II. Quotas and Voting Power in the IMF: A System That Calls for Greater Equity
- International Monetary Fund
- Published Date:
- August 2002
Role of Quotas and the Debate on the Quota Formula
Each member country is assigned a quota, which is its participation in the capital of the IMF and determines its voting power. In addition, quotas determine each member’s share in any allocations of SDRs. The original formula used at Bretton Woods for the calculation of the quotas of the 45 countries that participated in the conference included as economic variables national income, reserves, external trade, and export fluctuations. The quota formula was, and continues to be, directed in the first place at meeting the capital requirements of the institution.
On the occasion of the first reexamination of the Bretton Woods quota formula in the early 1960s, a multi-formula method was devised that included the choice of assigning differing weights for national income, on the one hand, and for current external payments and the variability of current receipts, on the other. With the flexibility that this provided, national income became a major weight in the formula for most industrial and other large countries, while current payments and variability of current receipts became important components for small open economies and for most developing countries. Since the early 1980s, the variables in the quota formula have included GNP, official reserves, current external payments and receipts, the variability of current receipts, and the ratio of current receipts to GNP.
The IMF’s Articles of Agreement provide for general reviews of quotas at intervals of no more than five years. The key issues in these quinquennial reviews include (1) the size of the overall increase, which needs to be considered in the light of the medium-term outlook for the world economy and the role of the IMF in the financing of payments imbalances that may arise; and (2) the distribution of the overall increase between equiproportional increases for all members and selective increases for certain countries—typically rapidly growing economies for whom the “actual quota” is seriously “out of line” with the “calculated quota.”
The scope for selective increases is limited because an increase in the share of total quotas—and, hence, in voting percentage—for one member will automatically reduce the voting power of all other members. Most members—and particularly the developing countries—are anxious not to see their quota share in the total IMF decline and have tended to favor equiproportional increases in quotas.
Over the years, the equiproportional element has averaged about 70 percent of the overall quota increases. An important argument for selective increases—in addition to the matter of equity that is associated with “out-of-lineness”—is the capacity of the candidates for such increases to provide liquidity to the IMF. This was a priority under the Seventh Review in 1978, when the quota share of the major oil-exporting countries was doubled at the expense of that of the industrial countries, that is, without infringing on the quota share of the other developing countries.
Total quotas have diminished rapidly in relation to the size of the world economy and world trade; actual quotas also have trailed increasingly behind calculated quotas. Among the reasons for these developments were (1) the growing access to world capital markets and the increased recourse to floating exchange rates, which have obviated the need for industrial countries to use the IMF’s resources; (2) the rapid dismantling of controls over international capital transactions in advanced and in emerging market economies, together with the expanding access to international capital markets by a growing number of countries; (3) the creation in the late 1980s of a special financing window, separate from the IMF’s quota resources, the Enhanced Structural Adjustment Facility (ESAF), now the Poverty Reduction and Growth Facility (PRGF), which strengthened the IMF’s ability to assist poor developing countries and became the principal instrument for financial assistance—at low cost and for longer terms—to a group of about 80 IMF members.
Since the late 1970s, the quota share of the developing countries has averaged about 37.5 percent and their voting share around 40 percent. The difference is accounted for by the provision in the Articles of Agreement (Article XII, section 5) of 250 basic votes for each member in addition to one vote per SDR 100,000 of its quota. Until the mid-1970s, basic votes as a percentage of total votes remained above 10 percent; since then, however, successive general increases in quotas have reduced the share of basic votes to barely 2 percent in 2002. In the meantime, the number of developing countries in the total IMF membership has continued to grow to 85 percent of the total membership, that is, 159 versus 24 industrial countries.
The developing countries have, repeatedly, urged that a new quota formula, including such elements as population and a poverty index, be devised that would give them a larger voice in the IMF. Moreover, as the industrial countries have ceased using IMF resources, this has diminished the characteristic of the IMF as a “credit union” where members are at times lenders and become borrowers at other times and the rules of the credit union are set by all and for all. This development has affected the balance in the relationship between the two groups of members and—as will be seen in Section IV—it has accentuated the importance of decision making by consensus to protect the interests of the developing countries that are the minority shareholders.
