The future of the IMF in the tensions between the US, China and the EU (Part 3)
This is the last post in a three-part series on the future of the IMF (read the first here and the second here).
The final part of this three-part series outlines six specific measures which, if implemented, would significantly raise the chances of the Fund surviving till 100. The Heritage Foundation’s blueprint for the second Trump government, Project 2025, calls for the US to leave the Fund, the World Bank and other multilateral development banks. The government’s aggressive and transactional approach to international relations suggests it gives little value to multilateral cooperation. But post-Trump?
One of the dangers in the current world disorder is that the Fund is even more vulnerable than before to arm-twisting by one or other of the three biggest economies, the US, the EU, and now China. We have seen over the past two decades what happens when the Fund deals with these entities not with independent frankness but in a kind of mutual non-aggression in which it downplays US fiscal deficits, downplays China’s gigantic current account surpluses, and downplays its role in the EU’s disastrous austerity imposition after the 2008 – 2012 North Atlantic Financial Crisis. Now we are seeing how these three entities are affecting growth in developing regions and even specific countries by selecting which ones get to produce their imports and which do not, using geopolitical criteria to make the selection (Posen 2024).
To survive till 100 the Fund should narrow its agenda and expertise around cross-border spillovers and macroeconomic stability, and leave other urgent global challenges like climate change, pandemics, food security, trade wars, and migration to other bodies. It must have well-defended operational independence, like central banks and the Bank for International Settlements (BIS). It can then assure member states, including the big three, that it will not dispense politicized conditionality or allocate funds unfairly to the allies of one or other of its most powerful members.
To give an idea of what is required, here are six specifics:
First, governance reform to raise the share of quota and votes going to many EMDCs (emerging markets and developing countries), notably China and India. More influence in the Fund could help to limit EMDCs’ incentive to build-up self-insurance against macroeconomic shocks, such as accumulating high foreign exchange reserves better used for development purposes. Europe’s share has to fall, to make way.
Second, governance reform to institute qualified majority voting on the Board of Executive Directors, with the US veto either given up or limited to narrow constitutional issues.
Both of these measures are unlikely any time soon, because “veto power protects veto power”. The US, Japan and the EU would be united in opposing them.
Several improvements can be made without directly hitting the formal allocation of power. The third specific is to reverse the earlier rule change that allowed the Fund to lend to a country (Ukraine) at war, because lending to a country at war sends the signal that it is siding with one side and against the other.
Fourth, recruit significantly more non-mainstream (non-neoclassical) economists, who think beyond the assumptions that markets are the key institution, that free trade and limited state produce higher growth; and who treat production as more than an afterthought (Galbraith 2025). This might be bad for Fund “efficiency”, because it makes policy advice and conditionalities more complex, but also more effective if combined with in-depth knowledge of the country in question.
Fifth, stick to a narrow interpretation of the IMF’s two main objectives, as stated in Article 1 of the Articles of Agreement. The first is to promote international monetary cooperation, and the second, to foster the growth of balanced international trade. Both together aim to contribute to high employment levels, higher productivity and higher real income levels. These are macro concepts, and their macro boundaries should be maintained, rather than opened up to include many other possible causes of economic growth, including structural reforms, climate, pandemic preparedness, food security and more, as we see today in the Resilience and Sustainability Facility. Expanding the scope in this way opens the door even further to what Adam Posen describes as “the geopolitical machinations of large-economy governments and the market flows they influence – which is precisely the threat that is currently on the rise” (Posen 2024).
In other words, be wary of “mission creep” into areas beyond the core functions, as a result of pressure from both Fund management and major states. The golden rule is “stick to core functions, and maintain operational independence.” It is a “back to the future” call for a global central bank similar to Keynes’ proposed International Clearing Union, minus a new global currency (bancor).
Sixth, institute a mechanism for progressively penalizing countries that run large current account surpluses. This should please the Trump government in particular.
In sum, the Fund can probably make enough of these reforms to ensure that it survives at least to 2044, aged 100. It meets a widely agreed collective need of the world economy; and alternatives are hard to create, as seen in the fate of the Chiang Mai Initiative and the Contingent Reserve Arrangement. The big question is how the Fund manages to stick to a narrow definition of its scope, and to navigate between limiting its vulnerability to arm-twisting by one or other of the big three and allowing them a minimal scope for using it as a multilateral tool to advance national interests.
Robert Wade is Professor of Political Economy and Development and Programme Co-Director, Development Management.
By International Monetary Fund - Wikicommons
References
Galbraith, James, 2025, “Economists’ way out of the wilderness”, Project Syndicate, January 20.
Posen, Adam, 2024, “Core mission”, Finance & Development, 31 May.
