the imf and the case of nicaragua

8/14/2019 The IMF and the Case of Nicaragua

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CRITICISM:FACTORFICTIONTheCaseofNicaragua

ElisaBarrios

JamesJusseaume

DavidLeyton

ClaudiaMendoza

StephanieZambrana

InternationalMonetaryFund

A v e M a r i a U n i v e r s i t y L a t i n A m e r i c a n C a m p u s


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TABLEOFCONTENTS

TABLEOFCONTENTS 2

Abstract 3

I.Introduction:OrganizationandPurpose 4IMF:Overview/History 4Purpose 4

II.Conditionality 5Privatization 5 WhatisPrivatization? 5Criticism 6IMFResponsetotheCriticism 6CaseofNicaragua:TransitionfromENELtoUNIONFENOSA 7

Analysis:WhyDidPrivatizationfailinNicaragua? 9Recommendations 10

FiscalPrescriptions 10Criticism 10AnalysisandRecommendations 13IMFResponse 14ApplicationinNicaragua 15

III.TaxationwithoutRepresentation 16I.Introduction: 16A.Backgroundoftaxationwithrepresentationinthedomesticsystem. 16B.BackgroundoftaxationwithoutrepresentationintheIMF. 16

II.IMFsCriticisminregardtovotingpowerofmemberstatesinrelationtotaxationwithoutrepresentation 16A.ProportionalVotingStructure 16

B.AllocationofVotes 18i.TheIMFResponse 18ii.Counterargument: 19

III.NicaraguasapplicationtotheCriticism 19A.ProportionalVotingStructure 19

B.AllocationofVotes 20IV.Analysis 21A.ProportionalVotingStructure 21B.AllocationofVotes 21C.Recommendations 22

IV.CONCLUSION 22

REFERENCELIST 23


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Abstract

ThefollowingdocumentprovidesashortintroductionabouttheIMFincludinganoverview,

historyandpurposeoftheorganizationstartingfromitscreation,untiltheworkas itdoes

today. Further on it engages in two main criticisms against the IMF: the Issue of

ConditionalityandTaxationwithoutrepresentation.Tomaintainthebalanceitalsoincludes

the responseorrebuttal tothesecriticism bythe Fund Itanalysesadditionallythe effect

these criticism havehad inNicaragua, initially subdividing the issuesof conditionality in

PrivatizationpoliciesandFiscalprescriptionsprovidedbytheIMFtothiscountry.


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I.Introduction:OrganizationandPurpose

IMF:Overview/History

TheInternationalMonetaryFund(IMF)wascreatedin1944,attheBrettonWoods

conference(IMF,n.d.).Thefoundersaimedtobuilda frameworkforeconomiccooperation

thatwouldavoidarepetitionofthedisastrouseconomicpoliciesthathadcontributedtothe

GreatDepressionofthe1930sandtheglobalconflictthatfollowed(Ibid,n.d.).TheIMFisan

organizationformedwithastatedobjectiveofstabilizinginternationalexchangeratesand

facilitatingdevelopment.Italsooffershighlyleveragedloans(Ibid,n.d.).TheIMFisuniquely

placedtohelpmembergovernmentstakeadvantageoftheopportunitiesandmanagethe

challengesposedbyglobalizationandeconomicdevelopmentmoregenerally(Ibid,n.d.).The

IMF tracks global economic trends and performance, alerts itsmember countrieswhen it

seesproblemson thehorizon, providesa forumforpolicydialogue,andpassesonknow-

howtogovernmentsonhowtotackleeconomicdifficulties(Ibid,n.d.).

Purpose

In addition the IMF's main purpose is to provide a forum for cooperation on international

monetary problems; facilitate the growth of international trade, thus promoting job creation,

economic growth, and poverty reduction; promote exchange rate stability and an open system of

international payments; and lend countries foreign exchange when needed, on a temporary basis

and under adequate safeguards, to help them address balance of payments problems (IMF, n.d.).

The IMF provides policy advice and financing to members in economic difficulties and also works

with developing nations to help them achieve macroeconomic stability and reduce poverty (Ibid,

n.d.).Finally, the IMF supports its membership by providing: policy advice to governments andcentral banks based on analysis of economic trends and cross-country experiences; research,

statistics, forecasts, and analysis based on tracking of global, regional, and individual economies

and markets; loans to help countries overcome economic difficulties; concessional loans to help


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fight poverty in developing countries; and technical assistance and training to help countries

improve the management of their economies (IMF, n.d.).

II.Conditionality

Conditionality is a concept in international development, political economy and

international relations and describes the use of conditions attached to a loan, debt relief, bilateral

aid or membership of international organizations, typically by the international financial

institutions, regional organizations or donor countries (Buira, 2003). However, Conditionality is

perhaps the most controversial aspect of IMF policies (Ibid, 2003). Among the traditional

criticisms of Fund conditionality focuses mainly on demand management and does not pay

adequate attention to its impact on growth, and the effects of programs on social spending or on

income distribution (Ibid, 2003). In particular, fiscal and monetary policies where the core of

programs, are seen as too restrictive and have a strong deflationary impact to the point where the

essence of the correction of the external payments imbalance come from sheer deflation (Ibid,

2003).

