Developing Nations Set to Get More Say

G-20 Plans New Role for Emerging Economies in IMF Lending, Bank Regulation

Washington Post Staff Writers
Tuesday, March 31, 2009; Page A12

LONDON, March 30 -- At this week's summit of world leaders, the big winner will be the developing world, with the United States, Europe and Japan offering China, India, Brazil and other emerging nations unprecedented new influence in global financial decisions.

At the meeting Thursday of the Group of 20 industrialized and developing nations, heads of state including President Obama are expected to back the addition of 10 developing countries to a key economic council in Switzerland that has long operated as a club of rich nations. This will grant them a platform to help revamp global financial standards and take part in the supervision of the world's 25 largest banks, according to diplomatic sources.

Several major developing countries -- most notably China -- are also in late-stage negotiations to win new authority to shape decisions at the Washington-based International Monetary Fund, an organization that developing nations have long complained dictate to them rather than hear them out.

The new role for developing nations signifies a tilt in the world economic order being accelerated by the financial crisis. Their leaders blame the collapse of financial institutions on bad management and poor regulations by the West, which, they argue, has robbed rich countries of the moral authority to rebuild financial standards on their own.

"This crisis was fostered and boosted by irrational behavior of some people that are white, blue-eyed," Brazil President Luiz Inacio Lula da Silva told reporters in Brasilia last week after a meeting with British Prime Minister Gordon Brown. "Before the crisis they looked like they knew everything about economics, and they have demonstrated they know nothing about economics."

The one-day London summit is expected to end Thursday with leaders from many of the world's biggest economies agreeing on new regulations for banks and hedge funds, a large increase in funding for the IMF and a pledge to fight protectionism.

But early versions of a draft communique the leaders are expected to release indicate that there will be relatively few specifics on those issues. They are also expected to tread lightly on U.S. calls -- opposed by many in Europe -- to boost government spending worldwide to combat the global economic crisis. U.S. officials indicated last week that they would not press nations to adhere to specific spending targets. Instead, analysts said that perhaps the most concrete agreement on Thursday will revolve around the new status bestowed on emerging countries.

The United States and Britain need the deep pockets of nations such as China and Saudi Arabia now more than ever as they seek buyers for billions of dollars worth of debt to cover the cost of stimulus spending and bank bailouts at home. In response, China in particular is exerting more authority. Beijing has gone so far as to push for a new global reserve currency besides the U.S. dollar, a proposal that, while dismissed by Washington, will nevertheless get an airing in London this week.

The IMF, which since its inception at the end of World War II has been largely funded and controlled by rich nations, is also seeking significant new contributions from cash-rich emerging economies as it comes under enormous strain to bail out a growing number of hard-hit and poor countries.

But the largest developing countries, many of whose economies are growing despite the global downturn, have made it clear that in exchange for the cash, they want a seat at the decision-making table.

Two weeks ago at a finance ministers meeting ahead of the summit, Brazil, China, Russia and India issued their own communique saying they want more say in global affairs. There has also been growing momentum to increase the presence of developing countries on other important bodies such as the United Nations Security Council.

"We call for urgent action with regard to voice and representation in the IMF in order that they better reflect their real economic weights," the four countries said in the communique.

The United States this week is proposing that five developing nations -- China, Brazil, Russia, Mexico and India -- be given more influence on IMF lending decisions in return for tens of billions of dollars in new donations, according to an administration official. Washington is looking for world leaders to endorse the idea this week, with details to be worked out before the IMF's annual meeting in Washington next month. Some European governments, however, are cautious, fearing they would lose power in an institution traditionally headed by one of their own.

The global leaders this week are also set to endorse the expansion of the Financial Stability Forum in Switzerland, which will emerge with a new name -- the Financial Stability Board -- and a vastly expanded mission. The organization currently brings together regulators, central bankers and finance ministers from a cluster of wealthy nations. The new membership will include 10 emerging markets including Argentina, Brazil, South Africa and China. The institution, which previously served as a little-used forum for exchanging ideas, will draft the details to enhance global standards for financial institutions, including benchmarks for executive pay and how much risk they can take on. Critics, however, charge that the entrance of so many emerging nations into the club at once could complicate the process.

"You can understand China; they are part of the global financial system now and you have to hear them out," said Howard Davies, director of the London School of Economics. "But while we may have messed things up royally, that doesn't mean we should be taking advice from Argentina."

© 2009 The Washington Post Company