IMF Survey: IMF Quota Reform a Complex, 2-year Process
February 26, 2007
- IMF now in second phase of reform process
- Improved governance part of IMF's Medium-Term Strategy
- Drawing up new formula for country representation
The IMF is pressing ahead with what is envisaged to be a two-year process of reform designed to update the representation of members and modernize the governance of the 62-year-old institution.
Representation of IMF members
After an initial round of ad hoc increases last September for four dynamic economies that were clearly underrepresented (China, Korea, Mexico, and Turkey), the IMF has now embarked on the second and more far reaching phase of the reform process.
At the IMF-World Bank Annual Meetings last September in Singapore, the IMF's Board of Governors, representing all members of the Fund, approved a resolution initiating the reform plan, which is designed to revamp the representation of members to reflect recent changes in the global economy, while enhancing the participation and voice of low-income countries. The revamp is part of an overhaul of the IMF's priorities and governance spelled out in IMF Managing Director Rodrigo de Rato's Medium-Term Strategy.
The timetable for completing the reforms is by the 2007 Annual Meetings, and no later than the Annual Meetings of 2008.
A key issue in the reform plan is how each member's subscription, or quota, is calculated. The reform package consists of the following elements:
• initial ad hoc increases in quotas for China, Korea, Mexico, and Turkey;
• start of work on a new quota formula to guide the assessment of the adequacy of members' quotas in the IMF, to be completed by the 2007 Annual Meetings, and not later than the Spring Meetings of 2008;
• a second round of ad hoc quota increases based on the new formula; and
• work on a proposal to increase the basic votes that each member possesses to ensure adequate voice for low-income countries in the IMF.
How quotas work
Voting power at the IMF is tied to the relative size of each country in the global economy—which is reflected in its quota. This quota also has a bearing on each country's access to IMF financing.
Quota subscriptions, which must be paid in full when a country joins the IMF, generate most of the IMF's financial resources. Up to 25 percent must be paid in the IMF's own currency called Special Drawing Rights (SDRs), or widely accepted currencies (such as the U.S. dollar, the euro, the yen, or the pound sterling), while the rest is paid in the member's own currency. With the admission of Montenegro as the IMF's 185th member in January, total members' quotas were about $325 billion.
What are basic votes?
Under the rules of the Fund, each country has 250 basic votes plus one vote for each SDR 100,000 of quota. The effect of an increase in basic votes is to increase the voting power of those members whose voting power is below the average voting power for Fund membership as a whole, and thereby to allow the smallest members to have an increased measure of influence in the Fund's decision-making process. Successive general increases in quotas have reduced the share of basic votes to the present 2 percent from 11 percent when the Fund was established.
The IMF's Executive Board has proposed at a minimum, a doubling of the basic votes that each IMF member possesses and protection of the pre-first round voting share of low-income countries as a group. The proposal also calls for the share of basic votes in total voting power to remain constant going forward. Offices of African Executive Directors have also been promised additional staffing resources. The increase in basic votes will require an amendment to the IMF's Articles of Agreement, and may require the approval of national parliaments.
Changing the method of deciding quotas is a complex process. "The resolution approved in Singapore was a crucial first step, and we have made a good start since then in moving forward with the agenda," explains David Burton, head of a committee appointed by de Rato to prepare the implementation of proposals for the Executive Board. "We have had an informal Board seminar on a new quota formula, and discussion of the legal issues involved in amending the Articles to increase basic votes and protect their share in total voting power going forward. Also, the Board has had a first discussion of increasing the resources available to the offices of Executive Directors with the largest -constituencies."
"But there is lot of work to do," adds Burton who is also head of the IMF's Asia and Pacific Department. "This is especially true for the development of a new quota formula—an essential step in this reform process, as it will provide the basis for the second round of ad hoc quota increases. We also hope a new formula would be durable and used in further quota adjustments beyond the second round. The goal is to develop a formula that is both simpler and more transparent than the present approach, and which appropriately captures members' weight and role in the global economy."
"The goal is to develop a formula that is both simpler and more transparent than the present approach, and which appropriately captures members' weight and role in the global economy."
Developing a new quota formula is very challenging because it is complex conceptually, technically, and politically. The IMF will need a very broad consensus behind a new formula, or it is unlikely to be implemented. "Such a consensus is difficult to forge when changes in relative voting share in the Fund are at stake," Burton admits. "However, it is encouraging that there seems to be a strong commitment on the part of the membership to move forward on this issue, including by members that did not support the resolution in Singapore."
Creating a formula
The IMF's Articles of Agreement provide for a general review and possible adjustment of quotas every five years but do not indicate how quotas should be determined. The Executive Board has neither formally adopted nor endorsed any particular method for determining quotas or quota increases. However, over the years, the Fund has developed quantitative criteria (or formulas) to "calculate quotas," which help determine the initial quota of new members, and serve as a guide in determining increases in quotas for existing members.
The formulas used by the IMF incorporate a number of criteria or variables to assess the relative standing of countries. Variables used in the current formula are a country's gross domestic product, the size of its current account transactions, the variability of these transactions, and the level of its official reserves.
Key to developing a new formula is deciding exactly which variables to include, and how they should be defined—as well as the relative weights to be given to them. For example, there will need to be further discussion of how to convert GDP into a common currency (including a possible role for purchasing power parity or PPP). Also to be debated is how best to define openness, including how to reflect the importance of capital flows in the global economy.
Developing broad support
The IMF's policy-setting International Monetary and Finance Committee is expected to review progress with the reform plan at the April 14-15 Spring Meetings in Washington, D.C. "It will undoubtedly take more than one further discussion after the Spring Meetings to home in on a specific proposal," says Burton.
"Experience with the discussions leading up to Singapore suggests that it takes time to develop a proposal that can command broad support, and that along the way new ideas are raised from many members, and indeed from outside the Fund, that can help get round what seem like very difficult issues. So, while it may take a little time, I am optimistic that agreement will be reached both on a new formula and the rest of the package broadly on schedule," Burton told the IMF Survey.
"Experience with the discussions leading up to Singapore suggests that it takes time to develop a proposal that can command broad support, and that along the way new ideas are raised from many members."
"At the end of the day, we have to find an agreement that the membership as a whole will support," says Andrew Tweedie, head of a team in the IMF's Finance Department that is working on the quota formula. "This is an exercise that in the end has real consequences."