The criticisms of Fund conditionality have also tended to center on its loss of focus, on

imposing an excessive number of structural conditions and trying to do too many things at the

same time, of expanding Fund influence beyond its area of competence. The Meltzer Report states

detailed conditionality (often including dozens of conditions) has burdened IMF programs in

recent years and made such programs unwieldy, highly conflictive, time consuming to negotiate,

and often ineffectual.

Privatization

WhatisPrivatization?

Privatizationisthetransferofassetsorservicedeliveryfromthegovernmenttothe

private sector. Privatization runs a very broad range, sometimes leaving very little

governmentinvolvement,andothertimescreatingpartnershipsbetweengovernmentand


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private service providers wheregovernment is still the dominantplayer. It refers to the

shiftingoftheproductionofagoodortheprovisionofaservicefromthegovernmenttothe

privatesector,oftenbysellinggovernment-ownedassets(USAccountingOffice,2009).The

broaderdefinitionofprivatizationalsoincludesawiderangeofpublic-privatepartnerships,

such as voucher systems. Even the creation of federal corporations, quasi government

organizations and government-sponsored enterprises is often filed under the general

category of privatization. In such organizations, though, it is often difficult to tell where

governmentendsandtheprivatesectorbegins(ibid).

Criticism

The IMF has been oftencriticized for the privatization policies it imposes in their

memberstates.ThecriticizedaspectofprivatizationisthatgovernmentsselloffStateowned

enterprisestothehighestbidderratherthanensuringthatthestatemonopolyisnotjust

replacedwithaprivatemonopoly.Mainreasonwhysomestatesareagainstthesepoliciesis

becauseofthedangersofrapidprivatizationofstateindustries.Basicallyarapidtransition

issuitableforcorruption.Often,state-controlledsectorsaresoldtothebureaucratswhorun

them or to their political associates. A combination of politics and business has led to

widespread corruption. Such fraudulent privatization eliminates the supposed benefit of

competitionandproduceswindfallgainsandgapingincomedisparity,theworsteffectsof

capitalism(Stiglitz,2002).Whenprivatizationproceedsintheabsenceofsimilarinstitutions

theresultisfinancialanarchy,alawlessstatewherethewealthiestandmostruthlessbreak

lawswithimpunity(ibid).

IMFResponsetotheCriticism

TheFundprovidestwomainreasonswhyprivatizationisapositivething.Thefirst

one is growth, basically microeconomic evidence indicates that private firms are


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operationally more efficient than those held by the state, particularly in competitive

industries(Davisetal,2005).Astrongcorrelationisalsofoundforthecasestudycountries

between privatization and growth. However, and consistent with the growth literature,

privatizationislikelyservingasaproxyintheregressionsforoneormoremissingvariables

that may broadly be characterized as a favorable regime change (ibid). Secondly, Labor

Markets,publicenterprisesoftenseektomaintainemployment,andbenefitfromalimitto

spendingbysomepublicbody.Consequently,thereisconcernthatprivatizationmayleadto

increased unemployment. Although empirical evidence suggests that aggregate

unemploymenttendstodecreasefollowingprivatization,particulargroupsofworkersmay

stillbeadverselyaffected.Thislendsimportancetomeasuresthatalleviateitssocialimpact

(ibid). The state no longer has to invest in sectors like water, electricity, electricity and

telephone, while it gives a concession to private companies to distribute these services

withinaregulatedmarket.Leadingtogreaterstabilityandeconomicefficiencyandallows

thestate todirectresourcestoother importantneeds like healthandeducation (Carrion,

2006).

CaseofNicaragua:TransitionfromENELtoUNIONFENOSA

Intheearly90stheIMFdemandedreformstotheEnergyStabilityLawinorderto

prevent it fromhaving control over fuel prices and tootherregulations constraining the

exerciseofmonopolypowerbyoilcompaniesthatimport,refine,storeanddistributefuels

(Acevedo, 2006). Nicaragua's government and the International Monetary Fund (IMF)

ratified the country's new Structural Adjustment Program (ESAF), which included a

comprehensiveprivatizationprograminthetelecommunications,electricityandoilsectors

(Business News America, 1998). The government planed to privatize the state-owned

telecommunications company, ENITEL, and part of the generation and distribution

operationsofenergycompanyENEL(ibid).


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The privatization process that started in 2000 with a public offering of the four

companieswascomplicatedduebothtolegalproblemsandtolackofinterestbyinvestors

(Acevedo,2006).Asaresult,ENELmaintainedamorerelevantrolethaninitiallyexpected.

HIDROGESAremainedinpublichandsas theonlyplayerinhydroelectricgenerationwhile

itsprofitsservetofinancethelossesofGECSA,whichownsthethermalplantsthatdidnot

attractprivateinterest,andtheruralelectrificationplansinisolatedareas(Carrion,2003).

