A. Stocktaking

5. The discussions to date have helped clarify some broad areas of agreement and also highlighted the key outstanding differences. On the former, there is agreement that the formula should be simple and transparent, consistent with the multiple roles of quotas, result in calculated quota shares that are broadly acceptable, and be feasible to implement statistically. Progress has also been made in narrowing the range of variables to be considered and identifying the impact of different combinations of variables and weights on members’ calculated quota shares.

6. On the quota variables, much of the discussion has centered on modernized versions of the four traditional variables, but other possibilities have also been considered. While all issues remain open at this stage, the remainder of this section attempts briefly to take stock of the discussions to date as a basis for the simulations described in the next section:

• GDP Conversion: While its precise weight still needs to be determined, it seems widely agreed that GDP should be the most important variable in a new formula. The main area of difference lies over whether it should be converted at market exchange rates or PPP. The last staff paper explored the conceptual issues involved, and illustrated the impact of including a blended variable involving a combination of GDP converted at market rates and PPP, noting that the financial role of quotas suggests that the former should continue to play an important role in a blended variable. Sharply differing views have been expressed on the appropriateness of employing a blended GDP variable in the formula. The simulations presented below illustrate the use of both market rate GDP and a blended variable with a minority weight on PPP GDP.

• Period for Measuring GDP: A separate question raised at the last discussion was whether adjustments should be made for structural breaks resulting from, say, balance of payments crises or civil conflict. The Board had previously agreed that GDP should be measured as a three-year average rather than a single year as in the existing formulas in order to capture the latest developments while reducing potential distortions from short-term volatility.⁵ The main options to address the issue of structural breaks would seem to be either adopting a longer average such as five years, or seeking to exclude outlier years according to some predetermined rule. On further reflection, staff believes that either option would have significant disadvantages, as the former would make the GDP data less reflective of current economic developments, while the latter would add a significant new element of complexity and judgment to the measure. Accordingly, no change to the three-year average is proposed in this paper.

• Openness: There also seems to be wide support for retaining an openness variable in the new quota formula, notwithstanding concerns about possible distortions associated with its measurement on a gross basis. In this context, some have continued to argue that intra-currency union flows should be excluded from the measure. The last staff paper illustrated the potential impact of such an adjustment, and also noted the difficult conceptual and data issues involved. As also discussed previously, data limitations would seem at this stage to preclude development of an alternative openness measure based on value added, and neither of these options is considered further in this paper.

• Financial Openness: Some continue to favor broadening the openness measure to give a greater weight to financial openness. As discussed in the last staff paper, there seem to be sound conceptual grounds for doing this, but it also raises difficult data issues because comprehensive data on the most promising measure—IIP—are currently only available for about half of the membership. That paper also discussed options for proxying IIP, including the possible use of investment income.⁶ This paper includes simulations with and without such a proxy pending further guidance from the Board on whether to pursue explicit inclusion of a measure of financial openness at this stage.

• Variability: Variability is seen by many as playing an important role in a new quota formula to capture members’ potential need for Fund resources. It was previously agreed that the traditional measure should be updated to cover both current receipts and net capital flows. However, some have raised concerns that the global share of advanced economies in this updated measure remains relatively high (63 percent based on data through 2005) and asked for further work on the scope for modifying the variable to make it more reflective of members’ likely need to draw on the Fund. Staff has examined a range of options for amending or redefining the measure of variability and the preliminary results of this work are reported in Appendix I. In general, this work points to the continued need for a measure that relates to economic size; this, together with the right of all members to draw on the Fund in case of balance of payments need, may limit to some degree the scope for modifications that result in major changes in global shares of this measure. Modifications that would lead to more moderate changes in shares are also examined. There are pros and cons with all of these options, and no further changes to the definition of variability are proposed in this paper pending further Board guidance.

• Reserves: While some continue to favor inclusion of reserves as an indicator of financial strength and ability to contribute to the Fund’s finances, others have noted that the relevance of this indicator may have declined over time, and have also raised concerns about the potential perverse incentives associated with excess reserve accumulation. The latter led to proposals for a cap on the reserves variable, and a number of options for implementing such a cap were considered in the last staff paper. As noted in that paper, the application of a reserves cap would raise a number of difficult issues, and this proposal is not pursued further here. Instead, reserves are included in the simulations below with a relatively low weight.

• Possible new variables: Suggestions were made to include population in the new formula, possibly with a low weight, as a measure of members’ relative stakes in the international public goods provided by the Fund. This option was explored in the last staff paper but did not appear to attract significant support. The last paper also explored a proposal to develop a new measure of financial contributions to the Fund, noting that financing considerations have long played a role in determining quota increases for individual members. However, the paper also noted that explicitly including such a variable in the quota formulas would raise a number of practical difficulties, and that it may be preferable to continue to take account of such factors outside of the quota formula itself. While these issues remain open, they are not included in the simulations presented below.

