The recent financial crisis has highlighted the need for legitimate and credible institutions for global governance. Such institutions are central to sustainable global economic prosperity and the management of risks arising from an increasingly globalised world.
It is in this context that South Africa and other developing countries have been calling for the reform of the governance of the International Monetary Fund (IMF) and the World Bank.
The sea change in the global economy, whereby world growth is being driven by emerging markets, further supports this call for more representative institutions of global governance. For one, world manufacturing, trade and investment have shifted to developing countries, especially China, India and Brazil.
Until the turn of the century, advanced economies accounted for about 80% of global output. The IMF forecasts that by 2015 developing countries will account for two-fifths of world economic output, with China and other fast-growing countries emerging as major sources of economic growth.
While this sea change heralds an array of new opportunities and risks for South Africa and the African continent as a whole it also exposes a major fault line in the current model of global governance. In a world where economies are as systematically connected as they are today we need institutions with a good view of the global economy.
The IMF, for example, has an unparalleled view. It is responsible for assessing policy, outlook and risk in its 187 member countries as well as globally. Such surveillance is crucial to the smooth functioning of the international monetary system, which regulates how international payments are handled and makes possible the global exchange of goods and services.
The current model of IMF and World Bank governance is a relic of the post-World War II world, when a few countries appropriated for themselves the right to decide what was right for the rest of the globe.
Yes, there is commitment to make amends, but the pace is slow. The IMF reform process began in 2006 when it adopted a resolution on quota and voice reform. The Singapore reforms agreed to later that year aimed to align better the IMF’s quota shares with members’ relative positions in the world economy and to make it more responsive to changes to the global economy. Just as importantly they sought to enhance the participation and voice of low-income countries in the IMF.
South Africa has not benefited from the first and second rounds of quota reforms. Nor will it benefit from the third round of reforms. In fact, South Africa and some over-represented developing countries will lose quota share to under-represented developing countries. Our share will decline from 0.784% of total IMF quota after the 2008 reforms to 0.64% after the 2010 reforms.
Also, the 21-member Africa Group I constituency, of which South Africa is a member, will also lose quota share. The constituency’s quota share will decline from 3.121% before the Singapore meeting to 2.471% after the implementation of 2010 reforms. These losses can be attributed to the four countries in the constituency (South Africa, Nigeria, Namibia and Swaziland) that will lose quota share relative to post-second-round (2008) reform quota.
The quota shares of these countries did not qualify for protection under the agreed arrangement to protect the shares of low-income countries, because South Africa, Namibia and Swaziland are middle-income countries and Nigeria’s per-capita income in 2008 was above $1135, the threshold below which countries are regarded as poor and therefore qualify for low-interest loans or grants from the International Development Association, an arm of the World Bank.
In fact, only three countries in the Africa Group I constituency (Angola, Ethiopia and Botswana) will gain quota share relative to their post-2008 round quota share. The remaining 14 will record an unchanged quota share relative to the post-second-round share and this is largely the result of the protection of the quota share of the poorest.
As the reform of the IMF unfolds, South Africa will continue to push for a third chair for the sub-Saharan African (SSA) region, which constitutes a quarter of the IMF’s membership (45 of 183 members) and yet is represented by only two chairs. The World Bank in 2009 decided to increase the size of its board to 25 to allow for an additional chair for SSA. We believe, for the sake of parallelism, that an additional chair should also be granted to SSA at the IMF.
The role of ministers also needs to be strengthened so that they play an instrumental role in giving strategic direction to the IMF, either through a ministerial council or through a reformed International Monetary and Finance Committee (IMFC) that moves beyond being just an advisory body to the IMF board. South Africa will continue to promote such a strengthened IMFC.
South Africa also supports reforms of the IMFC’s administrative arrangements. These include making IMFC meeting formats more effective and interactive, adopting a more inclusive leadership model, such as the G20’s troika system, improving the communiqué drafting process and incorporating mechanisms for accountability.
The IMF’s consultation with member countries, especially systematically important countries, also needs to be more forthright about financial and macroeconomic risk. In this regard, South Africa supports improved IMF surveillance, which also needs to produce a better understanding of how national risk can endanger the global economy through trade, capital flows, spill-overs and contagion effects.
Yet it must be emphasised that strengthening the surveillance role of the IMF by modifying its internal positions and carrying out additional analysis is not sufficient: it also requires greater legitimacy of the IMF, which would allow its recommendations to be more acceptable to domestic constituencies.
Finally, on the issue of leadership at the IMF, South Africa fully supports the consensus opinion in favour of a merit-based selection of the managing director and other senior leaders. This would help to further enhance the representation of emerging-market developing countries in the IMF. South Africa also supports calls for more ambitious targets and initiatives with regard to staff diversity in relation to nationality, gender and background, particularly at senior level.
South Africa’s engagement in global institutions will continue to argue for important institutions of global governance such as the IMF to be made more representative and credible and for them to serve the interests of the majority of the world, especially the poor.
It is unfortunate that some leaders are still making parochial calls for the next managing director of the IMF to come from Europe. There are several credible candidates from developing countries who are eminently suitable. Any one of them would bring a new perspective to the running of the IMF, a perspective that would ensure that the interests of all countries, developed and developing, are fully reflected in its operations and policies.
Pravin Gordhan is the minister of finance