## 1. Second Round Simulation – Illustration of Voting Shares

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---

### Introduction
- IMFC October 2007 Communiqué: Executive Board to agree on quota and voice reform package by Spring 2008.
- Reform package objectives (Singapore Resolution, Appendix 1):
  - Realign quota shares with economic weight in the global economy.
  - Enhance participation and voice for low-income countries.

### New Quota Formula (proposed elements)
- Purpose: simpler, transparent single formula consistent with multiple roles of quotas.
- Variables and weights (proposed):
  - GDP, 50 percent.
  - Openness, 30 percent.
  - Variability, 15 percent.
  - Reserves, 5 percent.
- GDP definition:
  - GDP blend variable with weights of 60 percent on market GDP and 40 percent on PPP GDP.
  - Inclusion of PPP GDP subject to a sunset clause; staff suggests phasing out PPP GDP role over a period of, say, 20 years.
- Compression factor:
  - K = 0.95 (compression factor of 0.95 proposed); inclusion of compression could be subject to a sunset clause.
- Data note:
  - Updated PPP GDP data incorporate new parity rates published by the International Comparison Program in December 2007.
- Staff caveats and modernization:
  - Openness measured on a gross rather than value-added basis; financial openness not explicitly included; variability measure may not fully capture potential need for Fund resources.
  - Formula represents a major simplification; further modernization over time appropriate.

### Second Round Ad Hoc Quota Increases (mechanics and illustrative elements)
- IMFC guidance reiterated:
  - Enhance representation for dynamic economies; further increase voting share for emerging market and developing countries as a whole.
  - Enhance voice and participation of low-income countries.
  - Total quota increase of the order of 10 percent, with at least a doubling of basic votes.
- Staff proposal for overall increase:
  - Two rounds combined: 11.5 percent.
  - Second round: 9.6 percent.
- Allocation mechanism:
  - Second round increases allocated to all underrepresented members under the new quota formula based on a uniform proportional reduction in members’ out-of-lineness (difference between calculated quota shares under the proposed formula and actual pre-Singapore quota shares).
  - Use of pre-Singapore quota shares as basis for allocation to treat the two rounds as a single reform.
- Additional illustrative package elements:
  - Foregoing by eligible G7 members:
    - Package based on foregoing by the U.S. to its post-Singapore voting share and same proportionate reduction in out-of-lineness applied to Germany, Italy and Japan.
    - Under this formulation: all eligible G7 members see an increase in quota share versus pre-Singapore levels; Japan slight increase versus pre-Singapore; U.S. remains at its post-Singapore voting share; Italy and Germany small declines from post-Singapore levels.
  - Cap on maximum percentage increase for advanced countries (illustrative):
    - Cap of 50 percent; affects Luxembourg and Ireland under illustrative calculations.
  - Booster for dynamic under-represented EMDCs:
    - Cut-off ratio suggested: 1.75 (eligibility limited to seven countries most substantially underrepresented in PPP terms).
    - Booster provides a minimum nominal quota increase of 40 percent (first and second rounds combined) for qualifying members.
    - Under this approach, India, Brazil, and Vietnam would benefit from the booster.
    - Booster eligibility condition — share of PPP GDP at least 75 percent greater than pre-Singapore quota share.
  - Minimum second-round increase for Singapore 4:
    - Proposed minimum increase of 15 percent (nominal quota increase from post-Singapore levels) for the four members that received increases in the first round but remain substantially underrepresented; would benefit Korea and Mexico.

### Members Eligible For Booster (as presented)
- China 3/3.242.1449.6
- Korea 4/2.452.94106.1
- Turkey2.202.1951.0
- India 5/2.111.0340.0
- Brazil 5/2.041.2140.0
- Vietnam 5/2.041.4940.0
- Mexico 4/1.781.6340.2
- Footnote summary (verbatim as presented):
  - 1/ Ratio of member's share of 3-year average global GDP measured at purchasing power parity exchange rates to member's pre-Singapore quota share. Underrepresented EMDCs would be eligible for minimum nominal quota increase (boost) of 40 percent for first and second rounds combined if their share of global PPP GDP is at least 75 percent greater than pre-Singapore quota share.
  - 2/ Ratio of member's calculated quota share (CQS) to pre-Singapore quota share. CQS based on the formula and parameters proposed by staff (paragraph 5).
  - 3/ Includes China, P.R., and Hong Kong SAR.
  - 4/ Receive minimum 15 percent second-round nominal quota increase under safeguard for Singapore 4.
  - 5/ Receive booster at 40 percent.

### Basic Votes
- IMFC call: at least a doubling of basic votes.
- Directors and staff: increase in basic votes integral to enhancing voice and participation of low-income countries; many directors called for at least a tripling.
- Staff proposal:
  - Tripling of basic votes.
  - Mechanism: Amend Articles to maintain the share of basic votes to total votes going forward, as specified in the Singapore Resolution.
  - Expected effects: Significant increase in voting share for low-income country members as a group; considerable increases for many countries with below-average quotas.

### Summary of second-round simulation results
- Ad hoc quota increases for 54 countries, with an aggregate shift in quota shares of 4.9 percentage points.
- Number of countries receiving increases in voting share as a result of the reform: 135; aggregate shift in voting share to these countries: 5.4 percentage points.
- Net shift in voting shares to emerging market and developing economies as a whole: 2.7 percentage points (1.1 percentage points in terms of quota shares).
- Increase in basic votes leads to substantial increase in voting share for small members, including many low-income countries.

