The world’s 20 leading economies called on Saturday for the prevention of a currency war and agreed to far-reaching reform of the International Monetary Fund (IMF).
Finance ministers and central bank chiefs of the G20 said they wanted to “move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.” They promised to be “vigilant against excess volatility and disorderly movements in capital flows facing some emerging countries,” in a communique issued at the end of a two-day meeting in South Korea.
The Group of 20 nations also pledged to resists “all forms of protectionist measures,” but refrained from setting concrete targets aimed at reducing global trade imbalances.
The decision went against a proposal by US Treasury Secretary Timothy Geithner. He had pushed for the G20 to fix targets of 4 per cent of a country’s gross domestic product for “sustainable” trade surpluses and deficits. The plan of the United States, which suffers large trade deficits, was met by resistance from other G20 members, among them Germany, which enjoys trade surpluses.
The meeting in Kyongju, some 370 kilometres south of the capital, Seoul, sought to find ways to resolve a growing dispute over exchange rate policies.The row, brewing for months, has seen allegations that some countries are keeping their exchange rates artificially low in order to boost their own economies.
The United States and Europe have accused China of artificially keeping down the value of its yuan to boost its exports, to the detriment of its competitors.
IMF reforms
The IMF reforms give more weight in decision-making to rising economic powers like China and India by re-apportioning IMF voting rights and shares rather than continuing to concentrate them on longtime economic powers.
The IMF reforms give more weight in decision-making to rising economic powers like China and India by re-apportioning IMF voting rights and shares rather than continuing to concentrate them on longtime economic powers.
German Economics Minister Rainer Bruederle described the changes as the deepest undertaken by the 187-nation IMF since its founding in 1945. IMF Managing-Director Dominique Strauss-Kahn called them “historic.” The reforms, which have been debated for years, would go into effect in 2011 and see overrepresented countries, primarily Western industrialized ones, lose influence in the IMF while China is to become the IMF’s third-largest shareholder.
IMF Managing Director Dominique Strauss-Kahn and World Bank President Robert Zoellick were taking part in the meetings, which are to prepare for the summit of the G20’s heads of state and government in Seoul in three weeks. The agreement removed a large hurdle for those leaders. he changes must be approved by other countries as well, but the G20 holds 80 per cent of the IMF’s voting rights.
The reforms, which have been debated for years, would go into effect in 2011 and see overrepresented countries, primarily Western industrialized ones, lose influence in the IMF while China is to become the IMF’s third—largest shareholder.
The IMF, whose importance has risen with the 2008—09 global economic crisis, is the watchdog of the world financial system and intervenes when governments have problems making their payments. Its structure is based on the state of the world economy at the IMF’s post—World War II founding, and has proven outdated with the recent rise of emerging markets in such places as Asia, Brazil, Russia and South Africa.
Heading into the meetings in Kyongju, huge differences existed between Europeans, the United States and developing countries on IMF reforms. They revolved not only around the reallocation of IMF quotas — which determine a nation’s voting power, financial contributions and access to IMF funding — but also new voting rules and appointments to top IMF positions.
The US sought less influence for Europe on the IMF’s executive board while the European Union came to the table ready to abandon the current power division between the Europeans and Americans, which included the current convention that the IMF’s managing director come from Europe while the World Bank boss is an American.
The Europeans, who now hold nine seats on the board if Switzerland’s is included, gave up two board positions but were determined to keep the board membership at 24 and succeeded in rejecting proposals to cut it.
Germany Deputy Finance Minister Joerg Asmussen, who predicted the reforms would strengthen the IMF’s legitimacy, said changes to the quotas would make a 6.5-percentage-point shift from the established economic powers to the dynamic emerging markets.
Currently, the quota for the US, the world’s largest economy and biggest quota holder, is 17 per cent while Japan has 6.5 per cent, Germany 6.1 per cent, and France and Britain 4.5 per cent each. Germany, Europe’s biggest quota holder, is to see its share drop to 5.6 per cent.
China, meanwhile, now has a quota of 3.7 per cent, which fails to take into account its newly acquired positions of the world’s second—largest economy and biggest exporter.
