IV. Consensus Decision Making in a Cooperative Institution
- International Monetary Fund
- Published Date:
- August 2002
In any discussion of decision making in the IMF, it is useful to examine first the size and composition of the Board in order to better visualize the complex forces that are at work among the 24 Executive Directors. There follows an outline of the general approach to consensus decision making, with indications where the system does or does not apply, together with several practical examples of the consensus method at work, as well as of the role of Executive Board minutes and of the summing up in decision making. The need to protect the consensus model is discussed in light of the importance of safeguarding the rights of minority shareholders.
Size and Composition of the Board: A Global Roundtable
At the Inaugural Meeting in 1946, the Executive Board consisted of 12 Directors. The five members with the largest quotas were the United States, the United Kingdom, China, France, and India. The seven other Board members were elected by constituencies. The formation of “constituencies,” which, together, elect an Executive Director, is a political matter that is left to the members. While geographical considerations have generally been important in the formation of constituencies, a number of constituencies have, traditionally, included both industrial and developing members or members from different regions.
As a result of the rapid increase in IMF membership, the size of the Board grew to 20 Executive Directors in 1964, when the IMF had 93 members. In 1970, Japan replaced India as one of the five appointed Board members. Germany had replaced the Republic of China (Taiwan) in that group in 1960. Between 1964 and 1980, IMF membership rose by a further 40 countries but the increase was absorbed among the 15 existing constituencies.
The number of Board members, nevertheless, rose to 21 in 1978, when Saudi Arabia became entitled to appoint an Executive Director because the Saudi riyal was one of the two currencies that had been most used in IMF transactions in the preceding two years. In 1980, the size of the Board was further increased to 22 when the government of the People’s Republic of China undertook the representation of China, and China’s quota was raised to a level that would make it possible for that country to elect an Executive Director by itself. In 1981, an ad hoc increase in Saudi Arabia’s quota gave that country the same scope.
The dissolution of the Soviet Union prompted the influx in 1990-92 of Russia, the other countries of the former Soviet Union, and some other formerly centrally planned economies. Switzerland, which had long contemplated IMF membership, finally also took the vow. As a result, the size of the Board was raised to 24. The size of Russia’s quota made it possible for that country to elect an Executive Director by itself. The other new members joined the existing Belgian, Netherlands, or Nordic constituencies, or the new group headed by Switzerland. As a result, these four Western European constituencies each include industrial, middle income, and developing countries, thereby mirroring the diversity of IMF membership.
The constituency headed by Australia includes a similar broad diversity of country composition. And there are two constituencies headed by members of the Group of Seven—that is, Canada and Italy—that include other industrial, middle income, and developing countries. Together, the seven “mixed constituencies” comprise 70 members; in Board discussions, they often hold the middle ground between the Group of Five major industrial countries and the 12 developing country groups (including Russia).
The most striking aspect in the regional distribution of Board seats is the heavy presence of Western Europe, with eight Executive Directors—onethird of the total Board—with an aggregate voting power of 36.3 percent.8 As explained in Section III, this was due to historical circumstances in the development of IMF quotas, when the weight attached to foreign trade and reserves served the European countries well at a time when their regional integration had only begun to develop. However, this heavy Western European presence is now increasingly seen as justifying a downward correction, taking into account the strides made toward European Union.
Appendix II lists the composition of the Executive Board with the voting power of each Executive Director as well as the composition of the constituencies in May 2002. Based on the nationality of the Executive Directors, the broad regional distribution of Board seats was then, and remains, as follows:
five from the Western Hemisphere: Canada, and the United States, and three from Latin America and the Caribbean;
eight from Western Europe: Belgium, France, Germany, Italy, the Netherlands, the Nordic countries, Switzerland, and the United Kingdom;
five from Asia-Australia-Pacific: Australia, China, India, Indonesia-Thailand, and Japan;
three from the Middle East: Egypt, Iran, and Saudi Arabia;
two from sub-Saharan Africa, including predominantly Anglophone and Francophone countries; and
one from Russia.
