Quotas - Updated Calculations

Abstract

Quotas - Updated Calculations

I. Introduction1

1. On July 31, 2003, Executive Directors discussed a number of issues related to the distribution of Fund quotas.2 The discussion covered the process for reaching a consensus on new quota formulas, as well as issues involved in revising and updating the formulas to reflect changes in the world economy and measure more adequately countries’ relative positions. It also covered possible approaches to accomplish broad changes in quotas and voting power. Directors agreed that future staff work on quota-related topics should include updating the data used to calculate variables and quota formulas. Many Directors also saw a need for further work on measuring capital flows and financial openness and more generally the availability of capital account data that could be used to capture these concepts.

2. This paper presents the preliminary results of updating the data used for quota calculations through 2002. The paper is organized as follows: Section II provides a stock-taking based on the outcome of the July 2003 Board discussion. Section III discusses the results of updating the data through 2002, including the impact on the distribution of calculated quotas based on the existing five formulas. It also provides an update on data availability for use in a capital stock variable. Detailed information on the methodology used and results of the updated quota calculations are presented in the appendices.

II. Status of Quota Discussions

3. The July 2003 discussion revealed considerable consensus among Executive Directors on a number of issues relating to the distribution of quotas, but important differences remained in several areas:

  • On the quota formulas, the discussion confirmed the broad support for a quota formula that is simpler and more transparent than the traditional formulas.3 In particular, a new formula should be based on an updating of the traditional economic and financial variables, and should comprise at most four variables, including GDP as the most important indicator of countries’ economic size, along with measures of openness, variability of current receipts and net capital flows, and reserves. A number of concerns still exist, however, and views differ on the details of the variables to be included in a new quota formula (Box 2).

  • On correlation among the variables, most Directors saw this as unavoidable, though a few Directors saw merit in further work to try to reduce this correlation. It was acknowledged that the correlation among variables meant that the coefficients attached to each variable cannot be taken to represent each variable’s relative importance in a new quota formula. Accordingly, the precise choice of weights will ultimately require the Executive Board to exercise judgment regarding an outcome that could command wide support.

  • On the distribution of calculated quota shares, it was noted that preliminary results using variables broadly endorsed for inclusion in a new quota formula would not lead to significant changes in calculated quota shares across country groups. A range of views were expressed on the implications of this result, including calls on the one hand for a political decision to secure quota shares that would strengthen the representation of developing countries in the Fund, and on the other hand a caution that changes in quota distribution should not target an a priori distribution between groups of countries. Directors also underscored that a new quota formula would make a significant difference in measuring the out-of-lineness of the quotas of individual countries.

Quota Formulas Discussed by the Executive Board: Specification of Variables

GDP: Directors have generally agreed that the 3-year average of GDP at market exchange rates is the most important variable to be included in any new formula as an indicator of countries' economic size and of their potential to either provide resources to the Fund or use Fund resources. The possibility of using purchasing power parity rather than market exchange rates to derive GDP was discussed in October 2001 when a “majority of the Board considered that market exchange rates should be used to convert GDP to a common currency, so as to obtain the best measure of the total amount of resources generated by a country.” (See Concluding Remarks by the Acting Chair—Alternative Quota Formulas, BUFF/01/171, 11/5/01).

Openness: Most Directors have supported the inclusion of an openness variable, specified as the absolute sum of current receipts and current payments, averaged over a five-year period, to reflect countries' integration in the world economy. Directors have taken note of the data difficulties involved at the current stage in broadening the openness measure by including a variable for financial openness. Some Directors have been concerned about the correlation of openness with other variables and also about the treatment of trade within currency unions.

Variability: To capture countries’ vulnerability to balance of payments shocks in the quota formula (and the attendant potential demand for Fund resources), most Directors have supported the inclusion of a measure of variability of current receipts and net capital flows. Directors have also generally agreed that variability be specified as deviations from a 3-year average, which would serve to smooth trends while adequately capturing the fluctuations in capital flows.

Reserves: Many Directors saw reserves as a useful indicator of members’ financial strength, which should be retained as a variable consistent with recent IMF emphasis on reserve adequacy. A number of other Directors considered that, for many members with access to capital markets, reserves are of declining importance and should be excluded.

On the choice of weights for the variables in quota formulas, many Directors supported the view that the weights should be selected mainly on the basis of judgments about the relative importance of individual variables on economic grounds. It was recognized that this would ultimately require the Executive Board to exercise judgment regarding an outcome that can command wide support.

4. In discussing how best to move forward toward achieving adjustments in quota shares, most Directors saw considerable merit in a package approach that would include elements that would benefit the membership as a whole. Specifically, such a package would involve: a general increase with a relatively large selective element allocated by means of a new quota formula; ad hoc quota increases aimed at addressing the clearest cases of out-of-lineness; and an increase in basic votes aimed at correcting the erosion of the voting power of the smallest members. It was noted, however, that an increase in basic votes would require an amendment of the Articles of Agreement, and that the required majority does not exist at this stage. More generally, most Directors noted that there was no need for a quota increase at present in view of the Fund’s satisfactory liquidity position.

