Tuesday April 24, 2012

Lagarde’s next battle – power shift

She will have to convince US and Europe to sign off on voting reforms and accept other changes

WASHINGTON: Fresh from a big victory in raising US$430bil for the International Monetary Fund (IMF), Christine Lagarde's tougher test as head of the global lender will be finding a way to give emerging economies more influence.

To do this, the former French finance minister will need to convince the fund's dominant powers the United States and Europe to sign off on voting reforms agreed in 2010 and accept further changes by January 2014.

When Lagarde passed around the hat among finance ministers last week to raise funds to contain the eurozone's debt crisis, China, India, Brazil and Russia said they would be part of the effort but chose not to announce each of their contributions until a June summit of the Group of 20 leading economies.

Lagarde : ‘I take reforms one step at a time,.’ – Reuters

Europe may have to yield something in return.

The crisis in Europe and a fragile recovery from recession in the United States has hastened the shift in world economic power towards the emerging markets, and they want their growing heft to be reflected in finance institutions like the IMF.

Brazil, the most outspoken of the big emerging economies, said the release of the money depended on winning firm commitments on more IMF voting power, although India's Finance Minister, Pranab Mukherjee, denied any link. He said other emerging heavyweights Russia and China would need time simply to get authorisation in their capitals for providing the money.

Domenico Lombardi, a fellow at the Brookings Institution in Washington who follows the issue closely, said the decision to withhold announcing their funding for now gave emerging economies room to extract concessions on increased voting power in the months ahead.

“The delay provides a bargaining chip for these countries to strengthen their negotiation position on the next quota round (of negotiations) that has just started,” he said.

“The BRICS have learnt that in order to be effective they need to act preemptively,” he said, referring to the four emerging heavyweights plus South Africa. “Bargaining on the extra resources provides a valuable tool to further escalate the negotiation.”

On Saturday, the IMF's governing panel called for the 2010 voting reforms to be ratified “expeditiously.” But emerging countries say those changes do not go far enough and bolder steps are needed. A fresh set of negotiations has already begun.

Their frustrations have grown in recent months with the likelihood that the Obama administration will not seek needed congressional approval of the 2010 reforms before the US presidential election in November.

Although it is Europe that stands to lose power at the IMF under the reforms, the Obama administration is reluctant to put the plan to Congress because Republicans might try to score pre-election points by opposing an increased US financial contribution to the IMF, which is part of the shakeup.

The reforms, which were supposed to be completed by the next meeting of global finance chiefs in October, would make China the third-largest IMF voting member.

To keep faith with the emerging nations, Lagarde, who took over as IMF managing director in July, will need to be seen to be pressing the United States to pass the reforms.

She will also need to make sure Europe sticks with a commitment to reduce its over-representation on the IMF board by giving up two of the eight seats it currently holds, and hand them to emerging and developing countries.

Europe's dominance of the board has become a particularly sensitive issue because the IMF has been called upon to lend to crisis-struck eurozone nations. In addition, the fund has always been run by a European.

“I take reforms one step at a time,” Lagarde told reporters on Saturday. “Everybody wants to have a bigger share of the same pie, so there will have to be give and take.”

Emerging economies have won assurances from G-20 partners that they will be rewarded over time with more IMF voting power via an increase in their so-called membership quotas, an issue that is central to keeping them engaged in the IMF. Reuters

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