In the middle of the G20 summit in New Delhi last month, President Joe Biden peeled away for a small gathering with a few other world leaders.
In attendance were Narendra Modi, the Indian prime minister and host, South African president Cyril Ramaphosa and Luiz Inácio Lula da Silva, the leader of Brazil — three of the five countries in the Brics grouping of large developing countries. They held hands and smiled for the cameras, along with Ajay Banga, the new president of the World Bank.
The event occurred shortly after Biden had presented what US officials describe as a big new push to deliver billions of dollars in additional financing to emerging and developing economies. Absent from the session at the G20 were China’s Xi Jinping and Russia’s Vladimir Putin.
The plan involves boosting the financial might of the World Bank and the IMF, the two Washington-based institutions that have been at the centre of the economic order America and its allies spearheaded after the second world war to foster international co-operation and increase their global leverage.
Biden’s bet — and that of his top officials including Janet Yellen, the Treasury secretary — is that he can revitalise them in a way that expands America’s economic offering to developing nations around the world, while countering China’s mounting international influence.
The plan is a litmus test for the future of the US-led order — whether institutions such as the World Bank and IMF can be renewed even as the US plays a less dominant role in the global economy, or whether they will become more marginal amid growing geopolitical competition between the US and China.
“I cannot think of a time when the US Treasury secretary and president have focused this kind of sustained attention on the multilateral development banks [MDBs] and the IMF,” says Karen Mathiasen, who previously served as acting executive director for the US at the World Bank and in the Treasury’s international affairs department.
Such efforts, she says, feel “more acute and existential, because you have an increasingly polarised global environment, making the importance of multilaterals delivering even more essential so they can show that they’re relevant”.
Biden has already clinched agreement with member countries or is expecting agreement on reforms to the World Bank and other multilateral development banks that would expand its balance sheet by $200bn and make them more nimble and aggressive in helping struggling nations. But he has also called on Congress to approve new funds for the World Bank to bolster its financial power by a further $25bn. If other countries join in, the total war chest could grow by another $100bn.
With the IMF, Biden has proposed directing $21bn in US funds towards beefing up the lender’s ability to deliver financial aid to low-income nations and backed a plan to increase its capital over the longer term. The plans will be at the heart of discussions at the annual meetings of the IMF and World Bank in Marrakech this week.
“As we look at countries that have gone through a very hard time and think, ‘What can we in the United States do to drive global growth and stability?’, the [IMF and World Bank] are incredibly important tools,” a senior Treasury official says. “We want to make sure they are operating as well as possible.”
Yet delivering on the plan will not be straightforward. The administration needs to get congressional approval in the midst of a polarised and dysfunctional US political climate with the Republican party mired in chaos after the removal of Kevin McCarthy as Speaker of the House of Representatives.
It also will require broad international backing, testing America’s international economic clout at a time when advanced economies are feeling budgetary pressures that will limit their financial contributions, and developing countries may resist plans to give western-led institutions more resources without a boost in their representation.
The new US effort to inject fresh capital into the World Bank and IMF does not include a push to address the underrepresentation of China and other emerging economies, a notable omission given that Beijing has only the third-largest share of voting power in each respective institution despite being the world’s second-largest economy.
Critics also question the ability of the IMF and World Bank to deliver help to developing economies on a scale to match China’s Belt and Road Initiative, a grand scheme to win influence in the “global south” launched by Xi in 2013.
China has lent close to $1tn to developing countries mostly to build infrastructure under the BRI. As many of these countries slipped into financial distress, China’s financial institutions have stepped in with bailout packages that totalled $240bn between 2000 and the end of 2021, a recent study found. That amounts to more than 20 per cent of total IMF lending over the past decade.
“We’re in a situation where the China-US relationship is in a period of tension we haven’t seen for 40 or 50 years, and [the IMF and World Bank] are caught in the middle,” says Kenneth Rogoff, who used to work at the fund and is now at Harvard University.
“They’re at this crossroads where they need to make a decision about whether to keep China in and fully engaged or begin a process of disengagement,” he adds. “I don’t really see how we’re going to solve the world’s problems without China.”
The new plan is the latest in a series of efforts backed by Washington to boost the international financial institutions. An agreement on raising IMF quotas was reached in 2010 and later enacted in 2016. And five years ago, the US and other governments across the globe extended a major show of support to the World Bank, both injecting new capital and ushering in a new era that gave China and emerging economies more internal sway.
