GYEONGJU, (Reuters) – Fast-growing emerging economies will get more clout at the International Monetary Fund under a landmark agreement clinched on Saturday that reflects a shift in global power from industrial countries.
Under the deal, more than 6 percent of voting shares at the Fund will shift to dynamic developing countries such as China, which will become the third-biggest member of the 187-strong Washington-based lender.
Europe will give up two of the eight or nine seats it controls at any given time on the IMF’s Executive Board, which will continue to have 24 members, according to a statement issued after a meeting of finance ministers from the Group of 20 leading economies.
As part of a wide-ranging package, the G20 also agreed to double the IMF’s quotas, which determine how much each country contributes to the IMF and how much it may borrow from it.
The quotas currently total about $340 billion. The IMF staff had argued for a doubling, which it said would put the fund “in a strong position to forestall or cope with potential crises in the coming years.”
The G20 said the reforms would make the Washington-based lender “more effective, credible and legitimate.”
The governance reforms amount to an overhaul of the global economic order established when the Fund was set up after World War Two, prompting IMF Managing Director Dominique Strauss-Kahn to describe the agreement as historic.
“This makes for the biggest reform ever in the governance of the institution,” he told reporters.
The reduction in Europe’s representation is less than the United States was seeking.
However, Washington, which has a 17.67 percent share of IMF quotas will retain its veto on the Fund’s most important decisions. These will continue to require a super-majority vote of 85 percent, according to IMF officials.
The G20 agreed a year ago to transfer at least 5 percent of voting rights to developing countries such as India and Brazil whose clout within the Fund has not kept pace with their emergence as major engines of global growth.
“It was a long-expected reform that is really shifting the balance of power and making space for all economies, including emerging markets,” said French Finance Minister Christine Lagarde.
China will leapfrog Germany, France and Britain in the Fund’s power rankings, with its quota share rising to 6.19 percent from 3.65 percent. India will be in 8th spot, Russia in 9th and Brazil in 10th, according to the Russian finance ministry.
Together, the four — known by the acronym BRICs — will have 14.18 percent of IMF quotas.
Emerging markets as a whole will have a 42.29 percent share, which the G20 said was likely to rise further following a comprehensive review of the quota formula due by January 2013.
“This does not complete the reform process,” Russian Finance Minister Alexei Kudrin said. “The position of the emerging market countries is that this work should be continued.”
Thrashing out which smaller European countries will give up their board seats is likely to take a year or more. The G20 set a final deadline of October 2012. Belgium, Denmark, the Netherlands and Switzerland are among the possible losers.
The fund’s current five biggest members — the United States, Japan, Germany, France and Britain — have their own seats on the IMF board and are allowed to appoint their executive directors.
Under Saturday’s deal, these directors will now have to be elected by the full board.
China, Russia and Saudi Arabia also have their own seats. The rest of the membership is divided into constituencies, which elect an executive director to vote for the group as a whole.
Officials said the Gyeongju Accord could lead to more multi-member constituencies, and a shake-up of existing ones, depending on how Europe reduces its representation.
“What that essentially means is that all of these multi-country seats will have to be reshuffled, so there will be jockeying and coalition-forming,” said Hyun Song Shin, the top G20 adviser to South Korea’s president.
There are no set rules governing how countries group together. Individual countries can switch constituencies in search of more influence within a group or to form a more coherent regional alliance.