Note on Quota Formula Review: Initial Considerations
Paulo Nogueira Batista Jr.
March 2012
1. The staff’s paper on Quota Formula Review – Initial Considerations (SM/12/29) is a very
useful contribution to the review of the quota formula. As we all know, the comprehensive
review of the formula by January 2013 is an important element of the 2010 quota and
governance agreement.
2. Staff reminds us in the first paragraph of the paper that this agreement includes as one
of its key elements: “Continuing the dynamic process aimed at enhancing the voice and
representation of emerging market and developing countries, including the poorest, through a
comprehensive review of the quota formula by January 2013 to better reflect the economic
weights; and through completion of the next general review of quotas by January 2014”, as
stated by the G20 Leaders in their Seoul communiqué. Some Executive Directors seem anxious
to stress that we should not prejudge the outcome of these reviews. It is undeniable, however,
that the Board is not starting from a clean slate. We are obliged to abide by the commitments
our authorities have signed up to.
3. The G20 and the IMFC have also agreed, and reiterated this guidance more than once,
that the distribution of quota shares should reflect relative weights of Fund members in the
world economy. Lest this be misinterpreted, I draw attention to the fact that the link between
quota shares and relative weights is invariably accompanied by the observation that these
relative weights “have changed substantially in view of strong growth in dynamic emerging
market and developing countries”. Thus, there is only one way to understand the commitments
made by Leaders, Ministers and Governors: quota shares should be derived from relative
economic weights with the latter corresponding to shares in world GDP. I attach to this note
the language on quotas and quota formula agreed to by the G20, the IMFC and the Board of
Governors since the last review of the quota formula in 2008.
4. Based on these commitments, GDP should be at the center of the review of the quota
formula. In my view, the quota formula should be streamlined so as to basically retain a
compressed blend GDP variable. This would align the ranking of calculated quota shares with
the ranking of economies by size, i.e., by their relative weights in the world economy, while
providing at the same time some protection to the small countries. We could also consider
raising the share of GDP-PPP in the blend from the current 40 percent. The compression factor
should be maintained in the formula, and possibly increased, to reduce the dispersion of quota
shares and especially to favor the smaller members.
5. At this stage, the Fund should discontinue work on variability and openness. These are
fundamentally flawed variables and their weaknesses have been widely recognized inside and
outside the IMF. I favor dropping both from the quota formula and increasing pro tanto the
share of GDP.
6. Variability is supposed to be a measure of the potential need for Fund resources. In the
current report, staff recognizes the many conceptual and measurement flaws of the variable. In
recent years, several attempts to redefine variability have led us nowhere. Moreover, the
relation between quotas and access to Fund resources became tenuous. Last year’s paper on
Quota Formula Review – Data Update and Issues (SM/11/226) showed that GDP, rather than
quota, has been a better gauge of potential access to Fund financing in exceptional access cases
since the Mexican crisis in 1995. For these and other reasons, I welcome staff’s appraisal that
there is a case for dropping variability from the quota formula.
7. Unfortunately, staff falls short of making the same appraisal regarding openness,
despite similar or even worse problems. As currently measured, openness results in double or
multiple counting because of the use of a gross measure. This problem is increasing over time
reflecting greater vertical integration and trade in intermediate goods. Measuring openness on
a value-added rather than gross basis could, in theory, mitigate double counting. However, staff
indicates, once again, that this is not feasible due to data availability constraints.
8. The traditional rationale for including openness in the formula is flimsy. Presumably,
countries that are more open to trade and financial flows have a greater stake in promoting
global economic and financial stability and should, therefore, be rewarded with higher quotas.
As staff notes, however, some have argued that larger economies tend to be more closed but
still have a major stake in international stability. The whole reasoning is essentially arbitrary. It
could also be said, for instance, that open economies more easily “export” their domestic
imbalances and shocks, especially through financial channels, and should thus be punished with
lower quotas. If we continue down that route, we will find all kinds of sophistic propositions to
justify our preferred quota variables.