In early 2002, total membership in the IMF was 183 countries,9 or nearly twice the number of members—93—in 1964, while in the same period the size of the Executive Board rose only from 20 to 24. In addition to the five members with the largest quotas who appoint their Executive Director—the United States, Japan, Germany, France, and the United Kingdom—there were three constituencies of “one”—China, Russia, and Saudi Arabia. Board membership is evenly divided between 12 Executive Directors from industrial countries and 12 from developing countries (including Russia). The average size of each of the 16 multicountry constituencies is nearly 11 countries, which imposes a large burden on their Executive Directors. The reduction, over time, of the share of EU quotas and voting power and of the European Union’s representation in the Board would facilitate the emergence in the Board of a majority of Executive Directors from developing countries, while the industrial countries would remain majority shareholders.
The strength of the voting power in May 2002 ranged from 17.2 percent for the U.S. Executive Director to 1.2 percent for the Francophone African constituency, which includes 23 members. The average voting strength per constituency is about 3.2 percent. Constituencies with less than 2.5 percent of the voting power include the Brazilian group, the Indian group, the Iranian group, the Argentinean-Chilean group, and the Francophone African group. The low voting strength of the two sub-Saharan constituencies, which together amount to 4.4 percent, is among the issues of concern in the size and structure of the Board in view of the exceptionally large number of member countries in the sub-Saharan groups, 45, many of whom have policy programs with the IMF and need technical assistance as well.
The Second Amendment of the Articles of Agreement in 1978 specified a Board of 20 Directors (5 appointed and 15 elected Directors) with the proviso that “for the purpose of each regular election of Executive Directors, the Board of Governors, by an eighty-five percent majority of the total voting power may increase or decrease the number of elected Directors.” Since the Second Amendment, IMF membership has increased by 57 countries, which have added, on average, nearly 4 countries to each constituency. While the great diversity of the global membership and the average size of the constituencies are arguments advanced for considering a further increase in the size of the Board, efficiency of decision making and management of the IMF would be better served by a smaller Board.
General Approach to Consensus Building in the Board
The rule of consensus decision making was adopted at the outset when the IMF was dominated by the political and voting power of the United States and the United Kingdom. In the view of the founding members, the jurisdiction and far-reaching mandate of the new institution, with a diverse membership and differing interests, called for a cooperative framework in which policy would be set by all and for all. Rule C-10 of the IMF’s Rules and Regulations prescribes that “The Chairman shall ordinarily ascertain the sense of the meeting, in lieu of a formal vote.” Thus, from the early days of the IMF, the Executive Board, management, and staff developed working methods to establish common ground among the members in setting policy. When, about three decades later, the industrial countries gradually ceased to use IMF resources and became the predominant class of IMF creditor countries, it was understood by all that consensus decision making should continue in order to maintain the cooperative character of the IMF; safeguard the interests of the developing and transition countries who are, de facto, the users of IMF resources; maintain a reasonable balance between the interests of debtors and creditors; and—ultimately—protect the rights and interests of the minority shareholders.
The Board works as a college of officials who devote themselves full time to the tasks and purposes of the IMF. The “sense of the meeting,” which the chairman must ascertain, is a position that is supported by Executive Directors having sufficient votes to carry the question if a vote were taken. “Consensus” denotes unanimity. While unanimity remains the objective, the Chairman and the Board view the achievement of “a large majority” as sufficient for many decisions. Executive Directors are not subject to time constraints in expressing their positions, reservations, and questions, including often successive interventions in response to questions and arguments of others. In that environment, the influence of an individual Director on IMF policies and decisions can—and frequently does—reach well beyond his or her voting power. Technical expertise is important, persuasiveness counts a great deal, diplomacy, sense of timing, and length of service all have an impact on the influence that an Executive Director can exert. It is a well-established practice that, on policy issues, all Directors intervene in successive “tours de table.” The minutes of Board meetings record all interventions by Executive Directors, management, and staff; they constitute the legislative or policymaking record of the Board’s activities. The system thus ensures that consensus decision making is fully compatible with accountability.
Consensus building on important policy issues is often a difficult and time-consuming process. Initial positions staked out by Executive Directors may appear irreconcilable; polite discourse may mask sharp dispute and tension; and, occasionally, the mood of the Board can become fractious. On complex issues there is, generally, an understanding that “nothing will be decided until everything is agreed.” This practice offers valuable protection to the developing countries because interrelated issues may well involve financial matters, such as the rate of charge or the rate of remuneration, or other issues requiring a special voting majority for decision making. It provides the developing countries as a group with a potential veto power to ensure that the package as a whole would be acceptable to them. That was most recently the case in the fall of 2000 during the review of IMF financing facilities, when the developing countries defeated a proposal of the Group of Seven regarding the rate of charge on the use of IMF resources and, instead, formulated a revised proposal that was acceptable to the Board as a whole.
