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Reforming the Governance of the
International Monetary Fund
Vijay Kelkar, Vikash Yadav1 and Praveen Chaudhry 1
1
University of Pennsylvania
1. INTRODUCTION
HE International Monetary Fund (IMF) is attempting to enhance surveillance
and harmonise rules related to member countries’ banking and financial
systems to strengthen the international financial architecture.1 However, the efficacy of these initiatives depends upon the level of compliance by the Fund’s
member countries. Democratising the Fund will make the organisation’s initiatives more effective as decisions produced by a democratic process have greater
legitimacy and credibility amongst participating members. The turn toward issues
of global governance moves the IMF reform debate beyond arguments about
the proper size and scope of the Fund. Realistic changes in the governance of the
Fund can be achieved by rationalising the Fund’s quota regime, which forms the
framework for the organisation’s decision-making process as well as the basis for
allocating member contributions to the organisation’s resources. Reforms based
on broadly accepted principles will enhance the Fund’s legitimacy and accountability as a forum for global economic policy decision-making.
A failure to reform the Fund coupled with the recurrence of financial crises in
the emerging market economies may hinder the growth of the global economy.
As processes of production are subordinate to the flows of financial capital,
financial crises have direct impacts on ‘real’ economic activity. Moreover, even
though most financial crises are short lived, they exert long-term and asymmetric
economic and social impacts on the lives of the most vulnerable members of the
global economy. Recent financial crises and global economic trends have already
mobilised non-governmental organisations, students and workers around the world
T
Vijay Kelkar is an advisor to the Finance Minister of India.
The views expressed in this paper are personal and not those of the organisation with which the
authors are associated. The authors wish to thank a number of current and former senior staff at the
IMF and World Bank for their assistance and comments on earlier drafts.
1
See Fischer (1999).
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727
728 VIJAY KELKAR, VIKASH YADAV AND PRAVEEN CHAUDHRY
to protest the perceived inequities in the operation of the global economic
system, including the policies of the global institutions such as the IMF. Thus, it
is important and urgent for politicians and policymakers to undertake reforms of
global institutions before another major crisis materialises.
Although the need for reform is urgent, it is important that reforms are transparent and based on principles. Reform efforts should not merely reflect ad hoc
responses to shifts in economic strength and vulnerability in the international
political economy. By grounding reforms on principles, the Fund will enhance its
legitimacy and accountability as a rule-making body for international economic
policies over the long term and across an increasingly democratic community of
states. Of course, realistic proposals for reform must accept that the IMF is an
international financial institution in which creditor confidence requires that the
majority of the voting power must remain with creditor countries. Within this
majority, the largest contributor, the US, will maintain its existing veto power
over decisions requiring a supermajority. Nevertheless, there is great latitude for
undertaking principled and forward-looking reforms within these constraints.
The next section traces the emergence of a ‘democratic deficit’ within the
governance structure of the Fund, i.e. the ‘quota regime’. Section 3 proposes a set
of principles to reform the quota regime. Section 4 provides a sketch of the pattern
of governance that might characterise the Fund if the quota regime is reformed.
The final section concludes.
2. REFORMING THE FUND
In an increasingly integrated world economy, the distribution of power within
the Fund must adapt to reflect the growing weight of developing and emerging
market countries in order to make the Fund more effective as an institution. The
volume of world trade flows has increased by six per cent annually over the past
two decades, twice as fast as world real GDP, thereby indicating a deepening of
economic integration.2 Developing countries as a group have achieved the fastest
expansion of trade and now account for one third of world trade, up from one
quarter in the early 1970s. The developing countries’ share of global GDP valued
at purchasing power parity (PPP) has increased from 31.86 per cent in 1992 to
37.56 per cent in 2001, while the European countries’ share has declined from
34.20 to 29.04 per cent over the same period.3 Unfortunately, the growing contribution of the developing countries to world output and trade is not reflected in the
redistribution of power in international financial institutions such as the IMF.
2
3
IMF (2001e, Ch. II).
IMF staff calculations. Complete calculations available upon request from the authors.
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TABLE 1
The Disparity between Voting Power and Economic Strength
Belgium
Italy
Netherlands
Brazil
China
India
Votes on IMF
Executive
Board in
2001
GDP Valued at
Market Exchange
Rates ($billion)
in 2000
GDP Valued at
Purchasing Power
Parity ($billion)
in 2000
Population
(millions)
in 2000
46,302
70,805
51,874
30,611
63,942
41,832
230**
1,090**
370
503**
1,100
474*
281**
1,464**
413
1,309**
5,900
2,233*
10**
56
16
175**
1,260
1,003
Notes:
* Data for 2000/01; ** Data for 2001.