### Selected numerical highlights from simulations and tables
- Aggregate shift in quota shares from the package: 4.9 percentage points.
- Aggregate shift in voting share to countries receiving increases: 5.4 percentage points.
- Net shift in voting shares to EMDCs: 2.7 percentage points.
- Net shift in quota shares to EMDCs: 1.1 percentage points.
- Box 1: overall increase in the two rounds of 11.5 percent (second round 9.6 percent).
- Box 1: booster eligibility condition — share of PPP GDP at least 75 percent greater than pre-Singapore quota share.
- Table 1 (voting share illustrations):
  - Advanced economies: Pre 60.6; Post First Round 59.5; Increase=10% 59.1; Increase=11.5% 57.9.
  - Emerging Market and Developing Countries: Pre 39.4; Post First Round 40.5; Increase=10% 40.9; Increase=11.5% 42.1.
  - No. of countries receiving ad hocs: 54.
  - No. of countries receiving voting share increase: 122 (first-round illustration) and 135 (second-round illustration).
  - Uniform reduction factor examples: 34.1 and 29.8.
  - LICs (PRGF-eligible) voting shares: 8.3 (pre), 8.1 (post first round), 8.4 (increase=10%), 9.4 (increase=11.5%).
- Table 2 (quota and voting shares under new formula and existing formulas):
  - Calculated Quota Shares (New Formula examples): Advanced economies: 65.6 (Existing Five Formulas), 63.8 (New Formula Pre First Round), 61.6 (New Formula Post First Round), 60.5 (New Formula Post Second Round).
  - Voting Shares under new formula and simulations: Advanced economies voting shares across scenarios: 60.5, 60.6, 59.5, 57.9.
  - EMDCs voting shares across scenarios: 39.5, 39.4, 40.5, 42.1.
  - LICs (PRGF-eligible) quota shares across scenarios: 3.6, 4.9, 7.5, 7.4, 7.5, 8.3, 8.1, 9.4 (as presented).
  - Uniform reduction factor cited: 29.8.
- Table 3 (top positive and negative changes, in percentage points from pre- and post-Singapore to post-second-round):
  - Top positive quota/voting share changers include China (0.74, 0.28, 1.02), Korea (0.58, 0.07, 0.65), India (–0.03, 0.53, 0.50), Brazil (–0.02, 0.39, 0.36), Japan (–0.11, 0.44, 0.33).
  - Top negative quota/voting share changers include United Kingdom (–0.09, –0.43, –0.52), France (–0.09, –0.43, –0.52), Saudi Arabia (–0.06, –0.28, –0.34), Canada (–0.05, –0.26, –0.31), Russia (–0.05, –0.24, –0.29).
  - Aggregate shift to countries gaining share: 4/ 0.83 4 4.08 4.91 1.22 4.21 5.42 (as presented in table foot).
- Formula definition preserved exactly:
  - CQS = (0.50*GDP + 0.30*Openness +0.15*Variability + 0.05*Reserves)^K.
  - GDP blended using 60 percent market and 40 percent PPP exchange rates.
  - K is a compression factor of 0.95.
- Simulation assumptions preserved exactly where cited:
  - Uniform proportional reduction of out-of-lineness based on pre-Singapore quota shares.
  - U.S. foregoing to its post-Singapore voting share and application of U.S. reduction factor to other eligible G-7 members.
  - Tripling of basic votes.
  - Minimum 15 percent increase in post-Singapore nominal quota for first-round ad hoc increase recipients.
  - Maximum 50 percent quota increase for advanced economies.
  - Underrepresented EMDCs eligible for minimum nominal quota increase (boost) of 40 percent for first and second rounds combined if their share of global PPP GDP is at least 75 percent greater than pre-Singapore quota share.

### Future realignments and governance elements
- Regular five-yearly quota reviews provide a vehicle for realigning quota shares.
- Board of Governors Resolution could request Executive Board consider further realignment as part of next (fourteenth) general quota review.
- If no agreement on a general quota increase during the fourteenth review period, Executive Board will promptly thereafter consider additional ad hoc quota increases.
- Additional Alternate Executive Director for African constituencies:
  - Preliminary consideration of amendment to Articles to enable Executive Directors elected by a large number of members to appoint an additional Alternate Executive Director.
  - Objective: enhance capacity of African offices; Directors agreed to further reflection; may revisit as part of broader package including accommodation within the envisaged medium-term budget envelope.
  - Note: In May 2007, Executive Board approved an increase in staffing resources for the two African Executive Directors’ offices through allocation of an additional advisor position.

### Issues for discussion (points for Directors)
- The new quota formula including use of a blended GDP variable with a 40 percent weight on PPP GDP and a 0.95 compression factor.
- Possible modalities of a sunset clause for the inclusion of PPP GDP and compression in the formula.
- Possible elements of the second round ad hoc quota increases.
- Possible nature of the commitment to future realignments of quota shares beyond the current reform.
- Amendment to the Articles to enable Executive Directors representing large constituencies to appoint more than one Alternate and budget accommodation.

*Source: _022608 - 1. Second Round Simulation – Illustration of Voting Shares*

---

### 2. The variability measure is intended to reflect members’ potential need for Fund resources

### Definition and purpose
- Modernized variability measure: standard deviation of current receipts and net capital flows from a centered, three-year moving average over a recent 13-year period.
- Intended to reflect members’ potential need for Fund resources by capturing:
  - relative susceptibility to exogenous shocks,
  - relative capacity to absorb such shocks,
  - potential size of access in case of a need to borrow.
- Measure must take into account every member’s right to draw in case of need.

