On her trip to India, IMF chief Christine Lagarde has repeatedly been confronted with questions on the much-delayed quota reforms at the fund. Country quotas determine the amount of financial resources they have to contribute to the IMF, their voting power, as well as the amount of financing they can access from the fund. But their relatively static nature has resulted in absurd imbalances — China, for instance, has been allocated a lower percentage of the total votes than France; Brazil less than Belgium. In order to rationalise the fund’s quotas and governance, in 2010, the IMF’s board of governors had mooted a reform package that, among other things, would reallocate more than 6 per cent of the quota shares to dynamic emerging economies, making China the third largest fund member and India among the top 10 shareholders — at the cost of the over-represented West. But the reform needs the approval of 85 per cent of the votes. Seeing as the US has a veto over the decision — its vote share is 16.75 per cent — things cannot move forward without the American Congress’s nod. Lagarde is “personally frustrated and irritated” with the lack of Congressional approval (European countries have already ratified the proposal) and, in the long run, holding out is against US interests, too.
Unless the administration and structure of multilateral institutions like the IMF keep up with the changes in the global economic order, countries like China and India will explore alternatives. Already, they have nudged the creation of the BRICS bank and China has launched the ambitious Asian Infrastructure Investment Bank (AIIB). Over the last seven days, Germany, France, Italy and the UK have announced they will join the latter. The scale and scope of these projects isn’t anywhere close to the Bretton Woods giants — the AIIB, for instance, is just an infrastructure lender with a fraction of the IMF’s membership and capital; the fund, on the other hand, helps countries deal with external crises. Still, the traction these projects are getting from other countries and the heft and influence they afford to China should set alarm bells ringing in DC.
US Treasury Secretary Jack Lew recently explained this to a House of Representatives committee. Now it is for Congress to smell the coffee and ratify the IMF reform.