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IMF Quota Increase: Indefensible Decision

IMF Quota Increase: Indefensible Decision

The IMF's quota structure has been long overdue for a major overhaul, but the decision on a selective quota increase that was taken at the 2006 annual meetings was hardly a step in that direction.

Commentary

IMF Quota Increase: Indefensible Decision

The IMF’s quota structure has been long overdue for a major overhaul, but the decision on a selective quota increase that was taken at the 2006 annual meetings was hardly a step in

that direction.

RAGHBENDRA JHA

O
n September 1, 2006, the International Monetary Fund (IMF) announced an overhaul of the institution to give more influence to some developing countries reflecting the shifting balance of power in the global economy. Under the plan, China, South Korea, Turkey and Mexico would see immediate increases in their voting rights and hence quotas. IMF quotas determine a member country’s contribution to the Fund, the member’s voting rights and access to financing. Such financing currently amounts to 28 billion dollars in loans outstanding to 74 countries.

On September 18, this proposal was passed with a more than 90 per cent majority – more than the 85 per cent majority needed under IMF rules. Under this revision China’s share of the votes in the 184 member IMF would go up from 2.98 to 3.719 per cent. The shares of South Korea, Turkey and Mexico, were similarly modest but consistent with the IMF’s proposal floated on September 1. In terms of billions of SDRs the enhancement in quotas is from

6.369 to 8.090 for China; 1.633 to 2.927 for South Korea; 2.585 to 3.152 for Mexico; and 0.964.0 to 1.191 for Turkey. By way of contrast the quota of the US is

37.1 billion SDRs and that of India 4.158 billion SDRs. (1 SDR = US$ 1.47601 on September 19, 2006).

A country’s quota position within the IMF depends on a number of factors including GDP (measured in dollar terms at market exchange rates), current account transactions and the country’s foreign exchange reserve position. The weights placed on these factors as well as their distribution across countries over time have changed significantly over the years. The IMF holds fiveyearly quota reviews – the 12th such review was conducted in 2003. Before that review there was considerable anticipation of an overhaul of the quota structure but this review was completed on January 30, 2003 with no proposal by the board of governors to reform quotas. The recently agreed revisions to the quota and voting structures of China, South Korea, Turkey and Mexico could have waited until the 13th quota review in 2008 but the IMF felt that such interim measures were necessary before it proposes a systematic overhaul of the quota structure that is to be undertaken in 2008. Hence a two-stage quota and voting structure reorganisation has been planned.

Quota and Voting Power

An IMF member country’s quota largely determines the country’s voting power in IMF decisions. Each IMF member has 250 basic votes plus one additional vote for each SDR 1,00,000 of quota. Accordingly, the US has 3,71,743 votes (17.1 per cent of the total) and a virtual negative veto in that it can block any proposal that it does not want to support (since a large majority of 85 per cent is required to pass most proposals). However, this still requires the US to get the support of other countries to get proposals that it supports passed.

The need to revise IMF quotas has continued to be felt at least since the 1998 quota review particularly in view of the spectacular rise of some developing and transition countries in the global economy and the need to provide global financial stability in the aftermath of the Asian currency crisis. A need has thus been felt to increase the voice of these countries – particularly those able to maintain relative stability in their external sectors – in the IMF, not merely to increase the resources available to these countries in case they need them, but also to enhance the stake and influence these countries exercise in global economic governance.

Part of the response of the IMF to address this need was a study commissionined in 2000 by a committee headed by Richard Cooper of Harvard University. The move to grant additional voting power (and hence higher quotas) to these four countries has to be seen in this light.

India is a significant omission from the list of countries afforded an increase in quotas and, hence, voting powers. In fact over the years India’s relative quota position has steadily deteriorated. Over the 40-year period 1958-98 India’s share in the IMF quota has come down from 4.1 per cent to 1.95 per cent.

A pertinent question to consider here is why was India not included in this list of countries whose voting was enhanced? Belgium with 2.16 per cent of the quota and 2.13 per cent of the votes is better placed than India. China, with 2.98 per cent of the quota and 2.94 per cent of the votes, has had its position enhanced. It is possible to argue that the increase in China’s share – and probably that of the other three countries – is justified. The pertinent question to ask is why was an immediate increase in India’s share not justified? In terms of the criteria used for determining IMF quotas, India has been doing as well as most of the four countries whose voting shares have been increased. India is certainly among the most under-represented countries in the IMF board with a record of macroeconomic fundamentals comparable to the four countries that have been awarded increases in their quotas. Given this, one can only conclude that this increase

Economic and Political Weekly September 30, 2006 in quotas and voting shares have been arbitrary.