But that initiative, which took place during the administration of Donald Trump, who was openly hostile to the idea of multilateralism, was widely judged to have fallen short as developing economies grappled with a multitude of challenges.
At the time, the official responsible for overseeing US engagement with international financial institutions — David Malpass, who eventually went on to lead the World Bank — was not only sceptical of the need to aggressively combat climate change, but had a record of being highly wary of the organisations themselves.
Following Malpass’s resignation this year, Biden-appointed Banga, a former Wall Street executive, has sought to address the criticism that the World Bank has failed to adequately address the scale of the global climate crisis, alongside its traditional mission of alleviating poverty.
Since taking the helm in June, Banga has also tied to stretch the lender’s balance sheet, without sacrificing its top-tier AAA rating, and put in place new financial instruments to help indebted countries.
Over the summer, Banga used a summit with French president Emmanuel Macron to unveil new “pause clauses” attached to debt repayments from countries hit by natural disasters and has launched a so-called hybrid capital scheme to experiment with new financial instruments. The organisation is also looking at ways to encourage private sector investment in emerging markets.
Banga has been clear that he needs not just a “better bank”, but a “bigger bank” to fulfil these goals, but the sheer volume of resources that must be mobilised presents a daunting task. For the green transition alone, the International Energy Agency estimates that investments to mitigate global warming need to increase by $2.2tn a year by 2030 in emerging and developing economies.
With a mandate of reform in place at the World Bank, US officials have turned to the IMF, demanding more in terms of overseeing troubled countries and guiding them out of crises.
“We cannot let the temptation to address every problem pull the IMF away from its core mission of macroeconomic and exchange-rate surveillance and guidance,” said Jay Shambaugh, under-secretary for international affairs at the Treasury, in a speech last month.
The lender has in recent years expanded its remit — something IMF head Kristalina Georgieva defended in a recent interview with the FT.
“The role of the fund inevitably has to change because the world around us is changing,” she said. It has established the Resilience and Sustainability Trust, aimed at extending lending for climate-related matters and pandemic preparedness, as well as a programme to help countries address balance of payment needs tied to food scarcity.
That embrace has garnered significant support. “In light of the costs of crises in the poorest countries, the fund simply cannot pretend to be a provider of global public goods unless it engages more with those countries and their issues,” says Maurice Obstfeld, a former IMF chief economist now at the Peterson Institute for International Economics.
But there are also detractors. Anne Krueger, who previously served as the first deputy managing director at the IMF, expressed “dismay” at what she characterised as the fund’s drift from “essential” mandates of financial stability and holding crisis-prone countries accountable. Argentina and Pakistan, for instance, have had to repeatedly turn to the IMF for assistance, most recently to ensure they did not default on debt payments, including ones owed to the lender itself.
Martin Mühleisen, a former IMF official now at the Atlantic Council, says that the US, as the lender’s largest shareholder, could also do more to pressure countries into compliance.
“If they’re not happy with what’s going on, they should just tell them that they’re going to be voting against the programmes,” he says.
Looming in the background of all discussions about the two institutions is China — and its growing presence in development finance.
China has long sought to boost its representation — and voting power — at the World Bank and several other multilateral development banks. It sees this goal as a crucial part of an overarching strategy to reform the world’s financial architecture by providing a greater say for developing countries, which Beijing has ambitions to lead, Chinese policy advisers and observers say.
But translating China’s aspirations into actual influence has been a hard road for Beijing, stretching back at least 15 years.
At the IBRD, the lending arm of the World Bank, China’s total voting power is 5.96 per cent, ranking third after the US with 15.62 per cent and Japan with 7.13 per cent. This is despite the fact that in nominal terms China contributed 18.06 per cent of global gross domestic product in 2022, compared with just 4.23 per cent for Japan and 25.41 per cent for the US.
It is not that China has been unwilling to stump up the capital necessary to increase its voting power at the World Bank. On the contrary, says Yunnan Chen, researcher at ODI, a London-based think-tank, it tried to boost its capital contributions, especially in the years following the 2008 financial crisis.
But the bank’s leading western shareholders were resistant because an increase in China’s voting power would most likely diminish that of other countries such as the US, Japan, Germany and the UK.
