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Liu: Mobilizing a Reformed International Monetary Fund

Andrew F. Liu, Analyst, G20 Research Group
September 3, 2016

On 15 December 2010, the board of governors of the International Monetary Fund (IMF) approved reforms of the institution's quotas and governance as part of the 14th General Review of Quotas. Five years later in 2015, the United States Congress allowed the reform package to take effect in January 2016.

The purpose of voting quota reform is to reflect the world's emerging economies by shifting the balance of power of IMF members, as well as protecting that of the poorest members. This is significant, as it indicates that the United States and other G20 members acknowledge the changing dynamics of the global economy and encourage the world's major multinational organizations in their governance rules to reflect these changes. Initially, within Congress there were those who did not want to see the United States lose influence to those who did not share their interests. However, due to Chinese pressure with the establishment of the Asian Infrastructure Investment Bank and the risk of the IMF losing legitimacy, the reform was ultimately ratified.

The IMF has forecast a risky and uncertain future, and has cut growth forecasts for the United Kingdom in light of Britain's referendum in June 2016 to leave the European Union. Britain's economic influence and future uncertainty creates, as the IMF puts it, "'substantial' increase in economic, political, institutional uncertainty." The 2016 G20 Hangzhou Summit will play an important role in formulating a collaborative and inclusive action plan with major economies and the IMF at the helm, not only to ensure the stability of the global economy, but also to promote economic recovery.

The G20 needs to make this a priority. Cooperation between the G20 and the IMF can produce global economic stability, stimulate economic growth, encourage investment and improve international trade flows. As well, through cooperation, the G20 and the IMF can adequately address geopolitical spillover effects and promote growth in developing economies, while maintaining and strengthening advanced economies. The IMF's fundamental mission is to ensure the stability of the international monetary system. This is critical, and it should be part of the G20's mission too.

The IMF monitors and advises G20 members on policy suggestions to improve their domestic economies and reviews policies and initiatives that the IMF and G20 members work together to design and implement. It can only engage in these activities when the countries provide adequate resources. The IMF's institutional structure further highlights the importance of the countries providing adequate resources to the IMF. Thus, there is hope that the Hangzhou Summit this year will spur action.

The renminbi was recently added to the IMF's basket of Special Drawing Rights (SDR), effective 1 October 2016. The Chinese government heavily favours this addition, which it sees as a priority for discussions at Hangzhou. It is important to monitor how other major economies, particularly the United States, react to this situation, as the renminbi's inclusion in the SDR basket would establish the Chinese currency as a global one. However, the SDR can serve several functions to ensure the stability of the global economy, serving as a supplementary asset. On 1 September 2016, the World Bank issued $500 million SDR units, valued at US$700 million, creating the so-called Mulan market. The issuance of the SDR bonds by the World Bank could help China boost the renminbi's global profile and recognition. It will also challenge the dollar's status as the default world currency. However, Mulan bonds have a simple, yet critical constraint: limited market recognition. This may prevent the renminbi, as well as the SDR unit, from being used widely. However, the timing of the World Bank's issuance of the SDR bonds just days before the Hangzhou Summit needs to be monitored closely.

At this year's summit, G20 members should explore different avenues for broader uses of SDRs in the global economy and discuss applying the SDRs to stimulate economic growth. G20 members will likely support this initiative as part of the reforms to the international monetary system.

More broadly, the IMF quota reform is extremely important not only to reflect the current global economy but also to signal that G20 members are prepared to react to this change. The Hangzhou Summit is an excellent opportunity for the G20 and the IMF to formulate a joint strategy to ensure global economic stability and stimulate economic growth. This commitment will certainly be at the top of the agenda, and will indicate how effective China can be as the leader on this issue.

Andrew F. Liu is an analyst with the G20 Research Group and a member of the field team at the Hangzhou Summit.

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