China, Saudi Arabia, and the IMF Quota and Voting System

Saudi Arabia and China could give a big boost to the International Monetary Fund (IMF) resources, and both have suggested that they may announce during the G-20 summit. But both countries expect greater influence within the IMF in return.

As world leaders convene in London for the G-20 summit, the role of the International Monetary Fund (IMF) in stabilizing ailing countries and the global financial system will be a topic of considerable importance. The IMF already has loaned billions of dollars to the hardest-hit European countries and to Pakistan. Meanwhile, a number of other loans are under negotiation — including a potentially huge one to Turkey, and the line of prospective borrowers is growing. At the moment there are two prominent discussions surrounding the IMF: The first concerns recent changes to the organization’s lending policies that would modify its practice of requiring strict fiscal behavior of borrowing countries; the second concerns boosting the fund’s reserves to increase its lending power.

To make sure the IMF has the reserves necessary to continue lending, and to do so rapidly and confidently, British Prime Minister Gordon Brown, German Chancellor Angela Merkel and others have called for the IMF’s reserves to be increased. Everyone agrees this should be done, but the question is whether this should be through contributions from member states or through having the IMF issue bonds. Japan promised $100 billion in February for the fund. Tokyo’s eagerness stems from the knowledge that if the global financial contagion does not stop spreading, then banks will not be able to return to normality and trade will continue to balk, making recovery impossible for Japan. The European Union and the United States have each suggested that they would contribute $100 billion, and Norway has promised $6 billion for the fund.

Now, the world’s eyes have fallen on Saudi Arabia and China, two countries faring relatively well amid the global crisis, each of which possesses an enviable near-$2 trillion in foreign exchange reserves and assorted national accounts. Together, these two could give a big boost to the IMF’s resources, and both have suggested that they may announce contributions while attending the G-20 summit. Yet both countries expect to get something in return beyond the interest on their loans.

At issue is the political power that the IMF exercises over its debtors. The IMF has long required countries that accept loan money to fall in line with austere financial management requirements meant to bring these countries in line with the highest fiscal standards and standards of creditworthiness, thus giving the IMF a sounder investment. The United States (or a critical mass of other IMF states) can wield executive power to shape requirements on countries that accept loans. This comes in handy when, say, Washington wants to turn the screws on Pakistan over the regional security situation while Pakistan is seeking financial assistance from the IMF. Similarly, if China and Saudi Arabia are to give more of their cash to the IMF, they will expect greater political influence over IMF borrowers and greater say over the IMF’s management.

The organization’s daily activities are handled by the Executive Board, which is made up of 24 directors who represent particular countries and coalitions of countries. (Beijing and Riyadh each are represented by their own director.) IMF members each have a quota reflecting their respective country’s relative economic heft and determining the amount of capital the country invests in the fund’s reserves. Quotas are matched by Special Drawing Rights (SDRs), the IMF’s reserve assets, which are valued according to a currency basket of euros, yen, dollars and pounds sterling. In addition, countries have voting rights within the fund, which are mostly determined by quotas.

If they are to contribute more money to the fund, the Chinese and Saudis want their quotas lifted and greater voting representation. Currently, the Chinese are ranked seventh, with 3.72 percent of total SDRs and 3.66 percent of votes. By contrast, Germany, the economy of which the Chinese overtook in 2008 in terms of gross domestic product, has 5.99 percent of SDRs and 5.88 percent of votes. Meanwhile, the Saudis are ranked ninth, with 3.21 percent of SDRs and 3.16 percent of votes. High-level Chinese officials have hinted that Beijing could give as much as $100 billion more to the fund, and Saudi officials have vacillated about giving the same amount — but both countries have made such donations contingent upon adjustments within the IMF’s structure of executive power.

Of course, Beijing and Riyadh are not necessarily after the same things. Riyadh has a relatively simple requirement: If it is being asked to give more money, its representation should be proportionate. The Saudis typically support U.S. leadership in the IMF. Riyadh thus wants a greater share of votes so their support is more valuable to Washington, thus giving the Saudis the ability to extract concessions from the United States on issues of importance to Washington. Foremost in the minds of Saudi leaders is the thought of Iran’s growing power in the Middle East and Washington’s attempts to strike a deal with Iran. Riyadh would be happy to have some way of reminding Washington to keep Saudi interests in mind as it negotiates with the Saudis’ chief regional rival.

Beijing, by contrast, wants more influence at the center of IMF decision making, including over the process of scrutinizing, granting and distributing loans. The IMF has a nasty reputation in East and Southeast Asia for being an instrument of Western hegemony, mostly a legacy of the strict demands put on borrowing countries during the Asian financial crisis of 1997-1998. Because China’s economic interests in this region are vital, Beijing hopes to have a heavier hand in IMF dealings there, if only to be sure that they do not run counter to Chinese interests.

The IMF is not necessarily jumping to give China and Saudi Arabia what they want. The Board of Governors decided not to alter quota amounts during a regular five-year review in 2008, but has formally agreed to increase quotas in the future in the case of member countries whose economies are growing rapidly. The alternative, in the urgent situation presented by the global economic crisis, is for the IMF to issue bonds, which would allow the fund to raise capital while not requiring structural alterations. Heading into the G-20 summit, the Chinese and Saudis have not ruled out the idea of buying these bonds. But they no doubt would prefer to increase their contributions and heighten their stature and influence within the IMF.

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