IMF Quota and Governance Reform - Elements of an Agreement

This paper sets out, and seeks to make operational, a core package for the consideration of the Executive Board and, subsequently, the Board of Governors. The reforms would lead to a major overhaul of the Fund’s quotas and governance, strengthening the Fund’s legitimacy and effectiveness. The paper proposes completion of the 14th General Review of Quotas with a doubling of quotas and a major realignment of quota shares among members. It also covers proposals that would lead to a more representative, all-elected Executive Board.

Abstract

This paper sets out, and seeks to make operational, a core package for the consideration of the Executive Board and, subsequently, the Board of Governors. The reforms would lead to a major overhaul of the Fund’s quotas and governance, strengthening the Fund’s legitimacy and effectiveness. The paper proposes completion of the 14th General Review of Quotas with a doubling of quotas and a major realignment of quota shares among members. It also covers proposals that would lead to a more representative, all-elected Executive Board.

I. Introduction

1. Background. After a long and intense debate, the membership is converging on quota and governance reforms essential to the Fund’s legitimacy and effectiveness as an impartial guardian of global economic stability. This paper sets out, and seeks to operationalize, a core package for the consideration of the Executive Board and, subsequently, the Board of Governors (summarized in Box 1).

Quota and Governance Reform: A Summary

Quotas

  • Increase. A doubling of quotas, with a corresponding roll-back of the New Arrangements to Borrow (NAB) preserving relative shares, when the quota increase becomes effective.

  • Shift in shares. Minimum targets in the October 2009 IMFC Communiqué to be exceeded:

    • Over 6 percent shift from over-represented to under-represented members.

    • Over 6 percent shift to dynamic emerging market and developing countries (EMDCs).

  • Protecting the voting power of poorest. To be done for PRGT-eligible members that fall below the IDA-income threshold through ad hoc increases on an individual country basis.

  • Quota formula. Review to be completed by January 2013.

  • Next review. 15th General Quota Review to be brought forward, completed by January 2014.

Governance—Executive Board size and composition

  • Commitment of the membership—noted in a Board of Governors resolution—to maintain Executive Board size at 24 and, after the conditions for effectiveness of the quota increases under the 14th General Quota Review are met, to review Board composition every 8 years.

  • Two fewer advanced European chairs, based on an agreed metric (occupancy of the Executive Director position pro-rated to the time spent in it)—to be implemented no later than the first regular election after the conditions for effectiveness of the quota increases under the 14th Review are met.

  • Move to an all-elected Executive Board.

  • Further scope for a second Alternate Executive Director for multi-country constituencies.

2. Other reforms. Beyond the ambitious agenda outlined above, progress is expected in parallel in several other areas. The first concerns open, transparent, and merit-based selection of Fund management and, correspondingly, of other IFIs. This clearly is an important issue but arguably also one most credibly dealt with at the time of the next turnover in leadership (as opposed to by mere reiteration of principle at this point). A second issue relates to ministerial engagement and strategic oversight, for which efforts have been made to strengthen IMFC processes (e.g., more informal and restricted meetings). Further improvements are expected as experience is gained; by contrast, the proposal to transfer some decision making powers to ministers has not commanded consensus. Finally, there is a need to make further progress in diversifying Fund staff.

3. Outline and approach. The first and most important step is for the Executive Board to discuss the proposed package, the specifics of which are laid out in Section II (on quotas, with an explanation of the data in Annex I) and Section III (on governance). If the package does indeed find broad support, it will be necessary to send to the Board of Governors an Executive Board Report on the Fourteenth General Review of Quotas and Reform of the Executive Board that includes a proposed resolution for adoption, a draft amendment of the Articles (for the future all-elected Executive Board), and associated legal commentary. In the interest of time, a draft report is attached as Annex II; a detailed redline of the proposed amendment of the Articles of Agreement is attached as Annex III. Section IV discusses the proposed phasing and inter-linkages between the various components of the package. Section V presents a proposed Executive Board decision, adopted by a majority of the votes cast, that is needed to transmit the above-mentioned report to the Board of Governors.