The reforms of the 1990s did not achieve their objectives. It had been expected that

privatizationwouldbringinvestmentinnewgeneration,butverylittlecapacitywasadded

intheyearsthatfollowedthereform(ibid).Moreover,thegenerationcapacityaddedinthe

lastdecadehasbeenmainlydependentonliquidfuels,makingthecountrymorevulnerable

torisingoilprices.Inaddition,asmentioned,distributionlosseshaveremainedatveryhigh

levels(28%).Thereformalsoaimedatimplementinggradualchangesinelectricitytariffs

thatwouldreflectcosts,whichprovedtobepoliticallyunfeasible.

When oil prices increased from 2002 onwards, the regulator failed to approve

electricity tariff increases, because theywere expectedtohave been very unpopular.The

financial burden of the higher generation costs was thus passed on to the privatized

distributioncompany,whichhas,partlyasaresult,beensufferingseverelosses.

In2006,theelectricitysectorinNicaraguasufferedaseriouscrisis,with412-hour

blackoutsthataffectedvirtuallythewholecountry(Relea,2006).Thedistributioncompany

ownedbyUninFenosa,wasblamedandtheconcessionwastemporarilycancelledbythe

government, which called for arbitration (ibid). This led Union Fenosa to call its MIGA

(MultilateralInvestmentGuaranteeAgency)guarantee.Thecrisiswasfurtheraggravatedby

the inability of INE and CNE to cooperate in a constructive manner (MIGA, 2006). The

emergencysituationimprovedin2007duetotheinstallationof60MWofdieselgeneration

capacityfinancedbyVenezuela.


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Analysis:WhyDidPrivatizationfailinNicaragua?

Thegeneral idea isthatelectricpowerwasastatemonopolythatran inefficiently.

Supposedly, by privatizing Union Fenosa, they would invest money in the service, and

encouragetheprivatesectortoproduceelectricalpower(thishadbeguntohappenbefore).

Themain issuewas that the state'smonopolywas expensive andmanyplaces didnt get

electricenergy.Basically,UnionFenosawas expectedtosell cheaper energy and provide

peoplewithbetterservice.However,asseentodayenergyismoreexpensiveandithasnot

reachedmore people. Electricity prices in Nicaragua increased between 1998 and 2005.

12%forresidential,26%forcommercialand23%forindustrialtariffs,meaningthatUnion

Fenosahadquitetheoppositeeffectinrelationtothepriceofenergy.

Theproblemwasthatitwasjustatransferofapublicmonopolytoaprivateone.An

independentmonopoly,regardlessif itsstateorprivate,itmusthaveastateregulator,but

onewasnotappliedtoUnionFenosa,giventhattheregulatorwasENEL,anditishandledby

the assembly with political criteria (Defranco, 2009). Monopolies by their nature have

market power to set prices and quantities, and in that sense they are inefficient. The

problem was not so much the privatization but the inability to regulate, in part by the

politicization,butalsobecauseelectricpowerisacomplexindustry,anditrequirestechnical

capacities that the country lacks (ibid). The privatization process was controversial.

AnotherreasonforthefailureoftheprivatizationofenergyinNicaraguaisthatonly10%of

customerspaytheelectricitybill. Robberies, assaultsonofficesandwarehousesofUnion

Fenosa,kidnappingbrigadesofthecompany,networkmanipulation,extortionarecommon

feloniesreportedbythedirectorsofthecompany(Relea,2007).Thereisadebtofovertwo

milliondollarsandincludesrichandpoor.InNicaraguaelectricityfraudisnotacrime,soit

isonlypursuedadministratively.Basically,thereasonsforthefailureofprivatizationare

politicalandconstitutional,provinginfactthatprivatizationasaneconomicprescriptionis

notafailure.


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Recommendations

Many countries have proposed alternatives to the privatization of public services

suchaswaterandenergy.Asemi-privateassociationofcompaniesholdingpublicservices

withthe government,in away thatpricesarekept low,but competition isencouragedin

order tokeepgood qualityofservice.Government couldhave subcontractors, 2 ormore

branchesofprivate enterprises (Urrea, 2008).Mixedcompanies 51% state49% private

exist.,sothereisadditionalcapitalontheprivateside,andalsothetransparencythatthey

require,wherethestatehasfullsayandthepubliccaninfluencethestate,incorporatingthe

principleofchecksandbalances.

FiscalPrescriptions

Criticism

Fiscalpolicyistheuseofgovernmentspendingandtaxationtoinfluencetheeconomy

(Weil). Whenever the government engages in the purchase of goods and services, the

transferofpayments,orthecollectionoftaxes,itisengagingfiscalpolicy(Ibid).Fiscalpolicy

is said tohave a neutral stance wheneverGovernment Spending= Tax Revenue; that is,

government spends what it earns (Cliffnotes, 2009) (Ibid, 2009). Similarly, a loose or

expansionarypolicyiswhenspendingishigherthanrevenue(i.e.,thebudgetisindeficit).In

addition, fiscal policy is considered asbe tightorcontractionarywhen revenue ishigher

thanspending(i.e.,thegovernmentbudgetisinsurplus)(Ibid,2009).