Debate and reflection continue inside the Board as well as in informal gatherings of Executive Directors and exchanges of views with the Managing Director and with the staff, which stands ready to participate in the Board’s search for ways forward and to prepare additional material to make sure that all avenues are explored in the search for workable solutions. When members belonging to a given constituency hold differing views on a subject, the Executive Director can put the differing views on record but cannot split his or her vote. The resolution of such conflicts is for each Director to decide and any Director remains free to record an abstention or an objection to a particular decision. The system has a tempering impact and evidence shows that the decisions that finally result may well be the best that could be taken under the circumstances. The stature of the Managing Director as Chairman of the Board adds much weight to his interventions. Directors will use informal contacts with the Managing Director to indicate where room for flexibility may be found. Directors also often turn to the Dean—the longest-serving Board member—for guidance in the Board’s work and for assistance in formulating possible ways forward in a difficult debate or in finding areas for compromise and resolution.
In line with the policies pursued since the mid-1990s to improve transparency, public information on Board activities is now being made available on a daily basis (see p. 60). Moreover, a growing number of members have agreed to the publication of country papers and the Chairman’s summing up of Article IV consultations in the Board (Public Information Notices, or PINs). However, while archival material generally becomes part of the public record after five years, there remains a time lag of 20 years in the case of minutes of Board meetings. An increasing number of “informal” Board meetings are also taking place without detailed record keeping.
Consensus Building and Decision Making in Practice
The search for consensus applies principally in policy formulation by the Executive Board. In discussions on the application of surveillance, such as Article IV consultations, and in the world economic outlook and capital markets discussions, each speaker states his or her views, including agreements or disagreements with the staff paper, with the authorities of a member, or with other speakers.
Requests for use of IMF resources and their reviews are considered by the Board as formal proposals of the Managing Director. In order for the staff to engage in program discussions with a member and to accept a package of policies as fulfilling the standard quality, the Board will accept the Managing Director’s judgment in all but the rarest cases. A case of Board dissent that attracted much press comment related to Mexico’s request for a Stand-by Arrangement, which the Board approved on February 1, 1995, with several Western European Board members abstaining on various grounds (see Section VI). Executive Directors who have reservations will put those in the record of the meeting. If they have serious reservations, they will fire warning shots by making such statements as “this should not constitute a precedent,” or “we wish to review this case soonest,” or “the staff should not do this again.” Management and staff will carefully consider such comments for future reference.
For matters that require a special majority of 85 percent, or 70 percent of the total voting power, such as for a number of financial issues, Board consideration concludes with straight up or down voting on the proposal. Such housekeeping questions as the administrative budget are also among the issues for which there is typically straight up or down voting.
Let us now focus on some examples of policy consensus building in practice.
Surveillance. Reviews of IMF surveillance take place every two years. A Board review of that subject—as well as of other major policy items—is, typically, initiated on the basis of a staff paper setting out the principal objectives of the policy, reviewing recent practice, and indicating where management and staff believe that changes in policies and practices may need to be considered. In the initial discussion, all Executive Directors will intervene extensively, a number of them on the basis of statements (“grays”) that they have circulated beforehand to their colleagues, management, and staff. Assume now that the opening discussion reveals wide areas of disagreement among Directors regarding the future direction and objectives of the policy. The Managing Director will then call for a follow-up discussion for which he—or, at his direction, the staff—may circulate a memorandum suggesting possible avenues for reconciliation between conflicting approaches. All Executive Directors will, no doubt, actively participate in these follow-up discussions.
When sufficient progress has been made to reduce sharp differences on the broad objectives of policy, the Managing Director will request the staff to draft detailed proposals for changes in policies and practices, building on the emerging areas of consensus. The new staff paper could well reopen areas of discord and the Managing Director’s leadership will be required to steer the discussion forward. When considering specific policy proposals, the Chair will not be satisfied with a narrow “sense of the meeting” (that is, a narrow majority if the matter were to be put to a vote) but will urge the Board to consider matters until consensus is achieved or, at least, a very broad majority has emerged on the significant aspects of the policy review. In the nitty-gritty search for areas of consensus, Executive Directors will often indicate not only their preferred solutions, but also the “second-best” and “third-best” outcomes that they would or might find acceptable. In the end, the minutes of the meetings will not only show the positions of each Director but also how the positions evolved and were adjusted in the light of arguments of others and how a continuing give-and-take brought Board members to solutions that all, or almost all, found acceptable.
