Oscar L. Altman
The Fund is in the process of increasing the quotas of its members, and therefore its own resources, from $16 billion to $21 billion. Increases totaling $5 billion have been agreed by the four-fifths majority required by the Fund’s Articles of Agreement in the form of two Resolutions: the First authorizes a general increase of 25 per cent in the quotas of all members; and the Second authorizes special increases for 16 members. The new quotas will come into effect as soon as the members that now have two thirds of existing quotas accept the increases proposed for them. When these Resolutions were agreed in the spring of 1965 it was hoped, rather optimistically, that approval by the necessary majority could be obtained before the Fund’s Annual Meeting in September 1965. This date was not met because of the schedules of the Parliaments of many member countries; it has been extended to the spring of 1966. It is now clear, however, that practically all the Fund’s members, and particularly all its industrially developed ones, will accept the increases proposed for them. Thirty days after their new quotas become effective, these members will be required to subscribe one fourth of their increases in gold and the balance in their own currencies.
Significance of Quotas
In the organization and operation of the Fund, quotas play a unique role that can best be described in terms of their three functions.
First, as already noted, quotas determine the subscription or contribution of each member to the resources of the Fund, and thus initially determine the total of Fund resources and their composition, i.e., its holdings of gold and of individual currencies. The usual way to increase the Fund’s total resources is to increase quotas generally, and the usual way to increase the Fund’s holdings of currencies that are in short supply is to increase the quotas of the countries concerned.
Second, quotas greatly affect the amount and rate of member drawings (borrowings) from the Fund. For example, a member may not draw more than 25 per cent of its quota in one year, or draw more than 125 per cent of quota in total, without a specific waiver from the Fund; the only exceptions—and these are recent—relate to drawings to provide compensatory financing for decreases in export earnings and drawings to help to finance gold subscriptions in connection with quota increases. The automaticity of drawings in the gold tranche, and the ease or difficulty of drawings in other tranches, are all stated in relation to quotas.1 In addition, quotas greatly affect the interest charges that members must pay on their drawings, the rate at which they must repay, and the currencies they may tender in repayment.
Third, quotas determine the relative voting strength of Fund members, which is based upon the formula that each member has 250 votes plus one additional vote for each $100,000 of quota. Voting strength is designed to reflect approximately the relative economic strength of members, since individual quotas, and therefore the structure of Fund quotas, reflect economic factors heavily but not exclusively. In recent years, these economic factors have been combined in somewhat different proportions for countries other than the large industrial ones, in order to improve their quotas.
Quota Increases in the Past
Each member agrees to a quota at the time it joins the Fund. This quota can be changed later only if the Fund and the member concerned agree. There have been many quota increases since the Fund was organized, but only a few decreases. The latter were temporary, having been reversed later.
The Fund’s Articles of Agreement provide that the Fund shall review quotas of members every five years and propose an adjustment of them if it deems it appropriate (Article III, Section 2). In accordance with this provision, the Fund completed quinquennial reviews of quotas in 1951, 1956, and 1961 without proposing any increases, but it did recommend a general quota increase of 50 per cent in 1958. The quota increases now in process of ratification are being made in connection with the Fourth Quinquennial Review.
Special quota increases for individual countries may be made at any time. Some of these increases, especially for the members with the largest quotas, were agreed at the same time as the general quota increases, but most have been made between quinquennial reviews.
At the end of the present quota exercise, the quotas of members that joined the Fund before 1958, and that have not benefited by special quota increases, will be about 90 per cent larger than they were originally. For example, the United States in 1946 had a quota of $2,750 million. This was increased to $4,125 million in 1958-59, and will become $5,160 million when the present round of increases is agreed. The United Kingdom, India, and Pakistan are other examples of countries which have received only general quota increases. Quotas of many countries that were members before 1958 have been increased by larger percentages. Countries that started with unusually low quotas (usually at their own request) and countries with smaller quotas—principally less developed countries that export raw materials—have received particular attention. Quotas in the latter group were found in 1956 to be lower relative to economic data than other quotas, and many were increased subsequently. Some small quotas have been increased several times. When the Fund took its decision in 1963 on compensatory financing of export shortfalls, it declared itself ready to increase the quotas of countries affected by this policy where these were inadequate. More than 15 quota increases have already been made under this decision.
