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IMF must adapt to China's rise, fintech, to stay relevant: Lipton

PARIS (Reuters) - The International Monetary Fund must continue to adapt to rising economic powers such as China and new financial technologies to remain relevant in its next 75 years, the fund’s acting managing director said on Monday.

International Monetary Fund (IMF) Deputy Managing Director David Lipton attends a conference entitled "Bretton Woods: 75 years later" in Paris, France, July 16, 2019. REUTERS/Philippe Wojazer

David Lipton, speaking at a conference in Paris marking the 75th anniversary of the Bretton Woods institutions, said the IMF, dominated by the United States and European industrial powers since its inception, has a built-in duty to reflect the rising power of emerging markets.

“The hubs of economic activity will shift over the coming decades. New financial centers will grow in importance. New reserve currencies may eventually emerge,” Lipton said in remarks prepared for delivery.

Lipton delivered the speech initially scheduled for IMF Managing Director Christine Lagarde, who was nominated earlier this month to become president of the European Central Bank. Lagarde has temporarily relinquished her IMF duties during the nomination period.

Lipton noted that Lagarde’s transition to the ECB in November was another change to which the IMF is readily able to adapt.

He said the IMF must make changes to maintain a stable and robust international monetary system.

“Free trade, flexible exchange rates, and non-disruptive capital movements are essential ingredients for a thriving. global economy. That is why the role of multilateral institutions — and especially the IMF — will be more relevant than ever. If we continue to adapt,” Lipton said.

Lipton, who has spent much of his career at the IMF and has served since 2011 as the Fund’s second-ranking official, praised the Bretton Woods founders for creating at the end of World War II a quota-based IMF shareholding system based on economic influence.

But he added that the current formula, where the United States has a 16.52% share of voting power, followed by 6.15% for Japan and 6.09% for China -- the world’s second-largest economy -- has not fully kept pace with economic reality.

“We must reckon with the fact that our formulae have not fully kept pace. We cannot expect to retain the global reach and resources that we need unless countries gaining in economic importance and ready to take on commensurate responsibility gain appropriately in their say at the Fund.”

The IMF’s bylaws call for the Fund to be based in the largest member economy. Lagarde said two years ago it was possible for the IMF to be based in Beijing in a decade if growth trends for China and other big emerging markets continued and are reflected in the IMF’s voting structure.

Lipton said some countries feel they lack the influence they deserve in other multilateral institutions that do not have such a proportional structure -- a veiled reference to the World Trade Organization, 164 member countries each get an equal vote and rule changes are extremely difficult to make.

Lipton also said the IMF sees significant gains from development of new financial technologies to increase efficiency and transparency and benefit people who are currently excluded from the traditional banking system.

Unlike U.S. President Donald Trump's dismissive comments about Facebook Inc's FB.O Libra digital currency plans, Lipton said such technologies could "help re-orient the financial services industry closer to better serve the real economy and foster job creation."

“These new instruments may to do for payments what the internet has done for information: make transactions secure, instantaneous, and nearly free.”

But he also outlined risks posed by digital currencies, including potential emergence of new monopolies, how personal data is monetized, impacts on weaker currencies and expansion of dollarization. They also create opportunities for illicit activities, threats to financial stability; and corporation effectively taking on the role of central banks.

“So, regulators — and the IMF — will need to step up”.

Reporting by David Lawder; Editing by Susan Thomas