### Concerns and challenges
- Advanced economies as a group hold the majority share of the variable under the current measure.
- A single measure capturing susceptibility, capacity to absorb shocks, and potential size of access is challenging.
- Volatility measures without a size dimension (e.g., Approach 13) would award disproportionately large shares to the smallest economies.
- Measuring net current account flows plus net capital flows may largely capture reserve changes affected by exchange rate regime and mask relevant current account adjustments.

### Staff review of alternative definitions (summary of approaches)
- Categories examined (Approaches 1–16, summarized):
  - Scaling (Approaches 1–3):
    - Examples: scaling current measure by GDP; by mean of CR+NCF; by GDP per capita.
    - Issues: proxies only probability of need; can award small members shares exceeding large EMDCs; GDP per capita driven by population shares.
  - Amendments to current measure (Approaches 4–8):
    - Examples: five-year trend; downside variability; extreme variability; extreme variability with five-year trend; Variability(CR)+Variability(NCF).
    - Issues: tradeoffs between smoothing, exaggeration, discontinuities, and ignoring comovements.
  - Redefinition of variable (Approaches 10–12 and 15–16):
    - Examples: volatility of GDP growth scaled by GDP (Approach 10); volatility of consumption growth scaled by consumption (Approach 11); extent of consumption risk sharing (Approach 12); Var(CR+NCF)/External Assets (Approach 15).
    - Issues: departures from balance-of-payments focus; data availability constraints (external assets, consumption, local financial market development).
  - Ad hoc adjustment (Approach 14):
    - Reweigh variability of advanced vs. developing countries by multiplying advanced economies’ variability shares by alpha between zero and one and rescaling; incrementing alpha by 0.1 shifts 6.27 pps to EMDCs under current dataset; setting alpha to 0.8 allocates variability shares about equally between advanced and EMDCs.
    - Such adjustment is arbitrary and departs from historical practice.

### Distortions and sensitivity analysis
- Small number of small, open advanced economies hold relatively high shares of variability measure.
- Adjusting for these economies would have negligible effect given small number of cases and small share of membership affected.

### Conclusions and recommended work program
- Variability measure must capture several dimensions relevant to potential demand across membership; this is particularly challenging given differing absorption capacities and forecasting uncertainty.
- Work on alternative variability measures should continue as part of future quotas work program, including analysis on improving forecasts of potential demand for Fund resources.

*Source: _022608 - 2. The variability measure is intended to reflect members’ potential need for Fund resources.*

---

### 16. Var(CR+NCF)/Index of local financial market development

### Concept and purpose
- Variable intended to adjust variability of current receipts plus net capital flows to capture countries' differential capacity to absorb shocks.
- Rationale: "The extent to which local financial markets are developed is one measure of the ability to absorb and insure against external shocks."
- Empirical status: measure cannot be calculated given lack of adequate data on local financial market development.

### Empirical findings and shares (selected exact figures from Table A1 / Table A2 excerpts)
- Variability of Current Receipts Plus Net Capital Flows (column (1) / column (8)):
  - Advanced economies: 62.7
  - Major advanced economies: 43.3
  - Of which: US: 20.7
  - Other advanced economies: 19.5
  - Emerging Market and Developing Countries: 37.3
  - Developing countries: 30.7
  - Africa: 3.2
  - Asia (Including Korea and Singapore per note): 13.5
  - Middle East, Malta & Turkey: 6.2
  - Western Hemisphere: 7.8
  - Transition economies: 6.6
  - Total: 100.0
- Memorandum items:
  - EU 27: 31.3
  - LICs (PRGF-eligible countries): 4.0

### Alternative variability and volatility measures (selected exact entries)
- Variability Scaled Down by GDP (Table A1 column (2)): Advanced economies 11.6; Emerging Market and Developing Countries 88.4; Total 100.0; LICs 46.7.
- Variability Scaled Down by Series Mean (Table A1 column (3)): Advanced economies 8.7; Emerging Market and Developing Countries 91.3; Total 100.0; LICs 50.6.
- Variability Scaled Down by GDP per capita (Table A1 column (4)): Advanced economies 8.7; Emerging Market and Developing Countries 91.3; Total 100.0; LICs 39.9.
- Variability Using 5-Year Moving Average (Table A1 column (5)): Advanced economies 60.1; Emerging Market and Developing Countries 39.9; Total 100.0.
- Downside Variability (Table A1 column (6)): Advanced economies 60.7; Emerging Market and Developing Countries 39.3; Total 100.0.
- Extreme Variability (Table A1 column (7)): Advanced economies 58.7; Emerging Market and Developing Countries 41.3; Total 100.0.
- Extreme Variability: With a 5-Year Moving Average (Table A1 column (8)): Advanced economies 55.9; Emerging Market and Developing Countries 44.1; Total 100.0.
- Variability of Current Receipts + Variability of Net Capital Flows (Table A2 column (9)): Advanced economies 59.6; Emerging Market and Developing Countries 40.4; Total 100.0; LICs 4.3.
- Variability of Current Account Plus Net Capital Flows, 5-Year Moving Avg. (Table A2 column (10)): Advanced economies 60.5; Emerging Market and Developing Countries 39.5; Total 100.0; LICs 5.0.
- Volatility of GDP Growth (scaled up by GDP) (Table A2 column (11)): Advanced economies 52.1; Emerging Market and Developing Countries 47.9; Total 100.0.
- Volatility of Consumption Growth (scaled up by consumption) (Table A2 column (12)): Advanced economies 45.7; Emerging Market and Developing Countries 54.3; Total 100.0.
- Consumption Growth Volatility Relative to GDP Growth Volatility (scaled up by consumption) (Table A2 column (13)): Advanced economies 70.3; Emerging Market and Developing Countries 29.7; Total 100.0.
- Volatility of GDP Growth (unscaled) (Table A2 column (13) footnoted): Advanced economies 5.4; Emerging Market and Developing Countries 94.6; Total 100.0; LICs 45.7; Africa 35.6; Asia 11.9.

