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IMF Reforms 2010: Do They Mirror Global Economic Realities?

The 2010 round of quota reforms at the International Monetary Fund did not adequately reflect the emerging global economic realities and this must be regarded as a missed opportunity to redress the gross imbalance that has prevailed for several decades. Several "positive" aspects of the reforms have been given high publicity, but they need to be assessed analytically. This paper addresses issues of governance reform at the IMF in the context of the emerging macroeconomic configurations.

SPECIAL ARTICLE

IMF Reforms 2010: Do They Mirror Global Economic Realities?

Arvind Virmani, Michael Debabrata Patra

The 2010 round of quota reforms at the International Monetary Fund did not adequately reflect the emerging global economic realities and this must be regarded as a missed opportunity to redress the gross imbalance that has prevailed for several decades. Several “positive” aspects of the reforms have been given high publicity, but they need to be assessed analytically. This paper addresses issues of governance reform at the IMF in the context of the emerging macroeconomic configurations.

The authors are grateful to Amar Bhattacharya, Edwin Truman, Partha Ray and Charan Singh for valuable comments which enriched the contents of this paper. The views expressed in this paper and all errors of omission and commission are to be attributed to the authors only. All other usual disclaimers apply.

Arvind Virmani (AVirmani@imf.org) is India’s executive director on the board of the IMF and Michael Debabrata Patra (MPatra@imf.org) is with the Reserve Bank of India and currently at the IMF.

T
he global crisis of 2008-09 is widely regarded as unprecedented in terms of the suddenness of its onset, the scale of its impact and the huge toll it has taken on human welfare, more generally. Prescient analysis suggests that output losses and associated erosion in capital, employment and productivity in the economies directly affected by the crisis may be longlasting and even permanent (IMF 2009). In the wake of its passage, the world economy appears to be at a watershed. Growth prospects in the advanced economies appear subdued and uncertain. Different parts of the world are recovering at different speeds. After suffering a glancing blow from the global crisis, emerging economies have continued their robust growth with economies in Asia and Latin America in the lead. The group of emerging and developing countries registered over 7% growth in 2010 (IMF 2011; World Bank 2011), contributing more than twothirds of global growth, providing vital support to an upturn weighed by risks and uncertainty.

Visitations of financial crises through the 1990s and 2000s have repeatedly exposed the gaps in the international financial architecture. Illustratively, the role of the International Monetary Fund (IMF) in the Asian financial crisis has been subjected to severe criticism, denting its credibility and its effectiveness. The recent global crisis has again starkly laid bare the deficiencies in both prevention and mitigation; apparently, the lessons of history brought home with every crisis remain either unlearned or too soon forgotten! Although initially delayed and localised, this crisis has, however, galvanised an unprecedented policy response and unlike in the past, a coordinated approach has been driven by the G20. A central plank of the G20 process has been reforming the international financial institutions (IFIs) to make them relevant, responsible and effective in the context of changes in the global economy. Thus, the London summit of the G20 in April 2009 and subsequently the Pittsburgh summit in September of the same year provided a strong impetus for reform of the governance of the IMF and the World Bank. In November 2010, the Executive Board of the IMF reached agreement on reform of its quotas and governance, which has been extolled by the IMF management as “the most fundamental governance overhaul in the Fund’s 65-year history” (IMF 2010a). The most important aspect is the so-called shift in quota shares in the IMF in favour of emerging market and developing countries to recognise their dynamic role in the global economy, while protecting the quota shares and voting power of the poorest members. These changes are expected to come into effect by the end of 2012. Among the 10 largest members of the IMF will be the “BRICs” (Brazil, China,

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India, the Russian Federation), along with the US, Japan and the four largest European countries – France, Germany, Italy, the United Kingdom. Do these reforms reflect the evolving global economic realities and facilitate the role of the emerging economies as drivers of the world economy?

This paper addresses these questions in the context of the emerging macroeconomic configurations. Following a brief overview in Section 1 of the major aspects of the recent IMF reforms and what they mean in terms of “say” in the governance of the IMF for the top 15 countries, Section 2 deals with issues relating to the appropriate measures of economic size. Section 3 empirically searches for tentative answers to the questions posed here. The final section carries concluding observations.

1 Key Elements of IMF Reforms

In comparison to their past, the recent IMF reforms, i e, the 14th General Review do assume a historic significance, at least in terms of the sheer size of the increase in quotas, the basic building blocks of the governance structure of the IMF (Table 1). In order to appreciate the import of the package of reforms that should come into existence by 2012, it is useful to encapsulate a simple understanding of the quota, the manner of its determination, and the way in which it works from the point of view of a member of the IMF.

Table 1: IMF Quota Reform – A Historical Profile

Quota Review Date Size of Increase (%)
First Quinquennial Review 8 March 1951 No increase
Second Quinquennial Review 19 January 1956 No increase
1958/59 Review 2 February and 6 April 1959 60.7
Third Quinquennial Review 16 December 1960 No increase
Fourth Quinquennial Review 31 March 1965 30.7
Fifth General Review 9 February 1970 35.4
Sixth General Review 22 March 1976 33.6
Seventh General Review 11 December 1978 50.9
Eighth General Review 31 March 1983 47.5
Ninth General Review 28 June 1990 50.0
Tenth General Review 17 January 1995 No increase
Eleventh General Review 30 January 1998 45.0
Twelfth General Review 30 January 2003 No increase
Thirteenth General Review 28 January 2008 No increase
Fourteenth General Review 5 November 2010 100.0

Source: IMF (2010a).

Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account. The size of an individual member’s quota should, in principle, reflect the relative importance of its economy in the world economy. When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members that are broadly comparable in economic size and characteristics. The IMF uses a quota formula to guide the assessment of a member’s relative position. The current quota formula is a weighted average of gross domestic product (GDP) based on market exchange rates (MER) and GDP based on purchasing power parity (PPP) in the ratio of 40/60 (weight of 50%), openness (30%), economic variability (15%), and international reserves (5%). The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members.

Flaws in the quota formula are by now well known (Portugal 2005; Truman 2006; Skala et al 2007; Bryant 2008; Bryant 2010). The quota formula is a political construct and is reported to have been developed in the US Treasury at the outset of the IMF’s history. Paradoxically the purpose of the complicated formula was to dilute the effect of the overwhelming presence of the US in the world economy so as to distribute the quota more widely to make the IMF appear more “international”. During the quinquennial reviews of quotas in subsequent years, very minor changes were made in the original formula. The Bretton Woods formula was replaced by a set of five formulas, which contained minor variations in the size of coefficients/weights, but continued to lack simplicity and transparency. It was only as part of the April 2008 reforms that a simpler linear formula based on four modernised variables – GDP, openness, variability and resources

– was adopted. This formula still has flaws and is quite inadequate in representing the sea change in the global economy since

1

the creation of the IMF.

Historical adjustments in IMF quotas were dominated by increases granted equi-proportionately to every member according to its existing quota share. This equi-proportionate component was on average some 70% of the total increase; in the quota review agreed to in 1978, this fraction was as large as 98%. Only a small component of any increase consisted of increases reflecting recalculated quota shares resulting from the old (inadequate) quota formulae. When the largest part of quota increases is allocated in proportion to existing quotas, adjustments in the relative quota shares of members tends to be minor and that IMF members experiencing relatively rapid economic growth will inevitably have quota shares that lag far behind recent economic developments.

Virtually all the negotiations in all quota reviews, including the 14th General Review, have downplayed the results of formula calculations and resorted instead to various “gimmicks” (Bryant 2008) that cover for the underlying political tradings among the governments of the largest member nations. The 14th General Review is particularly complicated, as are all suboptimal compromises. A proposed doubling of quotas is based 60% on the formula and 40% on an ad hoc increase that in turn is based on the GDP blend. Countries eligible for the ad hoc increase receive a uniform proportional reduction in the gap between their GDP blend share and formula-based quota share (eligible advanced countries receive half the proportional reduction applying to eligible emerging market developing countries or EMDCs), except that eligible advanced countries that obtain lower quota shares under the formula than their existing shares are capped at their April 2008 levels. Countries that obtain higher shares under the formula than their existing shares receive an ad hoc allocation that ensures that their gains from the application of the formula are not diluted. Furthermore, countries whose quota shares fall below their existing shares 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% is added. Furthermore, a further limit on the maximum decline in share of 0.85 percentage points is also provided to mitigate the adjustment burden on any individual country. Protection of the existing quota shares of the poorest 50 members (defined as those countries that are under the

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Poverty Reduction and Growth Trust (PRGT) – the new concessional financing framework of the IMF – and met the income cutoff of $1,135 in 2008) is also provided. Individual quota increases are capped at a maximum of 220%. The 14th General Review also includes a so-called voluntary foregoing by all advanced countries of 1.35% from the shares resulting from these adjustments and a voluntary redistribution of 5 basis points in quota share from the four largest European Union members (France, Germany, Italy and the UK) to Spain (which obtains a quota share under the formula that is significantly higher than its existing share) without affecting the quota share or ranking of any other member (IMF 2010b).

A member’s quota delineates basic aspects of its financial and organisational relationship with the IMF, including (a) subscriptions or the maximum amount of financial resources the member is obliged to provide to the IMF – up to 25% in SDRs or widely accepted currencies (such as the US dollar, the euro, the yen, or the pound sterling) and the rest in the member’s own currency;

(b) voting power in IMF decisions – each IMF member has 250 basic votes plus one additional vote for each SDR 1,00,000 of quota (the number of basic votes will change to 750 once the April 2008 reforms become effective); and (c) access to financing

– until recently, under the IMF’s Stand-By and Extended Facilities, a member could borrow up to 200% of its quota annually and 600% cumulatively (under newly instituted facilities, significantly higher access is allowed, but the basic issue is that the quota is the metric by which a member country’s access to IMF’s financing is gauged).

The IMF’s board of governors, the highest decision-making body of the IMF (consisting of one governor – usually the minister of finance – and one alternate governor – the governor of the central bank – for each member country) conducts general quota reviews at regular intervals (usually every five years). Any changes in quotas must be approved by an 85% majority of the total voting power, and a member’s quota cannot be changed without its consent. A general review allows for quotas to reflect changes in relative positions in the world economy. Ad hoc increases outside general reviews do not occur often – a recent example is the 2008 reform.

The April 2008 quota and voice reform was driven by a clear recognition that relative quota shares among members had changed only gradually and not kept up with the increased weight of major emerging countries in the world economy. At the same time, the voting power of low income countries (LICs) had eroded over time. At the IMF annual meetings in Singapore in September 2006, member countries agreed to a package of reforms to be completed over a two-year time frame. The key elements were an initial ad hoc increase in quotas for the most under-represented 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; and 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. While the initial ad hoc increase was implemented in 2006, all the other components of the package

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were endorsed by the IMF’s executive board on 28 March 2008. It was also agreed that a single quota formula (set out earlier) will be used, substituting the five used hitherto, which were complex and non-transparent, and included various non-linear elements. For the first time GDP measured in terms of PPP entered as a variable in the quota formula, in deference to a longstanding demand of developing countries. The April 2008 reforms are in the process of being ratified and will be implemented thereafter. Under the second round of ad hoc increases in quota shares, emerging economies would be the main beneficiaries: Korea’s quota will increase by 106% over pre-Singapore levels; Singapore by 63%; Turkey by 51%; China by 50%; India by 40%; Brazil by 40%; and Mexico by 40%. Enhancing the voice of LICs through a tripling of basic votes is a central element of the reform package.

