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# China's price: IMF reform
- URL: https://www.opendemocracy.net/en/chinas-price-imf-reform/
- Published: 2009-03-31T05:03:19.000Z
- Updated: 2019-02-14T23:00:47.000Z
- Author: John Springford
- Tags: #en, #Migrated, #Import 2026-04-09 19:57

The run-up to next week’s G20 summit in London has been dominated by the argument over need for a further co-ordinated fiscal stimulus. The Obama administration wants one, the Europeans do not. In this fractious atmosphere, expansion of the IMF seems to be a rare point of consensus – everyone wants it.

John Springford is the Globalisation Researcher at CentreForum, the UK’s Liberal think tank. He is the co-author of ‘[Divided we fall: can the G20 save globalisation?](http://www.centreforum.org/publications/divided-we-fall.html?ref=opendemocracy.net)’, published in March 2009, ahead of the London G20 meeting.

This view is misplaced. There is general agreement that the IMF is the body best placed to help the growing number of debt-ridden emerging economies hit by the global recession; that if it is to offer this help, it will need more money; and that China, with its huge reserves, is best placed to provide those extra funds. But China is unwilling to finance an organisation over which it has little or no influence, while the EU and the US appear unwilling to cede control. Negotiations are already heated and protracted: China is driving a hard bargain, demanding immediate quota reform, IMF bond issuances to give it an alternative to US treasuries, and a reserve currency, managed by the IMF, to replace the dollar.

The US and Europe agree that the IMF needs to be bigger. It has about $250 billion; Japan and the EU have recently agreed to lend $100 billion each, but this will almost certainly [not be enough](http://baselinescenario.com/2009/03/30/the-g20-communique-a-viewers-guide/?ref=opendemocracy.net). The Institute of International Finance has shown credit flows to emerging economies have fallen from $929 billion in 2007 to $165 billion this year, driving businesses under, and wiping out government finances as tax revenues fall. $500 billion won’t fill the gap, if the crisis drags on into 2010\. Simon Johnson, former IMF chief economist, thinks it could need $1 trillion to bail out emerging economies as the global recession takes its course.

How large the Fund will need to be will be determined by the length of the downturn. A recent IMF paper, ‘Global prospects and policies’, is pessimistic about developing country prospects. It will take a long time to restart international finance: the outflows of capital in the Latin American and East Asian financial crises of the 1980s and 1990s amounted to 5 per cent of GDP and capital inflows took years to reach pre-crash levels. While Asian and – to a lesser extent – Latin American governments responded to these crises by building up foreign exchange reserves, many eastern European countries have large current account deficits and high levels of external debt, both of which make fleeing capital much harder for governments to replace. The IMF is already bailing out Romania, Hungary, Latvia, Ukraine, Belarus and Iceland, and many other European countries are on the brink. The G20 must act swiftly if disaster is to be averted.

At present, the developed world is stalling for time. The US and Europe have agreed to bring forward a review of IMF voting weights to 2011, but the last one, after two years of negotiations, only managed to raise China’s quota to 3.6 per cent – slightly larger than Italy’s. The old G7 economies are also disbursing the new Japanese and European cash through the ‘New Arrangements to Borrow’, which [circumvent the main IMF voting system](http://www.ft.com/cms/s/0/9007adf4-170b-11de-9a72-0000779fd2ac.html?ref=opendemocracy.net). This means China won’t have a say in where it is lent.

This is unlikely to encourage the Chinese to stump up. Furthermore, sources at the European Commission who were at the recent G20 finance ministers’ meeting say the so-called BRIC countries – China, India, Brazil and Russia – are drawing a red line under this issue: they are demanding governance reform now. And China is staking out [a position at the edge ](http://blogs.cfr.org/setser/2009/03/29/the-pbocs-call-for-a-new-global-currency-the-sdr-the-us-and-the-imf/?ref=opendemocracy.net)of what is possible, to try to manoeuvre the US and EU towards the deal it wants. In exchange for giving more money to the IMF, it demands an end to the US veto. It suggests that the IMF should create a new reserve currency to replace the dollar, and issue bonds, which China would be happy to buy. Europe and the US will undoubtedly refuse such radical reforms.

If a deal is going to be hammered out at the G20, the Europeans and Americans are going to have to make China an offer. Perhaps the most surprising development in China's position is its apparent conversion to the benefits of international multilateralism. Zhou Xiaochuan, president of the People's Bnak of China, proposed in his [recent speech](http://www.pbc.gov.cn/english//detail.asp?col=6500&ID=178&ref=opendemocracy.net) that the IMF might become the [trusted custodian](http://blogs.cfr.org/setser/2009/03/29/the-pbocs-call-for-a-new-global-currency-the-sdr-the-us-and-the-imf/?ref=opendemocracy.net) of national reserves.

This is a real shift. Ultimately, the Western powers need to face up to political reality and offer China a reform of IMF governance that properly reflects the distribution of power in the new global economy. Whether the over-represented Europeans will agree to this is unclear: they currently hold nearly a third of the votes on the IMF. But their hand may yet be forced by events. After all, they know that if the IMF can’t bail out the countries of Eastern Europe, the EU may have to.