### Data and measurement notes (verbatim)
- "Preliminary calculations based on 1993-2005 data. Reflects the impact of adjustments to current receipts for re-exports, international banking interest, and non-monetary gold."
- Definitions preserved:
  - 2/ "Measures the square root of the sum of squared differences from a centered 3-year moving average of below trend (3-year moving average) levels of current receipts plus net capital flows."
  - 3/ "Measures differences from a centered 3-year moving average for observations that are more than one standard deviation below the trend (3-year moving average). Like downside variability, it takes the square root of the sum of squared differences."
  - 4/ "Measures differences from a centered 5-year moving average for observations that are more than one standard deviation below the trend (5-year moving average). Like downside variability, it takes the square root of the sum of squared differences."
  - 7/ "Measured as the standard deviation of real GDP growth in constant local currency units for 175 countries with available data."
  - 4/ (Table A2 footnote) "Measured as the standard deviation of real GDP growth in constant local currency units multiplied by average GDP from 2003-2005, for 175 countries with available data."
  - 5/ (Table A2 footnote) "Measured as the standard deviation of real consumption growth in constant local currency units multiplied by average consumption from 2003-2005, for 150 countries with available data."
  - 6/ (Table A2 footnote) "Calculated for 150 countries with available data on real GDP and real consumption."
  - 1/ (Table A1 / A2) "Preliminary calculations based on 1993-2005 data. GDP and consumption data are from the WEO database published in April 2007. Reflects the impact of adjustments to current receipts and current payments for re-exports, international banking interest, and non-monetary gold."

### Conclusion on Var(CR+NCF)/Index
- Conceptually useful to adjust for domestic absorption capacity via local financial market development, but empirical implementation not currently feasible due to data limitations.
- Prepared by the Quota and Voice Working Group; Finance Department figures and tables as provided.

*Source: _022608 - Var(CR+NCF)/Index of local financial market development*

### 1. Second Round Simulation – Illustration of Voting Shares ..................................................14

### 1. Second Round Simulation – Illustration of Voting Shares

### Introduction
- IMFC October 2007 Communiqué called on the Executive Board to continue work on quota and voice reform and to agree on all elements of a reform package by Spring 2008.
- Reform package objectives (Singapore Resolution, Appendix 1):
  - Realign quota shares with economic weight in the global economy.
  - Enhance participation and voice for low-income countries.
- Staff paper seeks a compromise package reflecting Executive Board discussions and guidance in the IMFC’s October 2007 Communiqué.

### New Quota Formula (proposed elements)
- Purpose: simpler and more transparent single formula consistent with multiple roles of quotas, feasible statistically, and broadly acceptable.
- Variables and weights (proposed):
  - GDP, 50 percent.
  - Openness, 30 percent.
  - Variability, 15 percent.
  - Reserves, 5 percent.
- GDP definition:
  - GDP blend variable with weights of 60 percent on market GDP and 40 percent on PPP GDP.
  - Inclusion of PPP GDP subject to a sunset clause.
- Measures for openness and variability:
  - Use measures applied in recent illustrative calculations, with no further modifications at this stage.
  - Staff notes shortcomings: openness measured on a gross rather than value-added basis; financial openness not explicitly included; variability measure may not fully capture potential need for Fund resources.
- Compression factor:
  - Compression factor of 0.95 proposed.
  - Inclusion of compression could be subject to a sunset clause.
- Sunset clauses:
  - Include sunset clause for both PPP GDP and compression.
  - Staff suggests phasing out PPP GDP role over a period of, say, 20 years.
- Data note:
  - Updated PPP GDP data incorporate new parity rates published by the International Comparison Program in December 2007.
- Staff caveats:
  - Formula represents a major simplification; further modernization over time is appropriate.
  - Agreement to proceed on current openness and variability measures would be a substantial compromise; further improvements should continue.