Reasons for Quota Increases in 1965
It was understood at Bretton Woods, and confirmed by developments since then, that the quotas of Fund members should be increased from time to time. The Articles of Agreement do not specify how these increases should be calculated or what economic variables should be taken into account in determining them, although early proposals for the Fund (1943-44), as well as Keynes’s proposal for an International Clearing Union (1943), envisaged virtually automatic adjustment of members’ quotas to the growth of national income and international trade.
The present review of quotas was greatly stimulated by the studies carried on in 1963-64 of international liquidity and of the operation of the international financial system. The Fund’s studies of these subjects paralleled those of the Group of Ten (the United States, the United Kingdom, the Federal Republic of Germany, France, Italy, the Netherlands, Belgium, Sweden, Japan, and Canada), and to some extent provided materials for the latter.2
The Fund and the Group of Ten agreed in these reports that there was no shortage of international liquidity but that serious thought should be given to improving the international financial system and to developing methods of increasing international liquidity in accordance with the need for it. As to the latter, it was stated that dollars could not and should not make so great a contribution to the growth of international liquidity as they had in the earlier postwar period, and that, in any event, the flow of dollars to foreigners would be sharply reduced (if not reversed) as the United States moved toward equilibrium (or surplus) in its balance of payments. The reports agreed that the Fund was an important supplier of both unconditional and conditional liquidity, and that its ability to supply these two kinds of liquidity should be increased.
Size of Quota Increase
The decision to increase all quotas by 25 per cent and to grant larger increases to 16 countries was a compromise. An unpublished study by the staff of the Fund had concluded, in the spring of 1964, that special quota increases totaling $5 billion were desirable to correct existing disparities in the structure of quotas, and that, in addition, a general quota increase of 50 per cent was desirable to improve the ability of the Fund to provide financial assistance and international liquidity. But it soon became apparent that these targets were not acceptable to the Fund’s Executive Directors or to the Group of Ten. While the United States and some other countries were willing to consider a general increase of 50 per cent, the continental European members of the Group of Ten favored a general increase of 10 or even 5 per cent. Further discussion made it appear that the largest members could compromise on a general increase of 25 per cent and a limited number of selective quota increases. The Fund’s Annual Report for 1964 therefore was able to conclude that “there is a case for an increase in Fund quotas” and that the Executive Directors should examine this question in detail after the Annual Meeting of the Board of Governors. Such a schedule would in any case coincide with the Fourth Quinquennial Review.
At the Annual Meeting of the Fund in September 1964, the Managing Director of the Fund, Mr. Pierre-Paul Schweitzer, stated in his opening address that “I strongly feel that an increase in the quotas of Fund members at an early date is, at the present time, both justified and necessary, and I urge the Governors to give it most careful attention.” The subsequent discussion made it clear, however, that there continued to be differences of opinion about the desirable size of quota increases. The Governor for France stated that his country was “willing to go along with a moderate increase of quotas that should not exceed 25 per cent,” while the Governors for the United Kingdom and Canada indicated their preference for larger increases. Within the group of less developed countries, the Governor for Nigeria stated that he considered it “rather disappointing that some developed nations have deemed it prudent in their studies to oppose large percentage increases in their quotas for purposes of replenishing the Fund’s resources,” while the Governor for Ceylon stated that “Ceylon, in common with other developing countries is strongly in support, not merely of an increase in quotas, but of a substantial increase. I also attach importance to the need for special adjustments where particular attention must be given to countries like mine, which are substantially dependent upon external trade.”
After the 1964 Annual Meeting (reported in Finance and Development, December 1964), the Executive Directors of the Fund discussed general and selective quota increases intensively and were able to announce, on February 26, 1965, that they had agreed on a report to the Board which incorporated the following:
(1) A general increase of 25 per cent in the quotas of all members (First Resolution). These increases were systematically rounded to simplify calculations relating to quotas, subscriptions, drawings, and other transactions: quotas below $500 million were rounded to the next higher multiple of $1 million, and all other quotas were rounded to the next higher multiple of $5 million.