International Monetary and Financial Committee

The International Monetary and Financial Committee (IMFC), which is the IMF’s main policy guiding body comprising 24 finance ministers from major developed and developing countries, called on the executive board of the IMF (responsible for conducting the day-to-day business of the IMF, it is composed of 24 directors, who are appointed or elected by member countries or by groups of countries, and the managing director, who serves as its chairman) in its October 2009 communiqué 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. After a long and intense debate, the membership converged on an agreement and on 5 November 2010, the IMF’s executive board approved the conclusion of the 14th General Review of Quotas and recommended that the board of governors, the IMF’s highest decision-making body, move expeditiously to adopt the proposed measures.

The main outcomes of the reforms were:

  • Quotas will double to SDR2 476.8 billion from SDR 238.4 billion agreed under the 2008 quota and voice reform.
  • There will be a corresponding rollback in the New Arrangements to Borrow (NAB), a back-stop arrangement between the IMF and a group of IMF members to provide additional lending resources to the Fund.
  • There will be a 6% quota shift to dynamic emerging market and developing countries and a 2.8% shift emerging market and developing countries as a whole vis-à-vis the 2008 quota and voice reform.
  • As mentioned earlier, voting shares will be preserved for the poorest countries.
  • A comprehensive review of the current quota formula will be completed by January 2013, and accordingly, the completion of the 15th General Review of Quotas will be brought forward by about two years to January 2014.
  • The size of the executive board size will be maintained at 24 members; the board composition will be reviewed every eight years.
  • Advanced European countries will reduce their combined board representation by two chairs at the latest by the time of the first election after the quota reform takes effect.
  • The executive board will consist only of elected executive directors, ending the category of appointed executive directors (currently the members with the five largest quotas appoint an executive director).
  • There will be further scope for appointing second alternate executive directors to enhance representation of multi-country constituencies.
  • The results of the 14th General Review are presented in Table 2. While the targets set by the G20 and the IMFC appear to have been met, the realignment of quota shares appears modest in relation to the media hype. The advanced economies relinquish only 2.8% of their combined quota share (measured from their post-April 2008 shares) to emerging and developing countries. The US and Japan actually gain while the European countries lose less than a percentage point share in each case in relation to the April 2008 shares – these losses are in the range of 0.59 percentage points for Belgium and 0.24 percentage points for Switzerland. China obtains the maximum gain in quota share –

    2.4 percentage points over the April 2008 level – followed by Brazil (0.53 percentage points), India (0.31 percentage points) and Mexico (0.35 percentage points). Spain is the only gainer among the advanced economies. Many emerging and developing countries will lose with Saudi Arabia undergoing the largest erosion of share (0.83 percentage points). Russia gains marginally. Turkey enters the top 20; Sweden and Venezuela drop out.

    According to the IMF, measured from April 2008 levels, 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%, and 8 of the 10 countries with the largest quota increases are EMDCs. After taking account of the protection for the poorest members, 99 EMDCs would either maintain or receive an increase in their quota shares (IMF 2010b). Are these claims substantiated in terms of the basic objective of reforms – to better reflect changing global economic realities? The devil, as they say, lies in the details. It is, therefore, necessary, to evaluate the reforms analytically and with macroeconomic evidence, for they will foreshadow the economic power play in the international monetary system at least till 2013-14.

    2 Measuring Economic Size: PPP or MER?

    The IMF quota is widely regarded as a measure of the economic importance of a country in the world economy. Given the position of the IMF in the international financial architecture, and in its surveillance as well as financing role in the global economy, there is naturally a heavy political economy aura surrounding its quotas. Therefore, it becomes important to ask: Is the IMF quota a true representation of the relative economic size in a cross-country context? In view of the quinquennial nature of reviews and adjustments to these quotas, does the recently agreed 14th General Review narrow the gap between the IMF quota and true economic size in the global economy?

    Over the last 30 years, data from the International Comparison Program (ICP)3 have fundamentally changed the practice of macro economic accounting. The ICP collects prices in countries around the world, and uses them to calculate price index numbers or PPPs – how much local currency is needed to buy as much as does the currency in the numeraire country, usually the US dollar. PPPs, which can be thought of as statistical averages of prices or given a cost-of-living interpretation, are used to deflate nominal local currency measures to yield “volume” measures expressed in a common currency unit, such as current US dollars. Adjusted for inflation in the numeraire country, the ICP yields real GDP accounts in constant internationally comparable dollars

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    Table 2: IMF Quota Realignments
    Country Existing (Pre-Singapore) April 2008 (Post 2nd Round) 14th General Review (2010)
    Quota Share (%) Rank Quota Share (%) Rank Quota Share (%) Rank
    US 17.09 1 17.67 1 17.43 1
    Japan 6.12 2 6.56 2 6.47 2
    Germany 5.98 3 6.11 3 5.59 4
    France 4.94 4 4.50 4 4.23 5
    UK 4.94 5 4.50 5 4.23 6
    Italy 3.24 7 3.31 7 3.16 7
    Saudi Arabia 3.21 8 2.93 8 2.08 12
    Canada 2.93 9 2.67 9 2.31 11
    China 3.72 6 4.00 6 6.39 3
    Russia 2.73 10 2.49 10 2.71 9
    Netherlands 2.37 11 2.17 12 1.83 15
    Belgium 2.12 12 1.93 13 1.35 18
    India 1.91 13 2.44 11 2.75 8
    Switzerland 1.59 14 1.45 17 1.21 19
    Australia 1.49 15 1.36 19 1.38 17
    Spain 1.40 17 1.69 15 2.00 13
    Brazil 1.40 18 1.78 14 2.32 10
    Venezuela 1.22 20 1.12 20 0.78 27
    Mexico 1.45 16 1.52 16 1.87 14
    Sweden 1.10 21 1.00 21 0.93 22
    Korea 1.35 19 1.41 18 1.80 16
    Turkey 0.55 37 0.61 32 0.98 20
    Memo
    Advanced economies 61.6 60.5 57.7
    Emerging and
    Developing countries 38.4 39.5 42.3