Arbitrary Structure

In fact, it is possible to go one step further and argue that not just the current increase in quotas but the entire quota structure itself has been arbitrary. A comprehensive analysis of the rationale for the quota structure was reported in the paper ‘Towards a More Rational IMF Quota Structure: Some Suggestions for the Creation of a New International Financial Architecture’, Development and Change, Vol 31, No 3, 2000, by Raghbendra Jha and Mridul Saggar. The authors had argued that the quotas were not serving their avowed purpose in particular of giving greater weight to size of the economy and the country’s macroeconomic stability, ceteris paribus. Countries with large nontraded goods sectors (like India) will have their national outputs systematically undervalued at current US dollar exchange rates. Similarly countries with greater stability in their current accounts demonstrate responsible international economic behaviour and should be rewarded with greater say in global economic governance, i e, through the grant of higher quotas. Jha and Saggar in fact suggested alternative formulae, some distinctly more justifiable than the ones currently used by the IMF.1

Some of these formulae would emphasise the size of the economy (measured in purchasing power parity terms to better reflect the vast differences in the shares of the non-traded goods sectors across different countries), the track record of macroeconomic stability and capital flows and result in an enhancement2 of India’s quota rank from the current 13th to fifth.

To be sure a strong and growing body of literature goes further and argues that quotas are an inferior way of organising an international organisation with as much influence and scope as the IMF. Thus Bird and Rowlands (2006) argue that efficiency considerations would require that a refined IMF structure must accommodate a more transparent separation of a member’s contributions to the Fund, its access to the institution’s resources, and its voting rights at the institution.3

Whereas such an overhaul is long overdue, the institutional response may not be immediately forthcoming. Faced with such constraints India should canvass for an enhancement in its quota, voting power and say in global economic governance beginning with the 2007 annual IMF meeting and certainly before the 13th quota review in 2008. The intellectual and practical foundations for such an argument already exist.

A cynical view might well be that the current revision to IMF voting structures is at least partly designed to provide China incentives to further revalue its currency with respect to the US dollar and thus provide the US economy some relief from Chinese imports in a US election year. Of course, the quota increase could not be confined to China. Whether the current changes will lead to a further overhaul of the quota and voting formulae and what rationale will be offered, particularly in terms of economic efficiency for these, remain to be seen. It would be hoped that the IMF, which has consistently been an advocate of efficiency in economic policymaking would consider making its own quota and voting structures more efficient as well!

EPW

Email: r.jha@anu.edu.au

Notes

[The views expressed in this article are those of the author alone and not of the organisation to which he belongs.]

1 See page 155 of G Bird and D Rowlands (2006) ‘IMF Quotas: Constructing an International Organisation Using Inferior Building Blocks’, Review of International Organisations, Vol 1, No 2, pp 153-71.

2 In an article entitled ‘IMF: Concern, Dilemmas and Issues’ in the September 13, 2003 issue of the EPW, A Vasudevan discusses my above mentioned joint work with Mridul Saggar on IMF quotas. In footnote 5 of his article Vasudevan suggests that the Jha-Saggar study concentrates on India and does not cover the changes in quotas for other developing countries some of which might lose in some revisions of the quota suggested in the Jha-Saggar study. He thinks that from an international economic diplomacy perspective this is a drawback of the Jha-Saggar study. I find this assertion to be misrepresentative of our work. The Jha-Saggar paper is actually part of a larger report on IMF quota structures entitled ‘IMF Quota Structures and the Developing Countries’. In chapter 4 of this report we have a substantial discussion of gainers and losers from the alternative quota formulas suggested by us and Table 4.12 in the report gives a detailed country by country breakdown of the losers and gainers from each alternative proposed quota formula. In fact that report had substantial other analyses of IMF behaviour including determinants of sovereign borrowings from the IMF (published in EPW, Vol 36, No 26, 2001) and determinants of power within the IMF.

3 See also D Rapkin and J Strand (2006), ‘Reforming the IMF’s Weighted Voting System’, World Economy, Vol 29, No 3, pp 305-24.

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