7. In addition to the quota variables, other issues to be agreed include the weights to be applied in each case and how they should be combined. Consistent with the goal of simplicity and transparency, there seems to be a broad consensus that the variables in the new formula should be expressed in terms of shares in global totals rather than nominal levels as in the existing quota formulas, and that a linear combination of shares would be preferable to a multiplicative combination. However, a further open issue is whether a compression factor should be included in order to moderate somewhat the effects of the high correlation of size-related variables that tends to favor large economies.

B. Illustrative Simulations

8. In line with the above, this section presents a range of illustrative simulations of a new quota formula based on updated data through 2005. As noted in Quotas—Updated Calculations and Data Adjustments (2006), the data update tends in general to result in a modest increase in the aggregate calculated quota share of developing countries relative to that using the previous database. However, the new data do not change the broad conclusions drawn in previous papers about the effects of different combinations of variables and variable weights. Therefore, rather than repeat the full range of simulations shown previously, this section presents a more limited set, including some additional simulations drawing on the discussions to date. Again, it should be emphasized that the simulations are intended to be illustrative, and not to prejudge the range of options that could be considered:

• Table 1 presents simulations based on the four traditional variables updated and modernized, including GDP at market exchange rates. In all cases, GDP has the largest weight, and as suggested by some Directors, the simulations include formulations with a higher weight on variability than in the baseline scenario presented in previous papers. The last simulation illustrates the effects of incorporating a proxy for financial openness in the openness variable.

• Table 2 focuses on simulations incorporating either a blended GDP variable or compression, both of which have been illustrated previously, as well as two new simulations showing the potential effects of combining moderate elements of both factors, which some have suggested could be a way of balancing the divergent views that have been expressed to date.⁷

Table 1

Calculated Quota Shares Based on a Linear Formula with Current Quota Variables and Financial Openness ^{1/ 2/}(in percent)

Source: Finance Department.

1/

Calculated as the sum of variable weights multiplied with a country’s share in the global total of the respective variables.

2/

Based on 1993-2005 data. Reflects the impact of adjustments to current receipts and payments for re-exports, international banking interest, and non-monetary gold.

3/

For the three countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used. Also includes Montenegro, which became a member on January 18, 2007 (pre-Singapore shares have been adjusted accordingly).

4/

Includes ad hoc increases for China, P.R., Korea, Mexico, and Turkey.

5/

Trade openness and financial openness are blended in equal proportion. Financial openness is measured as average investment income in the current account adjusted for international banking interest. Trade openness is the average sum of current receipts and payments, excluding investment income, adjusted for re-exports and non-monetary gold.

6/

Including Korea and Singapore.

7/

PRGF-eligible countries.

Table 1

Calculated Quota Shares Based on a Linear Formula with Current Quota Variables and Financial Openness ^{1/ 2/}(in percent)

	Actual Quotas 3/		Existing Five Formulas	GDP 50% Openness 30% Variability 15% Reserves 5%	GDP 50% Openness 25% Variability 20% Reserves 5%	GDP 45% Openness 25% Variability 25% Reserves 5%	GDP 50% Openness Blend 30% 5/ Variability 15% Reserves 5%
	Pre First Round Increases	Post First Round Increases 4/
Advanced economies	61.6	60.5	65.6	69.6	69.3	68.7	71.1
Major advanced economies	46.0	45.2	45.9	53.6	53.4	52.4	54.4
Of which: US	17.4	17.1	16.3	22.2	22.5	22.0	23.0
Other advanced economies	15.6	15.3	19.7	16.0	15.9	16.3	16.7
Developing countries	30.9	32.1	28.6	25.4	25.6	26.1	24.3
Africa	5.5	5.4	2.4	2.1	2.2	2.3	2.0
Asia 6/	10.3	11.5	16.2	13.7	13.7	13.8	13.1
Middle East, Malta & Turkey	7.6	7.6	4.8	4.0	4.1	4.2	3.7
Western Hemisphere	7.5	7.6	5.2	5.5	5.7	5.8	5.4
Transition economies	7.6	7.4	5.7	5.0	5.1	5.2	4.6
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0
Memorandum Item:
EU 27	32.9	32.4	37.8	33.9	33.3	33.3	34.4
LI Cs 7/	7.5	7.4	3.6	3.5	3.5	3.5	3.2

Source: Finance Department.

1/

Calculated as the sum of variable weights multiplied with a country’s share in the global total of the respective variables.

2/

Based on 1993-2005 data. Reflects the impact of adjustments to current receipts and payments for re-exports, international banking interest, and non-monetary gold.

3/

For the three countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used. Also includes Montenegro, which became a member on January 18, 2007 (pre-Singapore shares have been adjusted accordingly).

