It all began in Johannesburg on 24 August 2023. An important change went generally unnoticed. Yet it modified the balance of power within the multilateral financial institutions based in Washington DC. The enlargement of the BRICS group (Brazil, Russia, India, China and South Africa), provides the group de facto with a veto right over the functioning of the International Monetary Fund (IMF) and the World Bank, the keystone of all the financing of the world economy. With the addition of its six new members (Argentina, Egypt, Ethiopia, Iran, the United Arab Emirates and Saudi Arabia), the eleven BRICS countries now control nearly 20% of the IMF’s capital, in other words, the equivalent in voting power. Together they can prevent a new member from joining (like Taiwan, for example) or influence the Fund’s major financial-political measures, such as the revision of the respective weight of the 189 members of its capital, decisions which require 85% favourable votes. ‘The Global South1 will play a bigger role in the governance of world development,’ wrote on 25 January the Chinese press agency Xinhua.
The Chinese ‘threat’
US President Joe Biden, whose country is currently the only one to have a blocking minority with 17.43% of the quotas and hence of voting rights2 was not mistaken. On 25 August, the day before the enlargement of the BRICS, the White House let it be known that at the next summit of the G20, in September 2023, in New Delhi (India), ‘The matter of the modernisation of development banks across the world will be dealt with.’ And the pitch line consisted in a comparison between the ‘effective and transparent’ financing of international institutions and another financing of investments, ‘opaquer and coercitive’ claimed to be a speciality of China. This ia a ritual attack coming from the Democratic administration which accuses Chinese financiers of drawing up vague contracts. Jake Sullivan, National Security adviser was more diplomatic and claimed, in contradiction with the verbatim record, that China was not the target of the President’s accusation…
In point of fact the demographic and economic weight of emerging countries is not taken into account by the IMF. The BRICS, which represent between 32 and 46% of the world’s population and approximately a good third of the world economy have fewer votes than four ‘average European countries (United Kingdom, Germany, Italy) and France). The advanced economies have 59.1% of voting rights while representing only 13.9% of the world’s population. When the Breton Woods institutions were founded in 1944, most of those countries were still part of colonial empires and had no sovereignty. Since then, there have been many attempts to correct those inequalities, but none were really successful until 20093.
The revision of the quotas – i.e., of the shares of the IMF’s capital available to its members – takes up a large share of the staff member’s time. It is necessary both to correct the inequalities due to history and increase the number of shares to finance the Fund’s loans. For some fifteen years now, the revision has broken down for one and only one simple reason: Congress refuses to lower the United States’ quota for the benefit of the newcomers, because Washington does not want to lose its veto right which would unfailingly be the case if the US quota were to fall below 15%. In 2023-24, an electoral year aux USA, the country will be less prepared than ever to abandon quotas which give it the right to intervene in the affairs of the world.
President Biden offers to set the IMF’s capital increase at 200 billion dollars. The G7, which brings together the world’s richest countries is having ²hard time setting up the100 billion dollars fund already promised. So how are they going to finance this new cascade of greenbacks?
In theory, the sale of more quotas to each member country should provide the wherewithal. At present, the lack of any agreement regarding the redistribution of quotas makes this solution impossible. Failing that, the IMF borrows on the international financial markets thanks to multilateral arrangements (408 billion dollars) or bilateral ones (152 billion) from rich individual lenders at a rate for the USA which is climbing all the time, and which is currently close to 5% in North America.
At the New Delhi G20 which assembled at the beginning of September the world’s eighteen main economic powers, the quota issue was not debated in public. However, point 53 of the New Delhi Leaders’ Declaration returns to the reform of the multilateral development banks and the revision of the quotas, supposed to be accomplished by the end of next December.
We reiterate our commitment to a strong, quota-based, and adequately resourced IMF at the centre of the global financial safety net. We remain committed to revisiting the adequacy of quotas and will continue the process of IMF governance reform under the 16th General Review of Quotas (GRQ), including a new quota formula as a guide, and ensure the primary role of quotas in IMF resources, to be concluded by December 15, 2023.
Supplant the financing from the global North
What will the new quota formula mentioned in point 53 be? Until now nothing has leaked. Any commitment made by the members of the IMF holds for the US and the UE. But the rich countries do not seem anxious to cut back their quotas in favour of the Global South. On 18 October 2023 China celebrated with some hundred chiefs of State the tenth anniversary of the launching of the “Belt and Road Initiative” (BRI) and had already leant them 1,000 billion dollars. Its future commitments amount to more than 107 billion dollars. The People’s Republic no longer finances the US budgetary deficit by purchasing its treasury nods but places its savings by investing in the infrastructures (highways, dams, bridges, power plants…) of poor countries.
President Xi Jinping has promised to continue in the years to come and has, de facto, supplanted the IMF and the World Bank to contributing financially to the South thanks to the comfortable surplus of the Chinese balance of payments, year after year (over 150 billion dollars per annum).
In Marrakech, the traditional yearly assemblies of the shareholders in the IMF and the World Bank at the beginning of October, largely overshadowed by the explosion of violence in the Middle East issued on another muted confrontation between the world’s most important economies, the United States and China; For the first time, China has refused to yield to US pressures concerning the financing of the Fund; The implicit threat of a BRICS veto prevented the approval of a solution proposed by the US Treasury secretary, Janet Yellen. As a result, the “16th General Review of Quotas”, now under way, deals with the increase of the number of quotas, not with their relative distribution among member states which remains unchanged. And it is likely to remain so, despite the lone hand played by India, the only member of the BRICS who has subscribed to it. From now on two great powers (the USA and the BRICS) can use their veto in the international financial institutions.
1This term is contested insofar as it includes a country like Russia, but if it is a political reality.
2The quotas of a member of the IMF determine a. his financial obligations towards the IMF b. the number of his voting rights c. the maximum amount of aid he can claim from the IMF.
3The reform was timid, scarcely 6% of quotas were reallocated in 2016