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By Richard Mahapatra Developing countries are the sole market of the World Bank. But they collectively have only around 38% of its voting rights. All this is set to change, with developing nations set to get more representation and power. An exclusive report
Change is the new password to escape the current economic crisis. While there is a serious debate worldwide over the advantages and disadvantages of the free market economy, the global instruments created to perpetuate it – such as multilateral development banks and financial institutions like the World Bank (WB) and International Monetary Fund (IMF) -- are facing their worst-ever crisis of credibility. From the United States of America to India, people are calling for the reform of the Bretton Woods institutions, as they are popularly known, to ensure that they are more responsive to the needs of the developing world rather than the developed countries. In fact, inside both the WB and the IMF there are signs of sweeping institutional change. The IMF has already initiated some changes while the WB is in the process of doing so. Changing voice A confidential and limited-circulatiion document among senior WB officials titled ‘Enhancing Voice and Participation of Developing and Transition Countries in the World Bank Group: Options for Reform’, lays out specific changes in the Bank’s structure. These changes will be adopted by the Bank’s executive directors at an upcoming spring meeting in April. They were also discussed in October 2008 by the executive directors at the annual meeting of the WB in Washington. The changes have two core objectives: to make the Bank more equitable by giving greater power to developing countries; and enhancing the legitimacy and credibility of the Bank. The document suggests changes that will allow developing and emerging countries to play a greater leadership role. It also suggests better representation for the African continent. And there is talk about the US giving away its ‘right’ to nominate the president of the WB. The proposed voice reform package, as the WB terms the initiative, involves two stages of change -- immediate change, and a second stage comprising medium-term change. All the changes, however, will be adopted in the course of 2009. The first set of changes, according to the document, includes: - Creating an additional chair on the board for Africa which will give developing countries a majority of seats on the Bank’s boards.
- Bringing the voting share of developing countries up to 44.0% compared to 42.1% in the IMF. This is aimed particularly at giving low-income countries a voice.
- Bringing developing countries’ votes in the International Development Agency (the WB’s arm for soft loans to poor countries) up to 48%.
- Implementing a merit-based, transparent and open selection process for Bank president.
- Further enhancing diversity in management and decentralised decision-making.
- Advancing reforms to strengthen the boards’ effectiveness and internal governance.
The second stage includes: - Initiating a comprehensive and intensive work programme to re-align IBRD shareholding based on Bank-specific principles and formulae that recognise the evolving weight of countries in the world economy, including measures based on GDP-PPP, and members’ contributions to the institution, whilst moving towards equitable voting powers between developed and developing countries.
- Raising the voice of developing countries in the International Finance Corporation (IFC, the WB’s arm for the private sector) to enhance its role in private sector development as an engine of growth.
- Increasing the frequency of annual meetings held outside Washington DC, subject to decisions by shareholders.
An inequitable instrument The Bank has an irrational governance structure. Firstly, although it has 184 member countries, only the US nominates its president. Its clients -- developing countries -- don’t have majority voting rights; the US has the largest share of 16.4% while all other developing countries share 38.8% of the rights. As an expert on multilateral development banks, Devesh Kapur, puts it: “Less than a quarter of the current members of the IMF and World Bank were present when the institutions’ structures were crafted in the 1940s. Developing nations joined gradually over the years, but did so as rule-takers rather than rule-makers… with the passage of time, the mismatch between the antiquated structures of multilateral institutions and their larger global environment has increased -- and so have tensions.” The need for change within the WB arises from two urgent trends: loss of relevance for the Bank among developing and emerging economies like India, and a feeling among developing countries of not having a say in the Bank’s management despite being its sole market. The proposed changes have been making the rounds since 2002 (called the Monterrey Consensus) when an international conference on financing for development in Monterrey, in March, strongly recommended that the WB enhance the participation of all developing countries and countries with economies in transition in the Bank’s decision-making (see ‘Voting power at