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Voting Power
July 23, 2007

Canada seeks to break IMF deadlock
Canada has introduced a proposal to help break a deadlock among International Monetary Fund shareholder nations over how to increase the voting power of rapidly-growing countries, such as China, that would give them a greater say in the global financial institution.

The proposal, a copy of which was obtained by Reuters, will be considered by the IMF's 24-nation board on July 25.

It rewards "dynamic" economies that have contributed to world growth over a five-year period like China, India, Mexico, Turkey, South Korea and Vietnam. It also slightly increases the voting shares of poor countries.

"This achieves the desired outcomes of seeing the actual voting share of advanced economies, including the Group of Seven, decline, that of emerging markets increase, and that of (low income) countries increase slightly," the proposal says.

Developing nations are pushing for changes in institutions such as the IMF and World Bank that have been long dominated by the United States and Europe.

The debate over voting power in the IMF has intensified in recent weeks after the sudden resignation of IMF Managing Director Rodrigo Rato, a former Spanish economy minister. Europe moved quickly to maintain a long-standing tradition of appointing the head of the IMF.

Boosting the voting power of emerging markets would not only give them a bigger voice in who runs the IMF, but would also improve the legitimacy of an institution some argue is rapidly losing influence in the developing world.

For months, developed and developing countries have haggled over a new formula for calculating each country's voting power that will correct under-representation of emerging economies.

The Canadian proposal would reward dynamism using an economic method called the "filters approach".

The proposal rewards some 14 under-represented countries that have contributed more than 0.5 percent to global growth, in purchasing power parity terms, over a five-year period starting in 2000.

These include China, Germany, Greece, Italy, Japan, South Korea, Malaysia, Mexico, Spain, Thailand, Turkey, the United States and Vietnam.

Although it is considered under-represented in terms of voting shares and the size of its economy, the United States, which is the IMF's largest shareholder, has said it will not seek an increase in its IMF voting power.

Additionally, the proposal also tries to capture future developments in the world economy even if the countries are over-represented in their voting shares. Under this scenario, the voting power of Australia, Brazil, India, Indonesia and Philippines would be increased.

Washington has said the goal of changing the quota system should be to reflect the shift in power to dynamic emerging markets. 

It is willing to consider -- and go along with -- several alternative approaches to achieving that goal, including the Canadian proposal.

"It is important that any approach has a consensus of the membership and be achieved as part of an inclusive process," a U.S. Treasury official said.

IMF representatives of some developing countries, who asked not to be identified because of the political nature of the talks, told Reuters the Canadian proposal was the best they had seen, but was far from perfect.

The process of updating the IMF's voting shares was launched in September with small increases in the voting power of four countries -- China, Turkey, Mexico and South Korea.

But countries like India and Brazil complained that the initial adjustment did not go far enough or fast enough.

While member countries agree that gross domestic product should be a dominant factor in a new formula for calculating voting shares, emerging countries want a formula that gives greater weight to purchasing power parity (PPP). AFP

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