    Source: IMF (2010b).

    which is used as a measure of the quantity of goods and services produced and/or used in the country.

    In order to compare any quantity across time or space/geographies (country; region; cities), appropriate indices are thus required to represent relative prices at the appropriate aggregative level, which can then be employed as deflators to obtain approximations of quantities. Since we are now so used to comparing a country’s GDP across time, we tend to overlook the fact that this involves a careful choice between different indices that can be used and how difficult it initially was to construct these indices and get estimates of GDP. For instance, there are many different ways to construct indices across countries and enormous practical data challenges in doing so (Paasche’s, Laspeyre’s, Tornquist, and chain-linked indices which are now widely used in national income accounting)!4 Different formulae for price indexes will give rise to different indexes and different sets of accounts. Which of these is most appropriate depends on the purposes to which the data are to be put; as is the case with most index number questions, there is typically no unique right answer. But the differences tend to be more important in international comparisons over space than in national comparisons over time because the patterns of relative prices and of expenditures are much more different between India and the US, for example, than within the US or within India a few years apart.

    Using a PPP basis is appropriate when comparing generalised differences in economic size and living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of the countries. The ICP surveys include both tradable and non-tradable goods in an attempt to estimate a representative basket of all goods. The Penn World

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    Tableϱ is a widely cited source of PPP adjustments, and the so-called Penn effect reflects such a systematic bias in using exchange rates to compare outputs across countries. PPP measurement has its own caveats and it is important to take note of them when making international comparisons. PPP numbers can vary with the specific basket of goods used, making it a rough estimate. Furthermore, differences in quality of goods are hard to measure and thereby reflect in PPP. Calculations of PPP also tend to overemphasise the primary sector’s contribution, and underemphasise the industrial and service sectors’ contributions to the economy of a nation. In addition, linking regions presents another methodological difficulty. The 2005 ICP round resulted in large downward adjustments of PPP (or upward adjustments of price level) for several Asian countries, including China (-40%), India (-36%), Bangladesh (-42%) and the Philippines (-43%), which have been challenged as unrealistic (Bhalla 2008). It has been suggested that the discrepancy can be explained by the fact that the 2005 ICP examined only urban prices, which overstate the national price level for Asian countries, and also the fact that Asian countries adjusted for productivity across non-comparable goods such as government services, whereas non-Asian countries did not make such an adjustment. Each of these two factors would lead to an underestimation of GDP by PPP of about 12% (Deaton and Heston 2010). Be that as it may, this does not detract at all from the fact that PPP (even if far from perfect in actual practice) is currently the best available index to use if we want to compare quantities across countries. This applies to absolute values such as GDP, consumption and investment, as well as to ratios such as investment rates (investment/GDP) and to welfare measures such as per capita GDP or income.

    Market Exchange Rate

    The lack of PPP measures, till recently, led to the widespread use of GDP converted into a common or numeraire currency at MER as the standard metric for comparing economic size across countries. This was justified by the doctrine of PPP (this should not be confused with the Purchasing Power Parity Index for obtaining GDP at PPP) which postulated the GDP at market exchange rates would eventually converge to PPP.6 There has, however, been an animated debate for over 75 years on the usefulness of this metric for cross-country comparisons. It has been argued that the use of market exchange rates provide a misleading representation of the size of economies relative to each other because it is based on the assumption that price levels in countries are identical – that one dollar buys the same basket of goods and services in different countries. This is obviously an incorrect assumption, and it is especially erroneous for countries at different levels of development. For example, if the value of the Indian rupee falls by half compared to the US dollar, India’s GDP measured in dollars will also halve. It does not necessarily mean that Indians are poorer by a half; if incomes and prices measured in rupees stay the same, they will be no worse off assuming that imported goods are not essential to their quality of life. Using exchange rates typically understates the size of lower-income economies because prices are lower in these economies, especially for non-tradable goods and services. Furthermore, even in the context of traded goods

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    and services, currencies are exchanged for other purposes such as to buy capital assets whose prices vary more than those of physical goods. Differing interest rates, speculation, hedging or even interventions by central banks can influence exchange rates, irrespective of the exchange of goods and services. Also, in economies with strong government control, exchange rates need not be determined by market forces but by government fiat instead. In all such cases, GDP at MER can be even more misleading and a capricious measure for comparison of different countries’ real GDP (best measured by GDP based on PPP).

    The MER is an appropriate measure for all cross-border payments denominated in nominal values, such as cross-border purchase and payments for goods and services and assets and their impact on personal, firm or government budgets denominated in and balanced in nominal values. Similarly, the cross-border investment decisions of firms (FDI, equity investment, debt flows) are usually made in nominal terms and MER is used for this purpose. But we should not forget that all economic theory and analysis is about “real values”, whether we are comparing the real value of money/assets, real interest rates, real wages or real depreciation: logically the most appropriate conversion factor for these “real” comparisons across countries is the PPP exchange rate or PPP index as applicable. The only plausible case for the use of MERs is political, not economic (Heston 2004).

