Judging from her first public speech since taking office last July, Christine Lagarde is all that her many supporters say she is: tough-minded, articulate, charming. In a talk hosted by the Woodrow Wilson Center in Washington’s Ronald Reagan International Trade Center, she deftly laid out key challenges facing the global economy: “an anemic and bumpy recovery with unacceptably high unemployment” in the high-income countries, the debt crisis in Europe, and mounting public debt in the United States.
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Her solutions, neatly summed up in four Rs—repair, rebalance, reform, and rebuild—were balanced and nuanced. She urged Europe and the United States to adopt “credible measures that deliver and anchor savings in the medium term … to help create space in the short term for growth.” And she mentioned repeatedly the need to minimize the social costs of the economic downturn, warning of the risk of a “lost generation” of youth unable to find jobs.
Lagarde was also frank—and balanced—in her warnings about global imbalances, calling for a switch in global demand “from external deficit to external surplus countries.” While she did not name China, the audience could have had no doubt that China was on her mind when she said:
With lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery…. In some countries, rebalancing is being held back by policies that keep domestic demand growth too slow and currency appreciation too modest.
Other emerging markets, she added, are dealing with dangers from capital inflows that are too rapid (a problem that is particularly evident in Latin America and was the focus of a recent meeting of the Latin American Shadow Financial Regulatory Committee hosted by CGD).
There was, in short, there was nothing to fault in what she said. I found equally interesting what was left unsaid: the implications of the accelerating rise in the importance and clout of China for governance of the Fund itself.
These were captured this morning in a provocative op-ed in the Washington Post by Fareed Zakaria in which he proposes that the IMF seek a $750 billion credit line from China and other surplus countries (he names Japan, Brazil, and Saudi Arabia) to re-lend to Europe, imposing the tough reforms that the Fund has in the past insisted upon in developing countries, thereby helping them to get their fiscal accounts in order. In exchange, Zakaria suggests, Lagarde would commit to the Chinese that she will be the last non-Chinese head of the IMF.
This proposal elicited laughter when I asked Lagarde about it during the brief Q&A that followed her talk. It’s highly unlikely, and not only because one thing that China and the IMF have in common is a preference for incrementalism.
Yet Zakaria’s proposal encapsulates the conundrum that the IMF faces as an institution: the world’s global debtors continue to mostly call the shots in the IMF, while the global creditors—the big emerging markets, China foremost among them—have much less influence than their role in the global economy would warrant.
Lagarde recognized this in her reply, saying that the role of the big emerging markets in the Fund’s governance was sure to increase over time, subject to much skirmishing over exactly how the formulas for such things are to be adjusted. But she also said that this is not her favorite topic, and that she thinks it important for the IMF to be outwardly focused. Having wrapped up her answer, she thought for a moment and then added that “multilateral solutions” are highly preferable, seeming to put the kabash on Zakaria’s notion of a Chinese lifeline for Europe.
Even so, the ground is shifting rapidly. Zakaria would advance by about 15 years the scenario that Arvind Subramanian lays out in the opening pages of his terrific new book, Eclipse: Learning to Live in the Shadow of China’s Economic Dominance, in which a U.S. president in 2030 capitulates to a Chinese IMF head, agreeing to withdraw U.S. forces from the Pacific in exchange for a bailout.
After the talk, I asked a friend at the IMF whether China might increase its support to the IMF as part of an effort to help Europe. While refusing to speculate, he reminded me that in 2009 China purchased $50 billion in Special Drawing Rights (SDRs) from the IMF, the first such purchase in the history of the IMF. U.S. support to the IMF, meanwhile, is considered uncertain enough that Lagarde’s only major departure from her prepared text was to explain how valuable the IMF is to the United States.
Her concern? A bill pending in the House that would withdraw authorization for the United States to provide up to $100 billion to the IMF’s Enhanced New Arrangements to Borrow (Enhanced NAB). The Enhanced NAB provision passed in 2008 at the height of the global financial crisis in an effective bid to reassure the markets that the Fund had the necessary resources to cope with the crisis. (Only about $3.8 billion of this has since been tapped, as the U.S. share of an IMF loan to Portugal.) A bill similar to the one now pending was defeated when the House was controlled by the Democrats. Even if it were to pass the House, of course, it would likely die in the Senate.
It’s unlikely that China will replace the United States as the Fund’s largest shareholder anytime soon. Yet it’s hard not to be struck by the trends: increasing Chinese support to the Fund, on one hand, and uncertain U.S. support on the other. Sooner or later the folks who pay the piper will want to call the tune.