“Shareholding is a zero-sum game, and major shareholders, particularly the US, have consistently pushed back on any substantial changes in shareholding structure,” adds Chen.
In spite of its recent experience, China remains hopeful that the institutions will eventually soften their resistance to Beijing playing a larger role, according to senior Chinese policy advisers, who declined further identification.
One reason for this optimism is that the World Bank and other MDBs have an intense need for capital to fund development in many countries where infrastructure is insufficient to serve exploding populations and the impact of climate change.
“China’s representation and voting rights at the World Bank and [other MDBs] have been kept suppressed by western powers for too long,” says one adviser to the Chinese government. “We should be willing to increase our capital support for these organisations if they recognise our contributions and our economic weight in a proper manner.”
Observers also point to the way in which the Asian Infrastructure Investment Bank, a multilateral lender led by China, maintains a highly co-operative stance towards the World Bank. The AIIB has co-financed 20 projects worth $4.36bn between 2021 and the end of August this year, becoming the World Bank’s leading co-financing partner, says Sir Danny Alexander, the AIIB’s vice-president for policy and strategy.
On voting power within the IMF in the future, Georgieva said that “there is a need to constantly change to reflect how the world economy is changing”. Quota reviews happen at least every five years.
Speaking to the FT, Yellen hinted the US could eventually support broader changes for under-represented countries. Asked about China specifically, she says: “It is also important for China to live up to the norms of the institution when it comes to things like co-operation on debt restructuring and things like foreign exchange transparency.”
In Sri Lanka, for example, China has received considerable criticism for hampering progress towards a deal, which has led to mass public protests and shortages of essential goods. At issue is China’s hesitancy so far in co-operating with an IMF-led bailout that also involves its geopolitical rivals, Japan and India, analysts say.
The reasons for Beijing’s “go-it-alone” approach stem from the way its state-owned financial institutions view their lending overseas. They seek to preserve maximum discretion in setting the terms of their lending and when loans turn sour, they prefer to “reprofile” their portfolio so as to avoid significant writedowns.
Zambia, however, presented a more hopeful case. In June, China and other creditors agreed a deal to restructure billions of dollars in loans, ending an impasse over the African nation’s 2020 default that exposed a rift between Beijing and western lenders.
Bilateral lenders led by China eventually agreed to a three-year grace period on interest payments and to extend maturities, paving the way for Zambia to resume funding from the IMF and begin private creditor talks.
China is not the only potential roadblock: the fate of Biden’s pitch also hinges on support from Congress.
The president included measures to buoy World Bank and IMF lending in a budget request to Congress this summer alongside funding for aid to Ukraine, but help for the international financial institutions — like the money for Kyiv — was left out of the deal to avert a government shutdown struck on September 30.
A new budgetary deadline is coming in mid-November, but it is very unclear whether there is bipartisan support for new funds.
“It’s hard to persuade Congress of the merit of these institutions in any event, and they certainly don’t have constituencies that care deeply,” says Mathiasen, the former World Bank official. “And this isn’t any event. This is a highly dysfunctional period in US legislative history, so it makes for a perfect storm of the worst kind.”
Blaine Luetkemeyer, a Republican congressman from Missouri who chairs the financial services subcommittee with oversight over the IMF and the World Bank, says no concessional loans should be issued to China and that Beijing’s voting power should not be increased, while also calling on these institutions to narrow their scope to “poverty reduction and short-term balance of payments crises, respectively”.
“They have no business pushing radical climate and pandemic agendas that hurt energy producers and free markets,” Luetkemeyer says. “I sincerely hope both institutions reconsider their purpose so we may begin productive conversations about further bolstering their financial firepower.”
Bill Hagerty, a Tennessee Republican senator, says he “wholeheartedly” believed that more needed to be done by the west to counter China’s influence, but adds that the IMF and World Bank “must not waste their capacity advancing partisan priorities like climate change and social justice”.
“Without a clear commitment to prioritise basic economic development, such as building critical infrastructure, I do not see broad support for expanding these institutions’ financial resources from legislators like myself,” he says.
But if members of Congress want to offset Chinese influence in the world, Mark Sobel, a former US Treasury official, says the IMF and the World Bank are the “prime place” to allocate money.
“This is a darn good investment and we get a lot of leverage out of it,” he says. “It’s good for our economy and it’s good for our national security.”