4/

Includes ad hoc increases for China, P.R., Korea, Mexico, and Turkey.

5/

Trade openness and financial openness are blended in equal proportion. Financial openness is measured as average investment income in the current account adjusted for international banking interest. Trade openness is the average sum of current receipts and payments, excluding investment income, adjusted for re-exports and non-monetary gold.

6/

Including Korea and Singapore.

7/

PRGF-eligible countries.

View Table

Table 1

Calculated Quota Shares Based on a Linear Formula with Current Quota Variables and Financial Openness ^{1/ 2/}(in percent)

	Actual Quotas 3/		Existing Five Formulas	GDP 50% Openness 30% Variability 15% Reserves 5%	GDP 50% Openness 25% Variability 20% Reserves 5%	GDP 45% Openness 25% Variability 25% Reserves 5%	GDP 50% Openness Blend 30% 5/ Variability 15% Reserves 5%
	Pre First Round Increases	Post First Round Increases 4/
Advanced economies	61.6	60.5	65.6	69.6	69.3	68.7	71.1
Major advanced economies	46.0	45.2	45.9	53.6	53.4	52.4	54.4
Of which: US	17.4	17.1	16.3	22.2	22.5	22.0	23.0
Other advanced economies	15.6	15.3	19.7	16.0	15.9	16.3	16.7
Developing countries	30.9	32.1	28.6	25.4	25.6	26.1	24.3
Africa	5.5	5.4	2.4	2.1	2.2	2.3	2.0
Asia 6/	10.3	11.5	16.2	13.7	13.7	13.8	13.1
Middle East, Malta & Turkey	7.6	7.6	4.8	4.0	4.1	4.2	3.7
Western Hemisphere	7.5	7.6	5.2	5.5	5.7	5.8	5.4
Transition economies	7.6	7.4	5.7	5.0	5.1	5.2	4.6
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0
Memorandum Item:
EU 27	32.9	32.4	37.8	33.9	33.3	33.3	34.4
LI Cs 7/	7.5	7.4	3.6	3.5	3.5	3.5	3.2

Source: Finance Department.

1/

Calculated as the sum of variable weights multiplied with a country’s share in the global total of the respective variables.

2/

Based on 1993-2005 data. Reflects the impact of adjustments to current receipts and payments for re-exports, international banking interest, and non-monetary gold.

3/

For the three countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used. Also includes Montenegro, which became a member on January 18, 2007 (pre-Singapore shares have been adjusted accordingly).

4/

Includes ad hoc increases for China, P.R., Korea, Mexico, and Turkey.

5/

Trade openness and financial openness are blended in equal proportion. Financial openness is measured as average investment income in the current account adjusted for international banking interest. Trade openness is the average sum of current receipts and payments, excluding investment income, adjusted for re-exports and non-monetary gold.

6/

Including Korea and Singapore.

7/

PRGF-eligible countries.

Table 2

Calculated Quota Shares Based on a Formula with a GDP Blend, Compression, and Combinations ^{1/ 2/}

(in percent)

Source: Finance Department.

1/

Calculated as the sum of variable weights multiplied with a country’s share in the global total of the respective variables.

2/

Based on 1993-2005 data. Reflects the impact of adjustments to current receipts and payments for re-exports, international banking interest, and non-monetary gold.

3/

For the three countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used. Also includes Montenegro, which became a member on January 18, 2007 (pre-Singapore shares have been adjusted accordingly).

4/

Includes ad hoc increases for China, P.R., Korea, Mexico, and Turkey.

5/

GDP is blended using 75 percent GDP weighted at market exchange rates and 25 percent GDP weighted at PPP exchange rates. PPP data were retrieved from the WEO database for 176 countries. For nine countries with no WEO data, PPP GDP was estimated based on the countries’ share in global GDP at market rates.

6/

The compression (K) raises the quota formula to the power of K.

7/

Including Korea and Singapore.

8/

PRGF-eligible countries.

Table 2

Calculated Quota Shares Based on a Formula with a GDP Blend, Compression, and Combinations ^{1/ 2/}

(in percent)

	Actual Quotas 3/		Existing Five Formulas	GDP Blend 50% 5/ Openness 30% Variability 15% Reserves 5%	GDP 50% Openness 30% Variability 15% Reserves 5% K=0.95 6/	GDP 50% Openness 30% Variability 15% Reserves 5% K=0.90 6/	GDP Blend 50% 5/ Openness 30% Variability 15% Reserves 5% K=0.95 6/	GDP Blend 50% 5/ Openness 25% Variability 20% Reserves 5% K=0.95 6/
	Pre First Round Increases	Post First Round Increases 4/
Advanced economies	61.6	60.5	65.6	66.4	67.5	65.2	64.5	64.1
Major advanced economies	46.0	45.2	45.9	51.0	50.6	47.5	48.2	48.0
Of which: US	17.4	17.1	16.3	21.1	20.1	18.1	19.1	19.4
Other advanced economies	15.6	15.3	19.7	15.4	16.9	17.6	16.3	16.2
Developing countries	30.9	32.1	28.6	28.3	27.0	28.7	29.7	30.0
Africa	5.5	5.4	2.4	2.4	2.5	3.0	2.8	2.8
Asia 5/	10.3	11.5	16.2	16.1	14.1	14.4	16.1	16.1
Middle East, Malta & Turkey	7.6	7.6	4.8	4.1	4.4	4.9	4.5	4.6
Western Hemisphere	7.5	7.6	5.2	5.9	6.0	6.5	6.3	6.4
Transition economies	7.6	7.4	5.7	5.3	5.5	6.1	5.8	5.9
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
Memorandum Item:
EU 27	32.9	32.4	37.8	32.6	34.3	34.6	33.1	32.5
LI Cs 8/	7.5	7.4	3.6	4.4	4.0	4.5	4.8	4.9

Source: Finance Department.

1/

Calculated as the sum of variable weights multiplied with a country’s share in the global total of the respective variables.

2/

Based on 1993-2005 data. Reflects the impact of adjustments to current receipts and payments for re-exports, international banking interest, and non-monetary gold.

3/

For the three countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used. Also includes Montenegro, which became a member on January 18, 2007 (pre-Singapore shares have been adjusted accordingly).

4/

Includes ad hoc increases for China, P.R., Korea, Mexico, and Turkey.

5/

GDP is blended using 75 percent GDP weighted at market exchange rates and 25 percent GDP weighted at PPP exchange rates. PPP data were retrieved from the WEO database for 176 countries. For nine countries with no WEO data, PPP GDP was estimated based on the countries’ share in global GDP at market rates.

6/

The compression (K) raises the quota formula to the power of K.

7/

Including Korea and Singapore.

8/

PRGF-eligible countries.

View Table

Table 2

Calculated Quota Shares Based on a Formula with a GDP Blend, Compression, and Combinations ^{1/ 2/}

(in percent)

	Actual Quotas 3/		Existing Five Formulas	GDP Blend 50% 5/ Openness 30% Variability 15% Reserves 5%	GDP 50% Openness 30% Variability 15% Reserves 5% K=0.95 6/	GDP 50% Openness 30% Variability 15% Reserves 5% K=0.90 6/	GDP Blend 50% 5/ Openness 30% Variability 15% Reserves 5% K=0.95 6/	GDP Blend 50% 5/ Openness 25% Variability 20% Reserves 5% K=0.95 6/
	Pre First Round Increases	Post First Round Increases 4/
Advanced economies	61.6	60.5	65.6	66.4	67.5	65.2	64.5	64.1
Major advanced economies	46.0	45.2	45.9	51.0	50.6	47.5	48.2	48.0
Of which: US	17.4	17.1	16.3	21.1	20.1	18.1	19.1	19.4
Other advanced economies	15.6	15.3	19.7	15.4	16.9	17.6	16.3	16.2
Developing countries	30.9	32.1	28.6	28.3	27.0	28.7	29.7	30.0
Africa	5.5	5.4	2.4	2.4	2.5	3.0	2.8	2.8
Asia 5/	10.3	11.5	16.2	16.1	14.1	14.4	16.1	16.1
Middle East, Malta & Turkey	7.6	7.6	4.8	4.1	4.4	4.9	4.5	4.6
Western Hemisphere	7.5	7.6	5.2	5.9	6.0	6.5	6.3	6.4
Transition economies	7.6	7.4	5.7	5.3	5.5	6.1	5.8	5.9
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
Memorandum Item:
EU 27	32.9	32.4	37.8	32.6	34.3	34.6	33.1	32.5
LI Cs 8/	7.5	7.4	3.6	4.4	4.0	4.5	4.8	4.9

Source: Finance Department.

1/

Calculated as the sum of variable weights multiplied with a country’s share in the global total of the respective variables.

2/

Based on 1993-2005 data. Reflects the impact of adjustments to current receipts and payments for re-exports, international banking interest, and non-monetary gold.

3/

For the three countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used. Also includes Montenegro, which became a member on January 18, 2007 (pre-Singapore shares have been adjusted accordingly).

4/

Includes ad hoc increases for China, P.R., Korea, Mexico, and Turkey.

5/

GDP is blended using 75 percent GDP weighted at market exchange rates and 25 percent GDP weighted at PPP exchange rates. PPP data were retrieved from the WEO database for 176 countries. For nine countries with no WEO data, PPP GDP was estimated based on the countries’ share in global GDP at market rates.

6/

The compression (K) raises the quota formula to the power of K.

