IMF fails to find consensus on quota formula reform

Added 14 Feb 2013

by Bodo Ellmers,

The comprehensive review of the International Monetary Fund’s (IMF) quota formula failed to find consensus on a clear reform proposal. Controversies persist between the old rich and emerging economies on which factors should determine a country’s quota, and consequently its power in the IMF and access to IMF resources. Many stakeholders have fundamentally challenged the IMF’s plutocratic governance model which gives rich countries the power to decide over the fate of poorer nations and people, and propose alternatives such as a ‘double majority’ voting system which would greatly enhance the legitimacy of the IMF.

Keeping track? IMF quota and quota formula reform

In a new environment where new economic powers are emerging and old powers declining, the IMF has pursued several reform processes to keep up. On the one hand, it has already agreed to redistribute a very small share – less than 3 per cent by independent estimates - of IMF quotas to the marginal benefit of emerging economies. This process is currently stalled, as the initiative awaits approval by the US Congress.

But in parallel, a more fundamental reform of the formula that determines the quotas is ongoing, as part of a larger reform package of IMF governance agreed in 2010.  The IMF was mandated to conduct a comprehensive review of the quota formula, due to be completed in January 2013. The quota formula reform is supposed to reinforce the legitimacy and effectiveness of one of the world’s most influential international organisations, by setting new rules for realigning the member states’ shares with their changing relative position in the world economy.

The reform was pursued half-heartedly at the beginning but gained new traction when in April 2012 the BRICS countries (Brazil, Russia, India, China and South Africa) committed an extra USD 75 billion to the Fund, using a channel which did not increase their share of the votes. But this came under the condition that the IMF embarks on a governance reform process that would give a larger share of votes to the emerging economies.

The quotas’ relevance comes from the fact that they determine a member states’ financial contributions to the IMF, their access to IMF resources, and voting rights within the IMF. In contrast to the United Nations’ “one state – one vote” principle, decision-making at the IMF remains based on the plutocratic “one dollar – one vote” concept. Currently, the quota is mainly determined by a member states’ gross domestic product (GDP, weight of 50 percent). As well as by economic openness measured primarily on the basis of gross financial flows (30 percent), the economic variability (15 percent), and the currency reserves it holds (5 percent). Only complex the so-called “compression formula” helps smaller members to gain some weight. Member states have basic votes too, this gives poorer countries a little more weight, but historically their share of the total has been shrinking thus gradually marginalising their influence.    

The quota formula review: dissent throughout

The IMF Executive Board failed to find a clear consensus at its last meeting on 30 January. All that was achieved, according to the IMF’s official communication, is “identifying key elements that could form the basis for a final agreement on a new quota formula”. The work will have to continue under the 15th General Review of Quotas, due to be completed by January 2014.  

Conflict lines are drawn roughly between three factions: The old economic powers which do not want to see their share of quotas reduced the emerging markets which recently contributed massively to the Fund’s resource increases and want to see their new power reflected in the IMF’s governance structure, and the remaining developing countries which fear being even further marginalised.

The public report from the IMF Executive Board states that all components of the current quota formula were contested during the session.  The positions of different parties are not easy to identify as attributions are not made public, this lack of transparency is part of the IMF’s wider democracy deficit. Some parties argued that purchasing power parity should play a stronger role in calculating a member state’s GDP, and that the voluntary contributions to the IMF should have an influence on the quota too. Both approaches would massively increase the emerging market countries’ share. There was agreement that the voice and representation of the poorest members should be protected, but the report does not contain a clear proposal on how this is supposed to work in practice.   

The IMF Executive Board is missing the point

More fundamentally, many stakeholders including civil society organisations argue that the reform proposals currently debated in the Executive Board are missing the point. All proposals currently discussed remain within the outdated concept that money and economic weight should be the central criteria for determining influence of certain member states in an international organisation. Even under application of these criteria, it is obvious that the old North-Western economic powers need to give space. With a quota of 29.42%, in particular advanced Europe is overrepresented. The US share of 17.69% is justified from the point of view of economic relevance, but this quota gives the USA the privilege of a de facto veto right, as most decisions require a 85% majority. This right of veto by one single member degrades the IMF from an international to a de facto unilateral organisation in which IMF staff and other members are permanently obliged to please just one of the 188 Member States, in order to preempt an exercise of the veto.       

A more fundamental reform of the decision-making system is needed: this should include a double majority system, in which the current quota-based voting system would be complemented by a state-based system. Such a new decision-making process would essentially marry the current “one dollar – one vote” principle with the “one state – one vote” model that is used by the United Nations. The poor but numerous developing countries would gain substantially more influence.  The ongoing ‘gentleman’s agreement’ that ensures that a European is always head of the Fund and an American head of the World Bank was completely ignored by the Executive Board’s review exercise. This carve up of the leadership positions continues to undermine the Fund’s legitimacy as a global institution.

If legitimacy and effectiveness are the quota formula’s stated aims, the governance reform cannot be limited to cosmetic changes that leave the fundamental flaws of IMF decision-making unaddressed. Key step is to move on from the plutocratic governance regime that has distorted the IMF’s operations from when it was founded, right up to today.