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The Grand Bargain

It was no surprise that within hours after her taking over office as the Managing Director of the International Monetary Fund (IMF), Madam Christine Lagarde made an announcement about the elevation of Dr. Zhu Min of China. She said, “the former Deputy Governor of the People’s Bank of China (PBoC) and the current Adviser to the IMF Managing Director should play a more significant role in the Fund.” Why did she have to do it? We covered the background to this announcement in an earlier paper.[i] Indeed, we had felt that there was a grand bargain with China and our inference was not fanciful.

What is more significant is that she should have followed it up within days and acted on the commitment. On July 12, 2011 the IMF issued a press release announcing changes in its senior management positions. It adds a new post of Deputy Managing Director by raising the number of posts to four. It adds a new post specially to elevate Zhu Min without upsetting the existing balance.

The most senior post goes to David Lipton who is presently serving as Special Assistant to the President and Senior Director for International Economic Affairs at the U.S. National Economic Council and U.S. National Security Council at the White House. That Lipton was the choice of the U.S. authorities to   succeed John Lipsky was no secret and has been doing its rounds in the pink papers. Rumours began to float within days of Lipsky announcing his intention to leave the fund in August when his term expires. Apart from the right political connections, Lipton has done his stints with the IMF, the Treasury and the Wall Street. He served as Under Secretary in the Treasury and was on the staff of the IMF for eight years. In fact, he is an ideal fit in the game of “revolving door relations” with the IMF and the U.S. Treasury. Or rather, the Treasury is not giving up its hold on the IMF.

The IMF press release devotes three paragraphs giving details of Zhu Min’s background and professional experience. It quotes Lagarde: “As Deputy Managing Director, he will play an important role in working with me and the rest of my management team in meeting the challenges facing our global membership in the period ahead, and in strengthening the Fund’s understanding of Asia and emerging market more generally.”

These changes announced in the usual Fund lingo hide deeper implications.  Dr. Zhu will be the first to take over on July 26 and Lipton by the end of the month. These are new changes. The other two are current incumbents. Nemat Shafik is of triple nationality, viz. U.S.-Britain-Egypt. He is more properly treated as one representing Europe. The other- Naoyuki Shinohara- is from Japan. In short, apart from Zhu, all the others represent the G7 and the gain of developing countries may appear marginal. However, this is not the view of many analysts.

As Independent[ii] reported, “China has secured its first top-level post in the International Monetary Fund in a move that recognizes Beijing’s growing clout in the global economy.”  Xinhua[iii] was more upbeat when it said that the nomination of the renowned Chinese economist as the deputy-managing director “underscores the importance of emerging economies, which will have a greater say at the 187-member global agency.”

China Daily[iv] went to greater length to celebrate the nomination. It referred to the praise showered on Zhu in the IMF press release and went on to add the comments of some Washington based economists. It quoted Edwin Truman of Peterson Institute for International Economics who said that his appointment was no surprise and that it was on merits as “Zhu has demonstrated a sophistication and sense of responsibility as an advisor to the managing director over the past year or so. He clearly is more than a representative of China in the management of the IMF, and his presence will help to strengthen the management team.”

It also relied on the comments of Easwar Prasad, one of the old China hands in the IMF and currently a professor at Cornell University. Prasad is a close watcher of both the IMF and China. He said, “Zhu was alr4eady a de facto deputy managing director in terms of responsibility and power, but the formalization of his role symbolically quite important.” He went on to add, “The move is an acknowledgement of China’s increasing prominence in the fund’s power structure. It signals that the world community expects China to play an increasingly important role in the global economic stage.”

It is intriguing that China press, which is generally dismissive of western press reports, should lean so heavily on them in dealing with the senior changes in the IMF and the elevation of Zhu. On the surface, they may appear to the bureaucratic changes. However, the implications run deeper. Easwar Prasad hit it on the head when he said[v], “These appointments are part of a grand bargain that allowed Europe to retain its hold on the top job.” Furthermore, “This may be of the few instances where the three largest economies-China, Europe and the U.S.- found their short-term interests closely aligned.”

The bargain preserves Europe’s hold on the top post and also its share, rather undeserved under current economic conditions, in the management of the IMF both in terms of the number of posts in the Executive Board and voting strength. The U.S. continues to retain its hold on the post of the Senior Managing Director. More importantly, it ensures the U.S. of its privilege or unwritten prerogative to appoint an American as the President of the World Bank. There are already threats by U.S. Senators that Congress may not sanction funds for the Bank unless an American is appointed as the Bank President. Thus, the U.S. seems to have secured its part of the bargain. There are reports that Hillary Clinton may be considered for the post though this has been strongly denied.