Following the above simulation of a major policy review, let us now summarize the record of the Board’s consensus building in the late 1980s on two complex areas of policy. These are the establishment of the Enhanced Structural Adjustment Facility (ESAF), and the development of burden sharing and a collaborative strategy to deal with overdue financial obligations to the IMF, known as arrears.
ESAF was a major innovation in IMF policy. It promoted structural adjustment in the poorest members—a group of about 80 countries—with most of the financing to be provided outside of the quota resources of the IMF by a number of industrial and middle-income developing countries in the form of loans and grants.10 The target amount of the initial facility was SDR 6 billion. A special feature of the facility was the submission of a Policy Framework Paper (PFP), which set out public investment programs and financing needs over a period of three years, as well as the structural adjustment policies to reduce obstacles to sustainable growth and balance of payments viability. The PFP also sets out steps to protect the poorest from any adverse impact of the adjustment measures. Loans under the ESAF are highly concessional: an interest rate of 0.5 percent and repayments starting in the sixth year and ending 10 years after disbursement. Access ranges from an average of 150 percent of quota to a maximum access of 350 percent in exceptional cases.
It required all the tenacity and diplomacy of the then Managing Director, Michel Camdessus, to convince the industrial countries that an ESAF fitted in the IMF as an appropriate instrument to support the economic reform efforts of a large group of poor countries and to serve as a catalyst for the necessary financing. Equally, the Managing Director had to cajole Executive Directors from developing countries into accepting the policy discipline of the PFP, quantitative targets on key variables, prior actions, progress toward program ownership by the borrowing countries, and other requirements. It took many hours of negotiation and the resourcefulness of the staff to clear the path toward a scheme that the entire Board could embrace.
ESAF became the principal vehicle of IMF assistance to its poorest members. The facility was renewed after 5 years and again after 10 years. An external evaluation of ESAF was undertaken and published in the late 1990s. Shortly thereafter, ESAF was converted into the Poverty Reduction and Growth Facility (PRGF) in the context of the debt relief initiative for the Heavily Indebted Poor Countries (HIPC).
Overdue financial obligations to the IMF became a matter of increasing concern in the late 1980s. By April 30, 1990, 11 members had arrears totaling SDR 3.25 billion, with 4 members—Liberia, Peru, Sudan, and Zambia—accounting for the bulk of the problem. In order to protect the IMF’s financial position, the Board developed burden-sharing arrangements in 1985. Without such arrangements, the whole burden of unpaid obligations would fall on the paying debtors, which would have been patently unfair. Since the sharing arrangements “dipped into the pockets” of both creditors and users of IMF resources, it required a great deal of calculation and negotiation to convince both groups that the proposed distribution of the burden was fair and reasonable.
The strategy on arrears also involved the “carrot” for members in arrears to earn “rights”—based on a track record of policy performance and (modest) reductions of the arrears—toward IMF financing after the arrears would be cleared with the help of a “support group” of donors. And there was also a “stick” of remedial measures ranging from a declaration of noncooperation to the threat of compulsory withdrawal.
With the burden-sharing arrangements, the IMF’s precautionary balances rose to a total that more than covered outstanding arrears plus an additional protection against the risks associated with the encashment of rights. More important, the strategy was successful in assisting several countries in clearing their arrears and in preventing the further growth of such arrears. At the end of the 2001 financial year, total arrears amounted to SDR 2.2 billion, with the Democratic Republic of the Congo, Liberia, Somalia, and Sudan accounting for over 95 percent of that sum.11 The success of the strategy on overdue financial obligations remains an outstanding example of thel collaborative spirit of IMF debtors and creditors.
In the Board’s work on surveillance and general policy formulation, decision making by consensus is complemented by the practice of concluding Board discussions with a “Chairman’s Summing Up” or “Chairman’s Concluding Remarks.” The summing-up procedure was first prescribed in the context of the Second Amendment of the Articles as part of the procedures for annual consultations under the new Article IV, which mandates IMF surveillance over the economic policies of members. Since the late 1970s, the summing-up procedure has played an increasing role in decision making in the Board. It has become standard procedure not only for Article IV consultations but also to conclude Board consideration of policy items as well as for operational items such as requests for use of IMF resources and their periodic reviews.12 The “Chairman’s Concluding Remarks” have a more tentative character and are used to capture the progress of an ongoing policy debate or discussion of a country matter and to suggest how it can be carried forward.