7/

Including Korea and Singapore.

8/

PRGF-eligible countries.

9. The broad results of these simulations for the calculated quota shares of major country groups are similar to those discussed previously (the results for individual members are presented in a supplement to this paper). In all the variants of the simple linear formula with GDP converted at market exchange rates, the aggregate calculated quota share of advanced countries increases relative to the existing quota formulas, while that of developing countries declines. These changes are slightly less pronounced in the simulations with a higher weight on variability, and are more pronounced when the openness variable is explicitly broadened to include financial openness.⁸ They are also moderated somewhat in the scenarios that employ either a GDP blend (with a minority weight on PPP) or a modest element of compression. The only simulations in which the calculated quota share of developing countries as a whole increases are those employing a somewhat higher degree of compression or a combination of both a GDP blend and compression. As discussed in previous papers, however, this result can also be obtained through a higher weight on PPP GDP in a blended GDP variable.

A. Key Second Round Parameters

10. At this point in the process, it may be useful to begin to consider other elements that will need to be decided in moving forward with the second round of ad hoc increases. These elements include the overall size of the second round ad hoc increases, the way it will be allocated, and the size of the increase in basic votes. Consideration of these elements may help to advance the broader reform discussions. Also, simulation of alternative reform packages may serve to bring out the implications of alternative quota formulas for the distribution of actual quota shares following the second round.

Size of the second round

11. on the size of the second round ad hoc quota increases, the Resolution indicated that the second round should aim to achieve a significant further alignment of members’ quotas with their relative positions in the world economy, based on the new quota formula. It was also envisaged that a broader range of countries would participate in the second round than the narrow group included in the first round. The size of the second round increase is, of course, a question for the membership to decide, and on which little guidance has so far been provided. For purely illustrative purposes, the simulations presented in this paper use second round increases of 5.6, 8.1, and 10.5 percent, which—when combined with the first round increase of 1.8 percent—imply overall quota increases of 7.5, 10, and 12.5 percent, respectively. Increases of different sizes to those presented here are of course possible.

Eligibility and allocation mechanism

12. Various issues related to the eligibility for, and allocation of, increases will also need to be considered. For illustrative purposes, and as a starting point for the discussions, most of the simulations in this paper assume that all members that are under-represented according to a new formula are considered eligible for quota increases—that is, eligibility is defined solely on the basis of the new quota formula. With the exception of members that may choose to forego some of the increase for which they may be eligible, increases are allocated on the same basis as for the first round. That is, increases for individual members are determined such that each member’s out-of-lineness (as measured by the gap between calculated and actual quota share) is reduced by the same proportion.

13. Other approaches that go beyond simple application of the formula could also be considered, with past practice providing some precedent for this. In some instances in the past, this has involved the use of an additional filter. For example, for the first round of ad hoc increases, member countries needed to be significantly out-of-line according to the existing quota formulas as well as under-represented with respect to all four variables that the Executive Board was considering for inclusion in the new formula. Also, in previous quota reviews, ad hoc quota increases have at times been restricted to specific groups (e.g., developing countries) or differentiated between groups (e.g., oil producers versus others).

14. one such approach would be to limit second round increases to members whose quotas are most out of line—for example, whose ratio of calculated to actual quota shares exceeded a chosen threshold. Alternatively, members whose quotas are most out-of-line could receive larger proportional reductions in their misalignment than less misaligned members.

15. A further alternative that has recently been suggested is a supplementary filter based on contributions to PPP-weighted real global GDP growth.⁹ The filter would seek to capture many of those countries whose weight and role in the world economy have been increasing in recent times, including countries that may be somewhat over-represented under the new formula now but are unlikely to remain so in the future. This would be consistent with the reform objective, as emphasized in the April 2007 IMFC Communiqué, of increasing the share of the Fund’s most dynamic members. Such a filter could be used to restrict the list of eligible countries to those that have been making a strong contribution to global growth and that are either under-represented according to the formula or whose degree of over-representedness is not too large. Using a filter based on contributions to global growth to restrict eligibility would tend to filter out smaller economies but would achieve a more significant realignment of the shares of countries that remain. Alternatively, such a filter could also be used to add countries to the list of eligible members that otherwise would be limited to those that are under-represented according to the formula.

Treatment of members receiving first round increases

Consideration will also need to be given to the treatment of the ad hoc increases agreed for four members in the first round. These increases were intended as essentially a down payment on a larger reform that would include ad hoc increases for a broader list of members. Moreover, the four countries in question were chosen not because they were the most under-represented, though they were clearly among that group, but rather because they could be viewed as unambiguously under-represented taking account of both the existing quota formulas and their relative shares in the four main quota variables being considered for inclusion in a new formula, as noted above. Given these considerations, and to ensure even-handed treatment across members, it would seem reasonable when considering a broader list of ad hoc increases in the second round to take account of the increases already agreed in Singapore. In the simulations below, members’ eligibility for an increase and the uniform reduction factor are determined based on a comparison of calculated quota shares under a new formula with actual quota shares prior to the Singapore increases. In these simulations, the four members receiving increases in Singapore obtain additional increases to the extent required to deliver the same overall proportionate reduction. Other approaches to a uniform reduction are also possible, as noted above.

