By Peter S. Goodman
Washington Post Foreign Service
Tuesday, September 19, 2006; D06
SINGAPORE, Sept. 18 -- The International Monetary Fund on Monday gave more influence over its decision-making to four developing countries and pledged to make further changes in the next two years to heighten the power of under-represented and poor nations.
Fund officials cast Monday's decision by the membership as a significant step in the IMF's efforts to gain credibility with poorer countries and to maintain relevance in a world that has recently had little need for an agency whose specialty is stabilizing troubled economies.
On its face, the makeover is largely symbolic. China, Mexico, Turkey and South Korea will gain slightly greater voting power. However, control of the fund will remain solidly in the hands of the United States and Europe, whose contributions to its coffers dwarf those of other countries. Most decisions in the institution's clubby environs are made by consensus.
But policymakers at the IMF argue that symbolic change matters. In leading bailout drives from Asia to Latin America and Russia, the fund gained a reputation for obsessing over austerity and budget-cutting at the expense of the poor. It pressured governments reliant on its largesse to cut subsidies and social services, say critics, generating unemployment while limiting the damage to major financial institutions.
Fund administrators chafe at this narrative, noting that during the Asian financial crisis in particular, the fund adjusted its programs to protect social spending. Yet in reserving a larger space at the table for emerging and poorer nations, fund officials and finance leaders from countries with the largest economies have labored to alter this perception, while making the institution more reflective of the global economy itself.
"For the first time, not only economic weight will be considered, but also the need for low-income countries to be strengthened in voice," said the fund's managing director, Rodrigo de Rato, during a meeting last week with members of anti-poverty groups.
The structure of the fund is closer to the way the world looked at the end of World War II than the way it looks today. China has less voting power than Italy, though its economy is far larger. The fund has 184 member countries, but with its headquarters in Washington, it has a decidedly American and European flavor.
"The world economy has undergone significant change over the last two decades, and the governance of the institution ought to reflect this," said John Lipsky, the fund's first deputy managing director.
The vote on the governance change, conducted here at a meeting of the IMF and the World Bank, was 90 percent in favor. But behind the scenes, the issue was controversial. Some poor nations said the change was too small to matter.
"The voice of poor countries is being lost," said a member of Nigeria's delegation, Amina Ibrahim. "This doesn't do it. The battle goes on."
Such large emerging economies as Brazil, India and Argentina opposed the way the refashioning occurred, asserting that they should be given greater rights.
"It further erodes the credibility and legitimacy of the IMF," these three nations, joined by Egypt, declared in a statement over the weekend.
The most immediate impact of the vote, held late Monday, is to slightly increase the power of four of the most under-represented countries. But it also commits the IMF to reapportion more votes later, with the idea that some will gain more shares, including such Asian nations as Singapore and Malaysia.
The U.S. Treasury says it has been lobbying for the change, partly in hopes that a greater role for China will make it more willing to increase the value of its currency, the yuan. Western manufacturers say undervalued Chinese money has made China's goods unfairly cheap on world markets.
Treasury and IMF policymakers hope that as China gains prominence within the institution, it will take on more responsibility for affairs beyond its borders and see its economic interests as intermingled with global prosperity.
But on the eve of a trip to China to discuss economic and trade policy, U.S. Treasury Secretary Henry M. Paulson Jr. minimized the potential impact of the IMF changes on Chinese thinking.
"It's incremental," he said. "China's going to play its role in the world whether the IMF reforms or not."
For the fund, the most contentious issue lies ahead: Under the plan adopted Monday, fund administrators must craft a formula for apportioning control in the future.
The United States advocates focusing on the size of an economy to dictate voting power, while also increasing votes for the poorest countries. But European nations -- many of which would lose voting power under such a plan -- want to use additional criteria, including how much trade a country conducts and how open it is to capital flows.
In splitting the reapportioning into two phases, fund officials postponed that debate so they could get something accomplished.
"This reform must be done," said Finland's minister of finance, Eero Heinaluoma, who has coordinated fund policy positions for all nations of the European Union. "It will give more reliability and credibility to the voice of the IMF."