China may overtake Britain and France in IMF vote

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China will get the biggest increase in voting power at the International Monetary Fund when the global lender completes a long-awaited restructuring in 2011, the head of the IMF said on Tuesday (22 September).

In an interview with Reuters, IMF Managing Director Dominique Strauss-Kahn said European nations, which have resisted a dilution of their global economic clout in the IMF, increasingly recognised it was time for change. 

“The Europeans understand it is time to move,” said Strauss-Kahn, a former French finance minister. “So, some European countries will be smaller, others will be larger.” 

“The only big change will be China, and I think that is totally fair.” 

European countries had previously rejected pressure from the United States to reduce the eight seats Europe occupies on the 24-member board. A suggestion of a merger to just one chair was a source of disagreement between EU finance ministers in July (EURACTIV 18/09/09). 

The increase of China or India’s share on the board, however, was an agreeable amendment, European leaders said in a statement in which they also confirmed a 50 billion euro hike in their funding to the IMF. 

China decision to address global imbalances 

The United States has proposed a 5% shift in voting power from developed countries to some “dynamic” emerging economies. China could overtake France and Britain in IMF voting power. The main emerging economies have countered with a proposed 7% shift. 

Strauss-Kahn said China, the world’s most powerful emerging nation, was ready to play a bigger role in the global financial system. The developed world now realises that letting China gain more influence in the IMF provides an incentive for Beijing to play a more constructive role in the international financial system. 

“When they are recognised as a big player, they will play as a big player,” Strauss-Kahn added. 

The shift in attitudes comes as the United States pushes for world leaders to work toward a more balanced global economy that involves China and other big exporters shifting their economies more toward domestic demand, while large debtor nations, particularly the United States, look to export more. 

Washington is pressing leaders from the Group of 20 developed and emerging nations to agree on a “framework” for achieving better global balance at a meeting today and on Friday in Pittsburgh. 

Coaxing a shift in saving 

Asian countries, wary of the IMF’s handling of the Asian financial crisis in the 1990s, have amassed trillions of dollars in savings as insurance against a future crisis and to avoid having to turn to the IMF for help again. 

Strauss-Kahn said a more representative IMF would give countries confidence the fund would be there for them in times of crisis, taking away an inducement to save. 

“The question of global imbalances and governance are totally linked,” he said. 

Some economists have blamed those high savings for contributing to the financial crisis. With the money sloshing around the global economy, interest rates remained unusually low, helping to build housing bubbles and pushing investors toward increasingly risky assets to generate better returns. 

Under the US rebalancing proposal, G20 nations would assess each others’ policies. The IMF would be called upon to gauge the impact of those policies and report back twice a year with suggested adjustments. 

Need for coordination 

Strauss-Kahn said the G20 grouping of nations offered a unique forum to tackle imbalances, but warned political will for tough policy choices may fade once economies heal. 

“This kind of coordination is needed to solve the global imbalances. What is at stake is whether this coordination lasts after the crisis or not, or whether everybody will go back to their own domestic political problems.” 

He said it was not too soon to tackle imbalances as long as the global recovery is properly nurtured and governments don’t withdraw support for their economies too soon. 

The imbalances were “a problem before the crisis, during the crisis and will be a problem after the crisis. So it is not too soon to deal with it,” Strauss-Kahn said. 

“Moreover, part of what has been done during the crisis may change the rules of the game both for countries with big surpluses and countries having big deficits.” 

He said part of the solution for ensuring more balanced global growth would be for China to rely less on exports to drive its economy and more on domestic demand, adding that China needed to let its currency rise in value. 

“We still believe the renminbi is undervalued,” Strauss-Kahn said. 

He noted that in the United States the crisis had already prompted some rebalancing, with a big drop in household wealth encouraging more saving and less consumption. 

(EURACTIV with Reuters.

The International Monetary Fund (IMF) has been a key institution in reshaping the global economy since the Second World War. Established at the Bretton Woods conference in 1944, the IMF's main role ever since has been to bail out countries with troubled balances of payments. 

One of the main issues surrounding the IMF nowadays is its power-sharing organisation. The voting power of each member is calculated on the basis of its donations. The United States is by far the biggest decision-making power, with almost 17% of the total vote. 

China, the emerging power, contributes to less than 4% of the overall funding, and therefore holds just 3.66% of the voting rights. 

The European Union is over-represented, with eight seats reserved for EU states on the executive board of the fund. The four biggest EU donors (Germany, France, UK and Italy) together hold almost 20% of IMF voting power. 

Furthermore, Europe appoints the IMF's managing director, while Washington in return nominates the head of the World Bank, the other key institution created under the Bretton Woods agreement. 

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