Foregoing

16. A further factor that will influence the degree of adjustment in quota shares in the second round is the extent to which some members that are eligible for second round increases may be willing to forego part or all of those increases. In its report to Governors, the Executive Board noted that large advanced economies that already have sizable voting power in the Fund may be willing to consider foregoing, or at least limiting, the increases they request in the second round. This would augment the quota increases available for other eligible members for a given aggregate increase in quotas.¹⁰ The United States has already stated that it would be willing to limit any second round increase that it would be entitled to under a new formula to a level that would restore the US voting share to its pre-Singapore level, and other advanced countries may also be willing not to take up the full amount to which they might otherwise be eligible.

17. Particularly for the Fund’s largest members, the extent of foregoing can make a significant difference in terms of the overall adjustment in quota shares that is possible for any given aggregate second round increase. Any decision on foregoing is of course for individual members to make, and limited guidance on this issue has been provided to date. Accordingly, for purely illustrative purposes, the simulations presented in this paper use the simplifying assumption that G-7 countries will limit any second round quota increases that they are entitled to under a new quota formula to a level that restores their pre-Singapore voting shares. If a G-7 country is not eligible for a second round increase or if that increase is not large enough to affect the desired restoration, the country in question does not have its pre-Singapore voting share restored under this assumption. Other approaches are of course possible, including that the G-7 as a group may agree to limit its take up to a particular level, with some redistribution within the group.¹¹

Size of increase in basic votes

18. Under the Board of Governors Resolution, basic votes are to be at least doubled and, at a minimum, would need to protect the voting share of low-income countries. The increase in basic votes is an integral part of the quota and voice reform, with the Resolution stipulating that the second round quota increases shall not become effective until the amendment of the Articles of Agreement related to basic votes has entered into force. As such, the Board will need to consider the scale of the increase in basic votes along with that of the second round increase. For purely illustrative purposes, in these simulations basic votes are either doubled (to 500 per member) or increased further to preserve the voting power of low-income countries as a whole at its pre-Singapore level.¹²

B. Second Round Simulations

19. The simulations presented in this section seek to provide a very preliminary indication of possible outcomes for the second round based on the above considerations. As noted, they are purely illustrative and intended solely to help advance the discussions on the new quota formula. Tables 3-5 present the results in terms of voting shares for the main country groups of three different illustrative sizes of the second round (corresponding to a total quota increase in the two rounds combined in the range of 7.5-12.5 percent).¹³ In each case, simulations are presented using six alternative formulations for a new quota formula that are drawn from the scenarios considered earlier in this paper. As discussed above, the simulations assume: (a) that second round increases are allocated to all under-represented members to achieve a uniform proportional reduction in out-of-lineness, based on pre-Singapore quota shares and taking into account the first round ad hoc increases provided to four members; (b) that basic votes are doubled, except where a larger increase is needed to protect the voting shares of low-income countries; and (c) foregoing by eligible G-7 members of any increases that would take them beyond their pre-Singapore voting shares.

20. Several very preliminary conclusions may be drawn from these simulations:

• First, while the simulations imply significant increases in shares for individual countries that are eligible for ad hoc quota increases, the results for major country groups generally show little change or a modest increase in the voting share of developing countries as a whole in the second round. This partly reflects that, even with foregoing, major advanced countries tend to take up a significant part of the second round increase, and also that a number of smaller advanced countries would be eligible for ad hoc increases under the allocation mechanism assumed in these simulations.¹⁴ A larger shift in aggregate shares would likely require a greater degree of foregoing or a different allocation mechanism to that illustrated here.

• Second, there tends to be more room for developing countries to gain in share in those scenarios where the overall size of the second round quota increase is larger.

• Third, while the choice of quota formula has a significant effect on the distribution of members’ calculated quota shares, as discussed earlier, its impact on actual voting shares after the second round is more muted based on the assumptions used in these scenarios. In general, however, the gain in the share of developing countries is greatest in those scenarios with a formula that utilizes a blended GDP variable or that combines blended GDP with compression.

• Fourth, a relatively large number of countries would be eligible for ad hoc quota increases based purely on the criterion of under-representedness using the new formula, though the precise number and composition of these countries can vary significantly across the different simulations. The number of qualifying countries is largest in the scenarios involving compression. Also, for a given second round, the extent of the proportionate reduction in out-of-lineness that is possible varies inversely with the number of eligible members.

