IMF reforms impossible without US support

IMF reforms are impossible without US support, Christina Lagarde, Managing Director of the International Monetary Fund said today in a speech delivered at Beijing’s Tsinghua University. She added that without American backing there is not much she can do to give emerging markets a larger say.

In January, the Chinese Foreign Ministry reminded the IMF (International Monetary Fund) about its pledge to give emerging economies more power after the US undermined the plan by failing to agree on funding requirements.

In order to complete the 2010 reforms, the US Congress needs to approve IMF funding. When finalized, China will become the third biggest member of the IMF board.

The US holds the (only) controlling) share of IMF votes and is key for the successful completion of the reforms.

Lagarde supports IMF reforms giving emerging markets more say

For the relevant legislation to be passed the US needs to complete the process, Lagarde explained, “This is not something I can do much about.” She said she supports a greater role within the IMF for emerging markets.

In 2012, the US postponed considering the request because of the presidential elections. Since then the Treasury has tied the provision into several bills, making it even more difficult to reach any definitive conclusion swiftly.

Several Republican lawmakers argue that in a time of US budgetary squeeze, the country should not be spending more money on non-domestic issues.

A similar number of US politicians question the IMF’s effectiveness in helping some of the struggling economies in Europe as well as the risks linked to IMF loans. These two factors indicate that the United States does not see the proposed reforms as a top priority.

IMF viewed with suspicion by some nations

Emerging economies criticize the IMF for promoting catastrophic privatizations that undermined the ex-Soviet satellite countries’ transition from communism in the early 1990s, and also for urging Latin American and Asian countries to drastically cut their budgets a few years later. Some have expressed suspicion at the IMF’s motives.

The IMF, which was founded in 1944, and has a power structure strongly tilted towards the US and its allies.

China undergoing new transformation

Regarding China, Lagarde said:

“China is about to embark on the next phase of its remarkable journey, a journey that has propelled it to the top tier of the global economy and lifted hundreds of millions of people out of poverty in a remarkably short period of time.”

The new transformation, Lagarde explained, will come in three dimensions: a clear roadmap, a firm destination, and a deep sense of global responsibility.

A firm destination – China showed great economic leadership during the financial crisis and Great Recession that followed. Its aim now is for “higher quality, more inclusive, and more sustainable growth.”

A clear roadmap – Lagarde referred to the Third Plenum Reform Blueprint which highlights the required reforms to get to this destination. She described the reforms as “ambitious,” requiring hard decisions and tradeoffs, “but I am confident that China will rise to the challenge—as it has always done.”

Deeper global responsibility – as China continues representing a growing share of global GDP, its responsibility in supporting the “global common good” will increase accordingly, examples include factors that ensure the global rules of the game, environmental sustainability, and global financial stability.

Lagarde concluded:

“I firmly believe that this reform program will secure the ‘Chinese dream’ for the next generation, and in doing so, will benefit the entire global economy. I look forward to fruitful discussions surrounding this next great transformation and China’s continued global economic leadership.”