Report Underlines Urgency of IMF Reform
By JOHN ROSS
THE ostensibly innocuous report, entitled “International Reserves: IMF Concerns and Country Perspectives,” published by the IMF last year contained an explosive admission: the IMF had criticized a number of countries, China included, in a way it euphemistically described as “not helpful.” The report conceded that these criticisms were based on assessments and discussions that were “pro forma” and, in a display of artful diplomatic understatement, noted that, “the analytical underpinnings of IMF Management’s emphasis on the dangers of excessive reserves for the international monetary system were not persuasive.”
Thus stripped of the necessity for diplomacy, the Washington Post headlined its story on the report: “Auditor Finds IMF Was Pressured by U.S. to Fault China.” It went on, “the International Monetary Fund, at the urging of the United States, shaped recent research to pressure China over its economic policy, according to a study… by the funds in-house watchdog.”
That there had been bias not only against China but also developing countries in general was apparent in the report’s recommendation that “advice should not be directed only to emerging markets.” Amar Bhattacharya, head of the Group of 24, a consortium of developing nations that monitors the IMF, commented that the IMF “seemed to strike a particularly political note and was seen as a ‘stalking horse’ for the United States to press China.”
The IMF report specifically examined criticisms, since acknowledged as unjustified, of China and other countries for accumulating large foreign exchange reserves that purportedly constituted a threat to the stability of the international monetary system. The report concluded: “The IMF has not provided a compelling argument why ‘excessive’ reserves constitute a problem for the international monetary system.”
The reason why the IMF had taken this biased approach – one calculated to conjure up a non-existent threat – was unequivocally stated: “Interviewees – from among senior IMF staff and former Management, as well as country officials – considered that the views of influential shareholders regarding the IMF’s inability to influence China’s exchange rate policy in the last decade were an important factor explaining why concerns about the stability of the international monetary system were expressed in terms of excessive reserve accumulation.” In this context “influential shareholders,” as stated in the Washington Post, can be read as the U.S.
That factually baseless anti-China reports persistently appear in the international press is clear to anyone who seriously studies China’s economy. There appears to be a body of writers who produce inaccurate stories on China’s economy that are unfailingly reprinted. It would, however, be difficult to find a media outlet for articles containing similar inaccuracies regarding, for example, the U.S.
Examples include Gordon Chang’s comment in his 2002 book The Coming Collapse of China: “A half-decade ago the leaders of the People’s Republic of China had real choices. Today they do not. They have no exit. They have run out of time.” Rather than experiencing “collapse” in the following decade China, on the contrary, achieved the most rapid economic growth of any major country in human history. Forbes nonetheless employed Chang as an “expert” columnist (on China, Asia and nuclear issues).
Even the most established of economists seem to feel absolved of any need to acknowledge errors in their writings on China. American economist Paul Krugman, for example, went to the extreme in the New York Times of calling for tariffs against China, citing as grounds that “the International Monetary Fund expects China to have a 2010 current surplus of more than US $450 billion.” The facts of the matter were that China’s balance of payments surplus did not approach Krugman’s claim; the actual figure was US $237 billion.
These days, such journalistic inaccuracies on China’s economy are par for the course. The IMF, however, is supposed to be run objectively in the interests of its shareholders, which include almost every country. But the reality is lamentably different. Bias against developing countries has not been confined to issues acknowledged in the IMF report. During the 1998 Southeast Asian debt crisis, for example, the arrogance and incorrectness of the fund’s approach prompted the decision by several countries in the region never again to be placed in a situation where they had to rely on the IMF. This was a main reason why they decided instead to accumulate substantial foreign exchange reserves.
Similarly, in the 1980s the IMF pushed Latin America through all means at its disposal to concentrate on debt repayment and budget consolidation – policies that resulted over the decade in a dramatic fall in the continent’s per capita GDP. This behavior was in sharp contrast to that in 2008, with the breakout in developed countries of the international financial crisis. Rather than stern denunciations of budget deficits, expansionary monetary policies were forthcoming in the U.S., Europe and Japan. As the Washington Post noted, IMF policies on Europe were “criticized by some emerging-market officials as more generous than programs established in response to financial crises in Asia and Latin America.” In other words, the recent IMF report revealed just one aspect of a systematic bias against developing countries.
This situation, as shown in the report, is inevitable as long as the structure of the IMF continues not to reflect the actual significance of different areas to the world economy. Therefore, matters dealt with in the report are not confined to the past. Developing countries, including China, are of lesser importance within the IMF compared to that they possess in the global economy.
This situation was expected to be resolved through measures taken to deal with the international financial crisis. In December 2010, the IMF Board of Governors approved increases in both quotas and representation for developing countries. It stated: “Members will make best efforts to complete this by the annual meeting of the Board of Governors in October 2012.” By December 2012, however, only 70 percent of the necessary 85 percent of votes to reform the IMF voting structure had been secured. China had given its ratification in both cases. Changes agreed more than two years previously, however, had not been implemented because the U.S. had yet to ratify them. Systematic under-representation of developing countries, including China, in the structure of the IMF thus continued. As long as this situation exists, IMF abuse as revealed in the audit report on foreign exchange reserves is inevitable.
Unjustified bias as revealed in the IMF report hence highlighted the urgency, as a preliminary step, of carrying out the IMF reforms as agreed in 2010. Although China was the specific target of the manipulations revealed in the IMF report, it is an issue that concerns the interest of every developing country and the health of the world economy as a whole.
John Ross is a visiting professor at Antai College of Shanghai Jiao Tong University. From 2000 to 2008 he was director of economic and business policy in the administration of Mayor of London Ken Livingstone. He previously served as adviser to several major international mining, finance and equipment manufacturing companies.