China does not seem to be in a hurry. Its strategy is longer term and it is willing to wait. Perhaps, it is one of the classic Maoist strategies attempted elsewhere.

A closer study of China’s relations with the IMF/World Bank would show that China has looked upon them as agencies to facilitate its entry into e global markets or what they view as ‘market opening.’ This is in sharp contrast to the relations, which most other developing countries have with them. Most of them, including India, began to have their interactions during times of economic crisis and to get themselves bailed out. China was in a totally different category – it was not dependent on the Fund or the Bank for financial aid. If at all China decided to get aid from them, it was to supplement its domestic resources and was willing to take it on its own terms and not on the terms set by the Washington Twins.

Unlike most developing countries what China wanted from the Fund/Bank was technical assistance in various areas, especially finance and banking. It opened its doors to modern technology through foreign investment, etc. However, China did not suffer from the syndrome of ‘aid dependency’, which had stymied the national autonomy of many developing countries. It was free from conditionalities imposed by external agencies. It could choose its model of economic development suited to its national compulsions. It calls its model ‘capitalism with socialist characteristics’ and changes its contents over time. On major issues such as capital opening, foreign bank entry, privatization of state-owned-enterprises, directed credit, stimulus programs, etc China has maintained its own policies and approaches and has not succumbed to the “group-think” that pervades Washington circles.

Many Chinese economists have had their training or education in U.S. universities and worked on these themes with policymakers back home in China. Dr. Justin Lin Yifu was one of them and he joined the World Bank in 2008 as its Chief Economist. He has played an independent role in the Bank on development issues.

The experience with the Fund also clearly suggests that China has stood up to it on major issues. The major issues were: exchange rate policy for the Yuan, Fund surveillance on imbalances, capital market opening, Sovereign wealth fund and overseas investment in countries like Africa.  The foremost issue, which is being fought by the U.S. for over a decade, is that on China’s exchange rate policy. The present writer has covered this issue in a number of articles over this decade and it is too complex to be covered in this piece. The short point is that the U.S., which was so aggressive in its earlier attacks on China, has softened in recent years. It attempted to set the IMF on China to settle the dispute and the IMF could not match the wits and sagacity of China. This writer has covered it in a detailed article in the Economic & Political Weekly.[vi]

On other policy issues also the Fund had to close the issue, or arrive at a compromise or meet China’s views in part. These are relevant in issues like China’s investment in Africa where the Bank wishes to have China as a partner. On sovereign funds the effort of the US government ended in a deadlock and the IMF could not frame any rules. In fact, the OECD countries had to seek shelter with them to solve the liquidity crisis in the banking system. On imbalances, the early attempt was to attack China as the villain of the piece. Lipsky was engaged a serious dialogue for over two years during 2007-08 trying to exert pressure on China and had to retreat.

In most of these issues, which concern the Fund or the Bank, China has been able to use its resources (reserves!), global position and skills and match the wits of OECD countries. Even without a larger share in the past in the management of the Fund/Bank it was able to establish symbiotic relations with them and bring about changes their thinking somewhat.

It is not unnatural that it should seek a higher share in the management. It took note of the advantages of joining the G-20 and supported the cause of developing countries. Perhaps, once it realized that no common ground was emerging, it began to work on a pragmatic strategy of its own. It decided to strike a grand bargain with the G-7. The details of the bargain are there for all to see. Is China betraying the developing countries and becoming a status quo power aligning itself with the G7? Only future can tell.

(The writer, Mr K.Subramanian, is a former Joint Secretary, Ministry of Finance, Govt of India, New Delhi and is presently Associate of the Chennai Centre for China Studies.

[i] Subramanian, K: More on How the BRICS lost the crown: The China angle, dated July 11, 2011, C3S Paper No.833, at http:/ trade/2460

[ii] China gains role in top ranks of the IMF, 13 July 2011.

[iii] Nomination of China’s Zhu as IMF deputy managing director underscores changing economic landscape, at http:

[iv] Zhu moves up IMF ladder, 2011-07-13 at

[v] Binyaman Applebaum, Fulfilling Vow, IMF’s New Chief Names American and Chinese Deputies,

[vi] Subramanian,K: The burial of a controversy: The IMF, the US and the Renminbi, September 5, 23009, Vol.XIV No.36.

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