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The Global Chessboard:

Revising IMF Quotas in the Shadow of the allegedly decline of Western Democracy

International observers see the most recent confrontation between the United States and China over the governance of the International Monetary Fund (IMF) as emblematic of the threat to Western democracies. That includes Europe as an entity, and Europe should wake up to this new geopolitical reality and speak with a single voice.

According to current IMF governance, voting rights reflect the economic weight (GDP) of each country. The last revision of these parameters happened in 2010, 13 years ago. There has been much change in GDP values since, while IMF voting quotas have remained frozen. In 2010, China had a 6.08 percent voting quota in the IMF although its weight in the global economy was 9 percent. That has since increased to 18 percent. Japan, by contrast, has always had a higher share relative to China, although its economy weighs less. This imbalance is rooted in the politically inspired principles after WWII, and affects other emerging countries such as Brazil. One of the dividends of globalization has been that emerging countries outperformed the West, and that is reflected in IMF tensions. China, Brazil and other emerging countries are increasingly calling for a revision of quotas to reflect the current economic landscape.

The USA shares that imbalance in that it constitutes one quarter of the world economy and has a lesser 16.5 percent IMF quota. However, it opposes change, deeply involved as it is in preserving the status quo on multiple international fronts, such as Ukraine and the Middle and Far East. China responds by challenging Washington-based global financial institutions and undermining their credibility. The IMF thus finds itself in a critical situation, threatened by a crisis of legitimacy that could have decisive consequences, particularly when viewed with the current instability of world order.

Alec Ross, Distinguished Visiting Professor at Bologna Business School, summarized this challenge at the 10th International Business Exchange Conference in New York on October 10. The Cold War saw the opposition between American-sponsored democratic capitalism and Soviet-sponsored communism. That binary opposition had existed since the 1917 Communist Revolution, and had, particularly in European politics, outlasted the Soviet Union. Ross sees this opposition between left and right as now outdated. On the chessboard of 196 countries, is China on the right or the left? Is Russia now on the right? According to Ross, the opposition today is between open and closed societies. It is defined by the free flow of people, capital, and goods, and the degree to which social and economic mobility is or is not limited to elites, the degree to which social and religious norms are set by central authorities, and the degree to which societies respect or do not respect the rights of ethnic, sexual, religious and other minorities.

According to the Deputy Secretary of NATO Mircea Geoana during the same conference, we are facing a contest for the global and economic pre-eminence of two systems: one characterized by liberal democracies and the other by authoritarian regimes. For the first time in five centuries, the West is being challenged by a formidable competitor, China. In response, Western society is rethinking its model of development, shifting from an obsession with cost reduction and other efficiencies to the security of supply chains. This is forcing companies to take a stand on topical issues as they operate in an environment where the relationship with stakeholders has become much more complex than in the past.

Ambassador Michael Froman, president of the Council On Foreign Relations in New York, opened the conference. In a conversation with CNBC contributor Michelle Caruso Cabrera, he shared the same perspective, highlighting a fundamental question that urgently needs to be answered. "We used to think that the Chinese, as they got involved in market economies, would become more democratic, more like us. That hasn't happened. And so now we ask: where are we going?"

Where is the new globalization heading?

Bill Mayer, Chairman Emeritus of the Aspen Institute, summed up the evolution that anyone in a position of responsibility in a company or institution today would hardly disagree with. "The era of risk management is over. We are now in the era of ambiguity management." The role and ambitions of Europe reflects this dilemma. One path towards effective action that can reduce the impacts of ambiguity is to speak with one voice.


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