27 January 2016
China underwhelmed during the initial phase of its G20 presidency. The presidency’s priorities remain obscure and communication of its intentions insufficient. There was an expectation that China would propel the G20 forward. At a time when China has become so dominant a force in the international economy, the G20 presidency could have offered the perfect opportunity to demonstrate international leadership with both ideas and actions.
The G20 risks becoming irrelevant. The G20 Turkish presidency was uninspiring and so were several of its predecessors. According to the International Chamber of Commerce (ICC), there had been over 70 G20 meetings at different levels during Turkey’s presidency that produced the delivery of 22 Agreed Documents, 9 Ministerial Statements, 34 G20 Working Group and 54 Supporting Documents. Yet, it is not clear what impact if any those inputs have had on the direction of economic policies. Many are broad-based often uncontroversial recommendations that receive broad-based uncommitted support.
At the Business 20 (B20) inaugural meeting in Beijing on 26 January, China reiterated the priorities for its G20 Presidency comprising: i) promote a new growth model; ii) aim for more effective international governance arrangements; iii) foster open international trade under a multilateral framework; iv) advance “inclusive and connected development” in poor countries with emphasis on industrialisation in Africa.
China’s intent to upgrade international governance arrangements is consistent with its efforts to push for reforms at the IMF. It seems to reflect a persistent frustration by China and other emerging markets that representation or say in international bodies that matter remains insufficient (despite the recent IMF quota reform). It challenges the very idea that the existing multilateral system is sufficiently reformable to accommodate China’s and emerging markets’ aims. It serves as a reminder that China is looking for a new deal on international governance that is less biased by legacy, and hence in essence post-World War II arrangements.
China’s focus on Africa intends to cement a special relationship. China’s engagement in Africa is decades old. It fosters relations with a region where China sees strict complementarity and an opportunity for international leadership. The favourable growth prospects of Africa ensure that China will be a strong partner in a region that has the potential to outgrow the rest of the world for decades to come.
China will struggle like all G20 presidencies to point to some concrete deliverables by the time of the G20 Summit in early September. On promoting a new growth model, China could itself lead by example and improve communication on its economic policy intentions, through e.g. regular press briefings by key government spokespersons to provide more effective guidance to markets and the world economy. On international governance, agreement on a new IMF quota formula could be achieved and an accord on a quota increase though improbable under the Fifteenth General Review (see below). On international trade, it should offer a free trade agreement to all African countries to help Africa enter the global value chains. On Africa, it should get the G20 to establish a stabilisation fund for Africa’s currencies to help promote more stable investment conditions to facilitate industrialisation. Food for thought.
The ratification by the U.S. Congress of the IMF 2010 quota reform on 18 December was a milestone in U.S. multilateral engagement. It remained largely unnoticed. The reform provides for a significant shift of voting power to emerging markets and bolsters the IMF’s financial resources. Implementation of the reform was long seen as critical to allow the IMF to restore its legitimacy and effectiveness as a multilateral organisation.
The reform has been delayed considerably and caused widespread consternation among the IMF membership. The reform was adopted by IMF Governors in December 2010 but implementation deferred since largely due to the U.S. Congress. The U.S. Congress was unwilling to vote for the quota increase due to allegedly mostly political considerations. Any change in quotas requires support of 85 percent of the total voting power of the IMF membership. The U.S. has a rare provision under the U.S. Code by which Congress needs to authorise by law any change in the U.S. quota at the Fund. Given that the U.S. has 16.7 percent of the voting power at the IMF no provision that requires an 85 percent majority, also including loans to the IMF and gold sales, can be changed without consent of the U.S. Congress. The IMF rightly averted to proceed with a quota increase and dilute the U.S. quota share without U.S. consent.
IMF quotas define a country’s financial and institutional relationship with the IMF. Quotas are broad reflections of a country’s economic importance, that is, the bigger a country economically the larger its IMF quota. The quotas set the amount of financial subscriptions being the amount of financial resources an IMF member country is obligated to provide to the IMF. The quotas also largely determine the voting power of a country implying its voice and weight in IMF decisions. The quota also, although increasingly only loosely amid provisions of exceptional access, determines the amount of credit that can be extended to a country.
The 2010 quota reform will increase the IMF’s quota resources from US$330 billion to about USS$660 billion. The quota increase will not change the amount of total resources available to the IMF. The IMF currently has US$607 billion in total resources of which US$348 billion are available under the IMF’s borrowing arrangements. The borrowing arrangements are expected to be reduced in proportion with the quota increase.
The IMF regularly reviews the amount of quota resources through five-yearly reviews. The increase now occurred under the Fourteenth General Review. The IMF has found it difficult to keep up its quota resources relative to other metrics like international reserves, volume of international trade and in particular international financial transactions. The IMF will likely request under the Fifteenth General Review another quota increase to be able to signal and/or commit credibly adequate financial resources. The likelihood of another quota increase today is considered small though.
