The International Monetary Fund must tread carefully as it decides how to reform its quota formula later this year, or risk losing its unique status as the de facto lender of last resort to economies under pressure.
The IMF Board of Governors is due to release its latest General Review of quotas in December.
At least week’s IMF Annual Meetings in Marrakech, there were loud calls from developing economies for them to be given greater vote share and representation at the Fund. And with counterweight organisations like the Brics group growing in prominence, these requests are becoming harder to ignore. The risk of fragmentation in the global financial architecture is growing.
Voting power in the IMF is allocated according to quotas, which denote the contributions made by each country. At present, the lion's share is held by the US, Europe and other wealthy developed countries.
Developing countries believe they are under-represented and are calling for a rebalancing to reflect the modern world, in which developing countries are stronger economically and have fast-growing populations.
Unfortunately, at the IMF, any voting power gained by one country must come at the expense of others: the shares cannot add up to more than 100%.
And the quota shares are at a critical point. Since the last revision, agreed in 2010 and which took effect in 2016, the US has had 16.5%, enough to retain a blocking vote for decisions that require an 85% majority.
China increased its vote share then, while Western countries and some developing ones lost influence.
Now, China's economic weight would suggest a substantially greater share.
If the formula used in 2010 were employed again, reports suggest that China would have more than a 7 percentage point increase in voting power, while the US would lose around 2.5 percentage points — and its veto.
Given the tense relations between the US and China, the US may be reluctant to vote for an adjustment that benefits almost nobody but its greatest rival.
Russia and Brazil would also be among the losers. The way the quotas work mean the incentives for poorer countries to band together to demand change are limited.
Changing landscape
Meanwhile, the world has become more complex than it was in the 1940s when the Bretton Woods institutions were formed.
China has channelled resources into direct financial assistance to emerging markets, positioning itself as a lender of last resort to countries like Pakistan, and an increasingly important part of the crisis resolution landscape.
The Brics group, which recently expanded from five to 11 members, has indicated that it intends to use its Contingent Reserve Arrangement to provide an alternative to the IMF.
If countries that need a safety net find themselves out of favour at the Fund, or on the wrong side of its policies, there is every chance that more will opt for alternatives, undermining the unity of the IMF system.
So it is increasingly important for the Fund to listen to requests for greater representation.
The US has proposed some changes. In September, Jay Shambaugh, treasury undersecretary for international affairs, suggested giving Africa a third seat on the executive board, raising it to 25 members, and creating a fifth deputy managing director. There would be an “equiproportional” increase in IMF quotas, meaning enlarging contributions but keeping shares the same.
However, sources say these changes fall far short of what emerging markets want.
The IMF must look beyond the present spats and consider self-preservation. Failing to allow China greater representation could well drive it further from the Fund and encourage it to push ahead with its aspirations to form an alternative.
As the de facto leader of the IMF, the US faces an important choice. Cede control to China in a controlled manner, or fail to do so and jeopardise the entire organisation’s global position. While the US's protectionist stance may favour limiting China’s strength in the short term, in this instance a long term approach would be wiser.