21. The alternative approach discussed above of using a supplementary filter to determine eligibility for the second round is illustrated in Table 6. The scenario uses a new formula based on market rate GDP with weights of 50/30/15/5 and is based on an overall quota increase at the lower end of the above range. The filter has been calculated to capture countries that have contributed more than 0.5 percent to PPP-weighted real global growth during the period 2001-05 (see text table). These parameters have been chosen to make the simulation similar to the approach suggested by one participant at the G-20 meeting in Istanbul on July 1. Under this approach, the filter is used both to exclude countries that do not meet the above test, as well as to add additional countries that meet the test and are not over-represented by more than 50 percent using the above formula.

Table 6

Second Round Simulation—Illustration of an Alternative Approach Involving a Supplementary Filter ^1/

(in percent)

Source: Finance Department.

1/

Based on an approach outlined by a participant during a G-20 deputies meeting in Istanbul on July 1, 2007.

2/

Includes Montenegro, which became a member on January 18, 2007 (pre-Singapore shares have been adjusted accordingly).

3/

Includes ad hoc increases for China, P.R., Korea, Mexico, and Turkey.

4/

For the three countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

5/

Based on 1993-2005 data. Reflects the impact of adjustments to current receipts and payments for re-exports, international banking interest, and non-monetary gold.

6/

0.5*GDP + 0.3*Openness + 0.15*Variability + 0.05*Reserves.

7/

Under this scenario, members are eligible for a quota increase if i) they contributed more than 0.5% to global GDP growth measured at PPP exchange rates during the period 2001-05 and ii) they are either under-represented or over-represented by not more than 50 percent under the new quota formula. They also assume: a) a 5.6 percent increase (total first and second round increase of 7.5 percent); b) a doubling of basic votes; c) foregoing by eligible G-7 countries (US, Japan, Germany, Italy) to their pre-Singapore voting shares; d) other under-represented eligible countries’ out-of-lineness is reduced at a uniform proportional rate; and e) over-represented eligible members receive a 5% increase above their pre-Singapore voting shares (except the UK, Canada, and France).

8/

Including Korea and Singapore.

9/

Uniform proportional reduction in the gap between calculated and actual quota shares, applied to underrepresented countries, using the formula indicated above.

10/

PRGF-eligible countries.

Table 6

Second Round Simulation—Illustration of an Alternative Approach Involving a Supplementary Filter ^1/

(in percent)

	Voting Share 2/		Actual Quota Share 2/ 4/		Calculated Quota Share 5/		Second Round Simulation 7/
	Pre First Round Increases	Post First Round Increases 3/	Pre First Round Increases	Post First Round Increases 3/	Existing Five Formulas	New Formula 6/	Quota Share	Voting Share
Advanced economies	60.6	59.5	61.6	60.5	65.6	69.6	60.8	59.0
Major advanced economies	45.1	44.4	46.0	45.2	45.9	53.6	45.7	44.1
Of which: US	17.0	16.7	17.4	17.1	16.3	22.2	17.7	17.0
Other advanced economies	15.4	15.2	15.6	15.3	19.7	16.0	15.1	15.0
Developing countries	31.7	32.9	30.9	32.1	28.6	25.4	32.1	33.5
Africa	6.0	5.9	5.5	5.4	2.4	2.1	5.1	6.0
Asia 8/	10.4	11.6	10.3	11.5	16.2	13.7	12.2	12.3
Middle East, Malta & Turkey	7.6	7.6	7.6	7.6	4.8	4.0	7.3	7.4
Western Hemisphere	7.7	7.8	7.5	7.6	5.2	5.5	7.5	7.9
Transition economies	7.7	7.6	7.6	7.4	5.7	5.0	7.1	7.4
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
Memorandum Item:
No. of countries receiving ad hoes							19	19
Uniform reduction factor 9/							40.0	40.0
EU 27	32.5	32.0	32.9	32.4	37.8	33.9	32.0	31.3
LI Cs 10/	8.3	8.1	7.5	7.4	3.6	3.5	7.3	8.6

Source: Finance Department.

1/

Based on an approach outlined by a participant during a G-20 deputies meeting in Istanbul on July 1, 2007.

2/

Includes Montenegro, which became a member on January 18, 2007 (pre-Singapore shares have been adjusted accordingly).

3/

Includes ad hoc increases for China, P.R., Korea, Mexico, and Turkey.

4/

For the three countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

5/

Based on 1993-2005 data. Reflects the impact of adjustments to current receipts and payments for re-exports, international banking interest, and non-monetary gold.

6/

0.5*GDP + 0.3*Openness + 0.15*Variability + 0.05*Reserves.

