Public Information Notice: IMF Executive Board Discusses Quota Formula Review
August 2, 2012
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
August 2, 2012
On July 19, 2012, the Executive Board of the International Monetary Fund (IMF) held further discussions on the review of the quota formula. The background for the discussion was provided by a staff paper on Quota Formula Review—Data Update and Further Considerations.
In March 2012, the Executive Board held its first formal discussion on the comprehensive review of the quota formula, which was an important part of the quota and governance reforms agreed in 2010 and is to be completed by January 2013. At the March meeting, Directors stressed the importance of agreeing on a quota formula that better reflects members’ relative positions in the global economy for future discussions on the 15th General Review of Quotas. This view was reiterated in April by the IMFC, which looked forward to an agreement by January 2013 “…on a simple and transparent quota formula that better reflects members’ relative positions in the world economy.” The importance of the quota formula review was also highlighted at the recent summit of G-20 Leaders in Los Cabos.
To advance the discussions, and reflecting Directors’ earlier guidance, the staff paper covers three broad topics: first, it presents results of updating the quota data base through end-2010; second, it reports on additional staff work on three issues—financial openness, variability, and financial contributions; and third, it presents a number of illustrative simulations for calculated quota shares based on options for simplifying the formula by dropping one or more of the existing variables from the current formula, changing the weights of GDP measured at market exchange rates and at PPP in the GDP blend variable, increasing the weight on financial openness, and including a measure of financial contributions to the Fund. These calculations are intended to help inform the discussions and do not in any way represent staff proposals.
Executive Board Assessment
Executive Directors welcomed the opportunity for a further discussion on the quota formula review. They reaffirmed the importance of completing the review by January 2013, in line with the agreed timetable, and underlined that this will require a spirit of flexibility and compromise on all sides.
Directors agreed that the principles that underpinned the 2008 reform remain valid and should guide the current review, i.e., that the formula should be simple and transparent, consistent with the multiple roles of quotas, produce results that are broadly acceptable to the membership, and be feasible to implement statistically based on timely, high quality and widely available data. Directors reiterated their commitment to protect the voice and representation of the poorest members, and a few suggested protecting also the smallest members, either under the quota formula or through other mechanisms, including a possible increase in basic votes.
Directors took note of the results of updating the quota data through 2010, which show that the aggregate calculated quota share of emerging market and developing countries had increased by 7.7 percentage points since the 2008 reform. A number of Directors viewed this shift as providing evidence that the formula captures dynamic developments in the world economy and is not in need of radical reform. However, other Directors considered that the formula remains seriously flawed, producing results that do not adequately reflect members’ relative positions in the global economy.
Directors generally agreed that GDP is the most comprehensive measure of economic size and should continue to have the largest weight in the quota formula. Many Directors favored increasing its weight, with a number preferring a GDP-only formula or one that is essentially based on GDP. Some Directors supported the current weight of GDP in the formula, while a few others preferred to reduce it. Views continue to differ on the relative importance of market GDP versus PPP GDP. Many Directors favored increasing the relative weight of PPP GDP, a few considered that it should be reduced, and a few suggested eliminating PPP GDP. Some others noted that the composition of the current GDP blend variable had been a difficult compromise and should not be reopened. A few Directors saw scope for capturing more recent trends by relying on more recent data.
Many Directors considered that openness provides an important measure of members’ integration into the world economy—with some also seeing its inclusion in the formula as consistent with the Fund’s mandate—and favored maintaining or increasing its weight, notwithstanding scope for improvement in its measurement. A number of these Directors also stressed the importance of financial openness and welcomed the staff’s work on possible approaches to increase its role in the formula, including steps to limit the share of international financial centers. However, many other Directors did not see a case for increasing the weight of financial openness—which would increase the calculated quota share of advanced economies—or for further exploring ways to better capture financial openness, given significant measurement and conceptual problems. Many Directors reiterated their view that the current openness measure is flawed, including due to its reliance on gross flows, and given the challenges posed by intra-currency union flows. A number of these Directors also stressed that, in their view, the openness variable should either be substantially improved or dropped from the formula altogether.
Directors took note of the staff’s further work on alternative measures of variability. Most Directors favored, or could support, dropping variability from the formula, in light of the shortcomings in the current measure and the challenges in finding an alternative that better captures members’ potential needs for Fund resources. A number of other Directors nevertheless preferred to retain some measure of variability in the formula, possibly with a reduced weight, and encouraged staff to continue its work in this area. A few Directors suggested setting access norms for small, vulnerable countries in terms other than quotas.
Many Directors continued to support retaining reserves in the quota formula, with a few favoring a higher weight, stressing the role of reserves in reinforcing global safety nets. A significant minority of the Board noted that this variable provides the wrong incentives by rewarding countries for excessive reserve accumulation.
Many Directors welcomed the staff’s work on possible options for capturing members’ financial contributions, which they saw as a good basis for further work on how to include such a measure in the quota formula, either in place of or in addition to the current reserves variable. Many other Directors, however, viewed the inclusion of financial contributions in the formula as inconsistent with the Fund’s role as a quota-based institution, and observed that such an approach rewards largely advanced economies at the expense of emerging market and developing countries. A few noted that particularly generous contributions could be recognized outside of the formula, as has been done on occasions in the past.
To conclude, Directors expressed a wide range of views on how the quota formula can be improved. They also recognized the urgency of moving toward an agreement and looked forward to further staff work, which would take careful account of all the views expressed today.