Questions & Answers
Secretary’s Department, IMF
In 1990, the IMF received a flurry of membership applications, as a number of industrial and developing countries—new and old—decided to become part of the global economic community. The sudden burst of activity was reminiscent of earlier waves (see chart), but this most recent batch is notable in its diversity:
• Czechoslovakia was previously a member and is currently attempting a rapid transition from a centrally planned to a market economy;
• Bulgaria is undergoing a more gradual reform from an essentially agrarian society;
• Namibia just became a sovereign nation in 1990;
• Mongolia recently held the first multiparty elections in its history;
• Switzerland, a center of international finance, will be the first member that is not a member of the United Nations; and
• Albania is just emerging from a long period of limited contact with the outside world.
Membership in the IMF now totals 155; remaining nonmember countries—besides Albania and Switzerland, which have not yet completed the membership process—include Brunei, Cuba, North Korea, and the Union of Soviet Socialist Republics.
Because of rising public interest and curiosity about IMF membership, Finance & Development thought it timely to respond to some commonly asked questions about the membership process.
Who can apply for membership in the IMF?
The prospective member must be a country in control of its own foreign affairs, and it must be willing and able to meet the obligations of membership contained in the IMF’s Articles of Agreement—its charter. Under those obligations, a member must conduct its exchange rate policy and related economic and financial policies in accordance with the Articles, and provide requested economic and financial information. Consistent with its purposes, the IMF helps a member in finding a solution to the country’s balance of payments problems. A member must also pay a subscription—financial reserves that can be made available for use by the IMF’s members.
Does a country have to adopt a market economy to qualify for membership?
No. The variety of members is testament to the fact that membership does not depend on economic and political systems—in fact, around two dozen had, or still have, either centrally planned or mixed economies. It is also mistakenly thought that the IMF requires its members to adhere to a particular exchange rate arrangement, most likely involving convertibility. In fact, members can avail themselves of transitional arrangements of Article XIV of the IMF’s charter, whereby they may maintain or adapt to changing circumstances the restrictions that were in effect on the date that they became members—and over half of them do so. However, members are expected to pay regard in their foreign exchange policies to the purposes of the IMF and to take steps toward lifting all restrictions as soon as possible.
Who are the “largest” and “smallest” members?
The United States is the largest member in terms of quota, and as required by the IMF’s Articles, the institution’s headquarters, therefore, is located in Washington. The US quota is SDR 17,918 million, which entitles it to about 19 percent of the total votes in the IMF. (Each member is assigned a quota, essentially its share in the IMF capital base, and has 250 votes plus one additional vote for each SDR 100,000 of quota.) At the other end of the scale are the Maldives, with a quota of SDR 2.0 million and a 0.03 percent share of total votes.
Is there any connection between World Bank and IMF membership?
IMF membership is a prerequisite for joining the World Bank and its affiliates, but a country is not required to join the Bank once it joins the IMF. In practice, applicants tend to be more immediately interested in the project assistance services of the Bank, and they sometimes view IMF membership as a hurdle to be crossed before gaining access to those resources.
Does politics affect the timing of applications?
One sometimes reads in the press that the IMF is ready to accept a country as a result of political or economic developments in that country. While the Executive Board’s decision to consider an application is based on whether the country can meet the obligations of membership, the practical reality is that the Board of Governors—not the Executive Board—decides on a membership. It does so by a simple majority of votes cast; reasons for votes need not be given. To avoid the playing out of political issues in the process of deciding on membership, potential applicants tend to explore carefully the likely response of various important countries and groupings ahead of time. When they do apply, countries often have the enthusiastic support of current members who see particular advantages to having countries with which they have commercial relations accept the responsibilities of membership. The actual timing may hinge on domestic political and economic events. For example, most countries that joined the IMF after the 1940s did so within a year or two of achieving independence. Those that have delayed have cited several reasons, including concerns about the cost of the membership, a desire to remain truly neutral and uninvolved in international organizations, and a lack of popular support for membership at home or abroad. The Soviet Union was one of the principal negotiators at the Bretton Woods Conference, which adopted the original Articles of Agreement on July 22,1944, leading to the creation of the IMF, but it did not accept and sign the treaty as an original member.
