Why the IMF must give China and other emerging economies a greater say

The US, Europe and Japan will not gladly sacrifice their IMF quotas to give China and others more voting rights
But a failure to reform the organisation will worsen rifts and weaken its ability to deal with looming global crises

Anthony Rowley

Published: 5:30am, 7 Apr 2024

Why you can trust SCMP

The International Monetary Fund (IMF) will soon be debating the question of who among its 190 members gets to have how much influence. The outcome will help decide whether Western divisions with China heal or widen.

The discussion gets under way at the spring meetings of the IMF and World Bank from mid-April. It crystallises the paradox that the world needs global cooperation more than ever, yet global institutions seem more polarised than ever too.

It is not just threats of a climate crisis, or food, health and other issues that demand worldwide cooperation. A possible new global financial crisis would require a fully united IMF to cope with its devastating fallout.

Senior IMF officials warned in a recent blog post that “higher interest rates, higher levels of sovereign debt, and a higher share of that debt on the banking sector’s balance sheet make the financial sector vulnerable” to crises.

Negotiations over IMF “quotas” – which determine member contributions to the fund and are a key determinant of voting rights – have often been contentious in the more recent decades of its 80-year history, and the latest one could accelerate and magnify the fragmentation of the global economic order.

Debate will focus on anomalies whereby China punches below its economic weight in terms of its IMF quota. Yet raising China’s quota could end the veto power of the United States and reduce the influence of Europe, Japan and others. The IMF requires a vote of at least 85 per cent on any important issue and the US holds a voting power of 16.5 per cent.

Yi Gang, governor of the People’s Bank of China, and Rosanna Costa, president and governor of Central Bank of Chile, during an IMF Committee plenary session at the IMF-World Bank spring meetings in Washington, on April 14, 2023. Photo: Bloomberg

Western powers show no sign of being ready for such a change. The IMF and its Bretton Woods sister the World Bank were founded when Western economic supremacy was taken for granted, and attitudes have yet to adjust.

While the IMF board of governors approved a 50 per cent increase in quotas (raising its permanent resources to US$960 billion) in December last year, they steered away from the thorny issue of quota distribution. Instead, they asked the IMF to come up with a new quota formula by June 2025. Debate on this among governors will get under way soon.

Hung Tran, a former deputy director of the IMF’s Monetary and Capital Markets Department and now a non-resident senior fellow at the Atlantic Council, noted in a recent article that the IMF quotas are “misaligned”.

The quota formula is complex but on the basis of actual quota shares (AQSs) – which are partly politically determined and distinct from the economically determined calculated quota shares (CQSs) – the anomalies are clear.

34:00

‘Two sessions’: China’s economic and diplomatic challenges | Talking Post with Yonden Lhatoo

Tran said China is “significantly” under-represented in AQS terms while Europe is “way over-represented”. But correcting these anomalies “would lead to outcomes not necessarily welcomed by many countries,” he argued.

China would benefit from quota changes. It has an actual quota of 6.4 per cent whereas its economic size suggests its calculated share should be more than double this at 13.7 per cent, according to Tran. But to accommodate that, the US would see a reduced quota share while the EU and Japan would also need to sacrifice some quota.

All this may seem rather academic but China and other emerging economies have long argued that they have an insufficient voice and insufficient votes in the IMF to guide its policies in directions they would like to see.

This was stunningly obvious during and after the 1997 Asian financial crisis, which swept over East and Southeast Asia, causing currency, stock and other asset values to collapse.

Hypocrisy over Japan’s monetary policy shows need for Asian IMF

The IMF’s draconian remedies were strongly attacked by Japan’s Eisuke Sakakibara, then the vice-minister of finance for international affairs, who accused the IMF of mistaking the basic nature of the crisis, and rejected by Malaysian prime minister Mahathir Mohamad, among other opposition across Asia.

Calls quickly mounted for the establishment of an Asian monetary fund – an Asian IMF – and for a time, IMF advice was regarded with deep suspicion in much of the region, especially in Indonesia.

The plan for an Asian monetary fund was strongly opposed in Washington (home of the IMF’s headquarters) and eventually watered down to the so-called Chiang Mai Initiative, a currency swap arrangement among Asian countries launched in 2010 that works in close cooperation with the IMF.

Six years later, China launched the Asian Inyfrastructure Investment Bank (AIIB). One prominent Chinese economist I spoke to suggested the AIIB could serve as an alternative platform, giving Asia a greater voice.

The theme of the eighth annual meeting of the AIIB board of governors in Sharm el-Sheikh, Egypt, in September 25, 2023, was “Sustainable Growth in a Challenging World”. Photo: Xinhua

China’s ambitions in this direction are very likely to be influenced by the outcome of the IMF’s quota reform negotiations and whether Beijing and other Asian capitals secure greater voting powers.

Asia is not the only region to have alternatives. For instance, the EU has its European Stability Mechanism, a rescue fund set up in 2012 to provide loans to euro-area countries, and the Brics grouping has a Contingent Reserve Arrangement for its members.

How these develop will depend on how far the IMF is prepared to reform its voting structure in response to calls for more genuinely devolved power, when it comes to dealing with global monetary issues.

A critical aspect of this debate is who gets to act as lender of last resort, and on what terms, in times of international stress or crisis. The IMF plays this role but is heavily influenced by the US and the predominance of the dollar in international finance.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs