The road to greater legitimacy for the International Monetary Fund and the World Bank does not lie merely through greater “democracy”. Both the creditors and debtors of these international financial institutions need to have a greater say. A proposal to have two categories of shareholders, one of stakeholders and the other the creditors, the latter a group of countries that has hitherto not been given its due at the international financial institutions.

Avinash Persaud (avinash@intelligence-capital. com) is chairman of the Warwick Commission, member of the United Nations Commission on the Financial Crisis and Member of the Pew Charity Task Force on Financial Reform.

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If the United States had followed the kind of surveillance of domestic policies that their representatives at the IMF require others to follow, US economic policy would have been more balanced. Tighter fiscal policy would have limited America’s twin deficits that stand at the heart of the global crisis. If developing countries trusted the IMF to support them if they got into balance of payments difficulties, without onerous and wrong-headed conditionality, they would not have built up large surpluses that supported America’s excessive domestic consumption. If countries did not feel and resent that their money would be used to support the economic and political objectives of the US, the IMF would have been given sufficient resources to deal with the crisis.

Instead, countries sought to avoid the IMF and to a lesser extent the World Bank. In the years before the crisis these organisations began to resemble orphans. The illegitimacy of the international institutions made them increasingly irrelevant and this irrelevance

descending explanations that reform was difficult, could not be done quickly and everyone should be grateful for fractions of a per cent given here or there from time to time, painstakingly negotiated. One of the lessons of this crisis is that where there is a will there is a way. Governments have played god with the financial sector, deciding on who lives or dies and when. Nationalising half the UK banking system in three months was difficult, but it was done. Substituting the inter-bank market with central bank open-market operations and bill buying programmes was fraught with difficulties as yet unresolved, but when it was necessary, the Federal Reserve, the European Central Bank, the Bank of England and others stepped up to the plate – overnight.

The other great excuse used over the centuries by those who do not want to give up power is that greater democracy would make the institutions ungovernable. Governance – they effectively say – is far simpler when it is all up to the wise counsel and sense of fairness of King George III. Americans and European seem to have forgotten about the systems of representative democracy that they and all democracies use. Bashing Americans is always fun from the colonies of this passing American Age, but to be fair to the US, their voting share at the IMF is in fact reflective of their share of global GDP – if anything it is a tad low. It is the Europeans who have the most illegitimate influence with the almost obscene situation that for most of IMF’s existence, little Belgium had more votes than India. No disrespect is meant to Belgium but it is a small place. In Europe, a popular parlour game goes something like this: name, in less than a minute, ten famous Belgians – and Tin Tin does not count.

Up to this point I will have carried all my liberal friends, but I will now lose a few. The interest of developing countries

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today is no longer served by the old debate of giving greater voice to the poor and indebted. In the past, the issue was how do you give voice at a bank for sovereigns to countries with no credit. Today, the problem is that the countries with credit do not have a voice. The greatest threat to US and European hegemony at the IMF and World Bank is not a “progressive” voting structure that mixes issues of economic power, purchasing power parities, population and other things. Today, this is the route the US and Europeans want to go. They argue it is “for Africa” – Africans should beware of former colonialists bearing gifts – but it is the route that will maintain US and European influence most. The greatest threat to the existing powers is in fact to face up to the fact that their economic power is greatly diminished – a move towards a system of one-dollar-one-vote.

Liberals would not like the idea of a traditional corporate structure where the votes you have relate to how many shares you have bought. But it must be said that having a bank run by the debtors is not going to be legitimate either, and more importantly, it would send the creditors at bay. Today, China, Japan and Saudi Arabia are the paymasters of the IMF, but their willingness to do so is held in check by their lack of influence. They would give more if they, and not the US or others who have not put up the money, determined how the money was spent. Many Asians will remember that during the Asian financial crisis the Japanese and Singaporeans offered to spend over $200 bn supporting the region from dire collapse but were bullied into not doing so independently of the IMF, which at the time was calling for countries to raise interest rates, cut spending, and devalue – medicine they have not called for in the case of US and Europe this time around.

Debtors do not like an institution where they have little voice, but creditors will so dislike an institution where they have little voice that they will stay away from it and keep it irrelevant. What about Africa? Onedollar-one-vote would substantially raise Asia’s, Russia’s and Latin shares – assuming they commit a portion of their official reserves. The build-up of reserves has been less robust in Africa, but it has not been non-existent. North Africa would benefit. Energy-rich parts of west Africa may also do so. But even those countries in Africa and elsewhere with sparse reserves would benefit from this reform because those countries with the available resources to underpin global finance and trade, are those with a recent developing country experience. One-dollar-one-vote sounds undemocratic, but it would be far more democratic than where we are today, it would have creditor legitimacy and it would raise the voice of development in general.

How would this work in practice? There is a role for stakeholders, like borrowers and countries that play a pivotal role in the global economy, having a say on loans and not just the creditors. Consequently, one way of legitimising these organisations is to treat these two problems separately. There could be two classes of voting shares. One class of voting shares would be distributed according to stakeholder issues and would be not too far from the current formulation. A second class of voting shares are distributed purely according to funds committed to the institutions in Special Drawing Rights (SDRs). Important decisions will require a majority of votes for both share classes. Others may only require a majority of one specific share class.

The global economy needs global institutions to help administer global public goods. These institutions need to be legitimate. Legitimate for creditors as well as for borrowers. The build-up of reserves in developing countries provides an unusual opportunity for setting up these institutions like a corporation where voting power comes with the degree of financial commitment. There would still be an important role for the influence of stakeholders like borrowers, but a bank cannot be run by the debtors. One-dollar-one-vote would bring both creditor legitimacy and greater democracy than we have today; it would, perhaps most importanty, give greater influence on our IFIs to countries who know a thing or two about development and not countries who saw it merely as an extension of their foreign policy.