Source: Voting Data from IMF, Annual Report (2001); Economic and Population Data from Economist Intelligence Unit, Country Reports (2002).
At the moment, a great disparity exists between the economic strength and
voting power of the emerging market economies and smaller European countries
on the IMF’s Executive Board (see Table 1). Developing and emerging market
country members need to have a more prominent platform from which their
voices can be heard and incorporated into crisis prevention and management
policies. As Peter Evans and Martha Finnemore have recently argued, the quality
of information used for surveillance and the design of programmes depends
critically on the level of member country participation.4 Hence, an increase in the
effective participation of developing and emerging market countries is desirable
in promoting the success of IMF crisis prevention and management policies.
Moreover, as the IMF increasingly seeks to harmonise and coordinate strategies
for crisis prevention and management, the Fund is becoming a rule-making
institution whose decisions encompass international as well as national economic
policymaking. The legitimacy of a rule-making process can be enhanced through
the use of a democratic (i.e., a polyarchic) framework for governance.5 A polyarchic
process of governance, characterised by the diffusion of power and networks of
reciprocal influence, will also better resemble the process of governance within
the growing number of democratic states on the Fund’s membership roll in recent
decades. These reforms will permit the Fund to act more effectively in times
of crisis, as its decisions will hold greater legitimacy amongst the politicians
4
Evans and Finnemore (2001).
Dahl (1991, pp. 71–80). ‘Polyarchy’ literally means rule by the many. The term is intended to
denote a representative democracy with substantial interest-group influence on government. See
also McLean and McMillan (2003).
5
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730 VIJAY KELKAR, VIKASH YADAV AND PRAVEEN CHAUDHRY
and bureaucrats who will need to monitor and implement Fund programmes.
Moreover, the diffusion of decision-making power should help to prevent the blind
acceptance and application of universal models of macroeconomic management.6
The governance structure of the Fund is a product of the political and economic
agreements embodied in the quota regime. The IMF’s quota regime is the basis
for (1) determining a member’s required contribution to the Fund and thus the
overall size of the basic resources of the Fund;7 (2) the level of access to Fund
resources for each member country; and (3) the distribution of voting rights
within the organisation, including the right to a ‘permanent’ seat on the 24member Executive Board, which is responsible for conducting the business of
the Fund.8 The Executive Board is accountable to the Board of Governors, the
highest policymaking body of the IMF, which consists of one Governor and one
Alternate appointed by each member country.9 The quota regime is not an abstract
formula; it is the basis of power relations between member states of the Fund.
While it is true that consensus rather than actual voting characterises most decisions by the Fund’s Executive Board, it is also the case that member countries
will usually not submit issues which are likely to be vetoed by the US or defeated
by the majority of member votes. In essence, the distribution of voting power
implicitly influences the character and scope of issues on the Fund’s agenda.
6
Sakakibara (1999). The ‘constitutionalist’ design of the Fund and World Bank, in which duties
and actions were carefully proscribed by the Articles of Agreement, were originally intended to
keep these institutions from imposing far-reaching structural reforms on sovereign members. However, in the wake of major financial crises, particularly since the 1982 Mexican debt crisis, the
industrialised members of the IMF and World Bank have cast these institutions into the role of
correcting weaknesses in domestic financial systems to ensure growth and poverty alleviation. See
Woods (2001, p. 8). As the IMF agrees, ‘Conditionality has evolved substantially over the history
of the Fund. Some element of policy conditionality has been attached to Fund financing since the
mid 1950s, but the scope for conditionality has expanded particularly since the early 1980s’. See
IMF (2001d, para. 3).
7
Quota subscriptions provide the basic source of financing for the Fund. The Fund is also authorised under the Articles of Agreement (Article VII, Section 1) to borrow to supplement its quota
resources. The Fund maintains two standing borrowing arrangements (i.e., New Arrangements
to Borrow and the General Arrangements to Borrow) that allow the fund to borrow up to SDR
34 billion from a group of members and official institutions to supplement existing resources to
offset or manage an impairment of the international monetary system. The Fund has also made ad
hoc arrangements (e.g., during the oil shocks) to borrow from small groups of members and official
institutions when payments imbalances were particularly large and/or skewed to finance special
facilities and policies. The IMF may borrow from private markets but has never done so. See IMF
(2000b, 19 – Decision No. 9862-(91/156) 15 November, 1991).
8
Countries with the five largest quota subscriptions (i.e., US, Japan, Germany, France and the UK)
are allowed to appoint an Executive Director to the Fund’s Executive Board. All other members are
organised into regional groups and elect an Executive Director to represent their constituency.
