SINGAPORE, 19 September 2006 — As many had expected, the board of governors of the International Monetary Fund (IMF) adopted a resolution on quota and voice reform in the IMF. The resolution, which had been recommended by the IMF’s executive board to the IMF board of governors, is a package of reforms on quotas and voice in the IMF that would provide greater voting power to economies from the developing world, which have been underrepresented in the IMF’s decision-making process relative to their share of the global economy.
The two-year reform program includes as a first step ad hoc quota increases for a group of the most clearly underrepresented countries - China, Korea, Mexico and Turkey. The radical overhaul was backed by 90.6 percent of the vote. Germany’s Finance Minister Peer Steinbrueck described the outcome of the vote as, “an important and a very good result,” and reiterated Germany’s call for the IMF to provide stronger representation for developing nations.
“It’s a small step but an important step,” US Treasury Secretary Henry Paulson said earlier referring to the overhaul. “Our institutions, to be relevant, have to change with the economy.”
The four countries to benefit from the changes are said by the IMF to be the only members under-represented on all four elements of the criteria that determine a country’s voting rights.
The criteria includes: The member’s gross domestic product, its openness to trade, the “variability” of its economy (in other words how volatile its growth is), and the amount of its reserves.
“The international community recognizes that China has increased its role in the world economy,” said IMF Managing Director Rodrigo Rato during weekend meetings of the IMF here. Rato also described the revamp as an “historical change.” “I think the institution is becoming more and more aware of the need to reflect the situation of low-income countries,” he added.
Along with its sister institution the World Bank, the IMF had come under criticism in countries like Argentina and in Southeast Asia and Africa for prescribing severe belt-tightening measures that were blamed for causing severe economic hardship on the poor.
Some US critics had also opposed any increase in China’s IMF influence unless the rising Asian Giant took radical steps to overhaul and reform its currency, which many had accused China of keeping artificially low in order to keep its exports “unfairly” competitive. Criticism of China’s currency regime by the Group Seven (G-7) industrial nations had become particularly loud as China had recently recorded a record trade surplus while the US recorded a record deficit.
However, Paulson applauded the increased voting power for China. Paulson, who will be leaving for China on Sept. 19, 2006, said, “China has to play its role in the world, whether or not the IMF reforms.”
Earlier today, People’s Bank of China governor, Zhou Xiaochuan, told the Emerging Markets newspaper that China would not rush into liberalizing its exchange rate regime and is not certain that any relaxation will lead to an appreciation of the yuan. Zhou also told Bloomberg that he had not been challenged about the exchange rate when he met G-7 officials and predicted the 0.3 percent daily band - in which his currency can move against the dollar in intraday trading - will be widened “sooner or later.” China’s bank regulator said lenders should prepare for currency fluctuations by learning to use derivatives to manage risk.
Paulson, who is a former chief executive of Goldman Sachs Inc., had visited China 70 times before taking over from John Snow is expected to take the debate away from the topic and talk to his Chinese host about moving toward the revamping of its economy and markets.
Paulson said, “China needs greater currency flexibility and stronger domestic consumption as well as financial sector reform,” he said. “The biggest message I am going to take is to encourage China to move forward, more quickly with reforms.”