The creditors, from their side, have emphasized the importance of the quota formula in the financing of the IMF, while the IMF’s policy on access to its financial resources was designed to be responsive to the financing needs of members.2 They have also noted that the application of the quota formula had favored the developing countries, as demonstrated by the fact that aggregate “actual quotas” of the developing countries equaled about 60 percent of their “calculated quotas,” while the aggregate “actual quotas” of the industrial countries were only about 32.5 percent of their “calculated quotas.” The industrial countries have further observed that their share in global GNP continues to rise and that variables such as capital movements and access to capital markets, which favor them, should be captured in the quota formula. The developing countries have countered that imprudent lending by financial institutions of industrial countries and myopic reactions of the markets played a big role in the financial crises of the past decade and the ensuing contagion.
Further Work Toward Correcting Distortions and Enhancing Equity in Voting Power
While the developing countries have not formulated a target share of quotas and voting power for their group, it is realistic to assume that they will aim for the highest share that would be compatible with the maintenance of a modest overall majority of voting power in the hands of the industrial countries who are the predominant group of creditor countries. Since the IMF is a financial institution and needs to maintain the confidence of its creditors, it is generally agreed among the membership that the industrial countries, which are the predominant creditors of the IMF, should remain majority shareholders.
The work of the Quota Formula Review Group, a group of external experts that was established in 1999 at the urging of the developing countries, and the further work of the staff have demonstrated that it is not possible, on the basis of the existing quota formula, to obtain calculated quotas that would meaningfully increase the quota share of the developing countries. In other words, there is no quota formula that is sensible from a financial perspective and that would also solve the governance issue.3
Altering the balance in the voting power between the industrial and the developing countries can be achieved either through changes in the distribution of quota shares or through an increase in basic votes or through a combination of both methods. A practical way forward would require a consensual decision taken at the political level on the future voting shares of the two groups of countries, with the share of the industrial countries continuing to be larger than that of the developing countries.
Over the years, various proposals have been examined to increase the number of basic votes, which would be particularly beneficial to the smallest developing countries. Such an increase, however, requires an amendment of the Articles of Agreement and the necessary broad consensus around a proposal has not materialized.
Devising a special quota formula for developing countries—with its own set of variables and their relative weights—would be an alternative approach to raise their quota and voting shares. That could prove to be a complex and possibly divisive process, however, and would also raise new issues.
With regard to the group of industrial countries, the objective of better balance with the developing countries would require a reduction in their aggregate voting and quota shares. It would be an opportunity to tackle the complex issue of the appropriate distribution of quotas and voting power between the European Union, the United States (or North America), and Japan (or the rapidly growing countries of Asia). In the past, the sizable weights attached to foreign trade and official foreign reserves served the Western European countries well when regional integration had not yet proceeded far and they needed large quotas given the very open nature of their economies. Today, however, most of them have one currency, one exchange rate, and one regional balance of payments.
In early 2002, the aggregate voting power of the 15 members of the European Union was 29.9 percent,4 well in excess of the voting power of the United States, 17.2 percent, and of Japan, 6.2 percent—or of the Asian region as a whole, 18.0 percent. In the future, following the lead of the Quota Formula Review Group, GDP is likely to become the prime variable in quota calculations for industrial countries, while the role of reserves and foreign trade would decline. In that connection, it is useful to note that the 1999 GDP of the United States was $9.3 trillion, compared with an aggregate GDP of the 15 members of the European Union of $8.5 trillion and Japan’s GDP of $4.5 trillion.
The gradual reduction, over time, of the share of EU quotas and voting power to bring them better in line with those of the other major industrial countries or areas would be complex. It is accepted that, unless and until a group of members becomes a single country, each would continue as a separate member of the IMF. At the same time, the EU members are, no doubt, reflecting on the significant initiatives that will be required to promote a gradual adjustment. In that connection, the “foreign” character of intra-European trade, particularly that of EMU members, has become open to question. It should also be kept in mind that, for the purpose of IMF quota calculations, a technique exists, and has been used in some cases, to adjust data on current account transactions in some countries to exclude certain receipts and payments in order to avoid exaggerating the size of the external sector. The use of that technique, which could be done in stages, would facilitate a downward adjustment of the 15 EU quotas.
Japan desires to bring its quota and voting power more closely in line with its place in the world economy, even though the stagnation of its economy in the past decade has weakened that claim. The rapidly growing countries of the Asian region as a whole also stress that their quota shares should adequately reflect their present position in the world economy.
Calculations for recent quinquennial quota reviews suggested that the quota share of the United States was broadly in line with its global economic strength. However, following the exceptional growth of the U.S. economy compared with other regions of the world in the 1990s, updated calculations on the basis of the present quota formula may well suggest a higher quota share for the United States. Thus, there appears to be no economic rationale—as suggested by some—for the United States to reduce its weight as the principal shareholder of the IMF.