Lagarde's next battle
Washington - Fresh from a big victory in raising $430bn 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
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
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
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 depends on winning firm commitments on more IMF
voting power, although India's Finance Minister, Pranab Mukherjee, denied any
He said other emerging heavyweights Russia and China would
need time simply to get authorisation in their capitals for providing the
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."
Waiting for reforms and pushing for more
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
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
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
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 G20 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.
But demands for more influence go beyond voting power.
China is keen to see its currency, the renminbi, become part
of the IMF's basket of international currencies, which is used as a reserve
asset by central banks. Africa is demanding a third seat on the IMF's 24-member
The battle over the next round of voting reforms begins with
the elaborate formula for setting the quotas that determine each nation's
voting share, how much it must contribute to the fund and how much it can
The formula takes into account the size of each economy,
foreign exchange reserves and trade.
The current formula fails to capture the massive changes
that have taken place globally since the IMF was founded after World War Two,
especially the rise of emerging economic powers.
Now that emerging markets are being asked to bulk up the
fund's coffers to battle a crisis centred in Europe, their leverage to push for
more change has increased.
"Our demands are mostly for reforms, and those reforms
are always finding obstacles," said Brazilian Finance Minister Guido
"It's very easy for the Europeans to get the money and
not do any reforms."