China has become the largest contributor to the International Monetary Fund (IMF) after the United States and Japan. At the G20 Summit in London last week, China said it would contribute $40 billion to the IMF, the largest by a developing nation during an economic crisis.
China's contribution indicates it is committed to fulfilling its responsibility as an economic power and wants to push for the implementation of the IMF's plan to boost global credit recovery, economic growth and employment.
China has become a member of the newly established Financial Stability Board (FSB). But even before that it had been willing to undertake more international responsibility with other FSB members, and its contribution proves it is ready to do everything possible to support the IMF's and the World Bank's financing programs. The country's $40 billion contribution should boost global fluidity and greatly increase the IMF's capacity to help its member economies tackle the global financial crisis.
Though China is the world's third largest economy, it is still a developing nation. Its contribution to the IMF does not have much to do with its burgeoning foreign reserves because its per capita GDP stills rank below 100 in the world despite having about $2 trillion in foreign reserves. Vice-Premier Wang Qishan rightly said: "It is unfair and unrealistic to judge a member economy's proportion of increased contribution to the IMF only according to its foreign reserves."
A wide range of factors, such as an IMF member economy's stage of development, its per capita GDP and the structure and composition of its foreign reserves should be taken into account when deciding how much it should contribute, Wang said. The degree of a donor country's dependence on foreign reserves to ensure its economic security should also be an important factor in gauging its contribution to world financial bodies.
The existing IMF contribution structure and the way member economies share the votes do not reflect the changing pattern of the world economy. For instance, China, Brazil, India and other developing countries have achieved rapid economic development in recent years, and their economic influence has been on the rise on the world stage. But the IMF's contribution quota and its voting share have not undergone any major change. That's why it is necessary to reform the IMF and make it adapt to the fast changing world economy.
Member economies' proportion of contribution to the IMF and their voting rights should be decided by their economic aggregate and per capita GDP. Hence, the $40 billion China has promised to contribute is far more than its voting share in the international financial body. Needless to say, China's contribution to the IMF and its voting share should be commensurate with its rising economic status in the world.
The IMF's existing 85 vote mechanism has to be changed to make it more representative and to ensure that the voice of emerging economies and developing countries, including poor African nations, carries more weight.
The US is said to hold 17 percent of the IMF vote share and the European Union 32 percent. Such a voting arrangement is tantamount to extending the US and EU the privilege to veto any major resolution, which is unfair to the huge number of developing countries.
The reform of the IMF and the World Bank should also ensure that emerging economies and developing countries have a greater say in electing heads of international financial institutions, and that the elections are more transparent. Besides, candidates should be chosen on the basis of their overall merits, the most important being their ability to provide developing countries' representatives access to the high-level decision-making organs.
The range of the IMF's Special Drawing Right (SDR), long dominated by the US dollar, Japanese yen, euro and the pound sterling, should be widened. China, for its part, should accelerate the development of the yuan into an international currency and try to include it into the SDR. Simultaneously, measures should be taken to push for the development of the SDR as a super-sovereign international reserve currency.
Since China has increased its contribution to the IMF drastically, it should link it to member economies' recognizing it as a market economy. The country should make its recognition a precondition for the help it is extending to the IMF to increase its fluidity.
It is not fair for some IMF member economies to enjoy the benefits that China's contribution will bring even as they refuse to recognize the country's market economic status. Such a system would be detrimental to the establishment of a new international financial system, too.
The author is director of the Center for American Economic Studies, Institute of World Economics and Politics, affiliated to the Chinese Academy of Social Sciences.
(China Daily 04/09/2009 page8)