AT the June G20 meeting at Los Cabos in Mexico, the BRICS (Brazil, Russia, India, China and South Africa) countries agreed to increase funding to the International Monetary Fund and requested a reform of the IMF voting system.
IMF voting quotas are usually treated as unfair because the West is considered to be over-represented and the BRICS under-represented, relative to their weights in the global economy.
Though this disproportionality is not random, it needs to be reformed to more accurately reflect the modern world.
Understanding how IMF voting quotas have come to exist can help explain why the quota system is needed, how it needs to change — and why BRICS should push for further reform.
The current quota system dates back to the postwar period, when the IMF was created and Western nations were the creditors for the rest of the world.
Under these circumstances, it was natural for them to control the IMF (the West still controls 51 per cent of the votes).
The logic of a debt contract is such that the creditor should be able to exercise control over the debtor in case the loan is not repaid.
Unless such control is credible, lending will simply fail to take place.
Control rights for the creditor are in the interests of both creditor and debtor, as loans could not be made available to the debtor without such a guarantee.
This is why control rights in the IMF should stay with the net creditors.
The difference is that now the net creditors are largely emerging markets, in particular BRICS.
Emerging markets should not just obtain votes proportional to their weight in the global economy; they should get even more votes, because if BRICS cannot control how their funds are spent, they may simply refuse to increase funding to the IMF in the future.
In the best-case scenario this will result in bilateral lending — China will provide finance to the US and Europe through buying their bonds or equity in their firms.
In the worst case, they will not provide any funding at all. In both scenarios the usefulness of a multilateral institution such as the IMF (with its economies of scale and scope) will be lost.
In this sense, it is in the interest of both BRICS and the West to increase the weight of BRICS control in the IMF proportional to their actual share of the global economy.
This reform will not be easy. As the recent appointments of the IMF Managing Director and the President of the World Bank reminded us, the West still thinks about these institutions in terms of the past — when the World Bank was invariably run by an American and the IMF by a European with no serious discussion of alternative candidates.
This situation has to change if the IMF aims to adapt to the realities of modern times.
Unlike earlier sovereign debt crises in Africa, Latin America, Eastern Europe or Asia, the needs of the IMF are now of a much greater magnitude.
And the more control the BRICS have over the IMF, the more funds they will be comfortable to commit to support its operations.
* Sergei Guriev is Professor of Economics and Rector of the New Economic School, Moscow.
This post appeared in the ANU's East Asia Forum.