The International Monetary Fund is increasingly at risk of being pressured to tilt resources to countries favoured by the West, warned Raghuram Rajan, former governor of the Reserve Bank of India, in an interview with GlobalMarkets.
Rajan, also a former IMF chief economist and now a professor at the University of Chicago, said funding needs in crisis-hit countries could be growing.
But he said the difficulty United Nations organisations have faced in responding to the crisis in the Middle East, because of the UN’s veto system, showed that the IMF needed to move to a more professionalised executive leadership for day-to-day decisions, which would not be at the mercy of political influence.
A supervisory board would remain political and set general rules.
“I think we should learn from [the Middle East] that the worst thing we can do is emasculate existing organisations,” he said. “There’s more of a chance of that [at the IMF] as we get more protectionist, and as budget constraints bind more. Would the US be very happy if an organisation made decisions which looked a lot more China-friendly, and put the organisation’s capital to work to help China’s neighbours and friends? Obviously not. But the Western alliance basically believes that the rest of the world should be happy when it does this.”
The US, Europe and their allies have disproportionate influence over the IMF because their quota shares, which determine voting power, have not fallen as their share of global GDP has declined. The US has 16.5% of the votes and European Union countries 29.4%, while China has only 6.4% and India 2.75%.
West is short of cash
The risk of bias is getting worse, according to Rajan, because Western countries no longer have enough money to supplement IMF resources with their bilateral lending, as they did in the past, when friendly countries were in trouble — as in the 1994 Mexican debt crisis.
Rajan said: “I think there is a danger that [the Fund] would be increasingly used by the large shareholders to solve the international problems that most concern them and not necessarily the international problems that are most important.”
He pointed to the quota system, which is supposed to determine how much lending an individual country can get. “It’s funny how it’s waived in some cases and not in others,” he said. “There’s a potential for bias. Who do I want to help? I want to help the country which is more sympathetic to me: maybe it’s a neighbour, maybe it’s fighting my enemy. The IMF increasingly has to pick sides.”
Apart from Ukraine, Rajan noted that Egypt, Pakistan and Argentina were all among the Fund’s biggest borrowers. “I think that if it hadn’t been that these countries were a little more sympathetic to the board, perhaps the IMF would have had stronger conditionality,” he said. “I want to leave it as a question. I don’t know that will be true.”
Unsurprisingly, Rajan fears the Fund’s Western bias could become even more pronounced under a second Donald Trump presidency: “He would try to use it, as far as I understand from past behaviour, as an organ of the United States. In the previous [Trump presidency] there were some ways in which the US representative could be persuaded that this is not the right thing.”
He said of the Trump camp: “They’re more determined to get their agenda, and the agenda is America First.”
Even without Trump, rising geopolitical tensions meant the chances of the Fund adopting a less partisan stance were “pretty much zero”, Rajan said. But he argued even-handedness was more important than ever, particularly given the need for authoritative independent voices on trade disputes.
“What you have to see is the need for international institutions as the hostility between the large groups increases,” he said. “We need an honest broker as the fractures increase. The need for an impartial IMF will increase, but myopic politics will ensure it doesn’t happen. In the longer run, it makes the IMF much less effective.”
He said “I’m not holding my breath” on any major changes to the vote shares of China and India in the IMF’s next review. But he said an increase was clearly justified. Yet this could eventually lead to much more divided Fund governance, as in the UN.
“Rather than go dysfunctional, I would want to see more technocracy,” he said. “The politics enters at the board level, for sure, but the loan-by-loan decision is by management.”