How China won by playing second fiddle at the IMF

By K Subramanian

During Christine Lagarde’s whirlwind tours to New Delhi, Beijing and other capitals to canvass her candidature for the IMF top post, she gave assurances that she would correct the infirmities in the IMF’s management structure.

During her visit to Delhi, she was on a ‘charm offensive’ and cooed that if she were elected, “there would be a little part of me turning Indian.” It would have been music to Indian ears. She also said say that India, like China, was “massively underrepresented in the fund.”

[caption id=“attachment_40274” align=“alignleft” width=“380” caption=“France’s Minister of Economy Christine Lagarde (R) talks with China’s Minister of Finance Xie Xuren (L) during the International Monetary Fund and World Bank Spring Meeting in Washington. REUTERS/Jonathan Ernst”] [/caption]

Of course, kind words and homilies don’t count in diplomacy; in Lagarde’s case, they did not result in any commitment from India either. Not many would have counted on her assurance to increase India’s voting strength in the IMF, which was subject to a two-year review process over which the managing director would have no say.

But along the way, Lagarde was able to get the support of Ethiopia and Egypt. Also, at the annual meeting of the African Development Bank in Lisbon, she won the support of ten African leaders. The African states were looking to settle scores over the reduction of their shares in IMF vote.

Enter the Dragon

But it was Lagarde’s visit to China that held the greatest significance. Unlike other members of the BRICS grouping, China did not make any overweening attempt to sponsor any of the candidates. For instance, Brazil had its candidate in Augustine Carstens; Russia sponsored one of its own; South Africa was leaning on Stanley Manuel’s hopes; and India was undecided about Montek Singh Ahluwalia’s aspirations. China had its own plans for greater representation in the IMF management, but was willing to wait.

In fact, its plans were set in motion a lot earlier, when it deputed Dr Zhu Min as Adviser to the IMF Managing Director, a post for which he had been groomed for years. He had held senior positions at the Bank of China from 2003 to 2009 and served as Deputy Governor of the People’s Bank of China during 2009-10 - that latter posting was intended purely to advance his appointment to the IMF post.

With the fall of Dominique Strauss-Kahn, it was natural that Zhu’s candidature should have been raised. Reuters and the BBC did carry rumours to that effect, but Chinese authorities were not too eager to push for it. They seemed to have shared the view that Zhu was “not experienced enough for the position of managing director and was not expected to rise higher than a deputy managing director.”

Media reports suggested that Lagarde was more than pleased with her talks in China. Chinese leaders and officials, including Vice Premier Wang Qishan and central bank Governor Zhou Xiaochuan, were friendly and supportive but non-committal. On her part, Lagarde expressed support for changes in the IMF structure and for raising the voting powers of China and other major developing countries to reflect their increased economic stature. She added: “If the Chinese economy continues to grow and to be a driver of growth in the world, then clearly the percentage will have to grow.” These were generalities and platitudes, which would not have excited the Chinese authorities.

Lagarde discussed her candidacy with the Chinese Finance Minister, and the most significant understandings reached were hidden in the press reports. Timesonline mentioned: “She also expressed support for a leading role for former Chinese central bank official Zhu Min, who serves as Adviser to the IMF boss. She said it would be ‘fully appropriate if he played a key role’ in the fund’s management.”

Playing for seconds

While most of the BRICS members were keen on the top post, China was rather more interested in getting a higher share in the senior management of the IMF.

According to a report in the International Political Economy, the rumour was that the die had been cast long before Carstens’ visit to China. It noted:“The primary interest of China at this time is to get one of its own in a high- ranking position within striking distance of becoming IMF managing director (that is deputy managing director #2 or #3. So, when the post becomes open once again, he will be well-placed to become the first head from an LDC.”

China Daily reported on the substance of Lagarde’s discussions with Chinese officials. It said, “To win over China to her candidacy, Lagarde said she supported the decision to increase China’s voting rights at the IMF from about 4 percent to 6.4 percent. She also said Zhu Min, the former deputy governor of the Chinese central bank and the current economic adviser to the IMF managing director, should play a more significant role in the fund.” The deal was that China would throw its weight behind Lagarde for the top post, but expects the Europeans to do the same with a deputy managing director post for Zhu Min."

The above analysis is not fanciful. It is indeed evident that there was a bargain. This would be seen from the very first statement made by Lagarde after she took over as IMF Managing Director on 7 July , in which she pledged to give more sway to emerging countries in the IMF’s decision- making process. Institutions like the IMF should better reflect the shifting balance of power in the global economy. She added,“The idea of creating a top-ranking post at the IMF to give more say to emerging economies was not a bad one.”

In short, Lagarde stands by her commitment made to China while getting its support. China’s long-term strategy is to get a larger share in the senior management of international institutions like the IMF and the World Bank. China was able to send a Chief Economist to the World Bank two years ago, and Dr Justin Lin Fu has brought about changes in the developmental thinking of the World Bank. At the IMF too, China has begun its innings rather well and played its cards well.

K Subramanian is a former Joint Secretary in the Ministry of Finance of the Government of India; he is currently Associate at the Chennai Centre for China Studies. Republished with permission from the Chennain Centre for China Studies.