(2) Special quota increases for 16 countries (Second Resolution). The new quotas for these countries, incorporating both the general quota increase and the applicable special quota increase, were as follows:
|Quota at Date|
(Feb. 26, 1965)
|Quota as Increased Under|
(Includes First Resolution)
|Germany, Fed. Rep.||787.5||1,200|
(3) The report transmitting these Resolutions made it clear that increases under the First and Second Resolutions were without prejudice to the quota adjustments that countries could request under the Fund’s decision in 1963 on the compensatory financing of export fluctuations. Studies in February 1964 had suggested that some 26 countries were still eligible, on the basis of economic criteria, for increases under this policy. It may be noted that ten increases in this class have since been requested, and that all of these have been approved, or are in process of approval.
Mitigation of Gold Payments in Connection with Quota Increases
The Articles of Agreement require that all members increasing their quotas must pay the Fund 25 per cent of these increases in gold. The only exception to this requirement is that the Fund may reduce this percentage for any member whose monetary reserves are less than its new quota (Article III, Section 4(a)). Despite this authority, the Fund has always required a 25 per cent gold payment from members that accepted general and/or special quota increases, regardless of the state of their monetary reserves.
Some Fund members nevertheless felt strongly that this policy should be modified in connection with the general quota increases—but not the special increases—and that gold payments lower than 25 per cent should be set for members with low monetary reserves. The Executive Board discussed this view at length, but in the end did not accept it. Instead, they agreed that all members could, on their own representation, draw from the Fund the amount necessary to finance their required gold payment in connection with the general quota increase. This facility, already available to countries obtaining quota increases under the compensatory financing decision, will enable countries with low reserves to make gold payments without reducing their reserves or gold holdings.
A more difficult problem was involved in the large gold payments that had to be made by the United States and the United Kingdom. The balance of payments positions of both countries were weak or in deficit; the reserves of the United Kingdom were small; and the gold holdings of the United States had been declining substantially for many years. Both countries had to make gold payments in connection with their own quota increases (primary drain), and they also, as reserve centers, had to sell gold to other countries for the same purpose (secondary drain).
In the end, it was decided that most of the larger Fund members, including the United States, would make gold payments from their existing holdings, and that nothing would be done to mitigate the primary gold drain on the two key currency countries (United States and United Kingdom). To mitigate the effects of the estimated $500 million secondary gold drain on these countries, the Fund decided to suggest to members making drawings in order to acquire gold that they draw currencies other than dollars or sterling, up to a total of $150 million. The Fund would then replenish its holdings of these currencies by the sale of gold to the countries issuing them. This would leave country gold holdings unchanged. The Fund would also make general deposits of gold with the United States and the United Kingdom, up to $250 million and $100 million, respectively, to offset their sales of gold to other countries.
Quota Increases in the Fund and the World Bank
The structure of quotas in the World Bank (see “The Financial Structure of the World Bank” in this issue, p. 217) is very close to, but not identical with, the structure of quotas in the Fund, and the Bank made it clear during the quota exercise that it wished that this relationship continue. Accordingly, the Fund expressed the view that it expected members obtaining special quota increases in the Fund to apply for parallel increases in the Bank. No such expectation applied to the general quota increase, which did not affect the relationship of one quota to another.
The increase in Fund quotas from $16 billion to $21 billion will improve international liquidity and strengthen the ability of the Fund to assist its members to carry out the purposes of the Articles of Agreement. The ability of the Fund’s members to reconcile their wide differences of opinion about quota increases without having to resort to formal voting procedures confirms the Fund’s operating practice of reaching a consensus after full discussion. The quota Resolutions represented a compromise on all important points: the size of the general increase, the number and amount of special increases, gold subscriptions, and the gold mitigation techniques. But it has generally been recognized, inside and outside the Fund, that this compromise was an important step in the right direction.
See “The Financial Structure of the Fund” in Finance and Development, Vol. II (1965), p. 45.
See “International Liquidity” in Finance and Development, Vol. I (1964), pp. 142-45 and 170-77.