J. Keith Horsefield
THE FOUNDING Fathers of the Fund, when they met at Bretton Woods in July 1944, had already formed a rough idea of the way in which participation in the proposed Fund was to be distributed among its members. The United States, which had convened the meeting, had made available a year or so earlier a list of possible shares (“quotas”) to be allotted to a selection of the countries that might be expected to join the Fund if it came into being.1 This list was based on the following formula, applied to each country:
Two per cent of its national income in 1940, plus 5 per cent of its gold and U.S. dollar balances on July 1, 1943, plus 10 per cent of its maximum variation in annual exports in 1934-38, plus 10 per cent of its average annual imports in 1934-38; the total being increased in the same ratio as that which the country’s average annual exports in 1934-38 bore to its national income2
The actual quotas suggested corresponded to 90 per cent of the sums so calculated, in order to reserve 10 per cent of the total to make additions to the quotas of any countries whose economic weight might not be adequately reflected by the formula.
The background of the whole plan was an understanding between the U.S. Treasury, represented by Mr. Harry White, and the British Treasury, for whom Lord Keynes spoke. This understanding was to the effect that the total of quotas should be about $8 billion, and that the quota of the United States should be about $2.5 billion. It was also accepted that the quota of the United Kingdom should be about half that of the United States. The U.S. Treasury undertook, in discussions with representatives of the U.S.S.R. and China, that the quotas of these two countries should be such as to give them, respectively, third and fourth places on the list.
Armed with these stipulations, Professor Raymond Mikesell, who was then attached to the U.S. Treasury, evolved the foregoing formula, which was found by trial and error to give approximately the results wanted: it provided quotas of $2,929 million for the United States, $1,275 million for the United Kingdom, $763 million for the U.S.S.R., and $350 million for China. At the same time, the formula failed in one respect to achieve the desired object, as the quota for India (including Burma) on this basis, $367 million, turned out to be greater than that for China. There was, however, some justification for increasing both the Russian and the Chinese quotas because of some uncertainty in the figures used in applying the formula: since Soviet authorities declined to disclose the amount of the U.S.S.R.’s gold reserve, the contribution which this would make to the calculation could only be guessed; China’s national income did not cover its large agricultural population living on a subsistence basis. In consequence, in a tentative list of rounded figures distributed by the U.S. Treasury in January 1944, the suggested quota for the U.S.S.R. was shown as $900 million. Nevertheless, these proposals were not among those put forward at Bretton Woods, where the United States distributed a list repeating the original calculations and adding suggested quotas for certain European countries, notably France ($620 million), the Netherlands ($325 million), and Belgium ($250 million).
It was on the basis of this list that an Ad Hoc Committee on Quotas, appointed at Bretton Woods, began its labors. These were conducted in secrecy, and no record has come down to us of the reasons for the Committee’s decisions, except that the Mexican delegation agreed to relinquish $10 million of its quota in favor of $5 million each for Colombia and Chile. For some of the major changes introduced, however, it is possible to divine the influences which swayed the Committee. The quota for the U.S.S.R., for example, was increased from $763 million to $1,200 million in fulfillment of the pledge given by the U.S. Treasury to Soviet representatives during a series of discussions in Washington in the spring of 1944. The quota for China was raised from $350 million to $550 million in order to ensure its place as the fourth largest member. France (which was represented at Bretton Woods by the French Committee of National Liberation and not by an elected government) was given a quota of $450 million” instead of $620 million. India (including Burma), with a quota of $400 million (rounded up from $367 million), came sixth in the list. Apart from the U.S.S.R., which did not join the Fund, the quotas allotted at Bretton Woods totaled $7,600 million.
The many differences between these quotas and those calculated according to the formula make it clear that, as Mr. White said on a later occasion, the formula was little more than “a point of departure” for the negotiations. This was important. The Fund did not then, nor does it now, rely on any formula for determining quotas. Nonetheless, when Italy, Lebanon, Syria, and Turkey joined the Fund in 1947 the quotas which they were offered were based on the formula, and it has continued to be used for this purpose, with some modifications described below.
It should be added that the Articles of Agreement signed at Bretton Woods provided that every five years the Fund should review the quotas of all members, and, if deemed appropriate, propose adjustments in them. Individual quotas may be reviewed at any time at the request of members concerned.
Importance of Quotas to Members
Before considering the changes which have been brought about since 1946 it will be well to point out briefly the important part that quotas play in the Fund’s activities, since this explains why increases in quotas have been sought.