    Even before the establishment of the Bretton Woods institutions, it was realised that MERs were much further from PPPs than at the time Cassel was writing in 1918 (Clark 1940). This was because there were more barriers to the free flow of trade, and capital and people than after the first world war, and most countries instituted foreign exchange controls during the second world war that remained in effect long after the IMF was established. Yet, comparisons among countries were needed to make assessments to the various parts of the United Nations (FAO, WHO, and the like), and for the purpose of quotas for the IMF and World Bank. Several factors pushed national and international organisations to use PPPs more extensively – the demise of the Bretton Woods system in the early 1970s; the very slow growth of output in Asia reported in the late 1980s in the World Economic Outlook (WEO) even as countries like India and China were recording growth rates of 6% and 8% respectively; and the availability of the Penn World Tables. This data set permitted a cottage industry of growth studies using a panel of PPP-based numbers. As these convergence studies multiplied, it was quite clear that the world was not behaving in the very simple way that neoclassical economics suggested (Heston 2004).

    For over half a century to date, PPPs are now commonly used by the Organisation for Economic Cooperation and Development (OECD), the weo Database of the International Monetary Fund (IMF), and the World Development Indicators of the World Bank to measure the size of economies and per capita incomes. Yet, both the World Bank and the IMF have tended to rely on MERs for operational purposes and also in widely distributed annual publications like the Bank Atlas and the IMF’s WEO. The fact that GDP measured at market exchange rates continues to be used in the quota formula with a weight of 30% attests to the inertia in redressing the imbalance even though in various parts of the IMF and the World Bank the deficiencies of market exchange rates in country comparisons are recognised and research using PPP proliferates. A simple exercise of comparing ranks in terms of IMF quotas with ranks according to GDP PPP and GDP MER clearly shows that quota distributions are predominantly influenced by the latter, as measured by Pearson’s rank correlation coefficients, despite the quota formula being superimposed by ad hoc adjustments, and this correlation has actually increased over time (Table 3).

    Table 3: Cross-Country Comparisons of Ranks

    Country 2008 Ranks as per Shares in Country 2010 Ranks as per Shares in
    GDP PPP GDP MER Quota GDP PPP GDP MER Quota
    US 1 1 1 US 1 1 1
    China 2 3 6 China 2 2 3
    Japan 3 2 2 Japan 3 3 2
    India 4 12 11 India 4 11 8
    Germany 5 4 3 Germany 5 4 4
    Russia 6 8 10 Russia 6 10 9
    UK 7 6 5 UK 7 6 6
    France 8 5 4 France 8 5 5
    Brazil 9 9 14 Brazil 9 8 10
    Italy 10 7 7 Italy 10 7 7
    Mexico 11 13 16 Mexico 11 14 14
    Spain 12 10 15 Korea 12 15 16
    Korea 13 15 18 Spain 13 12 13
    Canada 14 11 9 Canada 14 9 11
    Turkey 15 17 32 Indonesia 15 18 21
    Rank Correlation 0.74 0.90 Rank Correlation with Quota 0.87 0.97

    Source: WEO Database and IMF (2010b).

    In order to assess whether or not the IMF quota reform of 2010 will stand the test of time, it is apposite to leave the debate here at this stage and evaluate the recent IMF reforms on a macroeconomic basis in Section 3. The main takeaway from this section is that real growth depends on real size, which is best measured in terms of PPP. When one wants to compare quantities across countries, money measures should be converted at purchasing power parities (PPPs), they will produce more credible results than market exchange rates (Heston 2004).7

    3 Measuring Economic Size Meaningfully into the Future

    which, despite several limitations, is the only source from which cross-country data are available on a consistent basis.

    For the purpose of the analysis, we use three proximate indicators: (i) size – the larger the economy, the greater should be its ability to drive the global economy; (ii) speed – given size, growing fast should enable a larger contribution to global growth; and

    (iii) pull – given the importance of sustaining and rebalancing global demand, it measures the contributions to net demand in the global economy. Drawing from the argumentation presented in the preceding section, size is determined the share of each economy in global GDP in terms of PPP. Speed is measured as real GDP growth weighted by each individual country’s share in global GDP at PPP so as to obtain effective contributions to global growth, while pull is reflected in each country’s current account balance weighted by its share in global GDP at PPP. Countries running current account deficits contribute to net global demand in the ultimate sense, whereas countries running current account surpluses withdraw or reduce global demand. Countries are ranked in descending order of magnitude in terms of size, speed and pull; it is important to note, however, that ranks are based on 187 countries that comprise the IMF’s membership, and are not inter se ranks.

    Size

    At the outset, it is useful to observe long-term trends in relative size of the largest countries over the last few decades before the crisis (Figure 1). The trend decline of the developed countries (Japan, Germany, UK, France, Italy) and the rise of China and India is very clear.9 The changes in Russia and Brazil are more ambiguous. During the 2000s, Russia had started to recover some of the relative losses suffered during the 1990s. Likewise, during the 2000s up to the global crisis, Brazil had just managed to reverse the trend decline in its relative position during the 1980s.10

    During the 1990s, the contribution of the emerging economies to global growth averaged 40%, rising to 58% for the years between 2000 and 2007. In fact, for four years through the summer of 2007, when global GDP grew at 5%, one of the highest rates for a sustained period of time, three-fourth of it came from emerging