7/

Under this scenario, members are eligible for a quota increase if i) they contributed more than 0.5% to global GDP growth measured at PPP exchange rates during the period 2001-05 and ii) they are either under-represented or over-represented by not more than 50 percent under the new quota formula. They also assume: a) a 5.6 percent increase (total first and second round increase of 7.5 percent); b) a doubling of basic votes; c) foregoing by eligible G-7 countries (US, Japan, Germany, Italy) to their pre-Singapore voting shares; d) other under-represented eligible countries’ out-of-lineness is reduced at a uniform proportional rate; and e) over-represented eligible members receive a 5% increase above their pre-Singapore voting shares (except the UK, Canada, and France).

8/

Including Korea and Singapore.

9/

Uniform proportional reduction in the gap between calculated and actual quota shares, applied to underrepresented countries, using the formula indicated above.

10/

PRGF-eligible countries.

View Table

Table 6

Second Round Simulation—Illustration of an Alternative Approach Involving a Supplementary Filter ^1/

(in percent)

	Voting Share 2/		Actual Quota Share 2/ 4/		Calculated Quota Share 5/		Second Round Simulation 7/
	Pre First Round Increases	Post First Round Increases 3/	Pre First Round Increases	Post First Round Increases 3/	Existing Five Formulas	New Formula 6/	Quota Share	Voting Share
Advanced economies	60.6	59.5	61.6	60.5	65.6	69.6	60.8	59.0
Major advanced economies	45.1	44.4	46.0	45.2	45.9	53.6	45.7	44.1
Of which: US	17.0	16.7	17.4	17.1	16.3	22.2	17.7	17.0
Other advanced economies	15.4	15.2	15.6	15.3	19.7	16.0	15.1	15.0
Developing countries	31.7	32.9	30.9	32.1	28.6	25.4	32.1	33.5
Africa	6.0	5.9	5.5	5.4	2.4	2.1	5.1	6.0
Asia 8/	10.4	11.6	10.3	11.5	16.2	13.7	12.2	12.3
Middle East, Malta & Turkey	7.6	7.6	7.6	7.6	4.8	4.0	7.3	7.4
Western Hemisphere	7.7	7.8	7.5	7.6	5.2	5.5	7.5	7.9
Transition economies	7.7	7.6	7.6	7.4	5.7	5.0	7.1	7.4
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
Memorandum Item:
No. of countries receiving ad hoes							19	19
Uniform reduction factor 9/							40.0	40.0
EU 27	32.5	32.0	32.9	32.4	37.8	33.9	32.0	31.3
LI Cs 10/	8.3	8.1	7.5	7.4	3.6	3.5	7.3	8.6

Source: Finance Department.

1/

Based on an approach outlined by a participant during a G-20 deputies meeting in Istanbul on July 1, 2007.

2/

Includes Montenegro, which became a member on January 18, 2007 (pre-Singapore shares have been adjusted accordingly).

3/

Includes ad hoc increases for China, P.R., Korea, Mexico, and Turkey.

4/

For the three countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

5/

Based on 1993-2005 data. Reflects the impact of adjustments to current receipts and payments for re-exports, international banking interest, and non-monetary gold.

6/

0.5*GDP + 0.3*Openness + 0.15*Variability + 0.05*Reserves.

7/

Under this scenario, members are eligible for a quota increase if i) they contributed more than 0.5% to global GDP growth measured at PPP exchange rates during the period 2001-05 and ii) they are either under-represented or over-represented by not more than 50 percent under the new quota formula. They also assume: a) a 5.6 percent increase (total first and second round increase of 7.5 percent); b) a doubling of basic votes; c) foregoing by eligible G-7 countries (US, Japan, Germany, Italy) to their pre-Singapore voting shares; d) other under-represented eligible countries’ out-of-lineness is reduced at a uniform proportional rate; and e) over-represented eligible members receive a 5% increase above their pre-Singapore voting shares (except the UK, Canada, and France).

8/

Including Korea and Singapore.

9/

Uniform proportional reduction in the gap between calculated and actual quota shares, applied to underrepresented countries, using the formula indicated above.

10/

PRGF-eligible countries.

22. Based on the parameters illustrated here, it can be seen that such an approach can lead to a significantly different outcome in terms of the second round increases. In particular, the ad hoc increases would be concentrated on a significantly shorter list of countries that have made sizable contributions to global growth, and are either under-represented or not very over-represented based on the new formula. This would comprise 13 countries (left hand panel of the text table) that are under-represented, and 6 countries (shaded in the right hand panel) that are over-represented. As noted above, a further variant of this approach would be to use the filter to add additional countries to the list. Under this variant, use of the same filter would add the 6 additional countries to the broader list of under-represented countries that would qualify for ad hoc increases based on the methodology described above. It should be stressed that these simulations are intended to be purely illustrative of the potential results of a supplementary filter based on contributions to global growth. Different parameters and combinations involving such an approach could also be considered.

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