Historically, the IMF has recommended a conservative fiscal policy, that is, a

contractionaryordeflationaryfiscalpolicy (Dreher, 2005).Asexplainedbefore,thisleads

andinvolvesloweringthefederalbudget,payingoffnationaldebt,andacquiringabalanced

budget and is basically done by either: reducing government spending increasing taxes

(Weil).Thus,forexample,whenthegovernmentraisestaxes,consumersareforcedtoputa


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largerportionoftheirincometowardtaxes,andthusdisposableincomefalls,thereisless

consumptionandinflationfalls.When thegovernment reducesgovernment spending,the

recipientsofgovernmentspending,thepopulace,havelessdisposableincome.

Despitetheseadvantages,criticsarguethattheIMF'sadviceonfiscalpolicyreduce

growthandincreasepovertyindevelopingcountries(IMF,2003).Theargumentgoesthatin

the search for a balanced budget and the elimination of public deficit, the IMF advises

countriestomakesubstantialcutsinpublicspendingthatendupaffectingthepoor(Ibid,

2003).Consequently,farfromcushioningtheimpactofcrisesonthepoor,thesecutsslow

downtheeconomyandmakeitmoredifficultforthepoortofindjobs(Ibid,2003).Thus,a

lowerinvestment (or spending)will lead toa lowercapital stockand toa reduction ina

countrys ability to produce output in the future. Similarly, they add that by decreasing

government spendingor increasing taxes, one hurts the poorestwhich are the ones that

needtheirbasicneedguaranteed(Dreher,2005).Forexample,byincreasingtaxesonbasic

foodssuchasriceandbeans,governmenthurtsthepoorbyleavingthemwithlessmoney.

Similarly,bycuttingsalaries(cuttingespenditures)forpublicemployeessuchasteachersor

doctors, one reduces their disposable income and their capability to contribute to the

economy.

The secondary criticism claims that the IMF programs for low-income countries

continue to restrict governments' choices of how to manage their own budget (Jubilee,

2003).TheseconditionsgivetheIMFthepower todictatespending levels ina numberof

sensitivesectors(Ibid,2003).FactsarethatoftentheIMFconditionstheirloansbysaying

that only certain types of government spending or taxation is allowed (Ibid, 2003). For

example,theIMFmaysaythatinordertobeeligibletoaloan,governmentmustnottaxon

theimportsoftextiles.Inaddition,someventuresaying,thatthisisthemechanismthough

whichtheIMFfavorsbigmultinationalcompaniesandtheinterestsofindustrializednations

(Dreher, 2003). On the other hand, there are those who argue that a higher level of


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governmentspendingand/orloweringoftaxesispreferable(Riley,2006).Thus,according

to them, government borrowing can benefit economic growth (Ibid, 2006). As Brown

University Professor Geoff Riley describes, a budget deficit can have positive

macroeconomiceffectsinthelongrunifitisusedtofinanceextracapitalspendingthatleads

toan increase in thestock of nationalassets (Ibid, 2006). For example,spendingonthe

transport infrastructure improves thesupply-side capacity of the economy. Similarly,

increasedinvestmentinhealthandeducationcanbringpositiveeffectsonproductivityand

employment(Ibid,2006).

The argumentfollows that ifthereismarket failurein theeconomysuchasunder

provision of education orpublic transport, the government should increase spending on

thesepublicservices(Ibid,2006).Intheshortrunthismaycauseadeficit,however,ifthey

increaseproductivitytheninthefuturetherewillbeahigherrateofeconomicgrowthand

more tax revenues (Ibid, 2006). In other words, in the long term, higher spending on

education,andtoalesserextenthealthcare,maycauseanincreaseinlaborproductivityand

economicperformance.

Byrunninganexpansionaryfiscalpolicy,governmentcanhelprestoreoutputtoits

normal level and to put unemployed workers back to work by either spending more or

reducingtaxes(Jubilee,2008).Governmentspendingmayrangefrombuyingpaperclips,to

raising teachers salaries to building highways and so on. The argument goes that the

spendingprocessstimulatestheeconomybyprovidingsocietywithmoremoneytospend

on,whichtranslatesonmorejobs,bettersalariesetc(Ibid,2008).Similarly,thereductionof

taxesissaidtostimulatetheeconomybyprovidingfamilieswithmoremoneytospendon

(Ibid, 2008). Regarding the issue of the IMF imposing what, how and when to spend a

governments money, critics are very clear on this. It should be the other way around;

governmentsaretodictatewhattheirprioritiesareandwhattheywanttospendonortax

(Richards, 2007). In other words, they claim that the IMF should have no role in


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determiningwhatshouldbespentonorless,andwhattotaxornot.Similarly,someventure

furtherbysayingthattheIMFviolatesthesovereigntyandself-determinationofnationsand

governmentstodictatehowtomanagetheirpublicfinances(Ibid,2007).

