In a key step toward reforming the International Monetary Fund, the Executive Board backed a resolution that would achieve a significant shift in the representation of dynamic economies, many of which are emerging market countries, and give poorer countries a greater say in running the multilateral institution.

 Managing Director Dominique Strauss-Kahn told a March 28 news conference after the Board vote that the agreement will help the Fund to adjust its structures to the dynamic and changing realities of the global economy, and added it was only a first step. "We are creating a more flexible system for quota and voice, which involves further changes over time as the relative positions of countries in the world economy evolve. The decisions taken today reflect the membership's commitment to the Fund's future by enhancing its effectiveness, credibility, and legitimacy."

Strauss-Kahn said the reforms produced immediate results, under which 135 of the IMF's members received an increased voting share that is better in line with their real economic weight in the world economy.

The voting share of low-income countries was increasing as a result of a tripling in IMF members' basic votes, Strauss-Kahn noted, adding that the two African constituencies on the IMF Board would benefit from the appointment of a second Alternate Director.

International cooperation

Strauss-Kahn said the reforms were not easy to advance. "Difficult compromise was necessary by all Fund members to reach this point. But these have been achieved in the spirit of international cooperation that is the hallmark of this institution."

The resolution represented a very important step that "will allow us to have a more legitimate Fund." By itself, the move was not enough, "but without this step it would have been totally impossible to go on rebuilding the legitimacy of a multilateral institution like the Fund," Strauss-Kahn said. "It shows the institution is likely to evolve and to adapt."

The resolution, which must be approved by the IMF's Board of Governors with an 85 percent majority of total voting power, is a critical element in Strauss-Kahn's proposals to enhance the IMF's legitimacy and relevance.

Objectives of the reform

Acknowledging the underlying shift taking place in the world economy, with emerging market economies playing an increasingly important role, the IMF reform process aims to better align quota and voting shares in the Fund with member countries' weight and role in the global economy. Equally importantly, the reform aims to enhance the participation and voice of low-income countries.

New Quota Formula

The new quota formula contains four variables expressed in shares—GDP, openness, variability, and reserves—with weights of 50 percent, 30 percent, 15 percent and 5 percent, respectively. The GDP variable is a blend of 60 percent of GDP at market exchange rates and 40 percent of GDP at Purchasing Parity Power (PPP) rates. In addition, some of the variables in the new quota formula have been updated and modernized from those in the existing five formulas.

The Board proposal is part of a two-year reform program approved at the 2006 Annual Meetings in Singapore, when initial ad hoc increases in quotas were agreed for China, Korea, Mexico, and Turkey. A country's quota at the IMF largely determines its voting power in the 185-member institution.

Reform package

The main elements in the reform package are:

• A more transparent quota formula. The reform is based on a simpler, more transparent quota formula (see box).

• A second round of ad hoc quota increases. Together with the 2006 ad hoc adjustments, the cumulative increase in quotas for dynamic countries is 11.5 percent. All underrepresented members under the current formula are eligible for a quota increase under the reform. Three one-time elements are also included:

□ Some advanced economies forgo increases. To reinforce the objectives of the reform, several underrepresented advanced countries have agreed to forgo part of the quota increases for which they are eligible: the United States, Germany, Italy, Japan, Ireland, and Luxembourg.

□ Boost for members underrepresented based on global PPP GDP. To give additional recognition to dynamism, underrepresented emerging market and developing economies with actual quota shares substantially below their share in global GDP in terms of purchasing power parity (PPP) will receive a minimum nominal quota increase of 40 percent under the reform.

□ Further increases for the Singapore-4. Recognizing that the four members that received quota increases in the first round at the Singapore Annual Meetings in 2006 remain substantially underrepresented, these members will receive a minimum nominal second-round increase of 15 percent.

• Five-year reviews. To ensure that quota and voting shares continue to reflect developments in the weight of member economies, and to make further progress in closing the gap between actual quota share and those calculated under the quota formula, the proposal recommends further realignments of quota shares in the context of future general quota reviews, which occur every five years.

• Improved voice for low-income countries. The proposal enhances the voice and participation of low-income countries through two measures, requiring an amendment to the IMF's Articles of Agreement:

□ A tripling of the basic votes of all members—the first such rise since the Fund's inception in 1945. A mechanism is also to be established that would protect the share of basic votes to total votes going forward. All countries receive an equal number of basic votes, designed to protect the voice of smaller members.

□ Additional Alternate Executive Director for African Chairs—this would further enhance the capacity of the two Executive Directors offices representing African constituencies, recognizing the heavy workload that flows from the important advisory and financial role that the Fund is playing in many of the member countries represented by these offices.

Resulting significant realignment

The reform brings quota shares closer to members' evolving position in the world economy. As a result, 54 countries will get an increase in nominal quotas ranging from 12 to 106 percent, with some of the largest gains going to the dynamic emerging market economies. The combined increase in quota shares for these 54 countries is 4.9 percentage points.

In total, 135 countries will see an increase in voting share of 5.4 percentage points due to the combined effects of the increase in quotas and basic votes. Among countries that will see the biggest increase in voting share in the two rounds combined are China, Korea, India, Brazil and Mexico.

Approval process

The Governors, who represent the highest decision making body in the Fund, are requested to vote on the proposal within the next 30 days. The resolution would come into force when it is accepted by members having at least 85 percent of total voting power. This would mark an important step in modernizing the quota structure of the Fund and strengthening the legitimacy of the institution. Nevertheless, governance reform at the Fund is an ongoing process and completion of the reform agenda approved in Singapore will open the door for further reforms in the future. (IMF)