Governance of International Financial Institutions Mrs. Chantavarn Sucharitakul Senior Executive International Economics Department Bank of Thailand

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Governance of International Financial
InstitutionsMrs. Chantavarn SucharitakulSenior
ExecutiveInternational Economics DepartmentBank
of Thailand
Disclaimer The views express herein are of the
speaker and does not necessarily reflect those of
the Bank of Thailand.
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What is Governance?

• Governance encompasses all aspects of the way a
  country or entity (institution) is governed and
  the policies it observes.

• Good governance is participatory,
  consensus-oriented, accountable, transparent,
  responsive, effective and efficient, equitable
  and inclusive, observing the rule of law. (ESCAP)
• With good governance, corruption is minimised and
  the views of minorities are taken into account.

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Governance and International Financial
Institutions (IFI)
Governance in International Financial
Institutions is crucial because of their dual
nature External IFIs such as IMF and WB
provide policy advice and undertakes surveillance
as well as provide financial support, and
technical assistance. Internal IFIs are
governed and administered by representatives of
their member countries
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Case Study International Monetary Fund (IMF)

• The IMF is one of the three most important IFIs
  in the world, along with the World Bank and WTO
• Founded in 1944, its mission is to promote
  international monetary cooperation by providing
  surveillance, financial assistance and technical
  assistance to its 184 member countries.

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Role of IMF in Promoting Governance I
Externally, the IMF promotes and encourages good
governance in member countries through its 3 main
activities
Good governance is included in IMFs policy
advice to members. Surveillance reports of IMFs
findings are publicised.
Surveillance
Governance or corruption are mentioned explicitly
in over 40 of LOIs required prior to receiving
financial assistance from the IMF.
Financial Assistance
Most of the IMFs TA has a direct bearing on
governance, e.g. assistance to strengthen tax and
customs administration
Technical Assistance
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Role of IMF in Promoting Governance II
Other IMF Initiatives relating to Governance
IMF encourages members to improve transparency
and accountability of decision-making by adopting
international standards and codes that cover the
government as well as financial and corporate
sector.
Standards and Codes
IMF has introduced minimum standards for the
control, accounting, reporting and auditing
systems of the central banks of countries to
which it lends money.
Safeguarding IMF Resources
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IMF Internal Governance Structure
Governors of 184 countries, decides on major
policy issues
Board of Governors
IMFC
Power is delegated to the IMFC and the Executive
Board, both are 24-member committees representing
184 countries. The Board is headed by the MD
Managing Director
Executive Board
IMFs 2,800 international civil servants from 133
countries carry out the policies
Staff
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Voting in the IMF
Though the IMF is a specialised agency of the UN,
voting in the IMF is determined by a members
economic size.
UN-General Assembly
IMF-Board of Governors
1
17.16
1
6.16
1
0.50
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Voting Groups in the Executive Board
Because of the small number of votes allocated to
small economies, voting groups have to be formed.
Each group is represented by 1 Executive Director
Brunei, Cambodia, Fiji, Indonesia, Laos,
Malaysia, Myanmar, Nepal, Singapore, Thailand,
Tonga, Vietnam
Southeast Asian Voting Group
3.16 of votes
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Composition of Votes in the IMF
U.S. 17.4
Developing Countries 30.9
Other Industrial Countries 44.2
Including 3.16 of SEA Group
Total Industrial Countries 61.6
Transition Countries 7.5
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Critiques of the IMFs Governance I

• Undemocratic Voting Structure
• Developing and transition countries (who are the
  IMFs borrowers), are minority shareholders and
  under domination of a small number of industrial
  countries in policy-making.
• There is no counterbalance of the influence of
  major industrial countries.

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Reform Proposals I

• Democratisation of Governance Structure
• More equitable quotas using alternative variables
  such as population
• Question the rationale of the linkage between
  quotas and voting
• Predetermination of voting power for developing
  countries
• Full democratisation adoption of the one man
  one vote system

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Critiques of the IMFs Governance II

• De facto Veto Power of a Member Country
• Important decisions of the IMF, like amendments
  in its charter or changes in its quota
  allocation, require an 85 supermajority.
• Therefore, the only member which has over 15
  voting power has the sole de facto veto power.
• In comparison, the UNs Security Council gives
  the prerogative of veto powers to its Big 5
  members.

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Reform Proposals II

• Restricting Veto Power
• Restricting the maximum share of a member country
  to, say, 10
• Eliminating or reducing the threshold of the 85
  supermajority clause for important decisions
• Following examples in other IFIs by eliminating
  veto power Even in the World Bank and the
  Inter-American Development Bank, the member
  country with the largest quota does not have the
  right to veto.

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Critiques of the IMFs Governance III

• Executive Board Dominated by Developed
  Countries
• Number of members 39 in 1944 ? 184 today
• Number of Executive Directors 12 in 1944 ? 24
  today
• Constituencies range from single-country
  constituencies of the 8 largest members to 8
  multi-country constituency led by a developed
  country, and 8 multi-country constituency of
  developing countries.
• Sub-Saharan Africa 43 countries represented by 2
  EDs
• Larger countries tend to dominate smaller ones in
  a constituency
• Board meetings dominated by developed countries

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Reform Proposals III

• Reallocation of Constituencies in the
  Board
• Limit the maximum number of countries in a
  constituency
• Eliminate single-country constituencies
• More equitable representation of countries by
  dividing them into constituencies of LDCs,
  emerging market, transition, and industrialised
  countries

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Critiques of the IMFs Governance IV

• Selection Process of the Managing
  Director
• Through a historical gentlemens agreement,
  the MD of the IMF has always been a Western
  European, while the President of the World Bank
  has always been an American.
• In contrast, the head of other international
  organisations is chosen from any member country
  (UNs Sec-Gen is Ghanaian, WTOs DG is Thai)

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Reform Proposals IV

• Create Transparency in the MD Selection
  Process
• Choice of the MD is by calibre and ability, and
  can be national of any member country
• Establish transparent and accountable process for
  selecting the Managing Director
• Member countries should be able to choose the MD

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Critiques of the IMFs Governance V

• Former executives of the IMF entering the
  private sector
• Despite the IMFs championing of high ethical
  standards, there are many cases in which former
  executives of the IMF, with their vast and
  profound knowledge of international finance and
  country-specific issues, join the corporate
  worldmostly private financial institutionsimmedi
  ately after their term at the IMF.

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Reform Proposals V

• Establish a Binding Code of Ethical
  Conduct for IMF Staff
• IMF Staff, in particular top executives, should
  be subjected to a cooling-off period before
  they join private (financial) institutions.

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Reforms Urged by the UN Financing for Development
Conference

• At the FfD Conference in Monterrey in March 2002,
  world leaders urged a reform in the IMF and World
  Bank
• Greater transparency and effective participation
  of developing countries.
• Enhance financing for development
• Continue to enhance the participation of all
  developing countries and countries with economies
  in transition in the their decision-making.
• Broaden and strengthen capacity building in
  multilateral forums.
• The need for Special Drawing Rights Allocations
  should be kept under review.

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IMFs Implementation of the Monterrey Consensus

• Major changes in transparency and disclosure
• Setting up on Independent Evaluation Office
• Continuing the 12th General Review of Quotas in
  light of developments in the international
  economy.
• Encourage steps to implement SDR allocation