Analysis: G20’s Ultimatum to America
The ultimatum given by the G-20 nations in April 2014 to the US to approve the reforms to the International Monetary Fund (IMF), as recommend by its Board of Governance in 2010, by the end of this year, or risk being left out of new changes is very bold step to challenge the singular US hold on the IMF.
The proposed reforms in the IMF are going to double its quota i.e. the equity capital of the IMF to $720 billion and are also going to move two of its 24 directorships from European to the developing countries. Besides, as per the 14th quota review made in 2010 and slated to be implemented by 2014, India, Brazil, China and Russia would be among the ten largest stockholders of the IMF.
It would not be out of place to mention that India had been among the five largest quota (share) holders of the IMF and the World Bank (WB), ever science their inception and also had one permanent director on board of each, among the five permanent directors of the two. It was due to the myopic decision of the Jawahar Lal Nehru Government in 1949 to seek World Bank loan, for which the country had to devalue the Indian Rupee. At the time of independence one US dollar was equal to 3.50 Indian Rupees. This devaluation of Rupee since 1949, depreciated the value to quota partly held in Indian Rupee by India. Because of which, India lost its position and permanent directorship in 1960s. Now, India can partly gain some re-enhancement in its position, but, China being its prime contender would be the biggest gainer and can occupy third place among the top stakeholders. Had India negotiated firmly during the 14th general review of quotas, it could have found a better place among top five as it ranks third in the world economy in terms of its GDP, based on purchasing power parity.
The year 2014 has special significance for the IMF as, it also marks the completion of 70 years since the Bretton-Woods Conference was held in 1944, when the main parameters of the post-war world-currency and financial systems were defined and, the decision to create the International Monetary Fund and World Bank was made. At that time, it was decided to have fixed exchange rates for the currencies of participant countries, along with the pegging of all currencies to gold (gold parity). Free convertibility of dollars to gold was also assured by the US Treasury to the monetary authorities of other countries. All of these are no more in practice now. The Fund’s main function was then defined as extending credit to member countries at the time of a deficit balance of payments where it could endanger the deviation of exchange rate of that currency from the established fixed rate and from gold parity. India was among the 5 top stockholders of the IMF as well as World Bank, with one permanent director till 60s in each of them.
The IMF is now an international organisation of 188 member countries, which now constitutes major component of the global economy, with its explicit objectives to foster global monetary cooperation, secure financial stability, facilitate international trade and payments, promote high employment with sustainable economic growth, and reduce poverty around the world. Of late, its resources are proving too inadequate to take care of the emerging crises worldwide; especially those that have emerged recently in the developed countries. Therefore, the proposed rise in its quota i.e. financial resources and voting strength of emerging market economies is in tune with the need of the hour.
The IMF had already faced a more serious crisis to its existence in the 1970s, when the original structure of the Bretton-Woods system collapsed, especially when on August 15, 1971, the U.S. President R. Nixon announced a retrograde decision that, the U.S. Treasury was terminating the convertibility of dollars to gold. The final dismantling of that erstwhile system was effected at the Jamaica Conference in 1976, when amendments were made to the IMF Charter. Thereafter, floating exchange rates were enacted and the pegging of the dollar and other currencies to gold was terminated. Now also, to execute the reforms the G20 has to give an ultimatum to the US to pass the reforms to the International Monetary Fund or risk being left out of the new changes.
The finance ministers of G-20 who met in Washington for the spring meetings of the IMF and World Bank had expressed their “deep disappointment” at the failure to implement changes agreed as early as in 2010, for want of the requisite US consent and gave the US final time limit until the end of the year 2014, to do so or face ignorance. However, despite this ultimatum, it is not clear what next step the G20 can take, since the US had a blocking minority of votes at the fund.
The United States has had controlling stake in the IMF ever science its inception with more than 15 per cent votes. And has never had problem in mobilising support of the UK and France as well, to push through its agenda. But whatever maybe the case, this stalemate has to be resolved now.
More than the 85 per cent of the IMF’s total
voting strength is required for these amendments to enter into force. As of January 15, 2013 almost 130 members having 70.2 per cent of the total voting power has already accepted these reforms. In addition, other 145 members with 77.1 per cent of total quota, have also consented to the quota increases under the aforesaid 14th General Review of Quotas (GRQ).
Though the IMF, which had the role of the world’s financial firefighter for last seven decades should have been taken out of the clutches of the G-7 in the 1970s itself, when the President R. Nixon announced the termination of convertibility of dollars to gold. But, if this step is taken now, it’ll not be too late. The step is necessary to make IMF a truly International organization that is capable enough to reflect a balanced approach.
It is believed, the US may still delay the approval of reforms. Therefore, Indian economy which is the 3rd largest economy of the world on the basis of purchasing power parity, as per the largest ranking announced by the World Bank, besides being the second most populous country should take the initiative to score atleast
one permanent directorship. Therefore, India should now endeavor to get the IMF fully revamped at the next i.e. 15th general review of quotas to redesign the global financial architecture of the
IMF, World Bank as well as the Economic
stability board.
For redesigning the global financial architecture, it’ll be imminent to make them more democratic and representative, and to ensure they are not dominated by the erstwhile G7 nations.
-Bhagwati Prakash Sharma