China, Russia and Saudi Arabia form separate single member country constituencies, thereby
effectively retaining a separate and independent seat on the Executive Board.
9
The Board of Governors, whose members are usually ministers of finance or heads of central
banks, normally meets once per year.
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The formula specifications and the weight of variables involved in calculating
members’ quotas have become matters of political judgement and compromise
that are intended to distribute power in a way that will command wide support
from member countries, and creditor countries in particular.10 In addition, the
quota regime effectively permits the US with 17.49 per cent of the total votes to
retain veto power over decisions that require a supermajority of 85 per cent.11
Hence, any proposed reform of the IMF quota regime must adhere to three basic
guidelines. First, any viable reform of the quota regime must be simple and transparent, as an infinite number of permutations are possible through minor manipulation of the quota formulas. Countries whose relative power within the Fund
will be diminished can be expected to resist any changes in the status quo. For
this reason, an excessively complex quota reform programme will only fortify
opposition from members who will have their voting share reduced. A proposal
that lacks sound economic criteria for change will inevitably succumb to charges
of ‘politicisation’. Second, as a financial institution, creditors need to have a
decisive voice in policy making otherwise they may lose confidence in the institution’s lending decisions. Third, any reform of the quota system must not seek to
remove the veto power of the largest individual creditor, the US; as such a
proposal would be politically stillborn.
3. THE DEMOCRATIC DEFICIT
Despite periodic changes to the quota regime, developing and emerging market
countries have argued that the distribution of voting power within the Fund does
not adequately reflect their importance in the world economy. This ‘democratic
deficit’ results from three factors: (1) the decline of basic votes in the Fund’s
quota regime which has reduced the voice of smaller countries in the governance
of the Fund; (2) biases in the calculation of economic strength which have caused
the IMF to neglect the strength of emerging market economies; and (3) the
needless complexity and opacity involved in the calculation of quotas. As the
legitimacy and representativity of the organisation is in question, the Fund will
have to address this growing ‘democratic deficit’ if it wishes to speak to demands
10
See IMF (2001c, 57 – Box II.7).
Decisions that require the approval of 85 per cent of the total voting power are: adjustment
of quotas; calculation of reserve tranche positions (exclusion of certain purchases and holdings);
changes in obligatory periods for repurchase; the sale of IMF gold reserves; acceptance of gold in
payments to IMF; balance of payments assistance to developing members; fundamental changes in
principle to the valuation of the Fund’s reserve asset (i.e., Special Drawing Rights – SDRs);
allocation of SDRs; prescription of official holders of SDRs; expulsion of members; and amendment of the IMF’s Articles of Agreement. See IMF (2001c, p. 172 – Appendix II – Special Voting
Majorities for Selected Financial Decisions).
11
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732 VIJAY KELKAR, VIKASH YADAV AND PRAVEEN CHAUDHRY
from civil society to improve the governance of the organisation and provide a
greater role for the developing and emerging market economies.
a. The Decline of ‘Basic Votes’
At the Bretton Woods conference in 1944 two alternate formulas were proposed
for determining voting power. In the first formula, voting power would be related
solely to members’ quota contributions (i.e., one dollar – one vote). The second
formula related voting power to the Westphalian principle of the equality of
states (i.e., one country – one vote). The Fund settled on a system that combined
‘basic votes’, which are distributed irrespective of quota size, and ‘proportional
votes’ based on a member’s quota contribution. The basic votes were designed to
increase the voting power of those members whose quotas were below the average
quota for Fund membership as a whole. However, a constitutional mechanism
was not created to maintain the ratio of basic votes to proportional votes if the
size of the IMF’s membership fluctuated.
The relative importance of the basic votes increased substantially from 1944,
when basic votes constituted 11.26 per cent of total votes for the 45 member
countries, until the late 1950s as a result of the growth in new Fund members
with smaller-than-average quotas. The relative importance of basic votes has
declined considerably since then. In 1958, basic votes constituted 15.61 per cent
of total votes but by 1995 basic votes constituted only 3.02 per cent. This decline
occurred alongside an expansion in the number of Fund member countries from
68 in 1958 to 181 in 1995.12 The decline in the relative importance of basic votes
reflects, in part, the effects of regular quota increases since 1965, and more
recently the marked slowdown in the new membership of relatively small members.
The result of this decline is that smaller countries have very little voice in the
governance of the Fund, even if they are able to form a united front.
b. Quota Calculations – Specification Biases
The democratic deficit within the Fund is exacerbated by biases that are built
into the calculation of members’ quotas. Current quota formulas are composed of
five components:
• A country’s gross domestic product at current prices for the recent year
converted at market exchange rates;
12
The number of countries included in the 1995 tally includes Brunei Darussalam and Sudan;
Zaire (whose voting rights had been suspended); South Africa (which did not participate in the
1994 regular election of Executive Directors); and Bosnia and Herzegovina, Iraq, Afghanistan and
Liberia – for which data was not available to make quota calculation under the Eleventh General
Review.