Recent Board Discussions on Quota Formulas

In 1997, the report of the Executive Board to the Board of Governors on the increases in quotas under the Eleventh General Review recommended “that the formulas used to calculate quotas be reviewed promptly after the completion of the Eleventh General Review.” As a first step in this review process, the Managing Director requested a group of external experts to review the existing quota formulas (Appendix I), with a view to providing the IMF Executive Board with an independent report on their adequacy.

The Quota Formula Review Group (QFRG): A group of external experts was convened in 1999 to review the formulas. Richard Cooper, Professor at Harvard University, served as chair. The mandate of the QFRG included the simplification of the formulas, including proposals for changes, as appropriate. The report was expected to serve, together with IMF staff’s comments and further work on the quota formulas, as a basis for the Executive Board’s own consideration of the quota formulas in preparation for the next general review of quotas.

The QFRG recommended a single formula with two variables: GDP and variability of current receipts and net long-term capital flows with a coefficient for GDP twice as large as that for the other variable. During the discussion of the report at a seminar in August 2000, Directors expressed concern that the proposed formula pointed toward a greater concentration of quotas among the largest industrial countries and commissioned further work on this topic.1/ Further discussion based on follow-up work by the staff took place at an Executive Board seminar in October 2001, where it was concurred that further work was needed to develop new quota formulas.2/

Executive Board discussion in June 2002: Building on the work of the QFRG, staff undertook further analytical work on alternative quota formulas as the basis for Board consideration of the variables and specification of a new quota formula. There was general endorsement by the Board of a simpler and more transparent approach in specifying the variables in quota formulas. Directors agreed to limit consideration to three or four variables used in the existing formulas, but updated and modernized. These variables include GDP, measures of openness, variability of current receipts and net capital flows, and possibly international reserves. Although no consensus emerged, many Directors suggested that GDP, as the most important variable, should have the highest weight. Options to modernize the formulas by including measures of capital flows were discussed and many Directors continued to support including a measure of variability of current receipts and net capital flows to reflect countries’ balance of payments vulnerability in the quota formulas.

Executive Board discussion in July 2003: Directors confirmed the broad support for a formula that is simpler and more transparent than the traditional formulas (a summary of these discussions is provided in the main text).

1/Report to the IMF Executive Board of the Quota Formula Review Group (EBAP/00/52, 5/01/00 and Supplements 1–3), Staff Commentary on the External Review of the Quota Formulas (EBAP/00/66, 6/07/00). External Review of Quota Formulas—Quantification (EBAP/01/29, 4/13/01). The papers are available on the Fund’s external web site.2/IMF Board Informally Discusses Quota Formulas, PIN No. 01/118, November 7, 2001.

III. Updated Quota Calculations

5. Staff has prepared a preliminary update of the data set used for illustrative quota calculations for 184 members through 2002. 4 The previous calculations used data through 1999. The updated data set for individual members is presented in the Statistical Appendix both for the traditional variables used in the existing five formulas,5 and for the variables discussed recently by the Executive Board.6 These data will be revised as further information becomes available.

  • The data are drawn mainly from International Financial Statistics (IFS) and the World Economic Outlook (WEO). Missing data series are computed based on the Country Desk Data database, staff reports, and in a few instances, data from the Eleventh Quota Review.

  • As in the earlier papers, some data adjustments such as exclusion of reexports, international banking interest, and official transfers from current account data have not been made.7

6. The existing five formulas were used with the updated data set to estimate calculated quotas and quota shares for all members. The results for the major country groups are summarized in Table 1, while the data for individual members are shown in Tables A1 and A2 (Statistical Appendix Tables).

Table 1.

Distribution of Quotas and of Updated Quota Formula Variables 1/

(In percent)

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Sources: International Financial Statistics ; World Economic Outlook; and staff estimates.

Individual country shares are provided in the Statistical Appendix.

For the four countries that have not yet consented to and paid for their quota increases, Eleventh Review proposed quotas are used.

Based on 1990-2002 data and computed as traditionally specified, except that current receipts and payments have not been adjusted for official transfers, reexports, and international banking interest.

Based on 1987-1999 data and computed as traditionally specified, except that current receipts and payments have not been adjusted for official transfers, reexports, and international banking interest. See Alternative Quota Formulas--Further Considerations (SM/02/132, 5/6/02), Table 4.

Average sum of current receipts and payments, not adjusted for official transfers, reexports, and international banking interest.

Variability of current receipts and net capital inflows, measured as a standard deviation from centered 3-year trend.

Average international reserves based on end-month data.

WEO classification except inclusion of Korea and Singapore under Asia instead of “other advanced”.

Including Korea and Singapore.

Table A1.

Quotas and Updated Quota Variables by Member

(In percent unless otherwise noted)

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For the four countries that have not yet consented to and paid for their quota increases, Eleventh Review proposed quotas are used.

Based on 1990-2002 data and computed as traditionally specified, except that current receipts and payments have not been adjusted for official transfers, reexports, and international banking interest.

Average sum of current receipts and payments, not adjusted for official transfers, reexports, and international banking interest.

Variability of current receipts and net capital inflows, measured as a standard deviation from centered 3-year trend.

Average international reserves based on end-month data.

Table A2.

Data Used for Quantification of Existing Five Quota Formulas

(In millions of SDRs)

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For the four countries that have not yet consented to and paid for their quota increases, Eleventh Review proposed quotas are used.

Traditional variables used in the existing five formulas.