### Second Round Ad Hoc Quota Increases
- IMFC guidance reiterated:
  - Enhance representation for dynamic economies, many emerging market economies.
  - Outcome of second round should further increase voting share of emerging market and developing countries as a whole.
  - Enhance voice and participation of low-income countries.
  - Total quota increase of the order of 10 percent, with at least a doubling of basic votes.
- Staff proposal for overall increase:
  - Two rounds combined: 11.5 percent.
  - Second round: 9.6 percent.
- Allocation mechanism:
  - Second round increases allocated to all underrepresented members under the new quota formula based on a uniform proportional reduction in members’ out-of-lineness (difference between calculated quota shares under the proposed formula and actual pre-Singapore quota shares).
  - Use of pre-Singapore quota shares as basis for allocation to treat the two rounds as a single reform.
- Additional package elements considered:
  - Additional foregoing by eligible G7 members:
    - Package based on foregoing by the U.S. to its post-Singapore voting share (goes beyond current commitment).
    - Same proportionate reduction in out-of-lineness applied to other eligible G7 members (Germany, Italy and Japan).
    - Under this formulation:
      - All eligible G7 members see an increase in quota share versus pre-Singapore levels.
      - Japan would see a slight increase in voting share versus its pre-Singapore share.
      - U.S. would remain at its post-Singapore voting share.
      - Italy and Germany would see a small decline from post-Singapore levels.
  - Cap on maximum percentage increase for advanced countries (illustrative):
    - Cap of 50 percent; affects Luxembourg and Ireland under illustrative calculations.
  - Booster for dynamic under-represented emerging market and developing economies:
    - Intended to ensure a minimum increase in quota or quota share for dynamic under-represented EMDCs.
    - Cut-off ratio suggested: 1.75 (eligibility limited to seven countries most substantially underrepresented in PPP terms).
    - Suggested booster provides a minimum nominal quota increase of 40 percent (first and second rounds combined) for qualifying members.
    - Under this approach, India, Brazil, and Vietnam would benefit from the booster.
  - Minimum second-round increase for Singapore 4:
    - Proposed minimum increase of 15 percent (nominal quota increase from post-Singapore levels) for the four members that received increases in the first round but remain substantially underrepresented.
    - Under the proposal this would benefit Korea and Mexico.

- Members Eligible For Booster (as presented)
  - China 3/3.242.1449.6
  - Korea 4/2.452.94106.1
  - Turkey2.202.1951.0
  - India 5/2.111.0340.0
  - Brazil 5/2.041.2140.0
  - Vietnam 5/2.041.4940.0
  - Mexico 4/1.781.6340.2
  - Source: Finance Department
  - Footnotes (as presented):
    - 1/ Ratio of member's share of 3-year average global GDP measured at purchasing power parity exchange rates to member's pre-Singapore quota share. Underrepresented EMDCs would be eligible for minimum nominal quota increase (boost) of 40 percent for first and second rounds combined if their share of global PPP GDP is at least 75 percent greater than pre-Singapore quota share.
    - 2/ Ratio of member's calculated quota share (CQS) to pre-Singapore quota share. CQS based on the formula and parameters proposed by staff (paragraph 5).
    - 3/ Includes China, P.R., and Hong Kong SAR.
    - 4/ Receive minimum 15 percent second-round nominal quota increase under safeguard for Singapore 4.
    - 5/ Receive booster at 40 percent.

### Basic Votes
- IMFC reiterated call for at least a doubling of basic votes.
- Directors and staff:
  - Increase in basic votes is integral to quota and voice reform and key to enhancing voice and participation of low-income countries.
  - Many directors called for at least a tripling.
- Staff proposal:
  - Tripling of basic votes.
  - Expected effects:
    - Significant increase in the voting share for low-income country members as a group.
    - Considerable increases in voting share for many countries with below-average quotas.
  - Mechanism:
    - An amendment of the Articles to maintain the share of basic votes to total votes going forward, as specified in the Singapore Resolution.

*Source: _022608 - 1. Second Round Simulation – Illustration of Voting Shares*

### 12.      The results of the package outlined above are summarized in the second simulation of

### 12.      The results of the package outlined above are summarized in the second simulation of

### Summary of second-round simulation results
- The package would result in ad hoc quota increases for 54 countries, with an aggregate shift in quota shares of 4.9 percentage points.
- The number of countries receiving increases in voting share as a result of the reform would be 135, reflecting the impact of basic votes, and the aggregate shift in voting share to these countries would amount to 5.4 percentage points.
- Net shift in voting shares to emerging market and developing economies as a whole would be 2.7 percentage points (1.1 percentage points in terms of quota shares).
- The increase in basic votes would lead to a substantial increase in voting share for small members, including many low-income countries.

### Future realignments of quota shares
- The Board recognizes the need to consider how quota and voting shares can continue to adapt to changes in the global economy while ensuring adequate Fund liquidity.
- Regular five-yearly quota reviews provide a vehicle for realigning quota shares.
- The Board of Governors Resolution could request the Executive Board to consider a further realignment of quota shares in line with changes in members’ relative economic positions as part of any increase in quotas under the next (fourteenth) general quota review, reaffirming the Singapore Resolution.
- If there is no agreement on a general quota increase during the fourteenth review period, the Executive Board will promptly thereafter consider additional ad hoc quota increases to achieve further improvement in alignment of quota shares.

### Additional Alternate Executive Director for African constituencies
- November 2007 Board preliminary consideration of an amendment to the Articles to enable Executive Directors elected by a large number of members to appoint an additional Alternate Executive Director.
- Objective: enhance capacity of African offices given heavy workload from advisory and financial roles.
- Directors agreed to further reflection and may revisit the amendment as part of broader package consideration, including accommodation within the envisaged medium-term budget envelope.
- Note: In May 2007, the Executive Board approved an increase in staffing resources for the two African Executive Directors’ offices through allocation of an additional advisor position.

### Issues for discussion (points for Directors)
- The new quota formula including:
  - Use of a blended GDP variable with a 40 percent weight on PPP GDP and a 0.95 compression factor.
- Possible modalities of a sunset clause for the inclusion of PPP GDP and compression in the formula, if agreed as part of the current reform.
- Possible elements of the second round ad hoc quota increases.
- Possible nature of the commitment to future realignments of quota shares beyond the current reform.
- An amendment to the Articles to enable Executive Directors representing large constituencies to appoint more than one Alternate and how to accommodate this within the envisaged budget.

