, and appoint the president.³⁰ As in the IMF, the five largest shareholders each appoint an executive director and the other 180 members elect 19 executive directors. Voting shares are the same as in the IMF.

A decentralized decision structure is well established in development finance. The World Bank's work is paralleled by four regional development banks: the African Development Bank, the Asian Development Bank (ADB), the European Bank for Reconstruction and Development, and the Inter-American Development Bank. These are further complemented by smaller sub-regional banks. The Meltzer Commission (Meltzer 2000) envisioned an especially large role for these institutions—eventually for them to handle all lending—but noted that their current activities often overlap with those of the World Bank. The 2009 London Summit committed to general capital increases in the regional banks, perhaps signaling a longer-term increase in their relative role in global development finance.

The ownership structure of the regional development banks includes global as well as regional members. For example, ADB has 67 members, of which 48 are from Asia and the Pacific and 19 from other regions. Regional members contribute 63.4% of subscribed capital and have a 65% share of voting power. The largest regional member, Japan, contributes 15.6% of the capital and holds 12.75% of votes. The largest non-regional member, the US, has capital and voting shares equal to Japan's. Governance is similar to that of the IMF, with a Board of Governors delegating day-to-day responsibilities to a 12-person Board of Directors, of whom two thirds are from the region. The president must be from the region and has always been Japanese.³¹

3.3 Trade Liberalization

The services provided by the WTO focus on facilitating global negotiations and monitoring the world trading system. The WTO's ongoing work program includes trade policy reviews to monitor compliance with WTO obligations and offering services for dispute settlement. Under the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT), eight rounds of international agreements have been conducted. Each round has become longer and more complicated. While the early rounds were completed within one year, the fourth lasted two years, the fifth four years, and the sixth six years. The seventh and most recently completed, the Uruguay Round, took nine years to negotiate. The current Doha Development Agenda was launched in 2001 and is in a stalemate at this writing. Although the WTO director general and participants often reaffirm their intent to conclude the round, the current global economic downturn is only likely to make progress more difficult.

The governance of the WTO is very different from those of the IMF and the World Bank. The WTO has no board or executive body. It is member-driven and consensus-based; decisions are facilitated by councils and committees. At different times, various smaller groups of countries have conducted negotiations in an effort to achieve breakthroughs that might be acceptable to a wider membership. The ministerial conference meets once every two years and makes decisions on multilateral trade agreements. Day-to-day work between meetings is managed by a small secretariat which supports a general council, the Dispute Settlement Body, and a Trade Policy Review Body.

At the same time, a sub-global framework for trade is rapidly emerging. Partly because of the stalemate in the Doha Round, bilateral and regional trade arrangements have grown exponentially (ADB 2008), and now include major agreements in Europe, North America, Latin America, the Gulf countries, and between ASEAN and various countries. Many countries participate in overlapping agreements and pursue regional and extra-regional agreements at the same time. Although these initiatives are theoretically subject to GATT Article XXIV (which requires the full liberalization of substantially all trade), they have been negotiated without any WTO involvement. While analytical studies (Baldwin 2006) show large benefits from consolidating regional agreements into a coherent global system, at this writing there are no serious negotiations underway to connect regional arrangements.

3.4 Financial System Stability

An important factor behind the global financial crisis is the lack of a global financial regulatory and supervisory framework. Such a system would regulate, monitor, and supervise the cross-border activities of systemically important financial institutions, as well as instruments and markets that affect systemic stability. No such system currently exists. The Financial Stability Forum, launched in 1999, has sought to encourage information exchange and international cooperation in financial supervision and surveillance, but has left regulatory functions to a division of labor between home and host authorities. Supervisory colleges have been set up to monitor and supervise the cross-border activities of large financial institutions, but their effectiveness remains untested, especially in the event of disagreements among regulators. A better global financial regulatory and supervisory system is needed to encompass the varied interests of a growing number of players and to address the challenges raised by systemically important financial institutions that operate in many jurisdictions. A partially decentralized approach may provide a way to establish such a regime in light of large initial differences in regional financial systems.

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