In September 18, 2006, the Board of Governors of the International Monetary Fund adopted a resolution requesting that the Executive Board reaches an agreement on a new quota formula before the annual meetings of 2007 and no later than the Spring 2008 meetings. It was agreed that the new formula should be simpler and more transparent, and that it should better reflect the positions of the various member states in the world economy.
The process of formula revision is a long and complicated one. Indeed, the formulas currently in use are dated 1983. In 1999, a group of experts chaired by Richard Cooper proposed a dramatic simplification of the existing, complicated system based on five different formulas. This proposal launched a lively discussion and intense work by Fund’s staff. The bottom line of the discussions is that it is extremely difficult to produce a simple formula that does not lead to higher concentration of quotas (hence, on voting rights) in advanced industrial countries, with even lower representation of low-income countries than is presently the case.
Once agreed on, the new formula(s) will unlikely be reconsidered for a number of years. Therefore, it is useful to simulate the impact of alternative formulas not only in the short run, but also in the longer run where the distribution of income, trade flows and capital flows across IMF member countries will surely differ from the present situation. It should be reminded here that a 2% GDP growth differential between two countries leads to a 22% income differential after 10 years and a 49% differential after 20 years.
To simulate quota formulas forward, a number of projection tools are needed. Here we rely on long-run GDP projections provided by Poncet (2006) and on CEPII’s computable general equilibrium MIRAGE to simulate various quota formulas up to year 2030, for 49 countries or zones.
Although these scenarios should be considered with great caution given the heroic assumptions they derive from, they provide useful benchmarks.
The results for the United States, the Eurozone, China and Sub-Saharan Africa in 2030 can be summarised as follows:
• The share of the United States is highest with an uncompressed formula with a high weight on GDP and preferably without volatility and reserves; it is lowest with a formula based on population instead of GDP. With the except of the population formula, this country manages in keeping a high quota share at the 2030 horizon.
• The quota share of the Eurozone can be as high with a compressed formula as with an uncompressed one; excluding intra-Eurozone flows is detrimental by up to 4 percentage points in 2030; population may not be worse than GDP in purchasing power parity, depending on the formula chosen. However there is little the Eurozone can do against an approximately 6 percentage points decline of its quota share from 2001 to 2030.
• The share of China is highest with a formula based on population or GDP in purchasing power parity; it is lowest with compressed formulas. Chinese share is bound to double or even triple from 2001 to 2030, but in a quite different way depending on the formula.
• The share of Sub-Saharan Africa is higher with compression, but the highest share is by far that obtained with population instead of GDP; using GDP in purchasing power parity does not produce a significant rise in the quota share.
On the whole, the present discussions around IMF quotas reflect existing inconsistencies between the three purposes of the quotas – contribution to the Fund, access to resources, voting rights – not to mention the design of good policy incentives for member countries. The reduced role of the Fund as a provider of financial assistance may have contributed in moving the focus to the third purpose at the expense of the first two. If this is the case, a deep change in the formulas, such as the inclusion of population and the dropping out of variables that risk producing wrong incentives, such as variability or reserves, may deserve some attention.