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September 7, 2006
The (marginally) more egalitarian IMF
From the NY Times editorial page:
Any move that makes the International Monetary Fund — and for that matter other major global institutions — look less like an old boys’ club is a good move. So the I.M.F.’s executive board began doing the right thing last week when it decided to give China, South Korea, Turkey and Mexico slightly larger voting shares — and promised them even more say to come.
A reapportionment is essential for bolstering the fund’s credibility. And it is long overdue. China represents about 15 percent of the world’s gross domestic product but has only a 2.9 percent voting share at the fund, which will grow to 3.7 percent. (Belgium, with less than 1 percent of the global economy, has a 2.1 percent share.)
...
The Bush administration, which championed the changes, is hoping that if China gains more of a stake in the global system it will have an incentive to behave more responsibly: allowing the yuan to strengthen against the dollar and reining in its export binge. China needs a more flexible currency, both for the sake of smooth trade relations — the system is pretty tetchy these days — and to gain more control over its economy. As long as China keeps the yuan artificially low, other Asian countries, eager to sell their own cheap exports, will too.
But the advice can’t stop there. The fund needs to take a closer look at who’s buying all those cheap goods and borrowing all that excess cash from China. China may be the enabler. But the United States needs to reduce its enormous trade deficit and its enormous budget deficit, to protect its economy and for the sake of global stability.
Ok, the sentiment is nice, but how much will these changes really affect the outcomes? Probably not much. It is, however, a step in the right direction. The makeup of the fund should evolve over time to reflect changes in the world economy. Decades from now we may want to enlist the help of a modern and developed China in the development of Africa. They will expect (and deserve) greater voice in those deliberations. We should welcome that.
I'm less sure about the argument that this will give the Chinese the "incentive to behave more responsibly." First of all, the American political definition of "responsible" in this situation is to allow a faster (immediate?) revaluation of the yuan. If you have done any amount of reading on China and know the first thing about the banking situation you know that the American political definition of responsible does not mesh with what the Chinese know that they need. Many economics blogs, including this one, have chronicled that story for some time, so I don't need to repeat it. Tyler Cowen sums it up quite well, also in the Times today. Cowen makes an additional point that is relevant to the Times editorial:
The Chinese keep the yuan low, relative to the dollar, by buying up United States Treasury securities; as of early 2006, the Chinese central bank held up to $470 billion in Treasury securities. This huge accumulation of relatively low-yielding assets is the investment strategy of risk-averse bureaucrats, but it may bring longer-term benefits. Those assets can someday be sold or otherwise transferred to underdiversified Chinese financial institutions. The accumulation gives the Chinese a stake in American prosperity and signals that the Chinese are committed to long-term participation in the global economy. On the American side, the Treasury market is more liquid and the budget deficit can be financed at lower cost.
Yes, you heard that right. Chinese ownership of U.S. assets signals a commitment to long-term participation in the global economy. One might even say that it would give them an incentive to "behave responsibly." In the long run, that is going to be as significant, if not more so, than a token increase in their IMF voting rights.
Posted by William Polley at September 7, 2006 10:31 AM
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