the World Bank group’). The Monterrey Consensus made this a priority for the Bank. Voting power at the World Bank group | Members | World Bank group (consisting of four institutions) | | | IBRD | IFC | IDA | MIGA (Multilateral Investment Guarantee Agency) | | Developing and transition countries | 42.6% | 33.3% | 41.1% | 50.0% | | Developed countries | 57.4% | 66.7% | 58.9% | 50.0% | Trigger for change The boom in the economies of big client countries like India and the availability of private funds has reduced the Bank’s relevance. There are reports that India and China, in fact, warned the Bank to fasten its lending or stop doing business. These warnings also involved pressure to reform the Bank’s governance structure. As recently as January 2009, the President of India demanded reform in the WB at a public meeting. A further push for internal structural change at the Bank came in September 2008 when the IMF agreed to adopt structural changes. In the face of the economic meltdown, the IMF saw opportunities and immediately instituted changes to make it more relevant to collapsing economies. The World Bank seemed to have been left behind. In April 2008, the development committee of the Bank initiated a reform process with the clear-cut deadline of adopting the changes by April 2009, at the spring meeting. The executive directors of the Bank met five times during 2008 to discuss the changes. According to insiders at the Bank’s headquarters in Washington DC, there is a consensus over the changes. “The Bank’s legitimacy, credibility and accountability could suffer without tangible and timely progress on the ‘Voice and Participation’ agenda. That progress becomes all the more relevant as significant changes in the global political economy highlight the importance of modernising the Bank’s overall institutional governance arrangement,” notes the confidential document. This is the first time since the Bank’s creation that developing countries will have a greater voting share. Being big capital shareholders, developed countries have so far had a free run of the Bank’s management. “Shareholding in the Bank has not been reviewed since 1998, pointing to the need for a new review by members,” argues the document. Instead, the voting power of developing countries has declined over a period of time, ironically coinciding with the Bank’s increased lending to developing countries. Take, for example, voting share trends in the International Bank for Reconstruction and Development (IBRD), the core wing of the Bank. The number of basic votes at the IBRD has been fixed since 1944, at 250 per member, in the Bank’s articles of agreement. Basic votes were introduced at the time the Bank was founded to maintain relative voting power for smaller members. In 1979, each member was allowed to subscribe to an additional 250 shares of IBRD stock. At present, basic votes represent 2.86% of total IBRD voting power, down from 10.78% at the time of the Bank’s formation in 1944. The voting power of developing nations and countries in transition at the IBRD is just 42.6%. This means that developed countries hold most of the voting power. Agenda for change “There is a consensus at the Bank that the level of basic votes should be increased and that the increase should take the form of specifying basic votes as a percentage of total votes,” the document recommends. It proposes three scenarios for this: doubling the basic share of developing countries to 5.55% of total votes, tripling the share to 8.10%, and keeping the original level of 10.78% of total votes. This translates to the voting share of developing countries being 43.8%, 44.9% and 46.1% respectively -- that’s an increased range of 1-3% over the current share (see ‘How the voting share in the IBRD will look’). How the voting share in the IBRD will look | Details | Setting basic votes as % of total votes | | | Current status | 5.5% (doubling scenario) | 8.10% (tripling scenario) | 10.78% (original scenario) | | Number of basic votes per member | 250 | 500 | 750 | 1,028 | | Voting power of developing and transition countries | 42.6% | 43.8% | 44.8% | 46.1% | The document also suggests a ‘transparent and merit-based’ process for selection of the Bank’s president. The US has been nominating the president since the institution’s inception, and it remains extremely secretive about the process. Indeed, the Bank has no formal or legal selection procedure for its head. Former president James Wolfensohn himself criticised the flawed procedure of selecting the Bank’s head. “There is considerable agreement on the importance of a selection process for the president of the Bank that is merit-based and transparent, with board consideration of multiple candidates and nominations open to all board members,” observes the document. Media reports say the US is considering giving away this ‘right’. The process of reform at the World Bank has been initiated at the right time. Although developing countries have been demanding such reform for decades, this time it is developed countries that are pressing for change. (Richard Mahapatra is with WaterAid India) InfoChange News & Features, February 2009
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