    Figure 1: Size of Countries Relative to US (GDP PPP)
    real economic impact of major economies 0.45
    that rank among the top 168 in terms of
    quota share in the IMF under the 14th 0.40
    General Review on the global economy in
    a phase in which national-level support to 0.35
    global demand and growth was critical in
    fighting off the Great Recession. Intui 0.30
    tively, those countries that provided the
    greatest sustenance to the global economy 0.25
    and helped prevent a 1930s-type Great
    Depression should be given due weight 0.20
    age in the evolving global economic order.
    The period of study is 2007-10 which cap 0.15
    tures the onset and unfolding of the global
    crisis and the recovery that is taking hold, 0.10
    the terminal year determined by the
    availability of firm data. All data are 1980 0.05 1983 1986 1989 1992 1995 1998 2001 2005
    taken from the IMF’s WEO database Source: Virmani (2009).
    58 july 23, 2011 vol xlvI no 30 Economic & Political Weekly
    ChinaGermany Japan RussiaIndia France Brazil UK Italy

    In this section, we attempt to evaluate the

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    Table 4: Relative Size of Countries (%)
    Country 2007 2009 2010 IMF Quota Share, 2010
    Share Rank Share Rank Share Rank Rank
    US 21.27 1 20.42 1 20.22 1 1
    China 10.76 2 12.56 2 13.27 2 3
    Japan 6.49 3 5.96 3 5.83 3 2
    India 4.54 4 5.05 4 5.28 4 8
    Germany 4.26 5 4.02 5 3.91 5 4
    Russia 3.17 7 3.02 7 3.02 6 9
    UK 3.27 6 3.07 6 2.98 7 6
    France 3.14 8 3.02 8 2.94 8 5
    Brazil 2.8 9 2.88 9 2.92 9 10
    Italy 2.72 10 2.49 10 2.41 10 7
    Mexico 2.26 11 2.1 11 2.1 11 14
    Korea 1.95 13 1.95 13 1.96 12 16
    Spain 2.05 12 1.95 12 1.86 13 13
    Canada 1.92 14 1.84 14 1.82 14 11
    Indonesia 1.27 16 1.38 15 1.4 15 21
    Turkey 1.34 15 1.26 16 1.27 16 20
    Memo item:
    Euroa Area 15.9 15.1 14.6

    Source: WEO Database and IMF (2010b).

    and developing countries. In 2007, former IMF Managing Director Rato declared China and India as the new engines of world growth, given growth rates of 14.2% and 9.9%, respectively (Rato 2007). Russia with 8.5% and Brazil with 6.1% were not far behind. Did the subsequent crisis render this premature? Using GDP PPP shares in the IMF’s WEO database as weights, interesting insights emerge from calculations of weighted contributions to world growth.

    The Great Recession of 2008-09 may have interrupted the evolution of these trends, but has not yet dethroned the dominant economic powers in terms of relative size – the US, followed by China and Japan (Table 4). It did, however, push the UK below Russia to 7th position and Spain below Korea to 13th. Indonesia has climbed a notch to 15th position. Indonesia, Korea and Turkey may be regarded as potential contenders for the top 10 positions in the years to come. It is, however, noteworthy that 10th ranked Italy with half the GDP of 4th ranked India in 2010, will have a quota share in the IMF that is 11% larger, even after the completion of the 14th General Review. There are many reasons for this gross anomaly, prominent among them being the excessive weight given to nominal GDP at MER. In general, the quota share ranks tend to lag the economic ranks according to relative size for emerging and developing countries across the sample, in sharp contrast to advanced economy counterparts.

    Speed

    When the definitive history of the crises and post-crises period is written, the Great Recession will also be remembered for the spectacular show of countervailing force that countries across the world put up to defend their economies against its deathly squeeze. Advanced economies dropped key interest rates to zero or close to it, emerging economies lowered them to historic lows. The cumulative fiscal stimulus of the G20 countries was – per cent of GDP, perhaps unparalleled in time. Extraordinary support was extended to prop up the financial sector and some other industries as well. But history is parsimonious – it rewards only outcomes. So, while size does matter, what will be defining in the end is staying power. By 2010, after the worst of the crisis is

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    july 23, 2011 vol xlvI no 30

    behind us, the question to ask in conjunction with the evolving distribution of economic power is: who contributed to global growth in the darkest days of the crisis and will it be sustained? In the final analysis, this will determine the locomotives of the global economy in the years ahead.

    Post-crisis, China and India retain their ranks as the fastest growing economies among the top 10, while Russia and Brazil slow considerably along with the US, Japan and Europe. China had eclipsed the US well ahead of the global crisis (Table 5). This position was consolidated in the crisis years. India emerged as the second largest contributor to global growth before the crisis and remained so through it. In 2010, India and the US each provided a third of China’s contribution to global growth and more

    Table 5: Contribution to Global Growth (% points)

    Country 2007 2009 2010 IMF Quota Share, 2010
    Share Rank Share Rank Share Rank Rank
    China 1.53 1 1.14 1 1.39 1 3
    US 0.41 3 -0.54 0.53 2 1
    India 0.45 2 0.29 2 0.51 3 8
    Brazil 0.17 5 -0.01 0.22 4 10
    Japan 0.15 6 -0.31 0.16 5 2
    Germany 0.11 7 -0.19 0.16 6 4
    Russia 0.27 4 -0.24 0.12 7 9
    Korea 0.1 8 0 0.12 8 16
    Mexico 0.08 12 -0.14 0.1 9 14
    Turkey 0.06 18 -0.06 0.1 11 20
    Indonesia 0.08 11 0.06 3 0.08 12 21
    Canada 0.04 21 -0.05 0.06 15 11
    UK 0.09 10 -0.15 0.05 17 6
    France 0.07 14 -0.08 0.05 18 5
    Italy 0.04 23 -0.13 0.02 31 7
    Spain 0.07 13 -0.07 -0.01 13
    Memo item:
    Euro Area 0.46 -0.61 0.25

    Source: Authors’ calculations based on WEO Database and IMF (2010b).

    than twice that of fourth-ranked Brazil. The contribution to global growth of Japan and Germany whose quota shares will rank them at 2nd and 4th respectively in the IMF was less than half that of India, while France and the UK, with a contribution to global growth of less than 10% of that of India, will be ranked 5th and 6th in the IMF.11 Even more egregiously, Italy which contributed virtually nothing to global growth in 2010 will be ranked ahead of India in terms of IMF quota share. This shows the dominance of Europe (EU) in the IMF. Quite clearly, this review of quotas has done virtually nothing to reward dynamism in a critical time in the evolution of the global economy, warranting careful scrutiny to the claim of transfer of governance in favour of dynamic emerging and developing countries.

