HONG KONG — The Nov. 5 agreement on new shareholdings in the International Monetary Fund, which will see China become the third-biggest power in the institution, has been heralded as a triumph for a new global financial order that will challenge the old Western imperial dominance.
The IMF deal is only one brick in the new global financial structure to be created. The complicated agreement still has a few steps to go before becoming reality. The deal is based on a doubling of IMF quotas, thus permitting a realignment of the shares. It needs approval by the IMF governors and then by governments to lift the quotas to 476.8 billion special drawing rights (or $755.7 billion at current exchange rates). The IMF has set autumn 2012 as the target for completing the deal.
Since governments are the IMF shareholders and since government representatives sitting in Washington hammered out these compromises, you might expect they will be true to their word. But governments are not always masters of their legislatures. In the case of the United States, the biggest shareholder, there was a major change in its legislature this month. Given that the IMF needs a majority of 85 percent to seal any deal, and the U.S. has a veto with current voting shares of almost 17 percent, President Barack Obama has to work out when and how to present the proposal to Congress. It may help that the U.S. will keep its veto with 16.5 percent of the votes under the new deal.
IMF managing director Dominique Strauss-Kahn was enthusiastic, calling the shareholding overhaul “the most fundamental governance overhaul” in IMF history, as it recognizes the growing role of developing economies.
The BRIC countries (Brazil, Russia, India and China) will celebrate. They, along with the U.S. and Japan and the four biggest European countries, will become the largest shareholders of the IMF with their own seats on the executive board. Other countries have to share board seats. China will become the third biggest shareholder, with 6.071 percent of the votes, just behind the 6.138 percent of Japan and ahead of Germany (5.308 percent). France and the United Kingdom will have 4.024 percent each.
According to Strauss-Kahn: “A fairer allocation of quota shares reflecting better our members’ economic importance, together with a more representative executive board, will enhance the credibility and effectiveness of the fund’s ongoing efforts toward greater global financial stability.”
There has been a shift of voting shares of more than 6 percent of quota shares from developed to developing countries. The exercise is complicated because the old developed countries do not want to give up voting powers and because the IMF tried to protect its smallest and poorest countries from being squeezed completely. Tuvalu, the tiny string of Pacific islands, whose 10,400 people are threatened by global warming, became a member of the IMF in June and will hold 0.0299 percent of the votes under the new arrangements.
It is easy to pick holes in the new arrangements. Why should the U.S. alone have a veto? Why should the 27 countries of the European Union keep 29.4 percent voting shares even after the reshuffle? Why should the old Group of Seven industrialized countries still hold 41.2 percent of the shares, or the advanced economies together still maintain a majority of 55.3 percent?
Will this shift of quotas and voting shares work? Will it help the IMF foster a smooth-running global economy? Similar questions apply to the IMF’s partners in the “global financial architecture” — the World Bank, which has a shareholding structure similar to the IMF’s, and the World Trade Organization.
Unfortunately, all of these questions collide with economic needs and political realpolitik. The much-maligned Obama has spoken of a “responsible stakeholder” principle for all countries in a globalizing world. Obama’s National Security Strategy, issued in May, states that “Power, in an interconnected world, is no longer a zero-sum game. New and emerging powers who seek greater voice and representation will need to accept greater responsibilities for meeting global challenges.”
All the big issues confronting the world today — from financial stability, energy and climate change to terrorism — are complex and global, where no one country, however mighty, has the solution or less still can implement it on its own.
Yet the international world is more Hobbesian — after Thomas Hobbes, who said that life in a state of nature is “solitary, poor, nasty, brutish and short” — than Obama or his Ivy League thinkers pretend. Just take the new members of the U.S. Congress who will take their seats in January: How much do they care about the rest of the world?
BRIC countries contend that it is time for their voices to be heard, especially since their rapid economic growth suggests that they have better answers than the old economies that are languishing and fighting recession as well as budget and current account deficits. But how much is their worldview worth developing? China, particularly with regard to its policies on the renminbi, is winning a reputation for wanting its own way, regardless of the impact on the rest of the world.
Strauss-Kahn pointed out that new powers should bring a new sense of responsibility. “On the one hand, voice, power, influence, but at the same time, responsibility.” China, he said, was “willing to be better represented in the IMF, which shows that they do care about multilateral institutions, and I expect that they will behave according to the importance of their role.”
The IMF itself must distinguish between its professional staff and politics. The IMF has a cadre of bright bureaucrats, economists and financial specialists who track and report and advise on global and national economies and financial trends.
It would be a mistake if the rising shareholders demanded special senior staff jobs for their nationals. Nationality should be checked at the door as far as the professional staff are concerned. The executive directors and governors of the IMF can ensure the political correctness of decisions.
Strauss-Kahn has one more important job to do apart from seeing that the new shareholding deal is completed: He must set the terms for his own successor and make sure that, whether European or African or Asian or American, he or she will uphold the independence and integrity of the IMF’s professional staff against political interference.
Kevin Rafferty, formerly in charge of the Financial Times’ coverage of Asia, is editor in chief of PlainWords Media.