Voting power defines the governance structure of the IMF. The main aim of the quota reform was to increase the voting power of underrepresented emerging markets. Country representation and say at the IMF through the Executive Board rests on the distribution of voting power. While the IMF is a consensus driven institution, key decisions depend on formal voting (which is rare). But voting is not everything. Small countries can exercise outsized influence in the proceedings of the institution if they are represented by strong Executive Directors. The quality of Executive Directors at the IMF has been mixed. The composition of the IMF staff remains biased towards advanced economies with 68 percent of managerial staff from advanced economies. This is where the challenge to change the IMF may be greatest.
The shift in voting power is more than 6 percentage points gross from the current level (post-second round). China is great beneficiary gaining 2.3 percentage points in voting share. 10 countries, also including advanced economies, increase their voting share by a total of 5 percentage points showing that the redistribution is highly concentrated. Emerging markets including China and excluding European Union (E.U.) emerging markets gained 2.5 percentage points net while the E.U. (27) and other advanced economies lost 2.5 percentage point net.
China now ranks third overall behind Japan and ahead of Germany. Brazil is now ahead of Belgium and Indonesia ahead of Sweden. The E.U. has been one of the biggest losers with its aggregate voting share down from 31.0 percent to 29.4 percent. The U.S. and Japan saw minor reductions from 16.7 and 6.2 to 16.5 and 6.1 percent, respectively. The G7 (Canada, France, Germany, Italy, Japan, U.K., U.S.) will see its share fall from 43.0 percent to 41.2 percent.
Emerging markets including China but excluding E.U. member countries now represent 42.1 percent of the voting power. This seems broadly aligned with emerging markets’ and China’s economic weights. Naturally depending on future economic developments, an important challenge may be more the distribution of voting power within emerging markets and China.
The shift in voting power may not appear very much. It is unlikely to change the IMF meaningfully. The importance is naturally whether countries maintain ownership of the institution. The ultimate test has always been whether the membership is willing to provide more financial resources to ensure the IMF can stay relevant as a lender. This will remain uncertain.
At Davos on 22 January, Christine Lagarde announced that she is ready to serve a second term as IMF Managing Director when her term ends in early July. She received instant support from a number of key countries. Her candidacy was quickly considered a shoo-in. Indeed, she will be very difficult to match. But questions remain.
In 2011, at the time of Ms Lagarde’s first appointment, there was considerable apprehension that the job of IMF Managing Director had been held for too long by Europeans and especially by the French. Several countries had argued that it was simply time for an emerging markets candidate to take the job. None of this has changed.
The fundamental problem of Ms Lagarde’s reappointment is indeed her nationality. The French have had the job almost 60 percent of the time since the IMF’s inception in 1946 (Chart). This looks odd for a multilateral institution under any circumstances.
Ms Lagarde’s legal embroilment poses a problem too. In August 2014, she was charged by a special court that deals with criminal cases and offenses committed by members of government, for negligence involving public funds in the Bernard Tapie Crédit Lyonnais-Adidas affair that involves hundreds of million euros in allegedly fraudulent arbitration proceeds when Ms Lagarde was finance and economy minister of France. She appeals the decision and denies any wrong doing but may also end up having to stand trial.
The future of the IMF remains unclear. While the IMF has several roles, its importance rests mostly with its capacity to provide financial assistance. The Fund now only has 18 non-concessional and 20 small concessional arrangements. This compares to 26 plus 29 arrangements in 2011 when Ms Lagarde took office. Greece remains a key arrangement and so does Ukraine. But the IMF will struggle to impose its relevance if it does not lend on non-concessional terms vast sums to large systemically important countries. Regional arrangements like the European Stability Mechanism (ESM) are likely to become a substitute for the Fund in the E.U. In Asia similar efforts around the Chiang-Mai initiative (CMIM) are under way. The current seemingly more difficult economic environment may offer needed relief though.
The IMF’s key purpose is also to promote internationaleconomic policy cooperation. At the Symposium in honour of former Bank of France Governor Christian Noyer in Paris on 12 January, several senior policy makers remarked in the presence of Ms Lagarde that there is simply no appetite for policy cooperation let alone coordination. The level of international economic policy coordination has probably rarely been lower as reflected in widespread unilateral policy actions, persistent large external imbalances and sharp exchange rate volatility.
The next Managing Director, whoever she or he is, must have the ability to energise cooperation and extend the convening power of the institution to promote policy dialogue. She or he will also have to convince above all that the best approach to economic crisis resolution is a multilateral one and ensure that the IMF remains a technocratic institution and can credibly represent the role of trusted neutral broker. The Fund will also need to engage more vigorously to address significant deficiencies in the international monetary system and build meaningfully on the success of the recent enlargement of the SDR basket. It will also have to upgrade climate change to become an integral economic policy matter. The quota reform will have to be implemented swiftly and further governance measures agreed upon to strengthen further the institution's legitimacy and member countries' ownership. The Fifteenth General Review of quotas should result in another quota increase. A long list indeed.