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Emerging markets play hardball for IMF governance changes

Brazilian Finance Minister Guido Mantega speaks to reporters after the International Monetary and Financial Committee meeting in Washington on Saturday.

Jonathan Ernst/Reuters

The big emerging market economies want in, and they are getting tired of waiting.

In 2010, the United States and other established powers acquiesced to a broad redistribution of voting rights at the International Monetary Fund that would leave China as the third biggest shareholder, and rank Brazil, India and Russia among the top 10.

But the old guard is dragging its feet on fulfilling its promise to redistribute shares, or quota as they are called at the IMF. The issue has gone beyond a bureaucratic power struggle, and is now central to the international effort to contain the European debt crisis. The emerging markets that are driving global economic growth are tying their participation to a greater say in how the world economy is managed.

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"We are deeply concerned about the slow implementation of the 2010 quota and governance reforms," Brazilian Finance Minister Guido Mantega said in his statement to the IMF's steering committee on Saturday.

The United States, many countries in Europe and even Canada have yet to pass legislation to enable the IMF governance changes. As a result, decisions at the IMF still largely reflect global power as it was at the end of the Second World War, when the fund was created, rather than a world where emerging markets are the main engines of global economic growth.

Mr. Mantega and some of his peers are getting tired of asking; they now are playing hardball.

IMF Managing Director Christine Lagarde needed financial commitments from Brazil, Russia, India and China to reach her goal of raising more than $400-billion (U.S.) to bolster her crisis-fighting reserves. But those countries pointedly resisted making specific pledges, saying they will do so later, when they feel confident the promised quota changes will be implemented.

There was some evidence Saturday that the message of Mr. Mantega and others might be getting through. The IMF's steering body, the International Monetary and Financial Committee, said in a statement after a meeting in Washington that there was some "urgency" to making the quota changes by the IMF's annual meeting in Tokyo in October to enhance the fund's "legitimacy and credibility."

The IMFC also said that it supports adopting a "simple and transparent" formula for determining a country's quota that "better reflects members' relative positions in the world economy," a nod to Brazil and others who argue that shares should primarily reflect gross domestic product, rather than complicated calculation that is currently used. The IMF is next scheduled to review how its shares are distributed in 2014

"Any realignment is expected to result in increases in quota shares of dynamic economies in line in with their relative positions in the world economy, and hence likely in the share of emerging market and developing countries as a whole," the IMFC statement said.

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None of this language existed in previous IMFC statements, indicating a shift.

European governments, who lobbied the Group of 20 economic powers to bolster the IMF's resources to help deal with the euro-zone debt crisis, have resisted a quota formula based primarily on GDP because they stand to lose relevance.

The current calculation, which gives considerable weight to economic "openness," certainly produces some seemly perverse outcomes. Brazil, with an economy bigger than that of every European country with the exception of Germany, has no more clout at the IMF than the Netherlands, and fewer votes than Britain, Italy and Spain. Belgium has more votes than Indonesia and three times as many as Nigeria.

This debate is relevant to Canada because Finance Minister Jim Flaherty this weekend turned himself into something of a champion of the cause.

Canada was one of only a handful of significant countries that declined to participate in Ms. Lagarde's fundraising effort. The position of Stephen Harper's government was a surprise to many. The Canadian economy, so dependent on trade, would benefit from any attempt to assure global financial markets that the IMF will have all the ammunition it needs to quell a future crisis.

"There will be pitfalls along the way, which is way Christine's umbrella is so important," said Singapore's Tharman Shanmugaratnam, the chairman of the IMFC, referring to Ms. Lagarde's characterization of her newly collected resources as an "umbrella" to protect against the dark clouds that continue to shadow the global economy. "It's going to be a challenging journey."

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Mr. Flaherty argues that the IMF had enough money to deal with any "imminent" threats posed by the European debt crisis.

After losing that debate, he raised questions about the IMF's governance, saying Europe's disproportionate representation creates a conflict of interest at time when so much of the IMF's resources are tied up in the euro zone. He said Canada will push for changes, suggesting that non-European countries should be given a veto over how IMF funds are used in Europe.

And perhaps to bolster his credibility, Mr. Flaherty said Canada no longer would be among the foot draggers. He told reporters Friday that he would make Canada's acceptance of the new IMF quota arrangements part of supplementary budget legislation that he will introduce within the next few weeks.

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