By Pedro Sousa
* The fourth in a series of five articles
The IMF, China, and the current financial architecture
The global financial crisis shook up the international financial architecture, catching many institutions off guard. G20 leaders agreed on coordinated expansionary policies at their London Summit in April 2009. Then they agreed in Seoul in 2010 to give emerging-market countries quota shares in the International Monetary Fund that would be more commensurate with their economic weight. Meanwhile, China has gained significant leverage amid these transformations, boosting its global influence. In 2015, the international system moved to adapt to what has been developing as it made room for China to play a substantially greater role in global economic governance. The basket of currencies in the IMF’s Special Drawing Rights (SDR) was expanded to include the Chinese renminbi (RMB) for the first time since the yen was added in the 1970s. Emerging markets, and China in particular, have a greater say in the IMF, after the US Congress moved to ratify IMF reforms to give China more representation in the institution. The 2010 quota and governance reforms delivered a 2.8% shift in quota share from advanced to emerging markets and developing countries. China’s international engagement is on a scale and at a rate never seen before. China is a member of regional players like the African Development Bank (AfDB) and the Inter-American Development Bank (IDB) with which it is deepening its relationships, especially through co-investment in projects around the world. Additionally, with this year’s G20 presidency, China wants to advance an ambitious agenda. It played a leading role in the creation of the New Development Bank (NDB) alongside its BRICS counterparts – Brazil, Russia, India, and South Africa. The NBD was launched in 2015, becoming the first major international financial institution led by emerging countries. Last but not least, despite US President Barack Obama’s resistance, the China-led Asian Infrastructure Investment Bank (AIIB) was established as well. It is symbolic not only due to US’s resistance, but also because countries like Britain and Germany joined anyway. Fifty-seven countries joined China in setting up this new multilateral lending institution, which Beijing insisted was not designed to replace existing institutions like the World Bank and Asian Development Bank (ADB) but to complement them. China’s urge to advance its influence in the region is reflected in the AIIB. The AIIB’s creation might be in China’s interest as the new regional power, true. However, this does little to respond to the need to improve multilateralism and to strengthen global economic governance. It fragments institutions and could present a risk of establishing divergent investment standards. Governments should act to maintain a harmonized, effective, binding, consistent, and multilateral framework of rules and standards that help integrate, rather than fragment, the world economy. China’s current financial power is undeniable but it needs to improve its own development model. The development challenges that China faces at home, including rapid environmental deterioration, demographic demands, demand for greater civil liberties and workers rights, are likely to come in the future. Amid all this, the US’ ratification of the IMF reforms and consequential doubling of IMF’s capital, is seen as an important move for the fund to fulfill its capabilities. It is a step to improve and reaffirm institutions that foster a rules-based global order. IMF’s reputation has suffered quite a lot in the past decade. By 2010, following the financial crisis, several Western economies ran significant budget deficits to bailout the banks that posed a systemic risk to the global economy – consequently running up sovereign debt. There was a global push for austerity as important economists – among them from the IMF – encouraged governments to cut spending and raise taxes. But, as years passed, economists started to accept that the harsh austerity programs are literally self-defeating, hurting the economy so much that they worsen fiscal prospects. As Paul Krugman wrote, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy. Thus, the IMF and its Managing Director Christine Lagarde have a long way to go. In 2015, Lagarde stated that the benefits of higher income are trickling up, not down and to see more durable growth, you need to generate more equitable growth. It was a very important speech.
Further references:
Berglof, Eril, (2015), “Will China Change The World’s Financial Institutions?”, World Economic Forum: https://www.weforum.org/agenda/2015/11/will-china-change-the-worlds-financial-institutions/?utm_content=buffer0b04b&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer
Carmichael, Kevin, (2015), “A Christmas Miracle: Obama Finds A Way To Save IMF Reform”, Kevin Carmichael’s Observer, Centre For International Governance Innovation, Waterloo: https://www.cigionline.org/blogs/kevin-carmichaels-observer/christmas-miracle-obama-finds-way-save-imf-reform
Frankel, Jeffrey, (2015), “International Macroeconomic Policy Coordination”, VOX CEPS’s Policy Portal: http://www.voxeu.org/article/international-macroeconomic-policy-coordination
Goodman, Matthew P., (2015), “An adaptable order: global economic governance in 2015”, in Global Economics Monthly, Center for Strategic and International Studies (CSIS), Vol. IV, Issue 12, Washington DC: http://csis.org/files/publication/151217_Global_Economics_Monthly_V4.pdf
Sainsbury, Tristram, (2015), “IMF: The Hard Yards On Reform Are Still To Come”, Lowy Interpreter, Lowy Institute for International Policy: http://www.lowyinterpreter.org/post/2015/12/23/IMF-the-hard-yards-on-reform-still-to-come.aspx
Shafik, Nemat, (2013), “Smart Governance: Solutions for Today’s Global Economy”, Deputy Managing Director, International Monetary Fund, Oxford, United Kingdom, IMF: https://www.imf.org/external/np/speeches/2013/120513.htm
Stiglitz, Joseph E., (2016), “The New Geo-Economics”, Project Syndicate: https://www.project-syndicate.org/commentary/hope-for-better-global-governance-by-joseph-e–stiglitz-2016-01
Subacchi, Paola, (2015), “The AIIB Is a Threat to Global Economic Governance”, Foreign Policy: http://foreignpolicy.com/2015/03/31/the-aiib-is-a-threat-to-global-economic-governance-china/
Woods, Ngaire, (2016), “Why Can’t The World Agree On Monetary Policy?”, World Economic Forum: https://www.weforum.org/agenda/2016/03/why-cant-the-world-agree-on-monetary-policy?utm_content=buffer9aa9c&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer
Woods, Ngaire, (2016), “How to Save the World Bank”, Project Syndicate: https://www.project-syndicate.org/commentary/saving-the-world-bank-by-ngaire-woods-2016-01?barrier=true
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