### Box 1 — Key elements of the proposed package for quota and voice reform
Quota Formula:
- Variables and Weights: 50 percent for GDP, 30 percent for openness, 15 percent for variability, and 5 percent for reserves.
- Blended GDP Variable: 60 percent weight to market-rate GDP and a 40 percent weight to PPP GDP under the blended GDP variable.
- Compression: a compression factor of 0.95 applied to the formula.
- Sunset of GDP Blend and Compression: Agreement to phased reduction of PPP GDP and compression over time (e.g., 20 years).

Second Round Increases:
- Size: overall increase in the two rounds of 11.5 percent (9.6 percent in the second round).
- Allocation mechanism: Uniform proportionate reduction in out-of-lineness for underrepresented countries under the formula based on pre-Singapore quota shares, except where otherwise indicated.
- Additional elements:
  - Foregoing: Voluntary foregoing by eligible G7 members. US foregoing to its post-Singapore voting share and application of the same reduction factor to Germany, Italy and Japan.
  - Booster: Provision for minimum 40 percent overall nominal quota increase for underrepresented emerging market economies with a share of PPP GDP more than 75 percent greater than pre-Singapore quota share.
  - Safeguard for Singapore 4: Provision for 15 percent minimum nominal quota increase for Singapore 4 from post-Singapore levels.
  - Cap: Maximum 50 percent nominal quota increase for advanced economies.
- Basic Votes: Tripling of basic votes and maintenance of share of basic votes to total votes going forward.

Other Elements:
- Review: Commitment to review the need for additional ad hoc quota increases to achieve a further rebalancing of quota shares within a specified timeframe.
- Alternate Executive Director: An amendment of the Articles to allow for an additional Alternate Executive Director for the two African constituencies.

### Selected numerical highlights from simulations and tables
- Aggregate shift in quota shares from the package: 4.9 percentage points.
- Aggregate shift in voting share to countries receiving increases: 5.4 percentage points.
- Net shift in voting shares to emerging market and developing economies: 2.7 percentage points.
- Net shift in quota shares to emerging market and developing economies: 1.1 percentage points.
- Box 1: overall increase in the two rounds of 11.5 percent (second round 9.6 percent).
- Box 1: booster eligibility condition — share of PPP GDP at least 75 percent greater than pre-Singapore quota share.
- Table 1 (voting share illustrations):
  - Advanced economies: Pre 60.6; Post First Round 59.5; Increase=10% 59.1; Increase=11.5% 57.9.
  - Emerging Market and Developing Countries: Pre 39.4; Post First Round 40.5; Increase=10% 40.9; Increase=11.5% 42.1.
  - No. of countries receiving ad hocs: 54.
  - No. of countries receiving voting share increase: 122 (first-round illustration) and 135 (second-round illustration).
  - Uniform reduction factor examples: 34.1 and 29.8.
  - LICs (PRGF-eligible) voting shares: 8.3 (pre), 8.1 (post first round), 8.4 (increase=10%), 9.4 (increase=11.5%).
- Table 2 (quota and voting shares under new formula and existing formulas):
  - Calculated Quota Shares (New Formula examples): Advanced economies: 65.6 (Existing Five Formulas), 63.8 (New Formula Pre First Round), 61.6 (New Formula Post First Round), 60.5 (New Formula Post Second Round).
  - Voting Shares under new formula and simulations: Advanced economies voting shares across scenarios: 60.5, 60.6, 59.5, 57.9.
  - Emerging Market and Developing Countries voting shares across scenarios: 39.5, 39.4, 40.5, 42.1.
  - LICs (PRGF-eligible) quota shares across scenarios: 3.6, 4.9, 7.5, 7.4, 7.5, 8.3, 8.1, 9.4 (as presented in table rows).
  - No. of countries receiving ad hocs: 54; No. of countries receiving voting share increase: 135.
  - Uniform reduction factor cited: 29.8 (in relevant simulation).
- Table 3 (top positive and negative changes, in percentage points from pre- and post-Singapore to post-second-round):
  - Top positive quota/voting share changers include China (quota and voting shifts noted: e.g., 0.74, 0.28, 1.02), Korea (0.58, 0.07, 0.65), India (–0.03, 0.53, 0.50), Brazil (–0.02, 0.39, 0.36), Japan (–0.11, 0.44, 0.33).
  - Top negative quota/voting share changers include United Kingdom (–0.09, –0.43, –0.52), France (–0.09, –0.43, –0.52), Saudi Arabia (–0.06, –0.28, –0.34), Canada (–0.05, –0.26, –0.31), Russia (–0.05, –0.24, –0.29).
  - Aggregate shift to countries gaining share: 4/ 0.83 4 4.08 4.91 1.22 4.21 5.42 (as presented in table foot).
- Formula definition preserved exactly: CQS = (0.50*GDP + 0.30*Openness +0.15*Variability + 0.05*Reserves)^K. GDP blended using 60 percent market and 40 percent PPP exchange rates. K is a compression factor of 0.95.
- Simulation assumptions preserved exactly where cited: e.g., uniform proportional reduction of out-of-lineness based on pre-Singapore quota shares; U.S. foregoing to its post-Singapore voting share and application of U.S. reduction factor to other eligible G-7 members; tripling of basic votes; minimum 15 percent increase in post-Singapore nominal quota for first-round ad hoc increase recipients; maximum 50 percent quota increase for advanced economies; underrepresented EMDCs eligible for minimum nominal quota increase (boost) of 40 percent for first and second rounds combined if their share of global PPP GDP is at least 75 percent greater than pre-Singapore quota share.

