The smooth operation of this rules-based, US-led global economic architecture contributed to the unprecedented economic growth and worldwide prosperity of the post-World War II period.
However, recently this architecture has lost much of its legitimacy because the world trade and GDP shares of emerging marketsespecially those in Asiahave risen more rapidly than their shares in IMF quotas. For example, China accounts for 13.6% of the global economy (in PPP terms), but its voting power is 3.8% less than that of the Benelux countries. It is not that the IMF and the White House have not made the effort. In November 2010, the IMF proposed what it labelled as the most fundamental governance overhaul in the Funds 65-year history. If approved, it would have reduced some of the quota misalignment at the IMF, fulfilled the G20 pledge to transfer 6% of the quota to dynamic emerging markets, and given China the third-largest voice in the IMF. The target was to make the reform effective in 2011 but, despite the support of Barack Obama, the proposal is still stuck in the US Congress. The cost of this delay is rising.
A consequence of the slow progress in reforming the governance of the IMF has been the move from a centralised to a decentralised global economic architecture, in which regional institutions are being established to deliver international public goods in parallel with senior global institutions. Other factors accounting for decentralisation are the need for a multi-pronged approach to manage financial globalisation and the evolution of a multi-polar world. For example, in the area of macroeconomic stabilitywhere the IMF is regarded as the global financial safety netwe have the European Stability Mechanism, the Arab Monetary Fund, and the Chiang Mai Initiative Multilateralization as the regional safety nets. Similar developments can be witnessed in the international trade, financial, and development architectures. These trends complicate the governance of the global economy, and lead to duplication of efforts and wastage of scarce resources.
The situation has been aggravated by the evolution of the China-led architecture in Asia. The establishment of the New Development Bank (NDB) by the BRICS (Brazil, Russia, India, China, and South Africa) and the soon-to-be-established Asian Infrastructure Investment Fundboth financed mainly by Chinaare signs that the country wishes to play a greater role in the global economic arena befitting its position as the number two (and the soon to be number one) economy in the world. Establishing institutions dedicated to providing infrastructure loans and guarantees is innovative, as they were lacking in the global architecture. But Chinas moves also reflect its frustration at being unable to obtain a greater voice at the IMF and the World Bank.
Other components of the China-led regional architecture are the $100 billion Credit Reserve Arrangement or the mini IMF among the BRICS to tide over members in financial difficulties, and the Chinese desire to steer infrastructure development in Asia (both maritime and land-based) through its New Silk Roads policies without Western influence. Through the latter initiative, China is exporting a central feature of its development model to the rest of Asia and the world. China spent 8.5% of its GDP on infrastructure development during 1992-2011, with the developing-country norm being just 2-4% of GDP. The Regional Comprehensive Economic Partnership (RCEP) in Asia locks out the US, while the US-led Trans-Pacific Partnership (TPP) locks out China. Going forward, we can expect more such initiatives from China.
While the China-led regional architecture in Asia does not pose a real threat to the IMF, the World Bank and the ADB, it locks out Western countriesjust as Western countries have locked out Chinaand complicates the governance of the global architecture. The ADB has projected that Asia requires $800 billion till 2020 for developing infrastructure, compared to the total lending by the ADB of $15 billion a yearroughly half of which goes to infrastructure finance. With an authorised capital of $100 billion, when expanded from the present $50 billion, the NDB could lend about $15 billion a year. So, there is ample room for everyone. Also, the Credit Reserve Arrangement is not a fund that can be used to stem an impending financial crisis, but a network of bilateral swaps with an absence of clearly specified rules on when they could be triggered and utilised.
What should be done The issue could be resolved if the IMF and the World Bank could work together with China-led regional institutions in a complementary and seamless manner. The troika modelin which bailout packages are designed, financed, and monitored jointly by the ECB, the European Commission and the IMFis a good example. But it is unlikely that such an approach will be possible in Asia, as it would require the IMF to work jointly with the Chiang Mai Initiative Multilateralization and the ASEAN+3 Research Office. This is because Europe is special to the IMF and Asia is not. Europe, which occupies 10 out of the 24 chairs at the IMF Board, has the second-largest voice in the IMF. If so, 70 years on, we need a New Bretton Woods led by a select group from the truly systemically important countries of the world, and not the motley bunch that comprises the G20.
Pradumna B Rana