In the first place, each of the five members with the largest quotas is entitled to appoint an Executive Director. (In the absence of the U.S.S.R., the five largest quotas, in the Fund’s early years, were those of the United States, the United Kingdom, China, France, and India. Subsequently Germany replaced China.) Moreover, if these five do not include the two countries the holdings of whose currencies had been reduced in the greatest absolute amount below 75 per cent of their quotas, as a result of sales of their currency by the Fund, during the two years preceding each biennial election of Executive Directors, these two countries are also entitled to appoint Directors; Canada did so in 1958 and Italy in 1968.
In addition to the appointed Directors, and in order to complete a Board which now comprises 20 Directors, other Executive Directors are biennially elected by members who are not entitled to appoint Directors. Those members form groups, within a prescribed range of voting strength, to participate in the elections. Since the voting strength of a member is related to the size of its quota, the relative size of a member’s quota is reflected in the influence which the member bears in the formation of a group to elect a Director.
Second, the votes which a country can exercise in the Fund are related to its quota. This applies both to the votes cast by the Governor at Annual Meetings or by mail, and to the votes cast by the Executive Director appointed or elected by the country. The relationship of votes to quotas may be described as a “damped” one: a member has 250 votes plus one additional vote for each $100,000 of its quota. Thus the quotas allotted at Bretton Woods gave the United States 27,750 votes, the United Kingdom 13,250 votes, China 5,750 votes, and France 4,750 votes. Panama, which had the smallest quota ($500,000), received 255 votes. The total votes corresponding to the quotas fixed at Bretton Woods, excluding the U.S.S.R., was 86,750, so that the United States, with 36.2 per cent of the quotas, had 32 per cent of the votes. Panama, on the other hand, with 0.007 per cent of the quotas, had 0.3 per cent of the votes.
Third, the amount which a member country has the right to draw on the Fund in case of need is proportioned to its quota: the Articles of Agreement limit this amount to 25 per cent of the member’s quota per annum, and to such a total amount as will increase the Fund’s holdings of its currency to not more than 200 per cent of its quota, unless the Fund agrees to waive these limits. In practice, the annual limit is very frequently waived, but the 200 per cent limit is generally only waived in connection with the compensatory financing of export fluctuations or the buffer stock scheme, both of which are described below.
A member’s quota also affects the rate at which it pays charges to the Fund on the Fund’s holdings of its currency in excess of its quota. The minimum rate is 2 per cent per annum, after a period of three months which is free of charge; it increases according to the proportion between the member’s quota and the Fund holdings in the member’s currency, and the length of time that the drawing is outstanding. The increases amount to ½ of 1 per cent per annum each six months, but the point at which these increases begin depends upon the relationship between the amount drawn and the member’s quota.
The member’s quota determines also the degree of conditionality applicable to any individual drawing. A member is free to draw, without being subject to challenge from the Fund, such an amount as will increase the Fund’s holdings of its currency up to the amount of its quota. If the member has, as it is the general rule, subscribed 25 per cent of its quota in gold, the amount it can draw within the gold tranche will be equal to 25 per cent of its quota. If the original gold subscription was less than 25 per cent, the amount which it can draw without challenge will be correspondingly smaller. Beyond that, policy requirements are imposed which become progressively stiffer as drawings fall into successively higher “tranches” of the quota (the word “tranche” is French for “slice,” and a tranche is equal to 25 per cent of the quota). Hence, the larger the quota, the larger the amount that a member may draw with no, or with relatively little, conditionality attached to it.
The size of a member’s quota is also a determining factor in the extent to which members might be obliged to repurchase their currency from the Fund under Article V, Section 7 (b), with gold, special drawing rights, or convertible currencies, if the Fund holds that member’s currency in excess of 75 per cent of its quota. Under the amended Articles, a member will not have to discharge a repurchase obligation which would reduce its monetary reserves below 150 per cent of its quota. Furthermore, the maximum amount of its currency that a member might be required to repurchase from the Fund in any year is limited to 25 per cent of that member’s quota.
There are, therefore, several reasons why each individual member country would wish to seek the largest possible quota. But, on the other hand, the member has to subscribe 25 per cent of its quota in gold, or, sooner or later, reduce the Fund’s holdings of its currency to 75 per cent of its quota through repurchases of its currency from the Fund in currencies acceptable to the Fund. Hitherto 25 per cent of any increase in quota has been payable in gold. Accordingly, a country will not seek an increase in its quota unless it considers that the potential rights that it will acquire will be more valuable to it than the gold which it must surrender. That many countries did think just this was made clear at Bretton Woods itself, where ten countries protested that the quotas allotted to them by the Ad Hoc Committee were too small. Among these were France, Egypt, and Iran, whose quotas were increased in 1946 and 1947. The increase for France was limited to $75 million, so that its quota should not exceed that of China. In the years since Bretton Woods, wishes to increase quotas have frequently been expressed, especially by countries with small quotas.