AnalysisandRecommendations

ItisclearthatthefiscalpolicyactionsrecommendedbytheIMFaredirectedatachieving

long-term sustainability of public finances tomaintain low inflation levels and stimulate

economicgrowthandarethus,beneficial.However,theone-sizefitsallparadigmoftheIMF

is increasingly creating tensions in developing countries and are instead damaging the

effectivenessofsuchprogramsandthemaneuverabilityofgovernmentstoprioritizetheir

ownneeds.Forthisreason,amoreparticipatoryprocessinvolvingthedomesticgovernment

aswellitsexternalcreditors(includingtheIMF)isneeded.Suchprocesswouldeventually

createandincreasetheparticipationofnationalandlocalgovernmentsonhowtoevaluate

revenues from foreign and domestic sources and then prioritize the expenditures and

improving theirefficiency, thus creatingamore effective, responsible and inclusive fiscal

policy.

Oneofthebiggestchallengesfacingpolicymakersisdecidinghowmuchinvolvement

governmentshouldhavethroughfiscalpolicy.Infact,fiscalpolicyhasvariedthroughoutthe

years, ranging from conservative constrained fiscal policies to liberal expansive fiscal

policies.However,ingeneral,itisacceptedthatacertaindegreeofgovernmentinvolvement

isnecessary tosustain avibrant economyand relief poverty. Dependingonthe political

orientationsandgoalsofthepolicymakers,taxcutsand/orgovernmentexpenditureaffect

differentsocialclasses.Eventhoughtherearesomethatstatethatexpansivefiscalpolicies

aimedathelping the higher classes have an indirectpositiveeffect on the poorest,most

governmenteffort should bedirectlyaimed atrelieving thepoor.These policieshave too

muchofadrasticeffectontheavailablecapitalforsocialservicesandreducetheeconomic


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activityinthepublicsector.Consideringthattheeffectsofanyfiscalpolicyarenotthesame

oneveryone,fiscalpolicyshouldbedirectedatreducingpoverty.Consequently,inorderto

doso,andastheexpertspointout,aresponsibleexpansivefiscalpolicyisnecessary.Todo

so,theIMFneedstoimprovetoolsforassessingthesustainabilityofdebtsincurredduring

expansive fiscal policies in emerging economies and take a longer-term perspective

regardingthevulnerabilitiesthatcouldsurfaceoverthemediumterm.Similarly,inorderto

minimizeerrorandincreaseeffectiveness,theIMFneeds to improve itsdecisionmaking-

processintermsofdebtriskanalysis,accountabilityandpredictability.

IMFResponse

IMFresponseisbasedontheexperiencegainedfrom5crises:theGreatDepression,the Japanese1990sbankingcrisis, the1997Asiancrisis,theUS1980sS&Lcrisis,and the

1990s Nordic crisis (Natarajan, 2009). The Fund believes that macroeconomic policies

aimedatexchange rate devaluations (for export promotion) andmonetary loosening (to

pumpbankcredit)arenotlikelytobeeffective,leavingnootheroptionthanfiscalpolicy

(Natarajan, 2009). Moreover, the IMF suggests that fiscal policies should contain the

following characteristics: timeliness, large in size, lasting till visible recovery, diversified,

contingent,internationallycollective,sustainable(Natarajan,2009).TheintentionofIMFis

to support programs for development, however it seeks to promote those than can be

startedorrestartedquicklytoavoidcuttingexistingprogramsforlackofresources;inorder

tomanagepublicexpectationsontopandtorestoreinvestorsconfidence(Natarajan,2009).

Furthermore, it recommends governments to stop supporting directly businesses in the

formofsubsidiesandsectorspecificbailouts,andtofavorindirecteffortstogetthecredit

flowingsothatfirmsfeelencouragedtonotpostponetheirinvestmentdecisions(Natarajan,

2009).


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ApplicationinNicaragua

According to Stiglitz the IMF should foster expansionary economic policyfor

instance, encouraging or enabling increased expenditures, lower taxes, lower interest

ratesinorder to stimulate the economy (Stiglitz, 2002). Nevertheless, Stiglitz declares

thattheIMFhastakentheoppositeside:itprovidesfundsforcountriesonlyiftheyinstitute

contractionarypoliciessuchascuttingdeficits,raisingtaxes,andraisinginterestrates,and

in this way imposing the stabilization and adjustment efforts to achieve a short term

financialbalance(Stiglitz,2002).

Nicaragua during the 90s couldnotmake the investmentsneeded torestorebasic

perspectives for future development and poverty reduction because the programs

recommendedbytheIMFabandonedtheruralareaswherepovertyismostconcentrated,

anddismantledthetraditionalinstitutionstopromoteagricultureandsupporttosmalland

medium producers (Neira). One of the conditions of the IMF in order to keep funding

programsinNicaraguawaschangingexistinglegislationsanddraftingnewlawssuchasLey

deResponsabilidadFiscal (FiscalResponsibilityLaw)andLeydeRgimenPresupuestario

(BudgetaryRegimeLaw)(AcevedoVogl,2006).Also,theIMFrequiredthecontrolofpublic

fundsbythe government through the Economicand Financial Programsponsored bythe

Fundasanindirectwaytocontrolfundsitself,yetthisprogramexcludedorcutresources

forsomesensiblenecessitieslikeeducation,health,housing,potablewater,andsanitation

(Acevedo Vogl, 2006). These restrictions werewith the purposeofgenerating budgetary

surplustovalidatemorecreditcontractssotoobtainmoreprivateinvestmentandincrease

internationalfinancialreservestostrengthenthecurrencyresultingin stabilityforprivate

investors(AcevedoVogl,2006).