*Source: Finance Department; material summarized from the specified simulation tables and accompanying text.*

### 2.      The variability measure is intended to reflect members’ potential need for Fund

### 2.      The variability measure is intended to reflect members’ potential need for Fund resources.

### Definition and purpose
- The modernized variability measure is defined as the standard deviation of current receipts and net capital flows from a centered, three-year moving average over a recent 13-year period.
- The measure is intended to reflect members’ potential need for Fund resources by capturing:
  - relative susceptibility to exogenous shocks,
  - relative capacity to absorb such shocks,
  - the potential size of access in case of a need to borrow.
- The measure must also take into account every member’s right to draw in case of need.
- Forecasting potential demand for Fund resources is uncertain, particularly as determinants of demand and the Fund’s financial role evolve.

### Concerns and challenges
- Questions have been raised whether the measure adequately captures members’ potential need, noting that advanced economies as a group hold the majority share of the variable.
- Defining a single measure that captures susceptibility, capacity to absorb shocks, and potential size of access is challenging.
- A volatility measure without a size dimension (e.g., Approach 13) would award disproportionately large shares to the smallest economies.
- Measuring net current account flows plus net capital flows would largely capture changes in reserves affected by factors not related to potential need, including exchange rate regime, and would mask adjustments within the current account that may be relevant to potential need.

### Staff review of alternative definitions (summary of approaches)
- Staff examined alternative definitions summarized in Table A1.
- Categories of alternatives:
  - Scaling (Approaches 1–3)
    - Examples:
      - Scaling the current measure by GDP.
      - Scaling the current measure by the mean of CR+NCF.
      - Scaling the current measure by GDP per capita.
    - Comments:
      - Proxy for the probability of need; does not take into account potential size of need.
      - Some of the smallest members receive shares that exceed those of the largest EMDCs.
      - GDP per capita adjustment is mainly driven by population shares and is problematic as a measure of potential need for Fund resources.
  - Amendments to the Current Measure (Approaches 4–8)
    - Examples and comments:
      - The use of a five-year trend: Attributes a greater fraction of overall CR+NCF fluctuations to variability than three-year averaging; five-year averaging is generally smoother and would exaggerate variability in cases of accelerating CR+NCF trends.
      - Downside variability: Square root of the sum of squared deviations of below trend CR+NCF; benefits countries with sharp downswings followed by gradual recoveries.
      - Extreme variability: Focuses on periods of strong deviations (one standard deviation below trend); may better capture situations associated with access but may be subject to discontinuities over time due to small sample of observations.
      - Extreme variability and a five-year trend: Combines considerations above; subject to exaggeration and discontinuities.
      - Variability(CR)+Variability(NCF): Summing variabilities ignores comovements; members with capital movements procyclical to current receipts would see shares decline.
  - Redefinition of the Variable (Approaches 10–12 and 15–16)
    - Examples and comments:
      - Volatility of GDP growth scaled up by GDP (Approach 10): Summary measure of vulnerability to external and domestic shocks; multiplication with MER GDP captures potential size of need; represents a fundamental departure from practice of considering only balance-of-payments-driven vulnerabilities.
      - Volatility of consumption growth scaled up by consumption (Approach 11): Closer than GDP volatility to capturing shocks that exert pressure on imports and the balance of payments; lower data coverage than real GDP.
      - Extent of consumption risk sharing (Approach 12): Volatility of consumption growth relative to volatility of GDP growth, scaled up by consumption; measures extent to which the economy can smooth consumption; data availability problems and low dispersion.
      - GDP growth volatility (Approach 13): Proxy for probability of need; awards relatively large shares to EMDCs that have had crises in the past decade; does not capture size.
      - Var(CR+NCF)/External Assets (Approach 15): Adjusts for countries' capacity to absorb shocks using external assets as share of GDP; cannot be calculated given lack of adequate data on international investment positions.
    - Data constraints are binding for approaches based on external assets, local financial market development, and, to a lesser extent, consumption.
  - Ad hoc Adjustment (Approach 14)
    - Reweighing the variability of advanced vs. developing countries: An ad-hoc adjustment that multiplies variability shares of advanced economies by a number (alpha) between zero and one, and adjusts others so shares sum to one hundred.
    - Incrementing alpha by 0.1 shifts 6.27 pps to EMDCs under the current dataset.
    - Setting alpha to 0.8 allocates variability shares about equally between advanced and EMDCs.
    - Such an adjustment is necessarily arbitrary and would represent a major departure from historical practice by applying differential treatment to country groups.

### Distortions and sensitivity analysis
- Concerns that a small number of small, open advanced economies hold relatively high shares of the variability measure.
- Staff examined adjusting for economies with disproportionately high shares relative to GDP shares or actual quota shares.
- Given the very small number of cases and the small share of the membership affected, such adjustments would have a negligible effect on the distribution of shares.

### Conclusions and recommended work program
- The variability measure must capture several dimensions relevant to potential demand across the membership, which is particularly challenging given varying capacities to absorb shocks and uncertainty in predicting potential demand for Fund resources.
- Work on alternative variability measures should continue as part of the future work program on quotas, including analysis on improving forecasts of potential demand for Fund resources.

*Source: _022608 - 2.      The variability measure is intended to reflect members’ potential need for Fund resources.*

### 16.  Var(CR+NCF)/Index of local financial

### 16.  Var(CR+NCF)/Index of local financial market development

### Concept and purpose
- This variable is intended to adjust the variability measure of current receipts plus net capital flows to capture countries' differential capacity to absorb shocks.
- Rationale: "The extent to which local financial markets are developed is one measure of the ability to absorb and insure against external shocks."
- Empirical status: "The empirical properties of this measure are not known, as the measure cannot be calculated given the lack of adequate data on local financial market development."
- Note: Measures marked with an asterisk were not discussed in Appendix 1 of Quota and Voice Reform—Stocktaking and Further Considerations (2007).