In 1955, the Second Quinquennial Review of Quotas revealed that a considerable number of members with small quotas wished to increase them. The Fund was cautious in its response. It agreed only that quotas below $5 million could be increased, on request, to $7.5 million; quotas of $5-8 million to $10 million; those of $10 million to $15 million; and those of $15 million to $20 million. Effectively, this set a minimum limit of $7.5 million to any quota if the member wished to claim this figure, regardless of how much less the quota would have been had the formula been applied. (In fact, however, a number of small countries joining the Fund in the 1960’s were offered and accepted smaller quotas.)
General Increases in Quotas
The next major development in relation to quotas came in 1958, when the Executive Directors came to the conclusion that quotas in general were too small to enable the Fund to carry out the intentions of the Founding Fathers. They therefore proposed, and the Governors agreed, that all members should be allowed to increase their quotas if they so wished by 50 per cent. The only members that did not take up the offered increase were China (which now meant the Republic of China), Cuba, and Panama. On the other hand, 30 countries were allowed to increase their quotas by more than 50 per cent. Three of these—Canada, Germany, and Japan—were countries whose relative economic size had greatly increased since they joined the Fund, and whose currencies were likely to be needed by the Fund. The quotas of 13 countries were increased because it was agreed either that their quotas at Bretton Woods had been too small, or that their subsequent economic growth had been substantially greater than the average. The remaining 14 countries had quotas which they were free to increase under the scale agreed in 1955; these were permitted to add 50 per cent to the figure to which they were entitled under that scale. As a result, no member needed thereafter to have a quota of less than $11.25 million.
The last point became of great significance when, during 1961-63, a large number of small, new countries joined the Fund. For many of them, the quotas calculated according to the formula (insofar as data were available) would have been very much less than $11.25 million. Accordingly, the formula used for apportioning votes and drawing rights between members has tended to favor these new, small countries.
Revision of Formula
During 1962 and 1963 the Bretton Woods formula which was used as a basis for determining quotas was revised. The revisions were undertaken largely in connection with the Fund’s decision on the compensatory financing of fluctuations of export receipts. The revision of the formula was also intended to increase the relative share of small quotas in the total of Fund quotas. Two important amendments were made to the formula presented at the beginning of this article. First, the measurement of variability, which was originally defined as 10 per cent of maximum variation in annual exports on the period 1934-38, was replaced by a concept of variability which was not largely determined by the trend of export receipts. The new factor for variability is now calculated as one standard deviation from a five-year moving average based on a period of 13 years. It was felt that this formulation gave a more appropriate measurement of the genuine variability of members’ export receipts for purposes of quota calculations.
The second modification of the Bretton Woods formula was to take account of the multiplicative factor which increased the total of the four additive factors by the ratio between exports and national income. This multiplicative factor could have the anomalous effect that countries with exports that are large in relation to their national incomes might have larger quotas than countries with greater relative economic strength but relatively smaller exports. Consequently a “linear” formula was developed by eliminating the ratio of exports to national income as a separate multiplicative element; in addition, the weights of national income and reserves in the new linear formula (as well as in the old formula) were progressively decreased. A further modification was to substitute in the formulas total receipts from exports, services, and private transfers for export receipts, and to substitute total payments for imports, services, and private transfer payments for imports alone.
As a result of these modifications to the original Bretton Woods formula, a large number of quota calculations for each country are now made on the occasion of a revision of a member’s quota or on the determination of a new member’s quota. However, as previously, the results of the calculations based on various formulas are only one, though perhaps the most important, of the considerations taken into account in determining members’ quotas. Further important considerations are how the resulting quota calculation fits into the over-all structure of Fund quotas and the extent to which the calculated quota for a member compares with the quotas of members which are in similar over-all economic positions and have similar economic structures.
Quotas and Compensatory Financing
During 1963 the Fund made a further move to assist members with small quotas. Examination of the problems of members dependent on primary products for their exports had shown that the variability of these receipts called for exceptional assistance to be available in order to enable the members concerned to tide over sudden shortfalls. The facility which the Fund established for this purpose, known as “Compensatory Financing of Export Fluctuations,”3 included two provisions that are relevant to quotas. In the first place, it was decided that a country might draw up to 25 per cent of its quota beyond the normal limit. This meant that the Fund’s holdings of its currency would be allowed to increase to 225 per cent of its quota. Second, the Fund promised to give sympathetic consideration to requests for special increases of quotas from members whose exports were subject to fluctuations of this kind, and whose quotas were too small for the permitted 25 per cent to be an adequate alleviation of their problems.
