The Revolution of Cheap Production

Moving the IMF headquarters to China

12 August 2017


As stated in Reuters, the Managing Director of the International Monetary Fund Christine Lagarde recently said, “The IMF’s headquarters may move to Beijing in 10 years time if growth rates in China and other big emerging markets continue, and these are reflected in the Fund’s voting structure.” The statement – despite the condition that emerging economics, primarily China, continue to grow and that this is reflected in the Fund’s voting structure – reflects the current development in international economy, which is represented in the transfer of economic centers of gravity from the West to the East. The statement’s significance is not limited to the IMF as one of the most important international economic organizations, but it also means a lot to the structure of the international economic order and its future.

Lagarde made this statement at an event in the Center for International Development in Washington and noted that moving the IMF’s headquarters “is a possibility.” The international economy is witnessing a retreat in the status of economic powers, which have dominated the scene for around seven decades. This retreat is happening in favor of new economic powers representing an evident change that cannot be ignored. The Chinese economy passed Japan as the second largest economy in 2010 and it’s expected for it to pass the US as the first largest economy in 2018 or by 2022 at most. In all cases, the Chinese economy’s progress to the top international rank has become certain. In this case, the Chinese economy will be qualified to host the IMF, which its regulations stipulate that the headquarters should be in the member state that has the largest economy.

Significance of the Transformation

The significance of moving the IMF’s headquarters from the American capital, Washington, to the Chinese capital, Beijing, is not just about the move itself but it actually means that the helm steering the Fund, and the international economic order behind it, will move to China. The Fund’s headquarters has been located in the US ever since it was established in 1945. During this time, the US kept its veto power over its decisions and remained in control of it considering it is the largest economy in the world as it has 16.5 percent of the voting rights. If China overtakes the US as the world’s number one economy, China will have these privileges. This raises several questions about the future of the international economic order as a whole.

For the past decades, China strongly objected to the IMF’s work methods and decision-making process. It accused the IMF of being bias to big economies claiming that it is “completely submissive” to American influence. It therefore built an international front that opposes the international economic order in its current form including the IMF. This front mostly consisted of developing and emerging countries, but some developed countries also joined it.

This step marked an important step at the time as China, in cooperation with these countries, established economic institutions to replace international economic institutions, which belong to the current international economic order. In December 2015, the Asian Infrastructure Investment Bank (AIIB) was established as a substitute for the IMF and the bank began to operate in January 2016. Despite the objections of the US and Japan, which are the largest, and the third largest economies respectively, several countries with advanced economies like Germany, Britain, Australia, Italy and South Korea joined the bank. This helped the bank to gain momentum and play a significant role in changing the international economic order.

Will the Fund’s Role End?

Amid China’s attempts to change the economic order, apart from the IMF, several questions have been raised concerning the Fund’s role in case it moved to China.

This depends on what will happen from now until the IMF’s headquarter is moved to China. It particularly depends on the capability of the AIIB to become an influential international economic institution that has a role that is more important than the Fund’s. It also depends on the bank’s capability to recruit other countries. It further rely on its ability to provide the funds and technical support required to its members and to adopt new financial and monetary policies and efficient tools that replace those adopted by the Fund.

It’s worth mentioning that in 2010, the IMF approved reforms of its quotas. It’s scheduled to carry out other amendments in 2018. These amendments in 2010 and all others which will follow decrease the voting rights of economies, whose global ranks are retreating in favor of other economies, i.e. these amendments increase the voting rights of emerging economies, mainly China, and decrease the voting rights of traditional economic powers, mainly the US which is gradually losing its status in the IMF. Therefore, by the time the IMF’s headquarters is moved to Beijing, China will have the highest voting power and the US will come in the second rank. China will also have the veto power over the Fund’s decisions. This will be positive for the Fund as China, which will have an influential role in the Fund during the next years, will be motivated to support the Fund. However, this may come at the expense of the AIIB, which significance may decrease and remain limited within the boundaries of the regional economic system.

Changes in the Economic Order

However, the fact that the Fund will stay does not guarantee that the Fund’s mechanism and adopted monetary policies will stay in place, taking into consideration the Asian influential approach. China is still categorized as a developing country and it seeks to attract more countries to stand by its side in order to create a positive image for itself amid the ruins of the international economic order, which it criticized a lot and to implement its developmental initiative “The Belt and Road Initiative.” All this may encourage China to work on restructuring the Fund to be more representative of developing countries when it finally reaches the top of international economic pyramid. It will also work hard to reformulate the Fund’s operating mechanism and adopted structural adjustment programs, which has been almost the same ever since the Fund was established. This will mark the real beginning of a new phase in the path of the international economic order.

Era of Cheap Production

The witnessed Chinese growth represents the beginning of a new era in the age of the international economic order. It is an era where China, the categorized developing country, heads the global economy. The technological features of Chinese products are still very low compared with more developed countries in the West, primarily the US which led international economic development for over 70 years. Before the US, Britain sparked the first industrial revolution and it had headed international economic development for over two centuries. However, the Chinese economy which is getting ready to lead the international economic order in the next phase will not be the most developed compared with the American economy or with the Japanese and German economies but it will only be the biggest economy.  

The exceptional rise of China’s growth model, which depends on a massive revolution in the quantity of production, may inspire a new idea that stipulates that the new international economic order under the Chinese leadership. That is encouraging various states to expand their cheap production, rather than making technological advancements. In other words, the international economic order is heading towards a new era, the era of “the cheap production revolution.” The economy, which can spark a revolution in the quantity of production and that can flood global markets with cheap products – even if they are least developed on the technological level when compared with competing products – will become the most important economic power. It is a beginning of a new phase of economic globalization, known as “Chinese globalization,” that will depend on the intellectual pattern of China’s development model relying on massive production of cheap products.