ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Apology of Quota Reform

ECONOMIC AND POLITICAL WEEKLY Apology of Quota Reform Discredited for its handling of financial breakdowns in Latin America and east Asia in the 1990s and finding itself increasingly irrelevant in a financial system dominated by private capital flows, the International Monetary Fund (IMF) is going through something of an identity crisis. The role and clientele of the IMF has changed considerably as a new global financial architecture has emerged, far removed from its original mission of providing balance of payment support to countries in an era of fixed exchange rates. A new role for the institution

September 23, 2006 ECONOMIC AND POLITICAL WEEKLY
Apology of Quota Reform Discredited for its handling of financial breakdowns in Latin America and east Asia in the 1990s and finding itself increasingly irrelevant in a financial system dominated by private capital flows, the International Monetary Fund (IMF) is going through something of an identity crisis. The role and clientele of the IMF has changed considerably as a new global financial architecture has emerged, far removed from its original mission of providing balance of payment support to countries in an era of fixed exchange rates. A new role for the institution – in terms of undertaking multilateral surveillance to prevent global economic crises – as was discussed in the 2006 spring meetings of the IMF and World Bank, could be envisaged, but only if it acquires a legitimacy that does not currently exist. If the early stirrings of reform in the governance of the IMF are a portent, any far-reaching changes in its structure will be a chimera. On September 18, the board of governors of the IMF hiked the quotas of what it termed “under-represented” countries, China, Korea, Mexico and Turkey, as part of a two-year reform package to make the institution more representative. The first phase envisaged ad hoc increases in the quotas of these four countries, while the long-term plan includes coming up with a new formula for redistributing quotas. Members’ quotas are ascertained broadly in relation to their economic might, as measured by the gross domestic product (measured at market exchange rates), official reserves and current account transactions. That reform in the IMF is long overdue is clear from the fact that the European Union, Japan, Canada and the US exercise 63 per cent of the vote, whereas the 80 poorest countries must do with a mere 10 per cent. For decades, the US, which has always held more than 15 per cent of the quotas, has had veto power since any major decision requires 85 per cent support. India, as part of a group of 24 countries, opposed the ad hoc quota enhancement plan saying it should be “kept in abeyance” until a larger consensus on quota reform emerges. This is reasonable and it is difficult to understand the haste to implement quota reform in this fashion, unless the idea is to take the wind out of a united demand by developing countries for more substantial changes. India is peeved at this exclusion, though, with its increasingly realpolitik stance in foreign affairs, one wonders what the country’s stance would have been if it had been favoured with a quota increase. A pertinent point, however, is how the magnitude of a country’s economy should be measured; if one goes by the developing countries’ contention that purchasing power parity (PPP) dollars should be used, the share of advanced countries in world GDP would reduce substantially, with the reverse effect on developing countries. China and the Eurozone, for instance, would then be at par. At present, the EU has 32 per cent of the vote whereas China, after the quota enhancement, has 3.72 per cent. But there is also hypocrisy in India’s argument that PPP should be used to measure GDP, for less than a decade ago the government (fearing that India would then be graduated out of the low income group of countries) was vehement in its opposition to PPP measurement! Even greater problems lie ahead. The EU has stubbornly refused any dilution of its quota and the US would not like its vote share to drop below 15 per cent. This would hardly serve the purpose if the IMF is to have any credibility in any enhanced capacity in the global financial system. The other issue is that in spite of the fact that most of the IMF’s funds come from lending to developing countries, the countries most affected by its policies have little say in its functioning. Although the present structure of the IMF provides 250 “basic votes” for each country, to which more votes are added depending on the country’s quota, their value has fallen over the years from 11.3 per cent to 2.1 per cent of the total allocation. Thus, although the fig leaf of an increase in basic votes has been maintained, purportedly to benefit smaller and poorer countries, it means nothing more than

a sliver of an increase in voting power. Besides this, the practice of nominating only a European as the head of the IMF (and a US citizen as the head of the World Bank) needs to be discarded and the plan for independence of the institution from any one country needs to be tackled head on. That, of course, means breaking the IMF’s link with global capital and its protectors, which would be demanding the impossible.

EPW

Economic and Political Weekly September 23, 2006

To read the full text Login

Get instant access

New 3 Month Subscription
to Digital Archives at

₹826for India

$50for overseas users

Comments

(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

Back to Top