Attention around the IMF and World Bank annual meetings in Marrakesh has focused on the failure of their members to agree on language condemning Russia’s invasion of Ukraine and Hamas’s attacks on Israel. But their inability to agree an increase in IMF quotas is one of the most important – if less publicized – issues for the future of the global economic framework.
To finance its lending to countries in distress, the IMF relies on contributions known as quotas from all its member countries – a share of funds paid in to be re-lent – as well as bilateral borrowing arrangements with individual members. As some of these bilateral arrangements are expiring, the US had proposed an increase in quotas in line with countries’ current shareholdings.
Although this proposal was broadly supported by other G7 countries, and some emerging markets (including India), opposition led by China saw this proposal shelved – at least for now.
The problem is that quotas are politically contentious, because they determine not only how much each IMF member contributes to the fund but also its voting power in the institution.
The decision this week highlighted the impact of geopolitics at play in international institutions, and the implications for the role of the IMF as the premier international lender for cash-strapped countries.
This has become another facet in the struggle for geopolitical leadership between China – now the second largest economy in the world – and the US, which is seeking to retain its international influence.
The IMF and the World Bank have traditionally been the most important and biggest international lenders, for crisis-hit countries and for developing countries respectively. They are a crucial part of the rules-based international system.
The US is, and has always been, the most significant shareholder in the IMF and has exercised a degree of control over its rules and operations. It currently holds around 17 per cent of total voting power. This is particularly significant as the most important IMF decisions require an 85 per cent majority, giving the US the power to block changes.
But over the last decade China in particular has emerged as a major geopolitical player, seeking to gain greater influence among developing countries. China has lent close to $1tn to developing countries under the Belt and Road Initiative, mostly to build infrastructure. It has also set up the Asian Infrastructure Investment Bank and is a major participant in the New Development Bank (the ‘BRICS bank’) which lends to developing countries in Chinese renminbi (RMB). Chinese rescue lending to crisis-hit countries is estimated to have been equivalent to more than 40 per cent of IMF lending in the three years leading up to 2021.
So the move by US Treasury Secretary Janet Yellen to bolster the finances of the Washington-based institutions is an attempt to reassert their role – and thereby US influence in the world.
Meanwhile, the decision by China and its allies not to agree to a capital increase without a further shift in voting shares towards faster growing emerging markets is a similar statement of intent.
The last increase in quotas was agreed in 2010, when emerging markets were very much part of a global solution to the financial crisis. The US and its G7 partners were willing to agree to a rebalancing of quotas towards emerging markets to encourage them to participate in wider reforms, such as financial market reforms and a substantial increase in the IMF’s resources. This increase – which was only formally ratified in 2016 – resulted in a significant transfer of voting power away from the US and Europe to (in particular) China, making it the third largest shareholder in the IMF, just behind Japan.
But as China, India, Brazil and other emerging markets have continued to grow relative to the industrialized world, pressures have grown for a further transfer of voting power.
The process to conclude the current review of quotas is due to be finalized on 15 December 2023, but it is hard to see how a positive conclusion is possible without concessions at the highest political level on both sides. In the meantime, the impasse is having a detrimental effect.
First, it will impact on the ability of the IMF to play its traditional role of lending to countries in distress if they agree to implement economic policy changes. In the absence of more firepower for the IMF, more developing countries are likely to turn to China.
Second, as a result, it will weaken the pressure on borrowing countries to make policy changes designed to help them make sustainable recoveries, while promoting international stability. The conditions placed on countries borrowing from China and Gulf states, for example, are not nearly as transparent as those agreed with the IMF.