China, the IMF and Governance

Again, China

An interesting article in today's Washington Post by Paul Blustein. Check it out here. In a nutshell, the International Monetary Fund's long mission of providing emergency loans to sovereign nations in financial trouble appears to be shifting. Countries appreciated the funds in the past when they were in trouble, but often didn't appreciate the onerous -- and often inappropriate -- requirements attached to the money. As a result, according to Mr. Blustein, many developing economies have been managing to keep a lot of cash on hand to avoid the heavy hand of the IMF.

Another critique of the IMF has been of its governance and representation. Mr. Blustein reminds us that countries like South Korea and China have been developing rapidly, contributing to the world economy far in excess of their representation within the IMF.

China certainly has a lot of cash on hand, and it is a net exporter, contributing tremendously to world economic growth, and simply becoming more integrated and important. As of this weekend, it will now have a larger share of voting power -- although, like the United States, that voting power will under-represent its actual economic contributions.

What's interesting to me are at least two characteristics that have led China to a position of greater power in the IMF. One is their cash on hand. The IMF wants to remain relevant, so it actually wants China in the mix, but all this cash means that China doesn't need to be a part of the IMF -- except to have more influence. So this is more a political chip being offered by the IMF than an economic one. And, may I say, the US has been following policies that have driven down the price of dollars. If any of us worry that China owns too much of our money and can therefore threaten us in a mass sale of those dollars, we only have our own leaders to blame.

A second consideration is what has been driving China's growth. By its own admission, much of the China-US trade imbalance is overstated because products we import from China are actually the product of US foreign direct investment in China. Their implication is that China isn't nearly the productive giant that the trade imbalance might imply. Nevertheless, it is measures such as their productivity that give them more seats at the table. Again, anyone is worred that China has too much influence, it is because US investors have flocked there.

My own view is this. So what? The IMF is actually doing its job by creating an international financial environment that encourages savings and better domestic economic management. It actually needs to make itself irrelevant. The question then becomes, if the IMF is become less of a bank of last resort, what role would it play? I'm a do-gooder at heart. I'd like to see it do some good. For example, offer cheaper money for transnational projects that mitigate famine, that improve the environment, that increase a quality water supply, and that discourage the root causes of war. Oh, I can see some of you rolling your eyes. But this follows a classic enlightened economic policy that much of the West has been pursuing for a long time: Economic integration and stable natural resource availability generate peace.

And, as for China's role in the world, I say, bring it on. The key arguments that concern many about China (resource use, military build-up, corruption, human rights) are valid but, I believe, short-lived in the face of economic and political integration, rule of law and a free press. They move slowly, but they'll get there, if we continue to provide good examples. The Chinese people I know are smart, eager, globally aware, good, hard-working folks. Fifty years ago, China was on the other side of the world. Now, China is our neighbor. Let's keep our eyes on the big picture: We share a planet and an economy. We are already embracing. We must make it a meaningful embrace by encouraging what works and being crystal clear when they -- and we here in the US -- are doing something that cannot be sustained.