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• The 12-month average of gold and foreign exchange reserves, including
reserve positions in the IMF;
• The annual average of current payments (goods, services, income and private
transfers) for a recent five-year period;
• The annual average of current receipts (goods, services, income and private
transfers) for a recent five-year period;
• The variability of external current receipts for a recent 13-year period.13
With the exception of the last item,14 these components are intended to measure
a member’s economic ‘strength’ as well as its ‘openness’ to trade. There are biases
in these components that result from problems of measurement and problems of
discrimination in the composition of variables.
c. Variable Measurement Problem
The first bias in the calculation of quotas stems from a problem in how
economic output is measured. Currently, the gross domestic product (GDP) of
each individual country is converted from the local currency into a common
numéraire currency based on prevailing market exchange rates. There are significant problems with the calculation of national income through the GDP at market
exchange rates. The underlying theory that has facilitated this technique of
comparison is that the exchange rates adjust automatically (through the action of
the market) so that the local currency prices of a group of identical goods and
services represent equivalent value in every nation. In practice, however, market
exchange rates undervalue the non-tradable sector and they do not necessarily
equalise prices of tradable goods across countries even after allowing for quality
and transport costs; the latter can be explained in part due to the lagged effect of
the exchange rate. As a result, it has long been observed that market exchange
rates for a nation’s currency often do not reflect that currency’s true purchasing power at home.15 This can give rise to a significant under- or over-valuation
of GDP of different countries when making cross-country comparisons of
incomes which in turn can significantly affect a country’s total allocation by the
IMF.
A country’s GDP converted at Purchasing Power Parity (PPP) rates better
reflects the real value of total output produced by a country. PPP raises developing countries’ GDP figures because it essentially uses international market prices
to value countries’ output, and international market prices tend to be higher than
13
IMF (2001c, p. 57).
The variability of the current receipts is the only need-based indicator; it takes into account the
financial problems that countries are likely to face.
15
Summers and Heston (1991, pp. 327–68), Heston and Summers (1988, pp. 467–73) and Kravis,
Heston and Summers (1978, pp. 215–42).
14
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734 VIJAY KELKAR, VIKASH YADAV AND PRAVEEN CHAUDHRY
domestic market prices in developing countries. Differences between these two
methods are sizeable for individual countries; PPP-GDP can be more than four
times higher than GDP at market prices.16
Critics of the PPP approach sometimes argue that this method may not always
correctly indicate a country’s ability to contribute to Fund resources and that
accurate data for all countries are not readily available.17 The objection overlooks
the point that a large number of developing countries are now in a position
to supply liquidity needs to the Fund as they have reasonably stable currencies,
large reserves and comfortable balance of payments positions. Countries that
have difficulty in meeting their contribution can be handled on a case-by-case
basis. Issues of data quality and availability can be resolved through a determined
effort to replace estimates by actual price surveys. By providing technical assistance, countries can be motivated to support price surveys. It should be noted that
over 95 per cent of world output is currently available through the PPP technique,
although there is some variability in the quality of the data.18 Moreover, the
IMF’s own publications, such as the World Economic Outlook, already present
annual calculations of individual country GDP valued at PPP for 176 countries.
Similarly, the World Bank publishes PPP-based figures for a significant number
of countries. Finally, there is support amongst the numerical majority of Executive
Directors for GDP valued at PPP.19
d. Variable Specification Problem
The second bias in the calculation of a member’s quota stems from a failure to
discriminate against entrepôt, ‘maquiladora’ and intra-currency union trade. The
current calculation of economic ‘openness’, which sums a country’s current receipts
and payments, contains a bias in favour of entrepôt countries. Current receipts
and payments give a rough indication of the resources generated in a country
from transactions with the rest of the world and of the amount of resources
devoted to consumption of goods and services created elsewhere.20 Entrepôt states
engage in the import and export of vast quantities of goods, thereby boosting
their receipts and payments; however, these transactions have little domestic
value added and consequently they highly overstate the underlying contribution
to global output. A similar phenomenon exists in countries where ‘maquiladora’
16
IMF Treasurer’s Department and Statistics Department (2002, p. 6). A compromise formula or
hybrid exchange rate based on a combination of PPP and market exchange rate is also possible, but
has not been adequately addressed by the literature.