This facility was reviewed in 1966 and it was then decided that drawings under it might total 50 per cent of quota, normally at the rate of 25 per cent per annum. Moreover, in future such drawings not only would be allowed to exceed the normal upper limit for drawings, but would be disregarded when the policy requirements in connection with requests for subsequent drawings would be considered. This, of course, lessens the stringency of the conditions under which such other drawings may be granted. Following this change, a number of member countries made use of the facility, and practically all countries which could have their quotas increased under the facility have obtained it.
Meanwhile, the Fourth Quinquennial Review, in 1965, showed that the over-all size of quotas had again become inadequate in relation to potential needs for the Fund’s resources, and the Fund approved a further general increase, of 25 per cent, with some rounding of the resulting figures. As in 1958, special increases, which in this instance exceed 25 per cent, were approved for some countries (on this occasion, 16) whose quotas were, for one reason or another, disproportionately small; Canada, Germany, and Japan were again on this list. The normal minimum now became $15 million, although a few countries opted for less. The total of quotas at the end of 1969 was approximately $21,300 million, there then being 115 members.
Quotas and Votes
As pointed out above, the voting system in the Fund is based on the size of the quota: each member is allotted 250 votes plus one vote for $100,000 of quota. In that respect the voting system in the Fund is different from most other international agencies and of the United Nations itself. Furthermore, changes in the membership of the Fund and, perhaps more importantly, changes in the relative size of a member’s quota alter the relative voting power of other members in the Fund. For example, the relative share of the developing countries in the Fund has increased since 1945, not only because a large number of developing countries have joined the Fund since that time but also because at certain periods the developing countries have had larger-than-general quota increases as a result of the small quota policy or of increases under the compensatory financing decision. A further consideration which has tended to increase the share of the developing countries in the voting power of the Fund has been that certain large industrial members have not always taken the quotas to which, on statistical grounds, they were entitled. The results of the many shifts in voting power that have occurred in the Fund is well illustrated by the position of the United States, which in 1945 cast 32 per cent of the votes while in December 1969 it cast 21.4 per cent of total votes. Nevertheless, perhaps the most important factor in determining the voting structure in the Fund is not the change in quotas but the absolute size of the quotas; substantial increases in a large number of comparatively small quotas can still be swamped by a change in one relatively large quota.
Changes in the distribution of votes among members of the Fund are of significance in two major respects. First, as mentioned above, the voting power of members determines, to a large extent, the groupings of countries which are formed to elect Executive Directors. Second, special majorities are required for certain Fund decisions; for instance, any amendment to the Articles of Agreement needs the support of at least three fifths of the membership, having four fifths of the voting power. However, in practice, the Fund rarely resorts to voting and is almost always able to reach a consensus by discussion.
In the last three years four further developments have increased the importance of quotas. The first of these was a decision by the Governors, on the recommendations of the Executive Directors, to distribute part of the Fund’s net income for the year. This was done in 1968 and again in 1969. The recipients were members that were “creditors” of the Fund. A member is regarded as being a “creditor” of the Fund if the Fund’s average holdings of its currency during the year are less than 75 per cent of its quota, and the distribution was proportioned to the shortfall below 75 per cent of quota of each such member.
The second development was that a new facility, somewhat like the compensatory financing of export fluctuations, was introduced in 1969. This offered to those members that were subscribing to maintain international buffer stocks of raw materials the right to draw on the Fund to meet contributions to such schemes. The right was limited to 50 per cent of the member’s quota, and an overriding limit of 75 per cent of quota was applied to drawings under this facility and the compensatory financing together.
The third development, the most important of all, was the decision to credit a supplement to international liquidity, called special drawing rights, thus creating unconditional international liquidity as a supplement to members’ gold and foreign exchange reserves. Special drawing rights are distributed to participating members in proportion to their quotas in the Fund. It was agreed to allocate $3.5 billion special drawing rights early in 1970, with further allocations of $3 billion in 1971 and 1972; for the first allocation, figures ranged from about $800 million for the United States to about $50,000 each for Botswana and Lesotho.
In July 1969 some changes in the Articles of Agreement were adopted. One important change was to require that for certain purposes (e.g., general increases in quotas) decisions of the Board of Governors need to be approved by 85 per cent of the members, whereas previously no decision needed to be supported by more than 80 per cent of the Governors’ votes.
A full account of the determination of quotas at Bretton Woods is given in “Quotas in the International Monetary Fund” by Oscar L. Altman, International Monetary Fund, Staff Papers, Vol. V, No. 2, August 1956. See also The International Monetary fund, 1945-1965, Vol. I. pp. 94-98.
If national income on this date was available and appropriate.
See J. Keith Horsefield, “The Fund’s Compensatory Financing,” Finance and Development, December 1969.