Reforming IMF and World Bank governance: in search of Simplicity, Transparency and Democratic Legitimacy in the voting rules Dennis Leech Warwick University and VPP, LSE and Robert Leech, Imperial College LSE November 20th 2008

Outline 1.Voting rules in the IMF 2.Voting power 3.Latest board decisions to redistribute votes 4.The 85% rule 5.Changes to Basic Votes 6.Democratic legitimacy and the Penrose square root rule

Simplicity, transparency and democratic legitimacy of voting rules Simplicity: How easy are they to understand? Transparency: Do they mean what they appear to mean? We specifically focus on voting power. Democratic legitimacy: can they be justified in a world of representative democracy? How can we reconcile weighted voting with democracy?

1. Voting in the IMF/World Bank 185 members; all have seats on the board of governors Weighted voting Each country has –250 “basic” votes, and –In IMF: 1 vote for each 100,000 units (SDR) of quota –In WB: 1 vote for each share (based on IMF quotas)

Determination of quotas How are quotas determined? The rules (Articles) contain no quota formula Each country’s quota set by the board (political process) Guided by a ‘simple’ formula …or rather 5 (complex) formulae:

2.Transparency: voting power analysis Vote shares often described as voting powers Misleading: power connotes the ability to influence decisions Voting power analysis studies the relation between vote shares and voting power by examining all possible outcomes of a vote and calculating a measure of decisiveness Power indices –Banzhaf index is a share in the decisiveness of all voters (power share)

 Voting rule not transparent Vote shares very unequal by design (dominated by quotas) BUT voting power even more unequal –A ‘hidden’ redistribution of voting power to the USA from all other countries due to weighted voting –USA has more than 7 percent more power than weight

3. New vote distribution Singapore resolution Sept 2006:quota increase for 4 countries Board resolution April 2008: New “simpler, more transparent” quota formula Quotas to be adjusted in light of formula –Some rich countries to forego formula increases Tripling of Basic Votes: –Each country’s basic vote increases from 250 to 750

“… the reforms will realign quota and voting shares to member countries' weight and position in the global economy and enhance significantly the voice and participation of emerging markets in low income countries.” (IMF senior official) Hype

New vote shares do not justify the hype Changes to the formula and tripling of basic votes make almost no difference in voting power Serious lack of transparency

4. The 85% voting rule This analysis for Ordinary Decisions requiring a 50% majority But major decisions require an 85% majority (Ensuring the USA a unilateral veto) But this is even more seriously distorting…

5. Increasing basic votes Increasing share of basic votes makes the distribution of vote shares, hence voting power, more equal. How important is this? We consider increases to 11% (restoring the 1946 level) 25% 50% The effect is surprisingly weak - restoring the 1946 level makes very little difference

6. Square root rules Consider vote shares proportional to square roots of (1) Populations (2) Quotas (1) can be justified by democratic legitimacy - OPOV (Penrose square root rule) (2) needs a justification in terms of one-dollar- one-vote These rules are almost transparent in practice

Democratic legitimacy The square root rule Simple Almost transparent Population rule has democratic legitimacy through Penrose square root rule: –Democratic vote at country level, OPOV, then weighted voting in the international body, with vote shares square roots. –Gives equal indirect voting power to all citizens Can an analogous justification be given to the square root of quotas? One dollar one vote?

References Buira Ariel (2005) Reforming the governance of the IMF and World Bank, London: Anthem Press. Felsenthal, Dan and Moshé Machover (1998), The Measurement of Voting Power, Cheltenham: Edward Elgar. IMF (2008)). “Reform of Quota and Voice in the International Monetary Fund—Report of the Executive Board to the Board of Governors”. March 28, Washington:IMF. Kirsch, Werner (2005), “What is a Fair Distribution of Power in the Council of Ministers of the EU?”, Brussels: Centre for European Policy Studies.

References , Moshé Machover, Wojciech Słomczynski and Karol Zyczkowski (2004), “Voting in the EU Council – A Scientific Approach”, bochum.de/mathphys/publikationen/voting.pdf Leech, D. (2002) “Voting Power in the Governance of the International Monetary Fund”. Annals of Operations Research 109, pp , and Robert Leech (2006a) “Voting Power in the Bretton Woods Institutions”, ch. 1 in Alberto Paloni and Maurizio Zanardi (eds.), The IMF, World Bank and Policy Reform, Routledge website: Algorithms for Voting Power Indices,

References ________ and Haris Aziz (2007), “The Double Majority Voting Rule of the EU Reform Treaty as a Democratic Ideal for an Enlarging Union: An Appraisal using Voting Power Analysis” (with Haris Aziz) Warwick Economic Research Papers no. 824; forthcoming in Słomczynski, Wojciech and Karol Zyczkowski, eds., The Distribution of Voting Power in the EU, Warsaw. Penrose, L.S. (1946), The elementary statistics of majority voting, Journal of the Royal Statistical Society 109: Słomczynski, Wojciech and Karol Zyczkowski (2007), “The Jagellonian Compromise: An Alternative Voting System for the Council of the European Union”, Institute of Mathematics, Jagiellonian University, Krakow,