The IMF must keep pace with a changing world economy

[thilton.drupal]

The IMF must keep pace with a changing world economy

The IMF must keep pace with a changing world economy
Expert comment
thilton.drupal
25 April 2025

The International Monetary Fund needs finances and governance that reflect the underlying balance in the world economy if it is to remain universal and effective.



The Trump administration's recent criticism of the IMF has put the institution's future global role into the spotlight. Treasury Secretary Scott Bessent has accused the Fund of failing to hold China to account  while Project 2025 has raised fears that the US might withdraw entirely from the institution. However, other commentators have pointed out that the IMF has historically been a vital instrument  for Washington's economic and financial policy and continues to serve US interests.

The IMF itself defines its mission  as 'furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity.' It aims to pursue these goals by providing policy advice, acting as the lender of last resort to countries, and helping to develop countries' technical capabilities in macroeconomic and financial policy.

President Donald Trump's new economic paradigm does not directly challenge the role of the IMF in the way that his tariff policies weaken the WTO or his cuts in US aid undermine the World Bank. Moreover, given the increasingly frequent shocks to the world economy, a global institution tasked with preserving macroeconomic and financial stability is needed now more than ever. 

But while the IMF is good value for both the US and the world overall, this will only remain the case if the institution evolves to reflect fundamental changes in the global economy. These include the growing economic weight of some emerging economies, particularly China, the consolidation of the EU/eurozone as a single economic block, and the demands of many smaller economies for more influence over IMF policies. 

While adapting to these changes will require the US and some other advanced economies to share power more equally within the IMF, it will allow them to retain the broad global benefits the Fund brings in the long term.
Influence within the IMF
At the heart of the issue is how countries are weighted within the IMF. 

This is dictated by the system of quotas at the core of IMF finances and governance. Each member country is assigned a quota  linked primarily to its economic size, but also other to factors including its degree of economic openness and level of foreign exchange reserves.   

The quota enables a country to draw down funds in a crisis in the form of Special Drawing Rights (SDRs). These are valued using a basket of five major currencies (US dollar, euro, RMB, yen, sterling) and can be converted into member country currencies, including US dollars. A quota therefore represents both a right to access hard currency funds and an obligation on issuing countries to provide them to the IMF when needed. 

The present formula for determining quotas substantially underweights emerging market and developing economies, including China. 

Countries in need can negotiate access to additional funds outside of their quotas, provided that they accept IMF conditions. The IMF funds the bulk of its administrative expenses from fees and charges levied on the loans it makes. 

Quotas also determine a country's overall voting weight in the Fund's governing board. Decisions are typically taken through consensus, but the underlying voting weights of different members have a very strong influence on the direction of policy. Quotas dictate whether a country has a board seat to itself and may also give a veto over the most important decisions which require an 85 per cent majority. Currently the US is the only individual country with a veto, although the EU/eurozone also has sufficient votes, collectively, to form a blocking minority. 

6.4%

is China's quota share at the IMF.

A fundamental critique of the IMF's current structure is that the present formula for determining quotas substantially underweights emerging market and developing economies (EMDEs), including China. In total, EMDEs account for some 60 per cent of global gross domestic product (GDP) but hold just 40 per cent  of IMF votes. China's quota of 6.4 per cent is less than Japan's 6.47 per cent, while India's voting weight is just 2.75 per cent. 

Quotas are reviewed every five years and the formula for determining their overall size and distribution can in principle be changed relatively easily, provided all members agree. But the last time a redistribution of votes was agreed was in 2010, at the height of the collaborative international response to the global financial crisis.

The latest review is due to end in June 2028 and geopolitical tensions between the US, EU, China and other emerging economies are likely to make negotiations very difficult.  
The risk of rival institutions
This situation poses major risks.  

China agreed to a $320bn rise in the total value of quotas at the end of 2023 without any change in distribution among countries.  But it is unlikely to do so again.  This would prevent the IMF from increasing its lending resources in line with likely growing needs. 


Source: https://www.chathamhouse.org/2025/04/imf-must-keep-pace-changing-world-economy Apr 25, 2025, 05:24 AM