G20 inks a deal on IMF reform

2010-10-30 11:16

A last-minute effort among G20 nations to give emerging economies more voting power at the International Monetary Fund (IMF) has been successful.

The deal became possible because the US abandoned its efforts to link the ­voting power shift in the IMF executive to trade balance targets, sources said.

US treasury secretary Timothy Geithner introduced the idea during meetings of the fund in Washington last month.

Geithner fleshed out his proposal in a letter to finance ministers of the G20 ­nations in which he pressed for a deal to limit current account surpluses and ­deficits to a specified share of national output.

The idea of linking a voting power deal to an agreement on trade caught emerging markets, which have long pushed for more say in the IMF, off guard and was widely rejected. Exporters that run large trade surpluses, such as China, Russia, Germany and Saudi Arabia, were particularly vehement in their opposition.

The sources – officials from emerging economies who took part in the discussions – said the US backed off the idea as G20 finance ministers met behind closed doors in Gyeongju, South Korea, on Saturday, ­enabling an IMF shift-of-power proposal to move forward.

“No deal would have been possible if the Americans had kept on insisting on that link,” said one source from a major emerging country.

“The attempt to link it to reforms was half-hearted because it was very difficult to manage and they couldn’t bring in a whole new condition for the completion of the deal at the last minute.

“It doesn’t mean they’re not going to pursue it when G20 leaders meet in Seoul on ­November 11 and 12.”

The sources said IMF managing director Dominique Strauss-Kahn and G20 host South Korea were instrumental in brokering the IMF reform deal by first bringing together the US and European countries to reach an agreement on the make-up of the IMF board, which is ­dominated by Europe.

In the meeting, Europe agreed to give up two seats on the 24-member panel. It has two years to decide which countries will cede their chairs.

Later, the thornier issue of redistributing voting power was tackled in a meeting between Brazil, Russia, Indian and China (Bric) and the Group of Seven old-line powers – Britain, the US, Canada, Japan, Italy, Germany and France.

In a surprise deal, the countries committed to a 6% shift in IMF voting power from ­developed countries to “dynamic” underrepresented emerging market economies, meaning the Bric nations.

But the size of the overall shift from ­developed to developing countries was just 2.78%.

That remained a point of ­contention as many developing countries, including G20 members South ­Africa and Argentina, would not benefit.

With the small shift in power, the ­legitimacy of the IMF would still be in question, sources said.

The deal vaulted China over Germany, France and Britain into third place on the list of IMF voting powers, and guaranteed Russia, India and Brazil a place in the top 10.

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