17
Quota Formula Review Group (2000, pp. 57–58, and 2001, pp. 13–14) and IMF Treasurer’s
Department and Statistics Department (2002, pp. 4, 6).
18
Ibid., p. 58.
19
IMF (2001f ).
20
Quota Formula Review Group (2001, p. 15).
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activity is large.21 Moreover, to the extent that some countries belong to a
currency union (e.g., the European Union), intra-currency union trade boosts the
‘openness index’ even though intra-currency union trade is not subject to balance
of payments crises as members share a common currency. In other words, states
within a currency union do not generate a financing need that needs to be addressed by the Fund. Given the growing magnitude of intra-EU trade, this is not
a trivial issue. It is estimated that quota figures for members of the EU would fall
by as much as 9.2 per cent if intra-currency union trade were subtracted.22 The
IMF should not incorporate intra-currency union trade in the assessment of
economic openness.
Critics of this position will argue that sharing a currency with one or more
members does not imply that members cannot run into balance of payments difficulties. Nor does a currency union guarantee that a member might not be tempted
to raise tariff barriers in a manner that might threaten the prosperity of its trading
partners.23 However, it is not necessary to terminate Fund interaction with members
of currency unions. It is only suggested that intra-currency union trade should not
be used as a factor in the determination of member quotas as this variable is not
very relevant in assessing financing needs or balance of payments issues.
e. Complexity and Opacity
Finally, adding to the democratic deficit is the extreme complexity of the quota
formulas and the non-transparent process by which these formulas are applied.
Currently, there are five different quota formulas. The five formulas use essentially
the same set of economic variables, but combine them in different ways with
different weights. Members may use whichever formula they prefer to generate
higher calculated quotas. Large, closed economies tend to prefer the revised
‘Bretton Woods’ formula in which GDP is the most heavily weighted variable.
Small, open economies tend to prefer one of the four ‘derived’ formulas in which
trade and openness have greater weight, and GDP holds relatively less weight.
The calculation of quotas becomes opaque because in practice the role of
quota formulas has declined in the determination of quotas, and quota share
adjustments have been relatively small. However, the quota formulas play a role
in determining the extent of the increase in quota share as well as the proportion
of selective increases.24 A principled reform of the quota regime would eliminate
21
‘Maquiladora’ economic activity refers to the trade generated by foreign-owned assembly plants
on international border areas, which import products duty-free for rapid assembly and subsequent
export.
22
IMF (2000a, p. 108 – Table 9.1).
23
Quota Formula Review Group (2000, p. 63).
24
IMF (2001c, p. 63).
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736 VIJAY KELKAR, VIKASH YADAV AND PRAVEEN CHAUDHRY
the unnecessary complexity and opacity of the current regime. A simple and
transparent quota formula would have the added benefit of improving relations
with civil society groups that have demanded greater transparency in the governance structures of the Fund.
4. PRINCIPLES FOR A NEW QUOTA REGIME
The International Monetary and Financial Committee (IMFC) of the Board
of Governors of the IMF has reaffirmed on several occasions that ‘Quotas
should reflect developments in the international economy’.25 However, recent
attempts to reform the quota regime have produced unsatisfactory results. For
example, an IMF-commissioned independent group of academics and policy
makers, known as ‘the QFRG’ (Quota Formula Review Group) or ‘the Cooper
Group’, proposed an alternative quota formula that actually increased the G-7
countries’ aggregate calculated quota share to more than 59 per cent, compared
to their aggregate calculated quota of 54 per cent at the time (and an actual
aggregate quota of 46 per cent). The failures of the Cooper Group may be
attributable, in part, to its restrictive mandate not to make any recommendations that would require a change of the IMF’s constitutions, the Articles of
Agreement. In order to discover the best options, it may be necessary to rework
the Articles.
The present quota regime is a single policy instrument that aims to fulfil three
important functions.26 First, quotas determine the required contribution of
member states to the Fund. A quarter of a member’s quota is paid in reserve
assets; the remainder is paid in the member’s own currency. Quotas constitute
the financial base of the IMF and therefore determine the size of the Fund’s
resources. Second, quotas determine the level of a member’s access to the
resources of the Fund. Members may draw a quarter of their quota, known as
the reserve tranche. As the reserve tranche is composed of the member’s own
contribution in hard currency, the country may use the tranche without any conditionality to meet a balance of payments problem. Drawing an amount greater
than a quarter of one’s quota requires the approval of the Fund. Upper limits on
borrowing (e.g., for structural adjustment programmes) are a function of the size
of a member’s quota. Third, the quota regime determines voting power within the
Fund. While the Fund recognises a basic number of votes for all members,
relative voting power in the Fund is determined by the size of a member’s quota.
