China to receive bigger IMF voice

Posted in China | 19-Sep-06 | Author: Steven Weisman| Source: International Herald Tribune

Paul D. Wolfowitz, left, the World Bank president, and Rodrigo de Rato, the I.M.F. managing director, after a news conference. Mr. Wolfowitz wants to crack down on corruption in World Bank lending.
SINGAPORE Member states of the International Monetary Fund, yielding to demands from China and leading Western countries, have adopted a plan to modify the fund's power structure and take steps to expand the voice of China and other rapidly developing nations, officials said Monday.

The modification of the governance of the IMF, the international agency that monitors the global economy and rescues countries from insolvency, was widely described as the biggest step since the fund was established in the 1940's, the era when the victors of World War II created the vast cooperative superstructure for the world economy.

China's share of the votes at the IMF, which has 184 members, would go up only slightly, from 2.98 to 3.719 percent. The shares of South Korea, Turkey and Mexico, the other countries that gained more power from the vote Monday, was similarly modest. But it was hailed by the United States and other nations as a decisive reform.

"It looks like a small step forward, but it's a large step," said Henry Paulson Jr., the U.S. Treasury secretary, who was here for the annual meeting of the IMF and the World Bank and participated in morning-till-night sessions assessing the global economy and possible steps to assure its health.

The precise tally of the IMF members was not available early Monday evening.

In a separate development, a committee of finance ministers that oversees the World Bank endorsed in principle a plan by Paul Wolfowitz, the bank president, to crack down on corruption in the bank's lending, but not unreservedly. They added a proviso that the bank's board of executive directors, a separate group that oversees the day-to-day bank operations on behalf of donor and recipient nations, be able to override the way Wolfowitz carries out the plan.

Wolfowitz, a conservative intellectual who was an architect of the Iraq war as deputy secretary of defense in the first term of President George W. Bush, has stirred unease in the bank with his corruption policy. Many directors fear that it could be overly punitive and lead to cutbacks in aid to poor countries.

The finance ministers' committee also raised concerns, Wolfowitz said, involving the standards to apply to various countries and the question of how much the bank's resources should go to anti-corruption plans.

The finance ministers' committee issued a statement that supported the anti-corruption campaign but with what seemed to be muted wording. It backed the bank's "engagement" on the issue but demanded further information on implementation, and in a suggestion of unhappiness, "stressed the importance of board oversight of the strategy."

Some officials here indicated that the wording of the committee's statement reflected discomfort with Wolfowitz, but Wolfowitz said he was pleased the board had given him a green light to proceed with what has become a signature issue for him in his 15 months at the bank.

Throughout the meetings of the last few days in Singapore, much of the criticism of participating countries has focused less on the World Bank than on the overhaul of the IMF. The fund vote needed 85 percent of the 184 member countries' voting shares to be adopted.

The United States has about 17 percent of the vote and Europe in aggregate about 23 percent. Paulson and his European counterparts have spent much of their time here lobbying other countries to agree to the reform. Japan has 6.1 percent.

The vote was not very much in doubt, but many countries that voted in favor said they did so under protest and insisted that in a second round of discussions, also approved by the vote here, scores of countries will be demanding a bigger voting share for themselves.

The change in the fund governance was advocated by the United States and many European countries as a way of getting China and other developing countries to feel more invested in the international economic system.

The IMF is one of many institutions that American and European officials say are in need of change. There are fears of disaffection with the World Trade Organization, the successor of a global trade regime set up 60 years ago, following the collapse last summer of trade talks.

Western leaders also want to change the composition of the United Nations Security Council, adding some countries to the roster of five permanent veto-bearing members. But they have been unable to agree on which countries to add. The United States wants to add Japan and one of several developing countries seeking membership.

Wolfowitz has said that his organization, the World Bank, also needs to change its governance to give more say to China and other fast-growing countries in the developing world.

Under the surface of the IMF vote was another objective of the United States: to engage China in the fund as it expands its role in monitoring currency flows and exchange rates. Washington hopes that the fund will become another voice urging China to let its currency fluctuate more freely in relation to the dollar.

If there was one overriding consensus among European and American finance ministers, it was that China is artificially keeping the value of its currency low in relation to the dollar, and that this is an unhealthy pattern also being followed by Japan and other Asian nations.

The net effect, economists say, is that Chinese exports are cheaper than they should be, and its imports are more costly than they should be, aggravating the huge U.S. trade and current-account deficits that have turned the United States into the world's biggest debtor nation.

The gigantic American debt that the United States owes to Asian and oil-producing countries was widely seen as posing a major threat to the global economy, along with other threats like the failure of trade talks, rising oil prices and fears of a major new terrorist attack.

As a partial solution the United States wants China to let its currency, the yuan, float more freely in the marketplace, where it would presumably rise in value and lead to fewer exports to the United States. The flip side of an appreciating yuan would be a lower value of the dollar, but American officials never like to be seen "talking down" the dollar.

Paulson told reporters Monday that the Bush administration favored a "strong dollar." But when asked about a comment from Zhou Xiaochuan, governor of the People's Bank of China, the central bank, that the yuan might not rise in value if it were to fluctuate freely, the Paulson smiled broadly and said: "It was an interesting comment."

But many economists fear that the solution of stronger Asian currencies might create a new problem. If a decline in the dollar effective reduces the hundreds of billions in dollar-denominated securities held overseas, it could lead to a panic-driven sell-off of dollars, driving up interest rates with possible damaging effects to the U.S. economy.

Paulson, meeting with reporters, said the IMF vote marked an incremental bit of pressure on China to do something about its currency, and he aimed to reinforce American concerns when he goes to China on Tuesday for his first visit as Treasury secretary.

He cautioned against "immediate solutions or quick fixes" flowing from his trip, but he also said "that doesn't mean I don't like results."

Few other economists and officials here expect Paulson to get Beijing to move quickly on currency, despite the many years of relations he cultivated with Chinese leaders as head of Goldman Sachs, the investment bank he left last summer for his current post.