Emerging economies and change at IMF

Despite the loud rhetoric about how the centre of gravity of the global economy and, with it, political influence, have moved from the trans-Atlantic to Asia, there continues to be strong resistance to reflecting this shift in the institutions of global governance.

The G-20, which has been acknowledged as ‘the premier forum for our international economic cooperation,’ agreed at Pittsburg in 2009 that in the International Monetary Found (IMF), there would be a shift in quota share of at least 5 per cent to dynamic emerging markets. This was raised to 6 per cent at the G-20 Seoul summit in 2010. The Pittsburg Summit also agreed that there would be an open selection process at the international financial institutions rather than the unwritten tradition of an American heading the World Bank and an European heading the IMF. However, it is clear by now that a European, Christiane Lagarde of France, will succeed her now disgraced compatriot, Dominique Strauss-Khan, at the helm of the IMF.

This is not really a surprise. The sense of entitlement that comes from prolonged ascendancy is difficult to abandon even though underlying power relations may have changed irreversibly.

Accelerated pace

Then of course there is the numbers game. Between them, the US and Europe still command over 45 per cent of the IMF vote. Even if the 6 per cent shift in votes towards emerging economies were implemented —and it hasn’t been—there would be no way a candidate from Asia would be able to succeed in gaining the coveted post on the basis of votes. But the reality of the global economy has also changed. Not only is Asia’s share of global GDP close to 50 per cent, but it is also growing at an accelerated pace. The world’s second and third largest economies today are from Asia (China and Japan) and in the next couple of decades, India may well capture third place.

 The health of the global economy, and in particular, of the world’s financial markets, depends on the cooperation of the emerging economies. The post of IMF Director-General is going to France, once again,  by default. And the emerging economies did not launch a credible and determined challenge.

First, there were no firm demands by the emerging economies to press for a candidate from their ranks. The BRICS statement, pushing for a candidate from a developing country, was issued by the executive directors representing  their member countries at the IMF.  There should have been a common statement at the head of state/government level if the demand was to be taken seriously.

Second, the emerging countries, ideally all those represented at the G-20 or at least the BRICS, should have quickly consulted each other and agreed upon a common candidate, someone with an international reputation and acknowledged expertise. This could have been an Indian. It could well have been a Mexican who is already a declared candidate. This would have reflected the seriousness with which the emerging economies view this issue. But it did not happen.

It would also appear that the French played their cards well to prevent a BRICS or emerging country consensus. Knowing how keen the Chinese were on the inclusion of the Chinese yuan in the IMF basket of currencies, Lagarde lost no time in making it known that she would support this. The French have also indicated that they would be open to supporting regional monetary arrangements and the ‘globalisation of emerging currencies,’ which is on China’s agenda and is also welcome to those countries that would like to see a decline in the prominence of the US dollar in the world's financial and trade markets. No wonder Lagarde obtained tacit Chinese support for her candidacy.

How will this impact India’s economic prospects and standing in East Asia, the most dynamic area of its external economic relations? Should we seek to join the AMF or should we focus on an effective global architecture instead? My fear is that several significant developments are taking place in the global economy, including the financial markets, which may have major implications for our own economic future. We need to reflect carefully on these developments, analyse their impact on us and formulate strategies to deal with them. Otherwise, we may find ourselves marginalised both in the region and in institutions of global governance.

(The writer is India’s former foreign secretary)