The Hindu Business Line : IMF quota formula needs reality check

The second stage of the IMF quota review must consider need-based economic indicators while contemplating a revision of the outdated Bretton Woods formula.

One of the items approved at the just concluded annual meeting of the International Monetary Fund, despite protests from Argentina, Brazil and Egypt led by India, was the two-step proposal for an immediate quota increase for China, South Korea, Turkey and Mexico, while the second phase would see a revision of the formula followed by further quota adjustments and increases in the so-called basic votes, which the African countries have been pushing for.

The ad hoc increase for China will increase its voting power from 2.98 to 3.72 per cent while that of India will slide to 1.91 from 1.95 per cent. While the IMF management had cautioned its members that its legitimacy was being threatened by the skewed voting system in which small European countries such as Belgium and the Netherlands together had more votes than China, the Finance Minister, Mr P. Chidambaram, had opposed the first stage of the proposal.

One-shot re-balancing

Stating that New Delhi does not believe that a two-stage approach is necessary or practical, India, which also represents Bangladesh, Sri Lanka and Bhutan, held that a one-time rebalancing of power, based on a credible new formula for calculating IMF quotas, would be more effective.

The percentage of quotas of the individual member-countries decides not just their voting rights but also determines their access to the Fund resources. Besides, the size of a country's quota is a decisive factor in its level of representation in the Fund, as for example, the post of a Director or his alternate on the Executive Board of the Fund.

Industrial countries also attach great importance to their ranking in the Fund membership, which is strictly in accordance with their quota size. At present the largest member of the IMF is the US, with a quota of SDR 37.1 billion (about $55.1 billion), and the smallest is Palau (SDR 3.1 million; about $4.6 million).

Voting power

The quota largely determines the voting power. Each member has 250 basic votes plus one additional vote for each SDR 100,000 of quota. Accordingly, the US has 371,743 votes (17.08 per cent of the total) and Palau 281 votes (0.01 per cent).

The amount of financing a member could obtain from the IMF (its access limit) is based on its quota. Under Stand-By and Extended Arrangements, a member can borrow up to 100 per cent of its quota annually and 300 per cent cumulatively.

However, access may be higher in exceptional circumstances. Further, a member's share of general SDR allocations is established in proportion to its quota.

The IMF Board of Governors conducts general quota reviews at regular intervals, usually five years. The Twelfth General Review was concluded on January 30, 2003 with no proposal to increase quotas. The Thirteenth General Review is to be completed by January 30, 2008.

Quota Formula

The quota for each member is arrived at using a set of formulas and this is known as calculated quota. The quotas of the original members of the Fund were determined at Bretton Woods by a process of negotiation and compromise, which took place within the limitations dictated by certain generally accepted principles but gave the US and the UK and its dominions, a dominant position within the Fund.

According to the Bretton Woods formula, a country would have a larger quota if its exports were larger in relation to its national income. The Bretton Woods formula was employed as the basis for calculation of quotas of 27 members who joined the IMF between 1946 and 1958. In several cases, however, member countries had preferred to take smaller quotas than allotted.

Use of the original Bretton Woods formula was considered inappropriate not merely due to lack of purpose of quota calculations but because the formula was yielding relatively small quotas for the smaller countries. In revision of the method of quota calculations made at the time of the Fourth Review, the Bretton Woods formula itself was re-weighted and the quota structure altered to some extent in favour of the developing countries. In the Fifth Review in 1969-70, all the members, except China and the UK, were authorised to increase their quotas by larger amounts.

The Ninth Review made adjustments to accommodate the members of the erstwhile Soviet Union, which had become individual countries and joined the Fund membership. Russia was given a sufficiently large quota to enable it to have a position higher than China though its quota would be still lower than the G-7 countries.

Need-based variables

At the time of the Ninth Review, India had made out a strong case for including need-based variables such as various forms of poverty index, indicators of debt and of current and capital accounts in the method of calculation of quotas. For want of time the proposal was deferred for the Tenth Review but even this review did not result in change in the quota formula.

The concerns expressed by Mr Chidambaram now over the proposed ad hoc increases for certain countries alone should be appreciated in this context. It goes without saying that in a cooperative institution such as the IMF, which plays a crucial role in the structural adjustment policies of several low and middle-income countries, the calculation of the quotas, which is the basis to determine the members' access to Fund resources, should attach certain weight to need-based indicators such as population, per capita income and poverty index.

The Finance Commissions in India have, over the years, developed several such indicators as income-adjusted population, inverse of per capita income, and the distance criterion (that is, the distance between the per capita income of the State with the highest per capita income and the per capita incomes of other States).

Such indicators could be considered at the global level for quota distribution. It is hoped that the second stage of the quota review will consider such need-based economic indicators while contemplating a revision of the outdated Bretton Woods formula.

(These are the personal views of the author, a former staff member of the IMF. and not those of the Government where he works or the Government of India. Email: sitharamgurumurthi@yahoo.com)

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