25
IMF (2001a, pp. 156, 159).
The quota regime also determines allocation of SDRs as a reserve asset. A decision to allocate
SDRs has only been reached twice. In 2001, SDRs accounted for less than one half of one per cent
of members’ non-gold reserves (IMF, 2001c, p. 89).
26
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As noted earlier, the IMF conducts reviews of all members’ quotas every five
years, and members may request an ad hoc review at any time.27
The basic problem of the quota formula is the mismatch between instruments
and objectives. This is a classic ‘assignment problem’. Presently, there is only
one instrument to achieve multiple objectives. In this context, Jan Tinbergen,
argued that an optimal arrangement requires one instrument for each policy
objective.28 To achieve an optimal arrangement, three instruments should be used
to achieve the three objectives of the quota regime: contribution, access and
voting.
a. Contribution – Share of Global Output
A member’s contribution to the Fund’s resources should be based on a
member’s stake in the global economy as well as ability to pay, which is a
function of its share of global output. The Fund’s major contribution towards
global stability and balanced growth comes through its crisis prevention and
management roles. In periods of economic crisis the Fund acts as a catalyst for
private sector involvement and as a de facto international lender-of-last-resort.
The Fund also carries out extensive economic surveillance and recommends
uniform standards and rules for monitoring the global economy. Members need
to support the global public good the Fund provides, consistent with the size of
their economies. Ceteris paribus, a larger economy uses greater resources and
has a greater systemic impact in the event of a financial or currency crisis; hence
larger economies should contribute more to the resources of the Fund than smaller
economies.
With greater economic integration, a country is now susceptible to contagion
even though it may adopt sound economic policies. Developing, emerging and
developed countries are likely to be affected. These negative spillover effects,
which include the ‘financial globalisation hazard’ of rapid capital flow reversal,
put a country’s stake in the globalised system at risk.29 A country’s stake in the
global economic system or its ‘value-at-risk’ is its gross domestic product, i.e. its
national income. Therefore, a member’s contribution to the Fund is best determined using that country’s value-at-risk as a basis.
If the quota regime were only used to determine members’ contributions to
the Fund resources, one variable could suffice: the national income (measured by
GDP valued at PPP). The transparency of a single variable would help redress the
current mismatch between calculated and actual quotas.
27
28
29
The 12th General Review of Quotas is scheduled to be completed in January 2003.
Tinbergen (1952). See also Theil (1961) and Blinder (1997, pp. 3–19).
Calvo (2001).
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738 VIJAY KELKAR, VIKASH YADAV AND PRAVEEN CHAUDHRY
b. Access – Gross Financing Need
Access to the resources of the Fund should be based on gross financing need.
Quotas need to be officially de-coupled from the determination of access policy.
Currently access to Fund resources is supposed to be limited to 300 per cent of a
member’s quota. However, as nearly 70 per cent of the Fund’s outstanding credit
is currently confined to five borrowers, who are borrowing much more than 300
per cent of their quota, it is apparent that the present access policy is not being
observed.30 In some cases, access to reserves is well beyond the present access
norms. In fact, Turkey exceeded 2,900 per cent of its quota in 2002.31 Therefore,
it is evident that the rules concerning access to Fund resources were not used as
a factor in determining access limits for these large borrowers. By approving
large facilities to these countries based on need, the Fund has recognised de facto
the limitations of the present quota-based access limits. It should be recognised
de jure and the link between access and quotas should be broken. Moreover, the
new Fund facilities created to deal with capital account crises, i.e. the Contingent
Credit Lines (CCL) and the Supplemental Reserve Facility (SRF), implicitly
recognise that financing should be based on need rather than quota. The SRF and
the CCL have no general access limits linked to a member’s quota; however,
there is an expectation that the CCL will not exceed 300–500 per cent of a
member’s quota unless under exceptional circumstances.32 Uncoupling the quota
formula from access considerations would have the added benefit of effectively
countering questions relating to equality of treatment, which has been raised in
recent years by some of the smaller borrowing members.
Access to Fund resources should be on the basis of gross financing need,
subject to two prudential norms. First, the Fund should supply only a limited
percentage of the gross financing need, thus confirming the role of the Fund as a
catalyst for private sector involvement in crisis management. For example, the
Fund could impose a limit of 20 per cent of the calculated gross financing need.33
30
The five borrowers are Turkey (SDR 14,510.5 million or 28 per cent of the Fund’s General
Resources Account – GRA), Argentina (SDR 10,849.8 million or 21 per cent of the GRA), Indonesia (SDR 6,884.9 million or 13 per cent of the GRA), Russia (SDR 5,515.5 million or 11 per cent
of the GRA), and Brazil (SDR 3,249 million or 6 per cent of the GRA) (IMF, 2002b, pp. 24–25).
