The 2023 Annual Meetings of the World Bank and the International Monetary Fund (IMF) at Marrakech in Morocco were to be game changing. They were expected to initiate much-needed reforms of the international financial architecture on many fronts. These included: the restructuring of IMF quotas, which decide voting heft, to reflect the changed economic strength of countries in an evolving world order; a substantial increase in financing capacity of both the IMF and the World Bank to deal with new challenges; a new cooperative framework to address debt distress in a wide range of developing countries; and, a change in the conditions set by the Bretton Woods twins when lending to poor countries so as to ensure that borrowing from them does not severely limit the fiscal space that the countries need to grow as well as realise sustainable development goals.
The objective of those with such expectations is to salvage an international system whose inability to address the world’s problems adequately suggests that it is broken. The real need, however, is to fashion a wholly new order to replace a system that is near dead. As repeatedly noted by numerous commentators and commissions, what is needed is a new architecture that is “fit for purpose”.
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To those inured to repeated failures of earlier efforts at reform, not much was expected from Marrakech. And they had reason to be cynical. The issue that flags the futility of reform is the failure to readjust quota allocations in the IMF. Quotas are, in principle, expected to reflect a country’s relative economic and financial position in the world economy. With the major transformation that has occurred in recent decades, countries like China have increased their weight in the world system considerably, while others, notably the European Union, have fallen behind. But vote shares in the IMF and the World Bank do not reflect this change. For example, China with about 18 per cent of world output holds only a 6.1 per cent share in the voting structure of the IMF.
The US has made it amply clear that it will not agree to any redistribution of quota allocations to member countries. This is because any significant redistribution would reduce its vote share to below the 15 per cent level that gives it veto power on major decisions, because those decisions need to be ratified with 85 per cent of votes. In practice, US opposition to periodically mandated reviews of quotas has delayed or stalled the process. Thus, the last increase in IMF quotas by $635 billion as part of the 14th General Review of Quotas was agreed in 2010 but implemented only in 2016. The 15th review ended in February 2020 with no quota increase. And this is likely to be the fate of the ongoing 16th review as well, which is slated to conclude by mid-December 2023.
At Marrakech, US Treasury Secretary Janet Yellen reiterated the current US position that if quotas must be increased to increase funding for the IMF, it can only be through an equiproportional increase, which does not change existing quota and voting shares. It is unlikely that China will agree to such an arrangement where it is called upon to contribute more to the Fund without having a say in its running that reflects its relative economic power. This constrains the IMF’s ability to enhance its role as the arbiter of most, if not all, things economic in the international arena.
The US wants the IMF to have that role without losing its own control. Hence the “equiproportional” quota increase gambit. Since that is unlikely to work, the IMF has to fall back on two other sources of financing it has. One is the New Arrangements to Borrow (NAB) window. Under the arrangement, participating countries and institutions stand ready to lend specified sums to the IMF to address special challenges to the international monetary system, when 85 per cent of them vote to activate the facility. The current NAB, which began in January 2021 and is valid until December 2025, involves 40 participants who have committed to provide up to $485 billion when needed. The NAB was activated 10 times between 2011 and 2016 because of crises. That is no means of ensuring abiding IMF pre-eminence.
Highlights
- To those inured to repeated failures of earlier efforts at reform, not much was expected from Marrakech.
- The issue that flags the futility of reform is the failure to readjust quota allocations in the IMF.
- With the major transformation that has occurred in recent decades, countries like China have increased their weight in the world system considerably, while others, notably the European Union, have fallen behind.
A similar arrangement consists of a set of bilateral borrowing agreements put in place after the global financial crisis to allow the Fund to borrow to meet the special financing needs of its members. There are 42 bilateral agreements in place involving a total sum of $188 billion. These too are activated when supported by creditors.
It should be clear that arrangements of this kind do not give the IMF the flexibility to intervene when and where it chooses. This poses a problem for the US and its advanced-economy allies. An IMF controlled by them but posing as an independent, “technocratic” institution managing the international monetary system, is an extremely useful instrument, specially when their relative economic strength is on the decline and the challenges to the international order they dominate are manifold and severe.
Their inability to keep the current system effective and legitimate is a source of much frustration. The “problem”, they argue, is China, which does not see why it should shoulder a greater share of the cost of resolving problems varying from the debt crisis in low- and middle-income countries to the climate crisis. Especially when the terms of resolution of these problems is set by the IMF, the World Bank, and the US and its allies that control these institutions. It is for this reason that China, which is otherwise willing to help less developed countries in difficulty, increasingly wants to stay out of IMF- and US-led resolution efforts that often impose policies on crisis countries that are not in their interest but in the interest of big business and financial players from the Global North exposed to these countries through lending and investment.
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To divert attention from this challenge faced by the current hegemons who find their dominance under threat, the narrative being built is of a China that is refusing to play by the “rules of the international order”, without underlining the fact that that order is broken and in disrepair. What is needed is not the reform of the institutions that straddle the current international order, but a redesign of the international financial architecture to yield a new order which is governed by new institutions that are more democratically controlled and run. That is the real message from Marrakech.
C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.