II. QUOTAS

4. Background. The IMFC in its October 2009 Communiqué called on the Executive Board to complete the 14th General Review of Quotas by January 2011. The IMFC noted that quota reform is crucial for increasing the legitimacy and effectiveness of the Fund, and stressed that the IMF is and should remain a quota-based institution. It supported a shift in quota share to dynamic EMDCs of at least 5 percent from over-represented countries to under-represented countries using the current quota formula as a basis to work from, while protecting the voting share of the poorest members. This section presents a proposal to meet these goals. It builds on the extensive work that has taken place within the Committee of the Whole over the past year and also draws on important guidance provided by the IMFC at its most recent meeting in Washington on October 9 and by the G-20 Finance Ministers and Governors on October 23.

5. Size of quota increase. Previous staff papers examined the broad range of issues relevant to the size of the overall quota increase. These included the decline in the size of the Fund relative to global economic and financial indicators since the last general quota increase in 1998, the potential demand for Fund resources under alternative scenarios, and the implications of the recent reforms of the Fund’s lending facilities for potential resource needs. There now appears to be broad support for a doubling of quotas, provided that there would be a corresponding roll-back of the NAB, preserving relative shares. This reduction could be finalized in the forthcoming review of the NAB that is scheduled to be completed by November 2011. To maintain the Fund’s lending capacity in the interim, it is important that the reduction in the size of the NAB only take place when the conditions for effectiveness of the quota increases under the 14th Review are met and the related payments made.

6. Realignment of quota shares. Committee of the Whole discussions have covered a range of issues, including the size and definition of the targeted shifts, the role of the current formula in allocating quota increases, the scope for improving on the formula within the timeframe for the 14th Review, the use of alternative metrics to distribute part of the increase, and modalities for protecting the poorest members. While Directors’ views previously diverged in several areas, there has been broad convergence on key points, including that: the quota increase should be allocated using a combination of selective and ad hoc increases, with no equi-proportional element given the focus on realigning shares;1 the current quota formula should continue to be used for the 14th Review, pending a review to be completed before the next general quota review (see below); part of the increase should be distributed using an alternative measure of economic weight, given the widespread misgivings about the formula; and the voting share of the poorest should be preserved through ad hoc quota increases to protect the voting share for each eligible country individually.

7. Narrowing options. Based on this guidance, recent staff papers focused on a narrower range of options. These involved distributing more than half of the increase on a selective basis using the formula and the remainder as ad hoc increases, primarily to those members that are under-represented using the compressed GDP blend variable. This approach was put forward as a possible compromise between those who considered that the quota formula should be the primary distribution mechanism and those who argued that economic weight should play a larger role. Part of the ad hoc increase was used to provide protection for the poorest members, and the staff papers also illustrated simulations where part was used to: avoid any dilution of the increase in share after the selective increase for countries that are under-represented using the formula only; (ii) protect over-represented countries from becoming under-represented, based either on the formula or the higher of the formula and the GDP blend; (iii) allow advanced countries that are under-represented under the GDP blend only to participate but with their increases capped at their post-second round quota share (i.e., their quota share after the 2008 reforms become effective); (iv) allow advanced countries that are under-represented based on both the formula and the GDP blend to participate partially or fully; and (v) set a floor on the maximum decline in any individual member’s quota share. The simulations also illustrated how voluntary foregoing could facilitate protection of the poorest and the desired shifts in favor of dynamic EMDCs: setting a maximum for individual quota increases and modest voluntary foregoing by all advanced countries.

8. Proposal. The following combine the above elements with the goal of seeking the broadest possible consensus, recognizing that it requires compromise from all sides and not all reform aspirations can be met:

  • A 60 percent selective increase and a 40 percent ad hoc increase.

  • Under-represented members based on the GDP blend variable are eligible for ad hoc increases and receive a uniform proportional reduction in the gap between their GDP blend share and post-selective quota share (eligible advanced countries receive half the proportional reduction applying to eligible EMDCs), except that eligible advanced countries that are over-represented under the formula are capped at their post-second round quota share.

  • Under-represented countries under the formula receive an ad hoc allocation that ensures that their gains from the selective increase are not diluted.

  • Over-represented countries under the formula are protected from falling below the higher of their calculated quota or their GDP blend share.