31
Although Turkey’s quota in the IMF is small relative to its geopolitical importance, the commitment of IMF loans at almost ten times the normal limit is unprecedented in the history of the IMF
(Mussa, forthcoming).
32
The CCL is aimed at preventing the spread of a financial crisis, by enabling countries that are
‘basically sound and well managed’ to secure precautionary financing in case a crisis should occur.
The SRF was established in December 1997 to provide assistance to members experiencing balance
of payments difficulties resulting from ‘a sudden and disruptive loss of market confidence’ reflected
through pressure on the member’s capital account and reserve holdings (IMF, 2001c, pp. 184, 196).
33
Sources for bridging the financing gap outside of the private sector could be (a) domestic
adjustment effort; (b) multilateral banks; (c) bilateral country assistance; and (d) loan restructuring.
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THE INTERNATIONAL MONETARY FUND
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Second, a prudential norm should be in place to limit Fund exposure to any one
individual borrower. For example, the Fund could limit access beyond 10 per
cent of the Fund’s total resources. Of course, these illustrative numbers are based
on a much larger Fund size than the present. Increasing the size of the Fund is an
important issue but would require a separate discussion. It suffices to say, however, that an access policy based on gross financial need may require a reevaluation of the Fund’s resources.
c. Voting – Proportionality, Sovereignty and Liberal Democracy
Voting rights should balance a member’s financial contribution with the
principle of sovereign equality. There are two common principles for determining voting rights in international organisations: (1) one country – one vote (the
Westphalian model); and (2) one dollar – one vote (the free-market model).
Maintaining a strong link between a member’s financial contribution to the
Fund and its voting power is necessary to inspire confidence among creditor
members and financial markets. However, there remains the need to balance the
capitalist norm with the principle of sovereignty in order to improve the governance of the Fund. The principle of sovereign equality can be advanced by
enhancing the weight of basic votes in the determination of voting power. This is
necessary as the share of basic votes has steadily declined over the past, and with
near universal membership of the Fund, this trend is likely to continue with every
further quota increase.
Basic votes continue to be important for countries with small quotas.34 Table 2
illustrates the current role of basic votes as a per cent of total voting power in the
IMF. In 2001, out of 183 members there are 25 members for whom basic votes
comprise more than half of the members’ individual voting power, while basic
votes make up at least 30 per cent of total voting power for 34 members, and 20
per cent of total voting power for 60 members. The aggregate voting power of
these 25, 34 and 60 members is 0.406, 0.699 and 1.919 per cent of the total
membership’s voting power respectively.35 The table shows the increase in voting power that would occur if basic votes were doubled to 500 basic votes per
member or if the proportion of basic votes to the total number of votes had been
kept constant since 1945.
It is apparent that any increase in the size of voting power of these relatively small members, nearly all of which are non-oil-producing developing
countries, would have an effect upon the highly skewed distribution of voting
34
A member’s voting power is equal to 250 basic votes plus one additional vote for each SDR
100,000 in quota (IMF, 2001c, p. 55 – fn. 28).
35
East Timor became the 184th member of the IMF on 23 July, 2002.
© Blackwell Publishing Ltd 2004
740 VIJAY KELKAR, VIKASH YADAV AND PRAVEEN CHAUDHRY
TABLE 2
Illustrative Voting Shares – No Change in Quotas and Increased Basic Votes (in per cent)
Current Members
No.
Total Voting
Power w/250
Basic Votes per
Member (Per cent)
Total Voting
Power w/500
Basic Votes
per Member
Total Voting
Power w/Basic
Votes per Member
(1945 Ratio)*
Countries in which Basic
Votes are >50 per cent
of their Quota
Countries in which Basic
Votes are >30 per cent
of their Quota
Countries in which Basic
Votes are >20 per cent
of their Quota
25
0.406
0.678
1.651
34
0.699
1.064
2.379
60
1.919
2.548
4.820
Notes:
This table is based on actual quotas except for nine countries which have not yet consented to their quota
increases, for which the 11th General Review proposed quotas are used.
* In 1945 basic votes constituted 11.3 per cent of total votes. If the basic votes component had not deteriorated,
each member would currently have 1,488 basic votes.
Source: Data derived from IMF Staff calculations.
power within the Fund. Currently the ten countries with the largest quotas control
54.022 per cent of the total vote, while the next 113 countries control 44.059 per
cent, and the bottom 60 countries control 1.919 per cent of the total voting share.