The summing up aims to capture all the main strands of a Board discussion and to reflect differences between the Board’s views and the positions of the staff. The summing up also needs to indicate clearly the aspects of the debate on which Directors generally agreed as well as where views differed among Directors. Precise indications on whether, for example, “a majority” or “some Directors” held this or that view is important. Significant dissent by some Directors from the views of others or from the positions taken by the staff needs to be captured in order to round off a summing up. The parts of a summing up that reflect the sense of the meeting have the character and effect of a Board decision.
Ordinarily, the summing up is made by the Chairman immediately after the end of the Board discussion, that is, after the staff’s comments and answers to questions by Executive Directors. Board members then have an opportunity to voice suggestions for alterations to the text, which are considered immediately by Directors and the Chairman. Not infrequently, these sessions become vivid exchanges between Board members to give greater precision to their views or to the thrust of the comments in the summing up. For a country summing up, the Director of the country concerned can offer suggestions for factual correction or clarification. If, after a Board meeting, substantive changes in the text should be suggested, the matter would normally be brought back to the Board for disposition. In the case of complex and multifaceted discussions such as the world economic outlook, international capital markets, or major operational policies, the Chairman may wish to reflect on the text of the summing up and postpone delivery until the next Board meeting, normally within 48 hours.
Protecting the Consensus Model and Safeguarding the Rights of Minority Shareholders in the IMF
The cooperative nature of consensus decision making promotes the search for common ground through the active participation of all who share the responsibility for formulating and implementing institutional policy. It is an approach that promotes thorough reflection, leading to middle-of-the-road solutions to reconcile differing interests of a large membership and willingness to revisit and review decisions in light of changed circumstances. As a result, consensus decision making has been of considerable benefit to the institution and its members and it has provided a particularly valuable protection to the interests of the developing countries. However, it is a feature that is neither self-preserving nor self-perpetuating. Indeed, it needs to be nurtured and protected in the face of developments that may become risks to the process:
Since the late 1970s, in the wake of the development of the international capital markets, the industrial countries have ceased using IMF resources. The IMF has, thereby, lost, in part, its characteristic of a “credit union,” even though a number of middle-income and emerging-market countries have been, at times, lenders to, and at other times, borrowers of the IMF. As a result, special vigilance is required to ensure that the rules of the game continue to reflect a reasonable balance between the interests and requirements of lenders and borrowers.
The major industrial countries, the Group of Seven, which command close to one-half of the voting power in the IMF, have exhibited a growing tendency in recent years to act as a self-appointed steering group or “Directoire” of the IMF. Recent reports of the finance ministers to the heads of state and government at the annual summit meetings have sometimes tended to deal with IMF matters in a manner that raises the question of whether they will leave the Executive Directors representing the Group of Seven countries with the necessary margin for discussion and room for give-and-take that is essential for consensus building.
The collaboration between the Interim Committee/IMFC and the Executive Board has had a positive impact on IMF decision making, with the Ministers giving political “advice” and the Board laboring until broadly acceptable solutions and compromises have emerged. It is important that the IMFC and its deputies endorse the consensus model of IMF decision making. To that effect, the deputies should avoid immersing themselves in what the Board does best.
Although Executive Directors are appointed or elected by members, they are officials of the IMF, responsible for conducting the business of the institution. Therefore, Executive Directors must have seniority in their capitals and should possess the necessary room for maneuver with regard to the “advice” or “directives” from their authorities.
Is there a risk that decision making by consensus in the IMF has been damaged in the light of the observations made above? Has criticism of the IMF in the legislatures of a number of member countries and by civil society organizations reduced the collaborative spirit of members? It is impossible to give firm answers or conclusive evidence one way or the other. What is clear, though, is that vigilance is needed to preserve and protect the mode of decision making in the IMF.
It is also clear from the foregoing that consensus decision making is an essential condition for safeguarding the rights of minority stockholders in the IMF. The prescription of special majorities of 70 and 85 percent of total voting power to take certain decisions (Appendix I) is supported both by the argument that important decisions should command wide support and by the consideration that groups of members—even a single member—should be in a position to prevent certain decisions from being taken.