IMF and World Bank meetings show China's rising influence

15:13, April 27, 2010

Backgrounder: Timeline of developing countries' rise in the IMF

The spring meeting of the World Bank and the International Monetary Fund (IMF) revealed signs of China's greater influence in the world economy and marked a major breakthrough in the shift of voting power from developed countries to developing countries.

The meeting also was significant in two other important respects: it showed Asia is playing a significant role in leading the global economic recovery and that each country should cooperate in light of economic uncertainty.

China's voice significantly louder in World Bank

The Development Committee under the World Bank approved the voting power reform plan on April 25. This plan shifts 3 percent of the voting power from developed countries to developing countries, and the developing countries’ combined share of voting power of will increase from 44 percent to 47 percent. China's voting power in the World Bank will increase to more than 4 percent from nearly 3 percent, making it the third largest shareholder behind only the United States and Japan. China was previously the sixth largest.

In February 2010, the IMF appointed Zhu Min, deputy governor of the People's Bank of China, as the Special Adviser to the IMF chief. Many scholars believe this move implied another rise in the voice and representation of developing countries in global financial institutions after World Bank President Robert Zoellick appointed Justin Lin the chief economist of the World Bank.

Chinese Finance Minister Xie Xuren said the reform approved at the meeting is the first reform in the history of the World Bank that aims to enhance the representation and governance power of developing countries. It marks the stronger economic power and higher international positions of developing countries, sets terrific precedents and will further advance the share reform of the World Bank. Zoellick also said he was proud that the reform has reflected China's increased influence in the world economy.

Li Yiping, an economics professor at Renmin University, said, "As China is becoming increasingly rich, China has a higher position in the international community and a greater voice in international institutions such as the World Bank. However, China will shoulder heavier responsibilities because more shares mean more capital contribution."

Li added that China's outstanding performance during the global financial crisis has won the country the trust of the world. The rise in China's international position was a result of China's excellent performance. Meanwhile, this has posed higher requirements for China. The responsibility China will shoulder should match its position as the third largest shareholder.

Asia will continue to lead the way in the economic resurgence

Before convening the spring meetings, the IMF released the "World Economic Outlook" report that said the global economic recovery has been better than expected, dropping by less than 1 percent in 2009 and is expected to increase by over 4 percent in 2010 and 2011. The meetings pointed out that the Asian economy will continue to lead the way in the global economic recovery with China and India becoming the focus of attention.

The meetings emphasized that despite the better-than-expected economic recovery, there are still new challenges. Dominique Strauss Kahn, president of the IMF, put forward five key subjects related to the global economy. These subjects are: ensuring the economic recovery, coping with new financial challenges, renovating and reforming financial departments, dealing with high unemployment and rebalancing the global demand.

The report showed that the IMF has realized the phenomenon of an asynchronous economic rebound as well as the spillover effect among countries and various regions, therefore each country should implement relevant exit strategies step-by-step on the basis of their national conditions.

Macroeconomic policy should aim at establishing a balanced and stable global economy, recreating the employment opportunities, stabilizing prices and avoiding protectionism. The meetings promoted the practice of ensuring sustainable public finances and the ability to deal with the sovereign debt risk.

Under the common promotion of the international community, the global economy and financial situation are better than expected, but the economic recovery remains unbalanced, with high unemployment existing in many countries. Every country should take different measures on the basis of their own national conditions such as making sure exit strategies include establishing unconventional macroeconomic and financial support measures.

At the same time, they should continue to strengthen policy cooperation so as to realize sustainable world economic recovery. The strategies must cooperate with five economic factors: ensuring prudent financial expenses; maintaining stable prices; building steady, effective and elastic financial systems; creating employment opportunities and reducing poverty.

International cooperation should be enhanced to deal with the uncertainty in economic recovery

Zhou Xiaochuan, governor of the People's Bank of China, said at the meeting that the global economy has maintained positive recovery momentum, but the speed and strength of the recovery vary significantly in different countries and regions. The recovery is strong in emerging markets and developing countries, while in developed countries the pace of recovery is relatively slow.

Zhou added that, at present, the primary risks to the global economy come from developed countries. Sovereign debt risk has become a major and real threat to global financial stability and economic recovery, and its potential adverse effects deserve special attention. The prolonged de-leveraging process in the banking industry could result in a lack of financing support for sustainable recovery thereby increasing the complexity and difficulty of exit strategies from the financial crisis.

The liquidity poured into financial markets by the central banks of major developed countries and the uncertainty of their exit policies have increased the instability of international capital flows. Consequently, this has added difficulty to short-term capital flow management for emerging market economies. In addition, the risk of a resurgence of trade and financial protectionism must also not be overlooked.

Some scholars pointed out before the meeting that the severe global financial crisis has fully exposed deficiencies in the current international financial system and also the necessity and urgency to reform the system. The meeting also stressed clearly the importance of greater international cooperation and effective multilateral institutions.

Xie said that developed countries should take into full account the possible impact of their exit strategies on the global economy, especially on the developing economies. In order to establish a solid foundation for the global economic recovery, all countries should maintain the continuity and stability of their macroeconomic policies and take greater care when implementing exit strategies. Furthermore, the strength, method and pace of policy adjustments should be in accordance with each country's national conditions.

It will still take some time for developing countries to share equal voice and representation with developed countries in reforming the international financial institutions. The IMF released a reform program for reallocating the IMF quota and voting shares as early as 2008, but the program has not yet been implemented. Moreover, the IMF promised that it will complete the new IMF quota and voting reforms by January 2011, but the recent BRIC Summit called for the reforms to be completed by the G20 Summit scheduled for November 2010.

By People's Daily Online