If each country were given basic votes at the original ‘1945 ratio’ of 11.3 per
cent of total votes, it would be possible for the 173 middle- and bottom-tier
countries to hold a simple majority over the top ten countries. Moreover, the
bottom 60 countries would benefit the most by having their total voting power
increase from 1.919 per cent to 4.820 per cent. Finally, it should be noted that
even if basic votes were revalued to the original ‘1945 ratio’, the US would not
lose its veto power.
In order to prevent further erosion of voting power amongst the poorest
members, it is necessary that basic votes be determined on an ad valorem basis.
The Fund’s Articles of Agreements should be amended to ensure that basic
votes would constitute 11.3 per cent of total votes regardless of future quota
changes.
5. CONCLUSION
If voting power were determined through a set of weighted averages for
GDP valued at PPP (88.7 per cent) and basic votes at the historic ‘1945 Ratio’
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THE INTERNATIONAL MONETARY FUND
741
(11.3 per cent), the results would appropriately reflect the economic weight of the
developing countries without eroding the veto power of the US (see the Appendix).
Current voting shares for the advanced economies would drop from 62 to 51 per
cent. Asian and African countries would have a greater voice. In fact, a coalition
of Japan, China and India would be able to have veto power. Similarly, a coalition of Africa and Latin America or Japan and Latin America would also have
veto power. The voting share of Middle Eastern countries, not including Saudi
Arabia (which is a creditor to the IMF), would remain relatively the same. The
voting share of smaller European states would decline significantly, but the EU
countries as a whole would retain a veto power. The proposed reform of the
quota regime would create far more ‘winners’ than ‘losers’ and thus has a realistic
chance of securing approval.
The redistribution of voting power would not only redress the current imbalance
amongst industrial, emerging and developing countries, it would also create a
more ‘contestable market’ for veto power as different coalitions of states will be
enabled to cooperate more effectively in order to prevent policies with which
they disagree. A highly contestable market in veto power should encourage greater
dialogue between member countries, as coalitions of member countries would be
empowered to effectively block the approval of programmes pending a discussion
of programmes that influence their interests. This increased pluralism would not
lead to deadlock as the large members (e.g., the USA) have a vested political,
economic and military interest in supporting developing countries that are strongly
linked to their economic and security system (e.g., Mexico and Turkey). As the
IMF is already a political institution, a reformed quota regime would make the
politics of the institution legible and create greater space for genuine dialogue on
the governance of the global economy.
As the Fund works to set standards and harmonise rules to strengthen national
banking and financial sectors of member countries, the ability of different states
to participate in the process of global governance will become increasingly
important. The legitimacy conferred upon rules agreed through a more democratic
framework, particularly amongst the growing number of democratic member
countries, represents an important means of reducing transgression or nominal
compliance. Enhancing the democracy of the Fund will increase inputs from
alternative perspectives, thereby contributing to crisis prevention and management while allowing a multiplicity of capitalisms to flourish.36 A democratic
Fund, in which different capitalisms exist and compete side by side, represents a
good start for the next century of capitalism.
36
See Albert (1993).
© Blackwell Publishing Ltd 2004
742 VIJAY KELKAR, VIKASH YADAV AND PRAVEEN CHAUDHRY
APPENDIX
Present and Proposed Quota and Voting Power1
Country Category2
GDP-PPP
1997–99
Average
(SDR Billion)
Advanced Economies
16,303
Major Advanced Economies
13,375
Other Advanced Economies
2,929
USA
6,315
Japan
2,282
EU
5,900
Developing Countries
11,320
Africa
1,086
of which Sub-Saharan Africa
873
Asia
6,181
Western Hemisphere
2,504
Present
Quota
Share
(Per Cent)
Proposed
Quota
Share on
Basis of
GDP-PPP
(Per Cent)
Present
Voting
Share
(Per Cent)
Proposed
Voting Share
on Basis of
GDP-PPP
(87.7%) and
BV (11.3%)
(Per Cent)
62.763
46.030
16.732
17.383
6.229
30.106
29.697
5.493
4.496
9.120
7.456
55.492
45.523
9.969
21.494
7.767
20.083
38.530
3.695
2.970
21.038
8.523
61.768
45.146
16.622
17.030
6.110
29.647
30.529
5.962
4.952
9.250
7.666
50.950
40.811
10.139
19.127
6.951
18.740
42.019
6.427
5.599
20.390
9.536
Notes:
1
BV stands for Basic Votes; PPP refers to GDP valued at purchasing power parity.
2
Country Categories based upon IMF World Economic Outlook.
The authors wish to thank Mr V. Bhaskar at the IMF for assistance with data calculations. A country-wide
breakdown of data is available on request (vyadav@aucegypt.edu).
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