Recently, at the International Monetary Fund (IMF) and World Bank autumn 2023 annual meetings held in Morocco, the IMF's capital increase approach became a hot topic of discussion. IMF President Christina Georgieva stated in an interview with the Financial Times that the IMF should make reforms to better reflect the changes in the global economic landscape over the past decade. She expressed optimism about achieving the IMF's voting rights reform goals. However, expert analysis points out that there are serious differences between developed and underdeveloped countries in terms of share ratio, capital increase methods, and voting weight in IMF reform. The IMF still faces numerous challenges in achieving democratization and modernization reforms.
The call for reform continues to rise
During the autumn 2023 annual meetings of the International Monetary Fund (IMF) and the World Bank, the 48th International Monetary and Financial Committee issued a presidential statement stating its commitment to building a strong, quota based, and resource sufficient IMF; We will be committed to completing the 16th overall share inspection before December 15, 2023; In order to better reflect the relative position of member countries in the world economy and protect the share proportion of the poorest member countries, adjusting the share proportion is urgent and important; Call on the board of directors to carry out work under the 17th overall share inspection and propose possible methods to guide further adjustments to shares by June 2025, including developing a new share formula.
Huang Ying, Deputy Director and Researcher of the Institute of World Economics at the Chinese Academy of Modern International Relations, told our reporter that the chairman's statement has two noteworthy points: firstly, it expresses the urgency and importance of adjusting the share, and sets out a specific timetable; The second is to call for the establishment of a 25th seat on the IMF Executive Board for Sub-Saharan Africa, in order to enhance its voice and representativeness, and improve the overall balance of regional representation on the Executive Board.
Xu Xiujun, a researcher at the National Global Strategy Think Tank at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, told our reporter that although the annual meeting discussed issues related to IMF share and voting rights reform, due to differences among members on the reform plan, no substantive progress was made on this issue.
The IMF and the World Bank were founded after World War II and are regarded as the two major international financial pillars of the Bretton Woods system led by the United States. As a multilateral financial institution composed of 190 member countries, each member country of the IMF has a quota that determines its contribution to the IMF, voting weight in the IMF, and access to emergency financing. IMF quotas are allocated based on the status and influence of each country in the world economy, mainly considering factors such as GDP, openness, economic volatility, and foreign exchange reserves. According to regulations, the IMF conducts quota reviews at least every five years and makes corresponding adjustments based on changes in the global economic landscape.
However, in practice, the IMF's last significant adjustment to the proportion of quotas was in 2010. More than 10 years have passed, and this adjustment plan cannot effectively reflect the significant changes in the global economic landscape. This lag and imbalance have sparked dissatisfaction and questioning among many emerging markets and developing countries regarding the governance structure and representativeness of the IMF. The international community's call for IMF reform is constantly rising.
UN Secretary General Antonio Guterres recently published an article stating that the existing structures and rules of the IMF and World Bank are unfairly biased towards developed countries, and less developed countries benefit far less from these two institutions than developed countries. He called for thorough reforms by the IMF and the World Bank, including increasing the representation of developing countries on the executive boards of these two institutions, promoting IMF share reform, and improving the use of funds.
China is a staunch supporter of IMF reform. During the 48th International Monetary and Financial Committee meeting, Pan Gongsheng, President of the People's Bank of China and Director of the State Administration of Foreign Exchange, pointed out in his speech that China has always believed that the reform of the IMF's share should achieve share capital increase and proportion adjustment, reflect the institutional nature of the IMF based on share, and better reflect the relative position of member countries in the global economy, Enhance the voice and representation of emerging markets and developing countries. As an important multilateral financial institution, the IMF should continue to call for the elimination of artificial trade, investment, and supply restrictions as soon as possible, to prevent economic and financial fragmentation, and to promote global governance towards a more just and reasonable direction.
Urgent and important reforms
The allocation of shares and voting rights between the IMF and the World Bank has long been far from the reality of the economic power balance of member countries, and the voice and representation of emerging markets and developing countries have been severely suppressed. As a result, the functions of the two institutions have been difficult to effectively play for a long time, "said Xu Xiujun, At present, against the backdrop of continuous tightening of monetary policies in the United States and Europe, the downward pressure on the global economy continues to increase, and the debt levels of more and more countries continue to rise. Some countries with fragile economic fundamentals, high external dependence and foreign debt levels have already experienced debt crises or are on the brink of debt crises. This makes it more urgent to promote IMF reform and better leverage the IMF's functions
The IMF must address the contradiction between increasing funding demand and shrinking lending capacity through reform, "Huang Ying said. As a product of the Bretton Woods system, the IMF's initial responsibility was to promote international monetary cooperation and exchange rate stability, promote the expansion and balanced development of international trade, and provide assistance to member countries facing international payment difficulties. In the early 1970s, after the collapse of the Bretton Woods system, some of the original functions of the IMF were disconnected from the times and needed to be repositioned. In recent years, the IMF has continuously expanded its functional boundaries, incorporating new issues such as poverty reduction, epidemic prevention, climate change, food security, energy security, and sustainable development. At the same time, the IMF's lending capacity has relatively shrunk. In recent years, although the IMF has been continuously increasing its capital, it mainly relies on semi permanent new borrowing arrangements and temporary bilateral borrowing arrangements to support it, while the proportion of loanable funds based on shares has been continuously decreasing. At present, the share based loanable funds have decreased to around 40% of the total loanable funds. Due to the imminent expiration of the $185 billion bilateral borrowing arrangement, the IMF urgently needs a funding gap to maintain its $1 trillion lending capacity.
