Changing International Financial Architecture: Growing Chinese Influence?

• Date: 01 July 2018
• DOI: http://doi.org/10.1111/aepr.12217
• Author: Takatoshi Ito
• Published date: 01 July 2018

Changing International Financial

Architecture: Growing Chinese Influence?

Takatoshi ITO†

Columbia University

It is often said that the 21st century will be the Asian century. Based on population and gross

domestic product projections, it certainly looks as if this will be so. Will the existing interna-

tional financial institutions give more voices, votes, and top positions to Asia? Or will Asia create

its own institutions that would rival the old architecture? This present paper argues, first, that

China, and possibly India, will be in a position to be so influential that the international financial

architecture may have to go through significant changes. Second, the three large crises in the last

20 years have made Asian countries more confident that they can manage capital flows by accu-

mulating large foreign reserves and by adopting sound macrofinancial policies. After 2009,

China started to push various initiatives that will amount to creating its own sphere of influence

with new regional institutions in the future.

Key words: Asian Financial Crisis, Chiang Mai Initiative Multilateralization, global financial cri-

sis, IMF, international financial architecture, MDB

JEL codes: F31, F32, F33, F34, F36, F37, F38, F55, G15, O11, O40

Accepted: 2 February 2018

1. Introduction

The basic structure of the international financial institutions (IFI) was designed in the

famous Bretton Woods conference in July 1944. Voting shares in these institutions are

determined according to the economic power of countries, mainly the size of their gross

domestic product (GDP), unlike the UN where each country has one vote. Voting shares

matter in steering the mission of the institutions, designing policy advice, and the condi-

tions imposed on nations that seek assistance from IFI. Hence, the international financial

architecture was used to disseminate the economic and political philosophy of the major

shareholders that were the USA and European countries in the 1950s and 1960s.

1

The rapid economic growth of Japan and Germany was gradually accommodated

in the voting shares in the 1960s and 1970s. The rapid economic growth among Asian

countries in the 1970s and 1980s was also reflected only gradually. Other than the rise

The author is grateful to Hal Hill, Yiping Huang, Haruhiko Kuroda, Jong-Wha Lee, and Cha-

longphob Sussangkarn for their helpful comments. This work was supported by JSPS KAKEN

Grant Number 17H00995.

†Correspondence: Takatoshi Ito, School of International and Public Affairs, Columbia Univer-

sity, 420 West 118th Street, Room 927, New York, NY10027, USA. Email: ti2164@columbia.edu

192 © 2018 Japan Center for Economic Research

doi: 10.1111/aepr.12217 Asian Economic Policy Review (2018) 13, 192–214

of Asia, IFI have been mostly managed by an “old power.”The top position of the

World Bank is always an American (US national) and the top position of the Interna-

tional Monetary Fund (IMF) is always a European. The top positions of IFI are impor-

tant for both symbolic and leadership reasons. In the difficult cases of designing

policies, the opinions of the top individuals become quite relevant.

2

The governance of

IFI has been slow to change.

In the 21st century, the center of economic gravity is fast moving toward Asia,

especially to China. The trend is expected to continue in the coming several decades.

For example, China is expected to become the country with the largest GDP, surpass-

ing the USA, by 2030.

Since the Asian currency crisis of 1997–1998, Asian countries have strengthened

their macroeconomic policies, financial supervision policies, and their exchange rate

policies. An accumulation of foreign reserves beyond a level commonly regarded as

sufficient is widespread in Asia. The policy is known as “self-insurance.”It is motivated

by the harsh conditionality imposed by the IMF. The IMF stigma is still alive and not

likely to disappear anytime soon in Asia (see Ito, 2012).

After the global financial crisis (GFC) of 2008–2009 and the European sovereign

debt crisis of 2010–2017, the Asian countries became confident and independent. The

USA and the Euro zone were no longer models to pursue for Asian countries, espe-

cially China.

The international financial architecture is becoming fragmented. The USA and

Europe hold on to an old governance structure for the IMF and the World Bank. Europe

is building institutions to prevent the Euro zone from disintegrating. The IMF has been

heavily involved in Greek programs with the European Union (EU) and the European

Central Bank. Asian countries are strengthening their regional institutions. If the current

direction continues, the world will be divided into the USA, Europe and Asia. The prob-

lem in Asia is, despite its deepening economic integration, political conflicts among the

major powers are serious enough to threaten any regional projects in the future.

The rest of the present paper is organized as follows. Section 2 reviews a long-term

simulation of the economic growth of China, Japan and India, in relation to the USA.

The purpose of this section is to show succinctly the shifting center of gravity to Asia.

Section 3 reviews the governance of the IMF and the World Bank. A country’s voting

power in these institutions is tied to the size of its GDP. However, revisions of the vot-

ing power (the quota in IMF and share in the World Bank) lag behind reality. Fast

growing nations, like Japan in the 1960s through to the 1990s have been always under-

weighted in voting power and now China is underweighted.

Section 4 reviews the Asian Financial Crisis (AFC) of 1997–1998, the GFC of

2008–2009, and the European sovereign debt problem of 2010 –, and how these crises

made Asia more confident in their crisis preventive mechanism. Although Asian coun-

tries were humbled in the Asian currency crisis, their policy responses enabled them to

recover quickly. However, Asians have maintained bad memories of IMF conditional-

ity. The GFC, originating in the USA, and the European sovereign debt crisis made

Asians more independent and confident to be different from the old powers. Section 5

Takatoshi Ito International Financial Architecture

© 2018 Japan Center for Economic Research 193