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III.TaxationwithoutRepresentation

ThissectionofthepaperseekstoexaminehowtheapplicationofNicaraguanvoting

power, inthe current IMF systemcanproveor disprovethecriticismof taxationwithout

representationintheFund?

I.Introduction:

A.Backgroundoftaxationwithrepresentationinthedomesticsystem.

Originally,itwasdistinguishedincourtsofequitythatsometimesitwasimpracticalto

havepresentallpersonsinterestedinacaseandthenthestrictapplicationoftherulecould

preventaplaintifffromobtainingjustice(ColombiaLawReview,n.d.).Whennotallofthe

affected are present an exception is made, in convenience for the parties to the dispute

whomaredirectlyinvolvedbutnotpresent(Ibid,n.d.).Therationalebeingthatthecourts

decision will be binding upon them, this was corrected by providing representation by

someonewithidenticalinterest(Ibid,n.d.).

B.BackgroundoftaxationwithoutrepresentationintheIMF.

TheideaoftheFundasasystembasedonvirtualrepresentationisoneofthemain

criticismsmadebytheeconomistJ.Stiglitz.HecriticizesthatalthoughtheFundwascreated

asapublic institutionbasedonthe ideaof collectingmoneyfrom taxpayers,such isnot

completelycarriedout(CLG,2009).Since,theFundisnotheldaccountabletotheinterests

ofthe taxpayers itcanbesaid that it is likehaving taxationwithoutrepresentation(Ibid,

2009).

II.IMFsCriticisminregardtovotingpowerofmemberstatesinrelationto

taxationwithoutrepresentation

A.ProportionalVotingStructure

ControloftheIMFiscarriedoutthroughacomplicatedsetofvotingstructuremostly,

basedon the economic influence amember has in the Fund (CLG,2009). According to J.


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Stiglitz,suchinfluenceisdrivenbythewealthierandindustrializedmembers,andbytheir

commercialandfinancialinterests(Ibid,2009).StigitzhighlightsthattheUnitedStateshas

virtualvetopoweroverthe IMFdecisions, sinceit has themajorityof shares intheFund

(Ibid,2009).TheExecutiveBoardatpresenthas24executivedirectorsandischairedbythe

MDinanon-votingcapacity(Diaz,2009).TheChairformallywouldhaveadecidingvotein

the caseof a50-50split vote,butwithweightedvoting thissplitis avirtualimpossibility

(Ibid,2009).Inpractice,since1992therehavebeen24executivedirectors:5appointedand

19elected(Ibid,2009).Fivedirectorsareappointedbythememberswiththelargestquotas,

and hence the largest shares in total votes (Ibid, 2009). The remaining 19 directors are

electedbythememberswhoarenot entitledto appointadirector that is, atpresent,the

other180membercountries( Ibid,2009).Regularelectionsareheldeverytwoyears;there

are provisions for interim elections, if needed and for by-elections if an elected director

leavesduringthecourseofhisterm(Ibid,2009).

ExecutivedirectorsareinvolvedinalmosteveryaspectoftheFundsactivities,both

informallyininteractionswithmanagementandstaff,andformallythroughmeetingsofthe

Board (Diaz, 2009). They also play an important role in informing and advising their

constituent governments on all aspects of the IMFs work (Ibid, 2009). The bulk of an

executive directors work is conducted in relation to formal Board meetings, including

preparationand follow up(Ibid, 2009). In2005, the Boarddevoted 462 hours to formal

Boardand committeemeetings, ofwhich 196hours(42percent)were for country items,

107hours(23percent)forpolicyitems,22hours(5percent)formultilateralsurveillance,

16 hours (3.5 percent) for administrative items, and 40 hours (9 percent) for Board

committees.Theproportionshaveremainedrathersteadyinrecentyears(Ibid,2009).


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B.AllocationofVotes

Themaincriticismregarding theallocationof votes totheIMFreferto Article XII

Section2(a)andSection3(b)oftheArticlesofAgreement,inwhichthepowertoincrease

thesharesofvotesofamemberisvestedontheBoardofGovernors(Cooper,2007).The

BoardistheFundshighestdecision-makingbody,anditconsistsofonegovernorandone

alternategovernorforeverymemberstate(IMF,2008).TheBoarddeterminesthequotasof

othermemberswhichought tobepaidfullyinformofadepositto theFund(IMF,1990).

