At the recent IMF–World Bank Annual Meetings in Singapore, the IMF’s 184 Governors debated Managing Director Rodrigo de Rato’s proposal for governance reform. His strategy, endorsed by an overwhelming majority of the governors, involved ad hoc quota increases for four countries—China, Korea, Mexico, and Turkey—whose calculated quotas are most seriously out of line with their actual quotas, and a two-year work program on a new quota formula. The IMF is hoping that its Executive Board will reach agreement by the fall of 2007 on a new formula to be implemented by the 2008 Annual Meetings.
In recent years, the media, policymakers, international observers, and nongovernmental organizations have repeatedly questioned whether the mandate and governance structure of the IMF adequately serves the needs of all its members. The critics argue that management and decision making in the IMF—a global institution in which industrial countries control more than 60 percent of the capital—should be reformed to make it more legitimate, participatory, and accountable. The initiative of the Managing Director reflects the importance of ensuring that the IMF remains an effective institution in the globalized economy of today.
What experience tells us
Quotas determine the voting strength of each IMF member in decisions made by the Board of Governors and the Executive Board (see box). Changes in quotas require the backing of 85 percent of the membership. A quota also cannot be reduced without a member’s consent.
Past experience has shown that a redistribution of quotas and quota shares has the greatest chance of winning approval if it is presented as part of a package that includes a general quota increase and other elements in which all members find more to vote for than to vote against. In January 2003, the Fund concluded its twelth general review of quotas without increasing them—deeming it had sufficient liquidity to meet members’ lending needs. Since then, the Fund’s liquidity position has improved further as a result of a rapidly growing world economy and liquid capital markets. At the same time, several members have prepaid large outstanding loans to the IMF.
These factors have reduced the demand for the Fund’s financial resources, making a general quota increase seem unlikely. Instead, a quota reform package could rely on further ad hoc increases for those members whose actual quotas are significantly out of line with their calculated quotas—a step that a majority of the IMF’s membership now seems willing to support.
In earlier Board discussions, broad support has emerged for a transparent quota formula that would be based on no more than three or perhaps four variables. These include GDP; openness (defined as the total of current external receipts and current payments); variability of current receipts and net incoming capital flows; and, possibly, official international reserves.
A look at the players
The United States has the largest quota share (17.1 percent), which gives it the ability to veto any quota reform package. The U.S. government has welcomed the Managing Director’s pro-posed strategy, making it clear it thinks the new quota formula should give greater weight to GDP, which is known to favor quota calculations for industrial countries. “Greater weight to GDP” can be interpreted as implying “less weight to openness” on the part of the United States. The present U.S. position also seems to imply a willingness to accept some reduction in its voting power—as long as its quota remains above 15 percent of the total voting power, thus allowing it to maintain its veto over decisions requiring an 85 percent majority.
The Managing Director’s proposals have raised the expectations of developing countries for a significant reduction in current quota imbalances. At present, more than 61 percent of total votes are held by 23 industrial countries, whereas 161 developing countries, accounting for about 80 percent of the world’s global population, hold less than 39 percent. The developing countries prefer using GDP purchasing power parity (PPP) data, which favor quota calculations for countries with large populations. The Executive Board had earlier rejected using PPP data, but developing countries may well wish to have it revisit that question. Since one set of GDP data favors industrial countries, and the other set favors developing countries, it would make sense to include both sets of GDP calculations in a revised quota formula.
How the IMF is governed
The IMF’s top decision-making forum is the Board of Governors, which consists of one governor (usually the finance minister or central bank governor) from each member country. All governors meet at the IMF-World Bank Annual Meetings. A subset of 24 governors sits on the International Monetary and Finance Committee, which meets twice each year and provides strategic guidance for the IMF. The day-to-day work of the Fund is conducted at its Washington, D.C., headquarters and is overseen by its 24-member Executive Board.
Quotas determine countries’ voting strength in the IMF. Each member has 250 basic votes plus one additional vote for each SDR 100,000 of quota. Apart from voting strength, quotas also determine countries’ ability to access IMF resources. Various economic factors are considered in determining quotas, including GDP, current account transactions, and official reserves.
For their part, the European Union (EU) countries have emphasized that a quota reform should focus on correcting the limited number of member quotas that remain seriously out of line. They have stressed that they do not wish to see a weakening of the EU’s position in the IMF and are known to favor heavy weights for openness and GDP at market prices, which tend to favor them. EU members have also emphasized that a unification of the chairs held by European members in the Executive Board should not be considered an option at this time.
Another central objective of the reform package is to enhance the participation and voice of low-income countries. A straight-forward manner to protect the voting power of the IMF’s small and poor members is through an increase in the 250 basic votes that were provided to each member in the Articles of Agreement (the IMF’s charter). In 1945, basic votes accounted for 11.3 percent of total votes; today, they account for only 2.1 percent. Earlier attempts to correct the erosion of basic votes failed because an amendment of the Articles of Agreement is required to do so. Today, however, there is strong willingness among the membership to at least double the share of basic votes.
Some thoughts about the road ahead
The EU is represented by seven chairs in the IMF Board. Belgium, France, Germany, Italy, the Netherlands, the Nordic group, and the United Kingdom all have their own Executive Directors, although some of them represent groups of countries, not all of which are members of the EU. The aggregate voting power of those seven chairs is 33.55 percent—nearly the same as the combined voting power (33.91 percent) of the 12 chairs held by the developing countries (calculations based on pre-Singapore data). The EU’s voting power is also nearly twice as large as that of the United States. The basis for Europe’s voting strength was laid in the early postwar period, when the western European members obtained large quotas because they were expected to need financial assistance from the Fund. Developing countries were generally treated less liberally because of data inadequacies and because they would be able to obtain loans from the World Bank. From then on, the quota formula and manner in which general quota increases were carried out favored Europe as it grew at a rapid pace and integrated its economy. During this period, Europe also contributed a large share of the financing of the Fund. Moreover, the diversity of views held by the European countries enriched the deliberations in the Executive Board and helped build consensus.
At present, however, governance issues have moved to the fore-front in the management of the international monetary system, and the uniquely large voting strength of Europe is now seen as a major distortion. Moreover, the regional trade of the European countries has, de facto, become internal trade—conducted mostly in euros—rather than international trade. This, in turn, has become an important argument for reducing the weight of openness in the new quota formula. At the same time, a more systematic coordination of European policies and voting positions would greatly strengthen the region’s influence in global affairs.
The challenge of agreeing on a new quota formula will require everybody to look beyond their short-term interests and rally behind an outcome that strengthens the legitimacy of the IMF while being respectful of all countries’ standing within the institution. As a group, EU countries constitute the IMF’s prime shareholder. They are therefore uniquely placed to work with other member countries and the Managing Director to ensure the success of governance reform. The resulting loss of quota shares would be modest and would not affect the viability of the seven EU chairs in the near term.
Looking further ahead, the strengthening of the EU’s voice and influence in the IMF will depend on EU members’ ability to coordinate their positions on Fund issues. Once that has been achieved, the unification of all 27 EU members in a single chair will be the next logical step. That, in turn, would open the way for close cooperation with the United States and other IMF members to create a more compact and powerful decision-making instrument in which the industrial countries would hold a reduced voting majority while the developing countries would hold a majority of chairs. The effective—and generous—collaboration of EU countries and their chairs in this endeavor would yield enormous benefits for the world community. And Europe itself would be a major beneficiary from an IMF that has regained legitimacy among all its members.
Leo Van Houtven
President of the Per Jacobsson Foundation and former IMF Secretary and Counsellor to the Managing Director