Reform of IMF Quotas and Voice: Responding to Changes in the Global Economy

By IMF Staff

The distribution of IMF quotas is intended to reflect the relative weight and role of its members in the global economy. But relative quota shares among members have changed only gradually and have not kept up with changing economic realities. Thus, there is a need to rebalance quotas to reflect the many changes that have occurred in recent years, especially the increased weight of major emerging countries in the world economy.

At the same time, there is a need to enhance the voice of low-income countries (LICs) in the IMF. While the weight of these countries in the global economy is small, the Fund plays an important advisory and financing role vis-à-vis these countries. The voting power of LICs has eroded over time, in part because other countries' relative economic weight has increased, in part because the effect on total voting power of "basic votes"-an equal allocation of votes based on the principle of equality of states that was made when the IMF was founded and that has not been increased since-has declined in recent decades with successive rounds of quota increases.

A Big Step Forward

The Fund's membership recognizes that governance reforms are essential to the continued effectiveness and legitimacy of the institution. At the same time, governance reforms need to be respectful of the interests of the entire membership. Therefore, broad consultation is required n order to reach consensus.

At the time of the IMF Annual Meetings in Singapore in September 2006, the membership endorsed a program to modernize the IMF's governance structure. Country members agreed to a package of reforms to be completed over a two-year timeframe. It comprised the following elements:

• An initial ad hoc increase in quotas for the most underrepresented members: China, Korea, Mexico, and Turkey;
• A new quota formula to guide the assessment of the adequacy of members' quotas in the IMF;
• A second round of ad hoc quota increases based on the new formula;
• An increase in the basic votes that each member possesses to ensure adequate voice for LICs, as well as protection of the share of the basic votes in total voting power going forward; and
• Allocating additional resources for the two Executive Directors representing African members, as their constituencies comprise a fairly large number of countries.

With the exception of the first element that was implemented in 2006, all the other components of the package were endorsed by the Executive Board on March 28.

The aggregate impact of both increases in quotas and basic votes will have a significant bearing for the Fund's membership: 135 countries will increase their voting share. The aggregate shift in voting shares for these countries is 5.4 percentage points, including substantial increases for LICs. Notably, 28 countries will see their voting share more than doubled as a result.

A single, simpler, and more transparent Formula

The agreement reached on March 28 means that a single quota formula will be used, substituting the five used until now. The old system of formulas is complex and nontransparent, and includes various non-linear elements. These will be replaced by a simpler linear formula based on four updated and modernized variables-GDP, openness, variability and reserves. The advantage of the new formula lies in its simplicity and transparency.

In the new formula, the GDP variable (the one with greater weight) will be a blend of GDP converted at market rates and at purchasing power parity (PPP) exchange rates averaged over a three-year period. The weights of market-based and PPP GDP are 60 and 40 percent, respectively. In the old formulas, GDP was measured solely at market prices for the latest year of available data. The measurement of GDP in PPP terms provides an alternative measure of a member's weight in the global economy that increases the weight of developing countries whose GDP measured at PPP is much higher than their GDP measured at market rates. Unsurprisingly, to have PPP as an element in the formula was a longstanding wish of developing countries.

The second round of ad hoc quota increases

The proposal endorsed by the Executive Board on March 28 will be put to the Board of Governors, that have a month (until April 28) to cast their votes on the issue. Thereafter, the Amendment to the Articles requires approval by three-fifths of the membership, with eighty-five percent of the total voting power. The individual quota raises, that would represent the second round of ad hoc increases, also need to be agreed by the relevant members. These steps will require action by legislatures in many countries. Therefore, the actual quota increases and other changes that were agreed are expected to become effective within the next few months.

The purpose of the second round of ad hoc increases is to achieve a further rebalancing of quota shares for a broader range of members. Fifty-four countries will see their quota shares increase from pre-Singapore levels by between 12 to 106 percent. Emerging markets are the main beneficiaries: for example, Korea will see its quota increase by 106 percent; Singapore by 63 percent; Turkey by 51 percent; China by 50 percent; India by 40 percent; Brazil by 40 percent; Mexico by 40 percent. The aggregate shift in quota shares for these 54 members is 4.9 percentage points. In contrast, several advanced countries have agreed to forego part of the quota increases for which they are eligible. This group of countries include Germany, Ireland, Italy, Japan, Luxembourg, and the United States.

The Crucial Trebling of Basic Votes

In order to avoid the erosion in voting share of LICs, the ad hoc increases will not become effective until the amendment to the Articles of Agreement regarding basic votes is approved. That is because enhancing the voice of LICs is a central element of the reform package. A key mechanism for achieving this goal is through an increase in basic votes. Basic votes reflect the principle of equality of states and give the smallest members of the Fund (many of which are LICs), a greater voice in the Fund's deliberations.

The Executive Board recommended a tripling of basic votes, the first such increase since the Fund was established in 1945. This boost is crucial as it will more than compensate many LICs that would have otherwise seem their voting shares diminished. The amendment will also add a provision to the Articles of Agreement that the share of basic votes in total voting power should not decline in the event of future quota realignments.

Additional Resources for African Executive Directors

The large number of countries represented by the two African chairs and the heavy workload that flows from the important advisory and financing role that the Fund is playing in these countries called for further steps to strengthen the operations of these offices. Consequently, the Executive Board also recommended that each of the two Executive Directors be allowed to appoint an additional Alternate Executive Director.

A First Step Successfully Concluded

The Fund has a global membership and global responsibilities. In order to retain its legitimacy and maintain its effectiveness, Fund members have agreed-after nearly two years of highly technical and sometimes arcane negotiations-to a package of significant reforms. For sure, no country got all that it wanted; but every country got a stronger, more globally representative institution.

The approved quota and voice reform signals the beginning, rather than the end, of a process. It recognizes that country representation will need to adjust to changes in the global economy further down the road. Specifically, the agreement provides that realignments of quota and voting shares will take place every five years-which will result in a further increase in the share of under-represented countries. So, unlike many past international agreements, this one is dynamic, not static.