Moreover,quotesarereviewedbytheboardeveryfiveyearsandthepowertochangethem

ifdeemedappropriatedinaccordancetotheBoard(Ibid,1990).AllmembersoftheBoard

mustvoteandreachamajorityofeighty-fivepercentofthetotalvotingpower(IMF,1990).

OnceagainweneedtoexaminethatUnitedStatesvirtualvetopowerisnecessaryinorderto

makesuchchange,sinceithasthemajorityofsharesontheFund(CLG,2009).Thiscanbe

illustratedwithChina,whichisthesecond-largesteconomyyet,ithasonly3.7%oftheIMF's

votingshares(Sarkar,2009).ThishasnotbeenentirelychangedtorepresentChinasreal

role in the economic field; since, its increased on shares depends on the approval by a

majorityofvotes oftheBoard(Ibid,2009).Moreover,oneofthemainobstacles facedby

Chinaintheboardisthatbydoingsoothermemberswouldhavetogivepartoftheirs,and

these would come from those who hold more shares meaning the developed country

members(Ibid,2009).

i.TheIMFResponse

In2006,theIMFsystemwasmodifiedinamodestwaybyauthorizingtheincreasein

a small amount of shares of four members, one of them China (Sarkar, 2009). Also, this

meanttheincreaseofmembersbasicvoteshencetherevisionofthesubstantiveformulasof

quotas (Cooper, 2007). More recently, the G20 a group that consist of the following

countries:Argentina,France,Japan,SouthAfrica,Australia,Germany,Korea,Turkey,Brazil,


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Canada, China, India, Mexico, United Kingdom, Indonesia, Russia, United States, Italy and

Saudi Arabia; recognized that there is a need of reforming the IMF allocation of shares

(Schiffers,2009).Andcompromisedonrevisingthereductionby5%ofdevelopedcountries

sharesbytheyear2011,yet,theway thatthiswasought tobeconductwasnotspecified

(Ibid,2009).

ii.Counterargument:

AswewillseeinthesectionIV,partB,themethodproposedtocorrectthisproblem

isre-allocatingthesharesoftheFund,whichsupposedlyleadtoamorefairsystem.Hence,

thefulfillmentoftheconceptof taxationwithrepresentationbeingrepresentedbyStiglitz;

thishasbeingCriticizedbyothermembersoftheFund.Forexample,anECrepresentative

Reinfeldt expressedthereluctance forthismeasure, becausedeveloped countriesare the

onesthatcontributethemosttotheFundsfinances.Sincedoingsowouldmean,togiveup

theECspowertoothercountriesthatcontributeless(Ibid,2009).

III.NicaraguasapplicationtotheCriticism


WhenitcomestoapplyingweightedorproportionalvotinginNicaragua;itisentitled

tothebasicvoteasamember.Moreover,according,toArticleXII,section5eachmember

shall have two hundred fifty votes plus one additional vote for each part of its quota,

equivalenttoonehundredthousandspecialdrawingrights(IMF,1990).Inaddition,basic

voteswerecreatedwiththepurposeofpreventingsituationsinwhichsomememberswith

small quotas would not have any sense of participation in the operations of the Fund

(Rapkin,David&JonathanStrand,2006).

In the application in Nicaraguas quality of shareholder representation is not

completely enhanced meaning that currently, only eight chairs (a third of the total)

representonlyonecountryeach,leavingtheothersixteentoeachrepresentanaverageof


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morethantencountries(Diaz,2009).Currently,Nicaraguaamongothercountriessuchas

Guatemala,Honduras,Mexico,Venezuela,Spain,ElSalvador,andCostaRicahavecomposed

abloctoallottheiramountofsharesinordertohaveagreateramountofvotingprocedure,

in which Spain is the country representing them and delivering themessage to the IMF

(Diaz,2009).TherepresentativeoftheBlocisRamnGuzmnZapaterfromSpain,andthe

blocholdsatotalnumberofshareswhichconstitutes4.45ofthetotalvotesinthefund(IMF,

2009).Finally,countriesformblocstoallottheiramountofsharesinordertohaveagreater

sayinginthevotingprocedure;yet,theformationofsuchgroupsraisesthequestion,suchas

inthecaseofNicaragua,astowhatextentcanagroupbeachanneltoaddressNicaraguan

problems.

B.AllocationofVotes

The role that Nicaragua can play in the allocation of shares in the Fund, can be

accomplishthroughitsgovernorintheBoard,whichisusuallytheministeroffinanceorthe

governoroftheCentralBank(IMF,2009).AsdiscussedinSectionII,partBifachangeought

tohappenintheallocationofshares,whatwouldNicaraguasvotingweightorvoicebein

suchmatter;thiscanbecalculatedbythenumbersofsharesinthefund.InDecember09,

2009itwasnotedthatNicaraguahad130SpecialDrawingRightsand0.06ofthetotalvoting

powerintheBoardofGovernors(Ibid,2009). Incontrast,to theUnitedStates,whichhas

37,149.3SpecialDrawingRightand17.09ofthetotalpoweroftheBoard( Ibid,2009).With

the purpose of examining howmany quotas wouldbeneeded tobe transfer from those

membersthatholdmoresharestothosewhoonlyhavevirtuallynoshares,itisnoticedthat

byjoining110countrieswiththelowerquotasthissumsatotalof18percentofthetotal

votingshareintheFund(Rapkin,David&JonathanStrand,2006).