    Pull

    Today’s buzzword is “rebalancing”, an adjustment of global demand from highly indebted deficit countries to low debt surplus countries, a reversal of what many believe was a factor in the unsustainable boom before the bust. This, it is believed, will restore global demand to levels that can sustain global growth, once the fiscal stimulus that supported demand in the face of private sector deleveraging in crisis-hit advanced economies is withdrawn. Market pressures and political constraints are, however, forcing many countries into severe fiscal tightening that may further reduce global demand. Thus countries that are contributing to global net demand, despite the risk of rising debt levels, are making an important contribution to global recovery and rebalancing in a period of sizeable global demand shortfalls.

    Who is providing this pull to the global economy and is likely to keep doing so in the future? Although the US’ contribution to global net demand in 2010 is about half that in 2007, it continues to be an important contributor. India has become the second largest contributor to global net demand, displacing UK and Italy to 5th and 6th ranks, respectively (Table 6). India and possibly Brazil, with private consumption constituting 57-58% of GDP, could become the major demand drivers. Despite its contribution to upholding global demand in a period of demand depression, India is still ranked eighth in quota share. Extending the window shows that Brazil, Turkey, Mexico and Indonesia suffer the same fate – their IMF quota shares fall well below their weighted contributions to net global demand. Two advanced economies – Spain and Canada – also face this perverse outcome. By stark contrast, advanced economies such as the UK and France receive the opposite results – their quotas are much higher than their contributions to global demand.

    Table 6: Contribution to Net Global Demand (% points)#

    Country 2007 2009 2010 IMF Quota Share, 2010
    Share Rank Share Rank Share Rank Rank
    US 1.09 1 0.55 1 0.61 1 1
    India 0.03 13 0.15 2 0.14 2 8
    Spain 0.2 2 0.11 3 0.07 5 13
    Brazil 0 0.04 9 0.09 3 10
    Italy 0.07 7 0.08 4 0.05 7 7
    UK 0.08 3 0.03 12 0.03 11 6
    Turkey 0.08 4 0.03 16 0.08 4 20
    France 0.03 15 0.06 5 0.05 8 5
    Canada -0.02 0.05 8 0.03 10 11
    Mexico 0.02 19 0.01 23 0.03 12 14
    Korea -0.01 -0.1 -0.04 16
    Indonesia -0.03 -0.03 0.02 19 21
    Russia -0.19 -0.12 -0.04 9
    Japan -0.31 -0.17 -0.1 2
    Germany -0.32 -0.2 -0.13 4
    China -1.14 -0.75 -1.32 3
    Memo item:
    Euro Area 0.46 -0.61 0.25

    # Current account balance as % of GDP at MER weighted by shares in world GDP at PPP; current account surplus is expressed as a negative contribution to net global demand. Source: Authors’ calculations based pnWEO Database and IMF (2010b).

    For the other economies in the top 10, their contribution to global demand is mostly negative in net terms. The negative contribution of China (with private consumption constituting only 35% of GDP) to global net demand is projected to increase further. In 2007, the US’ positive contribution was roughly offset by China’s negative contribution. This balance deteriorated in 2009. Despite this, China has moved rapidly to become the third highest quota holder in the IMF and is likely to become the second highest in the next review in 2013-14!

    4 Conclusions

    Change is the great constant of the world economy, as the World Bank president remarked (Zoellick 2009). The emerging economies have not yet become the engines of global growth, but they will continue to increase their contribution to global growth with China and India and possibly Brazil emerging eventually as engines of growth. Aging Europe and Japan increasingly appear a spent force.

    The analysis presented in Section 3 suggests that the recent IMF quota reforms do not adequately reflect the emerging global economic realities and at this point in time, this must be regarded as a missed opportunity to redress the gross imbalance that has prevailed for several decades. Several “positive” aspects of the reforms have been given high publicity, but they must be assessed analytically and free of rhetoric. First, the reforms have empowered the IMF with sufficient resources to perform its mandated role of oversight of the international monetary system to ensure its effective functioning. When the reforms become effective and the borrowed resources under the New Arrangements to Borrow (NAB) are rolled back, the IMF should return to becoming a quotabased institution as it is intended to be, responsible and accountable to its membership. Yet, adequacy of resources is only a necessary condition, not a sufficient one for the effectiveness of the IMF. At the height of the global crisis, the resources committed by the IMF to assist affected countries were of the order of $150 billion. Alongside, the resources provided by the US Federal Reserve were $600 billion! This brings into sharp perspective the lending function of the IMF and the stigma/impediments associated with it through conditionality and processes of approval of countries’ request to access – the sufficient condition. While some modernisation and rationalisation have been effected in the recent period, clearly much more needs to be done to ensure a new-look IMF. Most importantly, adequate resources should not promote mission creep, luring the IMF for political reasons into areas in which its core competencies clearly do not exist. Second, a shift of more than 6% in quota shares to dynamic emerging and developing countries is envisaged, which is intended to make the governance of the IMF more representative and more reflective of the configurations that are taking place in the global economy. This shift, which has been hailed as the “biggest ever” by the IMF management, must be evaluated carefully. Following the shift, the share of advanced countries in the IMF quotas will be 57.7%. However, their share in global GDP at PPP in 2010 is only around 52.9%. Moreover, out of the shift of 6%, only 2.8% comes from advanced economies. The rest is obtained by cannibalising the shares of other emerging and developing countries which actually provide more than half of the shift. Furthermore, the IMF includes countries such as Korea and Singapore under the group of dynamic emerging and developing economies whereas the WEO (correctly) lists them as advanced economies. This brings about 0.6% of the widely publicised shift under question.