How is the membership process begun?
The initial contact can take many forms, varying from formal inquiries to casual hallway conversations, but the first official inquiry is made by the authorities, perhaps through their diplomatic staff in Washington or New York. The next step is a formal application, signed by the head of state or a high official, such as a minister of foreign affairs.
How does the IMF respond to a membership application?
Soon after the application has been received, the IMF sends a membership mission to the country, which aims at collecting the necessary data for quota calculations and piecing together the country’s economic history, along with a description of its current economic and financial system. At the same time, the country learns about the IMF’s rules and standards regarding the information and statistics to be supplied to the IMF, as well as about the financial aspects and legal and procedural steps of membership. The Bank may also participate in the IMF mission, although it will use the quota arrived at by the IMF to determine the prospective member’s capital subscription for the Bank.
What does the staff do with the data gathered on this first visit?
The information gathered is used by the staff to prepare a “quota paper” for the Executive Directors. Based on the data supplied to the mission on national accounts, gold and foreign exchange reserves, and current payments and receipts of the balance of payments, five different formulas are used to come up with the calculated quota. Actual quotas, however, are on average much smaller than calculated quotas, and the initial quota of a new member has to be fitted into the structure of the existing quotas of members of comparable economic size. In addition, comparisons are made with other subgroups of countries that have similar characteristics. This normally results in a recommended quota range.
So the staff decides the country’s quota?
No, not at all. A committee of, say, five to eight Executive Directors is formed to consider the staffs paper, and it is this body that has the real power to recommend a quota. Once the applicant agrees to the quota recommended by the committee, the quota is considered by the Executive Board and submitted to the Board of Governors for a vote. This process can be rather contentious, as the quota not only determines subscriptions but also relative voting strength, the size of potential borrowings from the IMF and other transactions between the IMF and the member, and future SDR allocations.
Growth in IMF membership 1945-91
Note: Shaded areas represent waves of membership growth, including groups identified in chart.
What about countries that previously were members? Do they retain the same relative quota as when they originally belonged?
No. When previous members apply—as have Czechoslovakia, Indonesia, and Poland—they are treated as new applicants.
How does the vote by Governors work?
When the vote does go out to the Governors—it is generally done by mail and takes about 30 days—two thirds of the Governors, who must also represent over 50 percent of the total vote, are required to respond for a quorum to be achieved. This vote can also take place at the Annual Meetings. For the vote to be carried, a simple majority is needed. The culmination of the membership process is the signing by the authorities of the original copy of the Articles of Agreement at the US State Department in Washington and the deposit of an instrument of acceptance. This may be immediately followed by the signing of membership documents for the World Bank and its affiliates.
How is the constituency of a new member country decided?
There are no regulations governing the decision to become part of a constituency (namely, a group of countries represented by an Executive Director), other than those arising from prescribed proportions of votes required to elect Executive Directors. Directors of some large shareholders of the IMF represent only their own country. Others represent a group of countries. The distribution of countries tends to be geographically based, but practical interests often dominate: for instance, Spain is with a Latin American constituency; and Israel joined the constituency that includes the Netherlands, Yugoslavia, Romania, Bulgaria, and Cyprus, rather than the Middle East group.
Sometimes countries in a constituency may even seek out new members to strengthen their Executive Director’s vote if that would not upset the traditional majority within the group. At the same time, the new member looks to maximize the amount of influence it will have in the Board. Most constituencies have internal agreements about which country nominates the Executive Director and the Alternate. In some constituencies, the same countries hold the more important positions, while in others they are rotated as often as every two years. These agreements frequently also take into account arrangements in the World Bank Executive Board, whose constituencies, incidentally, differ slightly from those in the IMF. Joining a constituency, however, is not mandatory—for example, the Republic of South Africa has a special representative to the IMF who attends the annual Board discussions covering the country but does not participate in any Board decisions—although it is important for a country to safeguard its interests through such representation and to share in the IMF decision-making process.