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IV.Analysis


The doctrine of virtual representation is foundondomestic systemsand itused in cases

whenapersonisrepresentedbyapartywhois...[t]hetrusteeofanestateorinterestof

which the person is a beneficiary (Bank One Texas v USA, 1998). Taxation with

representationincontrasttovirtualrepresentationisarepresentationbysomeonewithan

identical interest. Itcanbeargue thatNicaraguasconditions isnot the sameasallofthe

membersofthebloc towhich it isamember,hencewhichrepresents it inthe Executive

Board. Thus, this reduces the quality of participation by most of the Funds members,

especially by some of the poorest countries that have very intensive policy relationships

withtheFund(Diaz,2009).Whichinessenceistheproblemconcerningtheapplicationin

Nicaragua.Therefore, thishasleadvoting issues concerningNicaragua asbeing uncertain

andunbalanced,becauseitisnotwithcertaintytheexactdecisionsmadebyNicaraguawhen

beingrepresentedbyanothercountrysuchasSpain.Thisalsohasaneffectonthedecision

making,sincethiscanundermine the legitimacyand relevanceoftheFundanditsroleof

promotingglobalgrowthandstability(Cooper,2007).

B.AllocationofVotes

InthecaseofdeterminingifNicaraguahasavoiceintheBoardofGovernors,itcan

argued that it is among the smallest members whom feel that their miniscule quotas

precludeaneffectivevoiceintheFund(Rapkin,David&JonathanStrand,2006).Theimpact

ofthisbeingthatNicaragua,havingsuchasmallpercentageofthetotalshareintheBoard

hassmallinfluence.Therefore,theeffectonthedecisionmakingpowerconcerningthere-

allocationofvotesleavesNicaraguawithasmallrelevanceintheinstitutionanditsroleof

promotingglobalgrowthandstability(Cooper,2007).Inaddition,theallocationofquotasis

andindicatorofinfluenceamembermayhaveinthedecisionmakingofthefund;insome

casescanbeanobstacleforchangingtheworldeconomy(Ibid,2007).Anexampleofthisis


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howtheallocationofthesharesinChinascasecanbeacumbersomeprocess.Finally,this

provesthatNicaraguahasacleardisadvantageifcomparedtoothermemberswithlarger

shares.

C.Recommendations

Inregard tothe ExecutiveBoard powerthere hasbeenaunilateralproposalfrom

partofUSwhichconsistedinreducingthenumberofexecutiveseatsintheIMFfrom24to

12 as a means to increase proportionately the votes of developing countries in the

deliberations of the IMF (Schiffers, 2009). In 2007, a proposal regarding the shares

allocationshavebeenmadeproposing a revisionof the fundssystem of the allocationof

shares it consisted of new formula (Cooper, 2007). In simple words, the new formula

placestraditionalindustrialcountriesinthepositionoftargetingalimitationoftheirquota

tobeashareof60percentoftheirGDP;Withthepurposeoffacilitatingtheredistributionof

quotasharestowardthenon-industrialcountries(Ibid,2007).

As a conclusion, after examining the formula relating weightedvoting and how it

takesplaceorthepossibledisadvantagesintheprocessfacedbydevelopingcountriessuch

as in the case of Nicaragua. We can with certainty state that the criticism being held

concerning weighted voting is in fact accurate and holds partial aspects that make the

criticism true. Since, it is hard to define what really constitutes a meaningful, equitable,

effectiveparticipationandtheroleplayedintheFundbythosecountrieswithvirtuallyno

shares(Rapkin,David&JonathanStrand,2006).

IV.CONCLUSION

IMFconditionalityspreadsoverabroad rangeoffields. It includesastrict control

over fiscal performanceaiming towardscontractionary policies:setting inflexible goals in

relation togovernment spending, public deficit, the amount ofresources the government


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should transfer to the central bank, the accumulation of international reserves (Acevedo

Vogl, 2006). In addition, it sets reforms for the legal framework that regulates local

governmentsanddeterminestheirscope,andtheallocationoftheirassignedbudget,aswell

asacomprehensivereviewofotherlegislationsuchastheTaxCode,EnergyStabilityLaw,

SocialSecurity,FiscalResponsibility,BudgetaryRegime,etc.(AcevedoVogl,2006).Inthe

caseofNicaragua,publicdebtservicerepresentsbesidestheinsufficientandregressive

characterofthetaxburdenthemainobstaclefortheallocationofresourcesrequiredfor

investmentinhumandevelopmentandcapital(AcevedoVogl,2006).TheIMFshouldjust

limit itself to ensure the prevention of unmanageable fiscal imbalances and in thisway

permitting the country to decide the policies looking towards development and the

reductionofinequalitiesthroughopen,democraticandparticipatoryprocesses.

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