    The most positive aspect of the IMF reforms is the agreement on a comprehensive review of the current quota formula to be completed by January 2013, and the tacit agreement to base the 15th General Review of Quotas on a reformed formula. Yet, given the IMF’s track record and the continued dominance by Europe and the US, this must be taken with more than the proverbial pinch of salt. The agreement itself represents a formal reneging on the 2008 promise to reform the formula before it is used again. The flawed formula, which was only agreed upon for

    july 23, 2011 vol xlvI no 30

    temporary use in 2008, has been rejected by the emerging and board, a plurality of governors on the IMFC and EDs on the execudeveloping countries. The 14th Quota Review also leaves the veto tive board and a monopoly over the position of the managing of the US intact. The double majority decision-making option, director! Although the US has the single highest share of the which was a way around the veto, continues to wait in the wings. votes, its relative power is significantly less than many outsiders

    Turning to specific aspects, China, despite being the second perceive. Especially on fundamental governance issues such as largest economy in the world with the highest contribution to the quota-voting shares, European representation on the board/ global growth, has been accorded third place in quota shares in IMFC and the opening up of the managing director’s position to the IMF, partly because of its negative contribution to net global competitive selection, the euro area members along with the UK demand. India, the fourth largest economy, with the second can be much more assertive! highest contribution to global growth and the second highest The evolving international architecture needs to accommocontribution to global net demand during the greatest demand date India and other countries whose contributions to global contraction since the Great Depression, is in eighth position. If growth and stability have been vital in the most critical times this is a precedent, India faces formidable hurdles ahead during and will inevitably become more prominent in the years to the forthcoming rounds of quota reviews to persuade the power come. To be effective and relevant in a globalised world, the elite to accord due recognition to its contribution to the global evolving international architecture will have to reflect couneconomy, despite being poised to become the third largest economy tries’ contributions to world growth and stability. Sadly, the in a year or so. Too much depends on the European shareholders, changes in the international architecture so far have fallen short

    which have over one-third of the votes in the IMF’s executive of expectations.

    Notes

    1 An in-depth technical assessment of the formula is beyond the scope of the current paper. 2 On 5 November 2010 the value of the SDR was equal to $1.56.

    3 The ICP was established in 1968 as a joint venture of the United Nations Statistical Division (UNSD) and the International Comparisons Unit of the University of Pennsylvania with financial contributions from the Ford Foundation and the World Bank. To date, comparisons have only been made of final expenditure on GDP for 1970, 1973, 1975, 1980, 1985, 1993 and 2005 covering 10, 16, 34, 60, 64, 117 and 146 countries, respectively. Results of the ICP were first published in 1975. 1993 was the first time that all regions of the world were covered, but no world comparison was made until 2005. The latest PPPmeasurement round was carried out by the World Bank for 145 countries in the year 2005 under the umbrella of the International Comparison Project. The 2005 PPPs, extrapolated to adjacent years with national accounts deflators, have been used to compute the country and region weights for subsequent years by all the sources referred to above. Following the successful completion of the 2005 Round, the United Nations Statistical Commission (UNSC) in its 39th session requested the World Bank to host the Global Office and take on the global programme coordination of the 2011 Round, and in its 40th session gave the final go ahead for the ICP 2011 Round.

    4 See Deaton and Heston (2010) for a comprehensive overview. It is worthwhile to remember that systematic national accounting began only in 1931; many developing countries still have severe data limitations and have to rely on “guestimates” rather than estimates in various aspects of their national accounts!

    5 The Penn World Table (PWT) is a set of national accounts data developed and maintained by scholars at the University of Pennsylvania to measure real GDP (per capita) from the corresponding relative price levels across countries and over time. Successive updates have added countries (currently almost 190), years (1950-2004), demographic data, and capital stock estimates.

    6 The doctrine of PPP has a long tradition, dating back to the writings of Gustav Cassel (1918) who, in turn, drew from the work of the School of Salamanca in the 16th century.

    7 Virmani (2005a) pointed to the flaws in the famous McKinsey & Co BRICs study, which used market exchange rates and growth in the same to make forecasts and added exchange rate forecasts to obtain GDP PPP forecasts!

    8 Sixteen countries are chosen as they cover most of the countries entering public discourse and media

    attention, with a view to ascertaining the factual basis of this attention. 9 See Virmani (2009) for a further analysis of these trends.

    10 See also Virmani (2006) for predictions of the rise of China followed about two decades later by that of India, converting the world polity into a tri-polar one by 2035-40. This contrasted with the McKinsey & Co’s emphasis on BRICs and many scholars’ statement of an emerging multipolar world. Op cit (2009) analyses the paradox of the multipolar transition from a uni-polar to a tri-polar world!.

    11 This also confirms the future potential of Indonesia, which was first pointed out in Virmani (2005b), who also cautioned that Indonesia rise would follow that of India by at least a couple of decades!

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