  • A floor to limit the maximum decline in quota share for any individual country to 30 percent; to mitigate the adjustment burden on any individual country, a further limit on the maximum decline in share of 0.85 percentage points has been added.

  • Protection of the individual post-second round quota (and thus voting) shares of the poorest members, defined as those countries that are PRGT-eligible and met the IDA income cut-off of US$1,135 in 2008 (or twice that amount for small countries). The countries covered include 49* members plus Zimbabwe, which is not currently PRGT-eligible.2

  • A maximum of 220 percent on individual quota increases.

  • Voluntary foregoing by all advanced countries of 1.35 percent (1.37 percent by G-20 advanced countries) from the shares resulting from the above elements.

  • A voluntary redistribution of 5 basis points in quota share from the 4 largest European Union members (France, Germany, Italy and the UK) to Spain, which remains significantly under-represented, and without affecting the quota share or ranking of any other member.**

9. Outcomes. The results of combining the above elements are summarized in Table 1.3 The realignment of quota shares exceeds the minimum targets set by the IMFC. In particular, it results in shifts to dynamic EMDCs and from over-to under-represented countries above 6 percent, while the voting share of the poorest members is protected. A major realignment in the ranking of quota shares is achieved to better reflect global realities, with the 10 largest shareholders comprising the US, Japan, China, Germany, France, the UK, Italy, India, Russia, and Brazil (Table 2). In total, 61 members would receive an increase in quota share, of which 53 are EMDCs; in terms of the largest increases, 13 EMDCs would receive nominal quota increases greater than 150 percent, and 8 of the 10 countries with the largest quota increases would be EMDCs (Tables 3 and 4). After taking account of the protection for the poorest members, 99*** EMDCs would either maintain or receive an increase in their quota shares. Moreover, the reform would result in a further net shift of quota shares to EMDCs as a group of 2.8 percent. There would also be a further shift in voting shares of 2.6 percent; when combined with the 2008 quota and voice reform, the aggregate voting share of EMDCs would rise by 5.3 percent (Table 4).4

Table 1.

Illustration of Proposed Quota and Voting Shares 1/

(In percent)

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Source: Finance Department

See Annex I for a description of the allocation mechanism.

GDP blended using 60 percent market and 40 percent PPP exchange rates, compressed using a factor of 0.95.

Includes ad hoc increases for 54 eligible members that are not yet effective; also includes Kosovo and Tuvalu which became members on June 29, 2009 and June 24, 2010, respectively. For the two countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

Basic votes are calculated using the agreed percentage of total votes, 5.502 percent of total votes (provided there are no fractional votes) as in the Proposed Amendment to Enhance Voice and Participation, which has not yet entered into effect.

Including Korea and Singapore.

Eligibility is limited to PRGT-eligible countries with annual per capital income below the prevailing operational IDA cut-off in 2008 (US$1,135) or below twice IDA's cut-off for countries meeting the definition of a "small country" under the PRGT eligibility criteria. Zimbabwe is included.

Includes all under-represented EMDCs plus other dynamic EMDCs defined as those whose PPP GDP share divided by post second round quota share is greater than 1 and who are not over-represented by more than 25 percent.

Uniform proportional reduction in the gap between GDP blend (see footnote 2) and post-selective quota share.

Table 2.

Quota Shares of 20 Largest Members

(In percent)

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Source: Finance Department

Includes ad hoc increases for 54 eligible members that are not yet effective; also includes Kosovo and Tuvalu which became members on June 29, 2009 and June 24, 2010, respectively. For the two countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

See Annex I for a description of the allocation mechanism.

Includes China, P.R., Hong Kong SAR, and Macao SAR.

Table 3.

Largest Increases and Decreases in Quota Shares

(In percentage points)

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Source: Finance Department

Includes ad hoc increases for 54 eligible members that are not yet effective; also includes Kosovo and Tuvalu which became members on June 29, 2009 and June 24, 2010, respectively. For the two countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

See Annex I for a description of the allocation mechanism.

Includes China, P.R., Hong Kong SAR, and Macao SAR.

Table 4.