9. I see little value in further discussing alternatives ways of measuring financial openness
and including it directly in the formula. The staff paper shows abundantly that there are several
obstacles to moving in this direction. Including financial openness as a separate variable or
increasing its weight inside the openness variable would distort the distribution of quota
shares, favoring a few international financial centers, tax havens and jurisdictions with lax
regulatory frameworks. Severe data availability constraints stand in the way of using the
International Investment Position (IIP) as a way of measuring financial openness. The existence
of large data gaps and significant measurement challenges, partly due to the complexity of
international financial transactions, lead staff to conclude that on balance IIP is not suitable for
inclusion in the quota formula.
10. As a proxy for financial openness, investment income also presents significant
measurement issues, as explained by staff, and is already included in the openness variable as
currently defined. The use of investment income flows would leave unaddressed the issue of
how to treat international financial centers. Indeed, the presence of financial openness in the
quota formula tends to reward countries that have large international financial centers relative
to their size, including those that attract financial institutions by adopting low taxes or soft
regulation and supervision.
11. Similarly, the discussion on ways to capture financial contribution in the quota formula
can be seen, at best, as a mere distraction. Staff highlights one key difficulty: financial
contributions to the Fund come in many different forms (bilateral lending, participation in the
FTP and NAB, funding of the PRGT, funding of technical assistance, and charges and fees
associated with borrowing from the Fund, among others). Any attempt to aggregate these
different types of contribution would be arbitrary.
12. There is, however, a more fundamental issue. Including financial contributions in the
quota formula would amount to putting up quotas for sale. We might as well auction off quotas
going forward. Is it not obvious that this approach would tend to crystallize the institution as a
“rich man’s club”? High-income members would gain automatic advantage vis-à-vis the rest of
the membership, especially the poorer countries. Therefore, and given the arguments that staff
itself presents in the report, I see no reason to continue to explore the inclusion of financial
contributions in the quota formula. This sort of proposal flies in the face of the commitment to
reform the institution and make it more credible, legitimate and representative.
13. I continue to support the update of the classification of advanced and emerging market
and developing countries to mirror the World Economic Outlook.
ANNEX
G20, IMFC and Board of Governors
Agreed Language on Quotas and Quota Formula Review (emphasis added)
1) September 25, 2009, G20 Leaders, Pittsburgh
“Modernizing the IMF’s governance is a core element of our effort to improve the IMF’s
credibility, legitimacy, and effectiveness. We recognize that the IMF should remain a quota-
based organization and that the distribution of quotas should reflect the relative weights of its
members in the world economy, which have changed substantially in view of the strong
growth in dynamic emerging market and developing countries.”
2) October 4, 2009, IMFC, Washington DC
“Quota reform is crucial for increasing the legitimacy and effectiveness of the Fund. We
emphasize that the IMF is and should remain a quota-based institution. We recognize that the
distribution of quota shares should reflect the relative weights of the Fund’s members in the
world economy, which have changed substantially in view of the strong growth in dynamic
emerging market and developing countries.”
3) June 27, 2010, G20 Leaders, Toronto
“We recognize that the IMF should remain a quota-based organization and that the distribution
of quotas should reflect the relative weights of its members in the world economy, which
have changed substantially in view of the strong growth in dynamic emerging market and
developing countries.”
4) October 23, 2010, G20 Ministerial, Gyeongju
[The IMF quota and governance reforms include:] “Continuing the dynamic process aimed at
enhancing the voice and representation of emerging market and developing countries,
including the poorest, through a comprehensive review of the quota formula by January 2013
to better reflect the economic weights; and through completion of the next general review of
quotas by January 2014”.
5) November 10, 2010, Board of Governors Resolution submitted to the BoG by the IMF
Executive Board
“The Executive Board is requested to complete a comprehensive review of the formula by
January 2013.”
“The Executive Board is requested to bring forward the timetable for completion of the
Fifteenth General Review of Quotas to January 2014. Any realignment is expected to result in
increases in the quota shares of dynamic economies in line with their relative positions in the
world economy, and hence likely in the share of emerging market and developing countries
as a whole. Steps shall be taken to protect the voice and representation of the poorest
members.
6) November 12 2010, G20 Leaders, Seoul
[Consistent with our commitments at the Pittsburgh and Toronto Summits, the IMF quota and
governance reforms include:] “Continuing the dynamic process aimed at enhancing the voice
and representation of emerging market and developing countries, including the poorest,
through a comprehensive review of the quota formula by January 2013 to better reflect the
economic weights; and through completion of the next general review of quotas by January
2014”.