China's Rise Prompts IMF To Reallocate Voting Power
Sunday, April 23, 2006
Scrambling to maintain its influence in a rapidly changing world economy, the International Monetary Fund yesterday adopted a plan aimed at reshaping itself to handle new challenges such as global trade imbalances and the rise of China.
The endorsement of the strategy by the IMF's policy-setting committee, which represents its 184 member governments, topped the agenda of economic policymakers gathered in Washington this weekend for the spring meetings of the monetary fund and the World Bank.
Part of the strategy involves making the IMF's governance fairer. In response to long-standing complaints that fast-growing countries such as China and South Korea are woefully underrepresented in the fund's decision-making bodies, the committee launched a process to reapportion voting power.
The committee also endorsed a proposal aimed at giving the IMF a more central role in dealing with global problems, including the massive U.S. trade deficit and corresponding surpluses in Asia and oil-producing countries. Rather than solely holding consultations with individual countries about their economic policies as it does now, the IMF also will hold consultations with top officials from groups of large countries about how their economic policies affect each other and the world.
At a news conference following the committee meeting, Rodrigo de Rato, the IMF's managing director, acknowledged that the organization has no power to force governments to change policies that have drawn widespread criticism for fueling the global imbalances. These include the U.S. budget deficit, which has helped spur the consumption boom in the United States, and China's system of pegging its currency to the dollar, which allegedly gives Chinese exporters an unfair competitive advantage because of the currency's low exchange rate.
"Of course the responsibility affecting government action is on governments, not international institutions," de Rato said, but he contended that by holding meetings at which "spillovers and linkages" of countries' policies are highlighted, "we can provide a framework in which consequences of actions can be seen more clearly, and also consequences of inaction."
The moves reflect a recognition that the growing clout of big developing countries requires that currency and other issues be addressed by groups broader than the Group of Seven major industrial nations, which have played a dominant role on such issues since the mid-1980s. The strategy endorsed yesterday also is a response to widespread concern that the IMF is in danger of losing its legitimacy and relevancy unless it changes.
Amid a strong global expansion and buoyant financial markets, there is little need now for emergency loans of the sort that the IMF dispensed in years past when crises erupted in countries such as Mexico, Thailand, Indonesia, Brazil and Argentina. In fact, most of the loans the IMF made have been repaid.
Furthermore, Asian countries in particular have accumulated immense hoards of dollars and other foreign currencies, which they say is partly to ensure that they never again have to rely on the IMF for loans. Many of those same countries also are upset about the IMF's voting system, raising the specter that one of the world's most dynamic regions could become alienated from the fund and undermine its status as an institution with global responsibilities.
Under the current formulas, for example, China has less than 3 percent of the votes, and South Korea about 0.75 percent, far below their relative proportions of the global economy. Countries with disproportionately high voting power include several European nations, and seven of the 24 seats on the IMF executive board are held by Europeans, including directors from Belgium, the Netherlands, Switzerland and Italy, who represent groups of nations.
The committee yesterday endorsed a plan advanced by de Rato for increasing the shares of a handful of the most underrepresented countries, which in addition to China and South Korea include Mexico and Turkey. Doing so would slightly reduce the voting power of other countries, including the United States, which has about 17 percent. U.S. officials said this week they would accept a small reduction, even though the U.S. percentage is already well below the U.S. share of the global economy.
But a fight looms over efforts to revamp the voting rules more fundamentally in time for the IMF-World Bank annual meetings in Singapore in September, because the Europeans are loath to give up their board seats.