Summary of Voting and Quota Share Shifts

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Oil-exporting EMDCs are those that WEO classifies in the functional group “fuel exporters”, consisting of 27 countries.

The adjustment coefficient measures the extent to which deviations between actual and calculated quota shares are reduced by the quota adjustment. The pre-Singapore calculations exclude Kosovo and Tuvalu.

10. Future steps. The process of adjusting quota shares to reflect the growing weight of EMDCs, including the poorest, is a dynamic one. Given the concerns about the formula expressed by all Directors, it is proposed that a comprehensive review of the formula be completed by January 2013 to better reflect economic weights, in light of the Fund’s mandate and the role of quotas. Further, it is proposed to bring forward the timetable for completion of the 15th General Review of Quotas to January 2014.*

III. Governance

11. Background. The Executive Board is not merely a decision-making organ of the Fund but also a crucial mechanism to bring the oversight, voice and interests of members to the work of management and staff. Last August, differences on the appropriate composition of the Board, more so than on its size, resulted in the failure of the proposed Board of Governors resolution on the 2010 regular election of Executive Directors. That resolution proposed to maintain the Board at its current size of 24 Executive Directors (5 appointed and 19 elected) and, thus, to maintain the number of elected Directors above the “default” size of 15 set out in the Fund’s Articles. In light of the emerging consensus on the reform package, including on enhanced EMDC representation, a new proposed resolution on the rules for the 2010 regular election of Executive Directors that maintains the Executive Board at 24 chairs has been sent to the Board of Governors.

12. Size. The proposed Board of Governors resolution takes note of a commitment of the membership to maintain the size of the Executive Board at 24 and to review its composition every 8 years (after the conditions for the effectiveness of the quota increases under the 14th General Review of Quotas are met). Such a resolution would constitute a public commitment to balance the need for change with the need for predictability. As a legal matter, however, it would not obviate the need for the Board of Governors to adopt a resolution, at the time of each regular election of the Executive Directors, to increase the size of the Executive Board from 20 to 24.

13. Composition. It is well accepted that representation at the Executive Board must continue to be based on the principle of voluntary constituency formation. Facilitating a re-composition of the Board, therefore, requires the pro-active participation of members to consolidate constituencies and otherwise develop mechanisms for sharing the Executive Director’s chair. To facilitate this, the proposed Board of Governors resolution notes a commitment to reduce the number of Executive Directors representing advanced European countries by 2 in favor of EMDCs. This is to be measured by the time pro-rated in the Executive Director chair (i.e., rotation of an EMDC into an advanced European Executive Director chair for one period out of two counts as ½).

14. Second Alternate Executive Director. The possibility of a second Alternate Executive Director (AED) for multi-country constituencies, introduced in the 2008 quota and voice reform that is yet to enter into force, can enhance representation as well as options for forming constituencies. The 2008 reform allows for a second AED to be appointed for constituencies with at least 19 members; this threshold may be adjusted by a majority of votes cast by the Board of Governors. It is proposed to lower the threshold to multi-country constituencies with 7 or more members—this being close to the notional “average-sized constituency” (187 members spread over 24 constituencies). It remains open for the Board of Governors to revisit and adjust this figure in light of future developments. Further, it is envisaged that a second AED would be provided for in a broadly budget neutral manner by re-designating an existing “Senior Advisor” as an AED—the exception being the large sub-Saharan African constituencies, for whom it was made clear in the context of the 2008 discussions that they would be granted an additional resource.* This proposal would become effective at the first regular election after the entry into force of the 2008 Proposed Amendment on Voice and Representation.

15. All-elected Board. Moving to an all-elected Board enhances options for forming constituencies and levels the playing field between appointed and elected Directors. It is therefore proposed that the Articles be amended to eliminate the category of appointed Executive Directors and the associated election rules set forth in Schedule E of the Articles (including minimum and maximum limits for the election of Executive Directors that are based on an election of 15 Executive Directors). The proposed amendment also specifies that the Board of Governors would need to adopt regulations to govern the conduct of the elections to the all-elected Executive Board. These regulations would be designed to avoid excessive concentration of voting power in multi-country constituencies, while allowing for adequate flexibility to enable members to form constituencies on a voluntary basis. A proposed amendment of the Articles (with a detailed commentary) that reflects this approach is set out in the draft Executive Board Report on the Fourteenth General Review of Quotas and Reform of the Executive Board (Annex II).

