Saturday, October 25, 2008

End US veto at IMF and World Bank

In the coming weeks, world leaders will be meeting in Washington to discuss how to reform the world's financial system and to try to prevent the recession from becoming an all out depression. One has to wonder if among the topics of discussion is how to reform the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). If not it should be.

While most developed countries and some developing countries have shares in the banks, the United States effectively holds sole veto power. They managed to do this years ago because the rules require an 85% supermajority to change the rules; and the US has 16% of the voting rights. So, if every other country on the planet voted against the US, Washington would still get its way.

Having five countries with a veto in the Security Council is bad enough -- it's one of the reasons things never get done at Turtle Bay and why reforming the UN has proven impossible. When only one country calls the shots, it's an even greater recipe for stagnation. Consider the fact that every single World Bank president has been an American -- always. Every single IMF president has been a citizen of the EU -- always. Both are nominated by the US President (the latter in consultation with the 27 EU heads of government, presumably); and because of its veto (and its nuclear weapons arsenal) the other countries have no choice but to fall in line.

Countries that may actually have smarter individuals who know what they are doing -- Canada, Australia, Japan, India, Pakistan -- need not apply.

Given that much of the world's crisis has been caused by irresponsible behaviour by both Washington and Brussels, I submit that for the foreseeable future -- say, the next twenty years or so -- no American and no EU citizen be permitted to even apply for the jobs. The US must also be forced to give up its veto and no country should be allowed to have more than a 10% voting stake. (Absolute equality is somewhat unworkable given the wide disparity in the sizes of various countries' banking systems). The qualified majority needs to be shaved as well, from say 85% to 67%. This is 2008 and not the 1940s. And even with the slide of the Euro as of late the Eurozone is still more powerful than the US economically; and the old rules don't consider the Asia Pacific region or the growing strength of Latin America -- let alone Africa.

Any vestiges of Bretton Woods need to be abolished all together; and the IMF and WB either have to be reformed or abolished all together and replaced with a system that helps countries that want to lift themselves, not punishes them for trying.

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Anonymous said...

"And even with the slide of the Euro as of late the Eurozone is still more powerful than the US economically;"

The Eurozone is a larger aggregated basket of economies than is the United States, but that has little to do with being "economically powerful." Until the Eurozone operates as a singular economic entity in support of a singular political 'state,' a small difference in aggregate GDP size confers no greater "power."

The pretense that the Eurozone is a singular entity is one of the more bizarre memes I've dealt with for some time. Economic power does not derive alone from exchange rates (which have dropped the Eurozone well below direct exchange rate parity with the U.S.).

BlastFurnace said...

I notice you posted your comment in something I wrote over six months ago rather than something more recent about the EU. Regardless, I am quite aware that the Eurozone still constitutes 16 sovereign nations. However, when it comes to money they have given up one of the ultimate symbols of independence which is monetary policy. Each can't unilaterally increase or decrease its money supply to address economic issues within -- they have to coordinate across the zone as a whole and hope for the best.

And you're right, economic power doesn't derive from exchange rates. We've learned that all too well in Canada where the currency gained strength 60% in a short period of time, then devalued 30% just as quickly.

There is no doubt in my mind that the Euro has been a huge success story, and that it will eventually replace the greenback as the world reserve currency. However, this current burst bubble will really test the ability of so many countries to work closely together. That's the point I was trying to make, and while bond markets may still look at individual states, as far as the 4X market goes there is no distinction -- the euroland is treat as one.