### Empirical findings and shares (Table A1 / Table A2 excerpts)
- Table A1 / Table A2 present regional shares of variability of current receipts plus net capital flows under alternative scaling methods and variability measures.
- Key shares from Variability of Current Receipts Plus Net Capital Flows (column (1) / column (8)):
  - Advanced economies: 62.7
  - Major advanced economies: 43.3
  - Of which: US: 20.7
  - Other advanced economies: 19.5
  - Emerging Market and Developing Countries: 37.3
  - Developing countries: 30.7
  - Africa: 3.2
  - Asia (Including Korea and Singapore per note): 13.5
  - Middle East, Malta & Turkey: 6.2
  - Western Hemisphere: 7.8
  - Transition economies: 6.6
  - Total: 100.0
- Memorandum items (from same tables):
  - EU 27: 31.3
  - LICs (PRGF-eligible countries): 4.0

### Alternative variability and volatility measures (selected figures)
- Variability scaled by other metrics and alternative measures appear across columns in Table A1 / Table A2; selected exact entries include:
  - Variability Scaled Down by GDP (Table A1 column (2)): Advanced economies 11.6; Emerging Market and Developing Countries 88.4; Total 100.0; LICs 46.7.
  - Variability Scaled Down by Series Mean (Table A1 column (3)): Advanced economies 8.7; Emerging Market and Developing Countries 91.3; Total 100.0; LICs 50.6.
  - Variability Scaled Down by GDP per capita (Table A1 column (4)): Advanced economies 8.7; Emerging Market and Developing Countries 91.3; Total 100.0; LICs 39.9.
  - Variability Using 5-Year Moving Average (Table A1 column (5)): Advanced economies 60.1; Emerging Market and Developing Countries 39.9; Total 100.0.
  - Downside Variability (Table A1 column (6)): Advanced economies 60.7; Emerging Market and Developing Countries 39.3; Total 100.0.
  - Extreme Variability (Table A1 column (7)): Advanced economies 58.7; Emerging Market and Developing Countries 41.3; Total 100.0.
  - Extreme Variability: With a 5-Year Moving Average (Table A1 column (8)): Advanced economies 55.9; Emerging Market and Developing Countries 44.1; Total 100.0.
- Volatility of GDP and consumption measures (Table A2 selected columns):
  - Variability of Current Receipts + Variability of Net Capital Flows (column (9)): Advanced economies 59.6; Emerging Market and Developing Countries 40.4; Total 100.0; LICs 4.3.
  - Variability of Current Account Plus Net Capital Flows, 5-Year Moving Avg. (column (10)): Advanced economies 60.5; Emerging Market and Developing Countries 39.5; Total 100.0; LICs 5.0.
  - Volatility of GDP Growth (scaled up by GDP) (column (11)): Advanced economies 52.1; Emerging Market and Developing Countries 47.9; Total 100.0.
  - Volatility of Consumption Growth (scaled up by consumption) (column (12)): Advanced economies 45.7; Emerging Market and Developing Countries 54.3; Total 100.0.
  - Consumption Growth Volatility Relative to GDP Growth Volatility (scaled up by consumption) (column (13)): Advanced economies 70.3; Emerging Market and Developing Countries 29.7; Total 100.0.
  - Volatility of GDP Growth (unscaled) (column (13) footnoted as measured for 175 countries): Advanced economies 5.4; Emerging Market and Developing Countries 94.6; Total 100.0; LICs 45.7; Africa 35.6; Asia 11.9.

### Data and measurement notes (verbatim terms preserved)
- "Preliminary calculations based on 1993-2005 data. Reflects the impact of adjustments to current receipts for re-exports, international banking interest, and non-monetary gold."
- Definitions and methodological notes preserved in tables:
  - 2/ "Measures the square root of the sum of squared differences from a centered 3-year moving average of below trend (3-year moving average) levels of current receipts plus net capital flows."
  - 3/ "Measures differences from a centered 3-year moving average for observations that are more than one standard deviation below the trend (3-year moving average). Like downside variability, it takes the square root of the sum of squared differences."
  - 4/ "Measures differences from a centered 5-year moving average for observations that are more than one standard deviation below the trend (5-year moving average). Like downside variability, it takes the square root of the sum of squared differences."
  - 7/ "Measured as the standard deviation of real GDP growth in constant local currency units for 175 countries with available data."
  - 4/ (Table A2 footnote) "Measured as the standard deviation of real GDP growth in constant local currency units multiplied by average GDP from 2003-2005, for 175 countries with available data."
  - 5/ (Table A2 footnote) "Measured as the standard deviation of real consumption growth in constant local currency units multiplied by average consumption from 2003-2005, for 150 countries with available data."
  - 6/ (Table A2 footnote) "Calculated for 150 countries with available data on real GDP and real consumption."
  - 1/ (Table A1 / A2) "Preliminary calculations based on 1993-2005 data. GDP and consumption data are from the WEO database published in April 2007. Reflects the impact of adjustments to current receipts and current payments for re-exports, international banking interest, and non-monetary gold."

*Prepared by the Quota and Voice Working Group; Finance Department figures and tables as provided in the source content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_022608.pdf_