IV. Phasing and Structure of the Resolution

16. Phasing and inter-linkages. The quota and governance reforms would be placed in a single Board of Governors resolution, reflecting a political understanding that they are all part of a single package of reforms. As a unitary resolution, it would be subject to an 85 percent majority, this being the highest applicable majority (for quotas). With the adoption of the resolution, the implementation of important features of the package would be formally interlinked (Figure 1):

  • 2008 quota and voice reform. The 2008 reform, including its increase in basic votes, is an important foundation upon which the current package is built, providing the basis for the current quota discussion and, as noted above, for a second AED for multi-country constituencies. It is imperative, therefore, that members complete the necessary domestic procedures to ratify the reform—to date, 94 countries representing 82.55 percent of the total voting power have done so (113 countries representing 85 percent of the voting power are required).

  • 14th General Review of Quotas. It is proposed that best efforts be made for the quota increase and shift in shares to enter into force by the 2012 Annual Meetings. It is proposed thati (as was the case, for example, with the 8th and 9th General Reviews) increases in quotas provided for under the 14th Review will not become effective until members having at least 70 percent of the total quotas on November 5, 2010 have consented.5 In addition, it would require that the proposed amendments of the Fund’s Articles on Voice and Participation (that formed part of the 2008 reform) and on the reform of the Executive Board have entered into force. It is expected that a corresponding adjustment to the NAB would be agreed, to become effective when these conditions are met and related quotas paid.

  • Executive Board size and composition. The proposed Board of Governors resolution would note the commitment of the Fund’s membership to maintain the Executive Board size at 24 and to review its composition every 8 years after the conditions for effectiveness of the quota increases under the 14th General Review of Quotas are met. The reduction by two of the number of Executive Directors representing advanced European countries (on the metric noted in ¶13 above) would be implemented no later than the first regular election after the conditions for effectiveness of the quota increases under the 14th General Review are met.

  • Second AED. It will become possible for a second AED to be appointed in constituencies with 7 or more members after the proposed amendment of the Fund’s Articles on Voice and Participation (the 2008 reform) has entered into force, and the proposed resolution has been adopted. The actual appointments would be made at the time of the first regular election thereafter.

  • All-elected Board. The amendment of the Articles for an all-elected Board would enter into force when the Fund certifies in a formal communication to all members that three-fifths of the members having 85 percent of the total voting power have accepted it.

Figure 1.
Figure 1.

Quota and Governance Reform: A Simple Illustration of the Phasing and Interlinkages

(Arrow from X→Y indicates dependence of Y on completion of X)

Citation: Policy Papers 2010, 094; 10.5089/9781498336598.007.A001

V. Proposed Decision

The following decision, which may be adopted by a majority of the votes cast, is proposed for adoption by the Executive Board.

1. The Executive Board: (a) adopts the report entitled: “Fourteenth General Review of Quotas and Reform of the Executive Board—Report of the Executive Board to the Board of Governors” that is set forth in Annex II, (the “Report”) and (b) recommends the adoption by the Board of Governors of the resolution set forth in the Appendix to the Report (the “Resolution”)

2. The Executive Board authorizes and directs the Secretary to send to each member of the Fund the proposal of the Executive Board set forth in the Report, with a request for a vote by each Governor on the Resolution.

3. The Board of Governors is requested, pursuant to Section 13 of the By-Laws, to vote without meeting on the Resolution. To be valid, votes must be received at the seat of the Fund before 6:00 p.m., Washington time, on December 15, 2010. Votes received after that time will not be counted.

4. All votes cast pursuant to this decision shall be held in the custody of the Secretary until counted, and all proceedings with respect thereto shall be confidential until the Executive Board determines the result of the vote.

5. The effective date of the Resolution shall be the last day allowed for voting.

6. The Secretary is authorized to take such action as he shall deem necessary or appropriate in order to carry out the purposes of this decision.

IMF Quota and Governance Reform - Elements of an Agreement
Author: International Monetary Fund