In history, the allocation of IMF shares has always been in a dynamic adjustment state, "Huang Ying said. Since the 1950s, the IMF has adjusted its share ratio and capital increase to varying degrees several times during the overall share inspection. The current quota arrangement of the IMF was made during the 14th overall quota inspection in 2010 and officially took effect in 2016. In the past 13 years, the global economic landscape has undergone significant changes. According to the existing IMF share formula, at least 25 member countries have a serious mismatch between their economic strength and their voice and representation in the IMF, requiring a significant increase in their share. If the IMF's share arrangement continues to remain unchanged, it will weaken its authority and credibility as a lender of last resort and global standard setter.
The proposal for IMF share reform has been opposed by the United States. Japan's Yomiuri Shimbun reported that the United States is attempting to push for an agreement to increase capital proportionally among countries without changing their existing share ratios.
The purpose of this proposal by the United States is not to change the existing voting power structure, "Xu Xiujun said. According to the IMF agreement, proposals for major issues such as share and voting power adjustments require 85% vote support to pass, while the United States has a voting weight of 16.5%, giving it one vote veto power on major issues. The United States is certainly unwilling to give up this privilege. However, currently, the capital increase that developed economies such as the United States can provide cannot meet the funding needs of the IMF, and an equal proportion of capital increase cannot enable some emerging market and developing country members with the ability to provide funds to play a greater role.
Huang Ying introduced that Edwin Truman, who previously served as the Assistant Secretary of the US Treasury, recently wrote an article stating that according to the IMF's existing share formula, at least 25 countries should have a share increase of more than 50%. Even if the share growth of these 25 countries only meets the target of half, the voting power share of the United States in the IMF will fall to around the 15% threshold. If the share formula is strictly modified according to the global economic pattern, it will be even more detrimental to the United States. Therefore, the United States is very resistant to adjusting its share.
Bridging differences is very difficult
On October 10, the IMF released the latest World Economic Outlook Report. Affected by high interest rates, the Russia-Ukraine conflict and geopolitical disputes, it is expected that the global economic growth will slow down from 3.5% to 3% this year, and the economic growth will slow down from 3% to 2.9% in 2024.
Georgieva called on member states to provide more resources to the IMF, as at a time of sluggish global economic growth, if the IMF does not have sufficient financial resources to assist troubled countries, it will have "devastating" consequences. She warned, "If the IMF cannot step forward and give people confidence, then from an economic, social, and security perspective, the damage may be profound
If the reform of the IMF is democratization and modernization, it can release a strong signal of international cooperation, which is crucial for boosting confidence in global economic development. Huang Ying believes that in recent years, the risk of global economic collectivization and fragmentation has been increasing. The COVID-19, the Russia-Ukraine conflict and the Palestinian Israeli conflict have hit the global economy repeatedly. Confidence in global economic development is very fragile. The demand for global multilateral institutional reform is very high, but the momentum is insufficient. Many low and middle-income countries face the risk of debt crises erupting. If the IMF has sufficient resources, it can help some countries avoid liquidity crises.
However, Huang Ying stated that in recent years, although the IMF has added some lending tools, such as preventive financing tools and flexible credit lines, its loans are not unconditionally provided and usually come with some harsh political and economic conditions. These conditions may include fiscal tightening, monetary policy adjustments, and structural reforms, greatly increasing the difficulty and development costs of developing countries in utilizing funds.
Hussein Nawad, editor in chief of Pakistan's Tribune Express, recently posted a comment on its official website stating that although the IMF has implemented some reforms to open up some powers to emerging markets and developing countries, it still needs to improve inclusivity through broader reforms, ensure the transparency of IMF plans and policies, and implement economic policies that contribute to financial stability and monetary cooperation among member countries.
The biggest obstacle to IMF reform comes from the United States. Even if other IMF members reach an agreement on share and voting rights reform, the United States may still use a veto to hinder the final implementation of the reform plan, "Xu Xiujun said.
At present, it is very difficult for the IMF to bridge the gap. The major discussion on adjusting the IMF's share proportion has been arranged for the 17th overall share inspection, with a milestone of 2025. According to Western media disclosure, the IMF's current funding gap can be covered by a one-third to one-half increase in share capital. Next, the magnitude of the increase in share capital is expected to reach a compromise in the fierce game, but the adjustment may not be significant, "Huang Ying said.
In order to maintain the credibility, legitimacy, and effectiveness of the IMF, the direction of IMF reform is to continue to improve its share and governance structure, ensuring that the IMF becomes an international financial institution based on share and with sufficient resources. Xu Xiujun stated that IMF reform should simultaneously increase share capital and adjust share, expanding the IMF's fund pool and better reflecting the relative position of member countries in the global economy. The IMF share reform should not only fully utilize the financial resources of emerging markets and developing countries, but also give them corresponding representation and voice. In the long run, the issue of one vote veto power over major matters exclusively enjoyed by individual countries should also be discussed, in order to avoid the overwhelming majority of members' efforts to promote reform being undermined by the obstruction of individual countries.