Commentary: Indonesia bids for leadership in multilateral development banks
Indonesia has positioned itself to be a leading international donor, says Retno Maruti, senior policy analyst at Indonesia's Ministry of Finance.
Under an unofficial agreement, the World Bank President always comes from the United States. Although the multilateral development banks (MDBs) have many members, in practice, MDBs are long known to be a vehicle for supporting the political and economic agenda of economically powerful countries.
For decades, a few rich countries have dominated the shareholding and the voting rights of MDBs.
For instance, the US has a dominant share in the World Bank, with 15.98 per cent of voting power and capital subscribe valued US$38.45 billion.
Japan and US dominate the Asian Development Bank (ADB), with voting power as much as 15.6 per cent each. Likewise, Saudi Arabia has a chief role in the Islamic Development Bank (IsDB) with 23.50 per cent capital subscription valued US$11.89 billion, while China, as the major shareholder, has 26.5 per cent of the voting power in the Asia Infrastructure Investment Bank (AIIB) with subscribed capital valued at US$29.78 billion.
CALLS FOR REFORM
In recent years, calls have grown for reform of the World Bank and International Monetary Fund governance structures, to shift focus in the voting structure from the needs of the US and European countries to the developing world.
The leadership of particular powerful countries in these MDBs is clearly a part of an attempt to promote their own economic and political interests, regardless of the fact that the main borrowers from the MDBs are developing countries. Those with big voting rights weigh in on major policy decisions.
Yet the call for reform call should address not only World Bank and IMF procedures but also aim to improve governance in other MDBs.
Clarifying mandates and addressing constraints are critical to allow these banks to be more effective. Research by the Brookings Institution in 2018 found that when borrowing countries have adequate voting rights, the results are positive for the banks themselves.
There is less reliance on a compliance rules-based culture, less conservative financial policies, and more flexibility in allocation procedures. Although MDBs have come under great pressure to reform, they have been slow to change.
Part of this change should include a move to recognise the influence of emerging economies. Indonesia, for example, has also been a major shareholder and mostly a top ten of shareholder in these MDBs. Among countries in Asia, Indonesia is a significant shareholder alongside Japan, South Korea, and India.
For example, in ADB, Indonesia is the sixth largest shareholder out of 67 member countries, with paid-in capital valued US$402 million. Indonesian shares represent 4.6 per cent of the total ADB voting power and it is the biggest shareholder in its constituency.
In IsDB Group, Indonesia has US$207 million of paid-in capital, US$1.1 billion of subscribed capital, and is the 12th biggest shareholder, with 2.3 per cent of the voting rights. In IBRD (World Bank Group), Indonesia has contributed US$167 million, with 0.98 per cent voting rights and is again the largest shareholder in its constituency.
To the young and new AIIB, Indonesia is the eighth largest shareholder, with US$537 million of paid-in capital, US$3.36 billion of subscribed capital, and a 3.1 per cent voting right.
A POWERHOUSE THAT'S UNDER-REPRESENTED
Economically, Indonesia is one of the powerhouses in Asia and will boast the world’s fourth most powerful economy by 2050, according to a report by PwC.
Indonesian GDP was an estimated more than US$1 trillion in 2018, judged by the IMF as the 16th largest GDP in the world. Indonesia has positioned itself to no longer be merely an aid recipient, but also an international donor.
Currently, the Indonesian government has set up a special institution to channel assistance to less developed countries. Internationally, Indonesia has won its bid for a non-permanent seat on the United Nations Security Council 2019–2020.
Unfortunately, Indonesia has not gained a significant role in MDBs despite being a major shareholder. Indonesia is also under-represented in terms of only having few Indonesians working at those institutions.
Developing stronger cooperation and showing more leadership in MDBs should be a key priority in Indonesia's multilateral cooperation. But the way there seems difficult, given the way MDBs have been dominated by established players for decades, and that powerful countries naturally prefer the status quo.
HOW INDONESIA CAN BE A GREATER INFLUENCE
There are strategies for Indonesia to improve its role.
In the short term, Indonesia should place more representatives in the MDBs to advance Indonesia’s agenda.
Former finance minister Sri Mulyani Indrawati has had a positive reputation as the Managing Director and Chief Operating Officer of the World Bank Group, but the country is stacked with talent that could be dedicated to MDBs to ensure that the priorities and agenda of these institutions reflects not only an Indonesian agenda but that of other developing countries.
In the medium term, Indonesia should try to negotiate a capital increase in key MDBs to gain more voting rights. Obtaining a capital increase is not easy, due to existing rules that require any increase to have the approval of other members.
In a more ambitious sense, Indonesia might need to set up its own multilateral development bank as a long-term strategy.
Indonesia has accomplished much in the socio-economic and political domains, so the idea is worth considering, even if not an easy task. But history has shown a strong political and economic commitment will be needed from founding countries of MDBs.
China, for example, began the AIIB by committing to contribute the largest share of capital. With an initial US$50 million start-up contribution, hired the best available talent, and actively approached other nations to invite them to join the initiative.
Indonesia needs to make a similarly bold move if it intends to win greater influence in MDBs.
Retno Maruti is a senior policy analyst at Indonesia's Ministry of Finance focused on international economic issues. She holds a Master of Applied Economics (International) and also lectures and consults in this field. Retno’s posts represent her own views, not official policy or the position of the Indonesian Government. This commentary first appeared on Lowy Institute's blog The Interpreter. Read it here.