- Feb 06 2016
Marking a significant development at the International Monetary Fund, developing countries, including India and China, will now have more voting rights with the implementation of long-pending quota reforms that was approved by the US Congress in 2015.
This pending resolution had been recommended by the IMF's Board of Governors in December 2010 and was seen as a move to strengthen and repair the fund's credibility, legitimacy and effectiveness, by increasing the role of emerging and developing countries.
As a part of far-reaching reforms, the Executive Board in 2010 had proposed the completion of the 14th general review of quotas with the doubling of quotas to approximately Special Drawing Rights 476.8 billion and major realignment of share among the members.
This reform package, which came into effect on January 26, has delivered a 100 per cent increase in quotas and a major realignment of quota shares, thereby improving the representation of the emerging and developing economies in the institution. A more representative, modern IMF will ensure that the institution is better able to meet the needs of its members in a rapidly changing global environment.
Quota subscriptions are central to the IMF's financial resources and determines the country's financial and organisational relationship with the IMF. Having faced criticism by the developing and the under-developed countries for a lack of representation and monopoly, which rich countries like the United States and Europe enjoy, present reforms have transferred more than six per cent of the quota share, including both the fund's capital and its proportionate voting rights from the developed economies to the emerging economies.
As a result, the combined quotas of the IMF's 188 members has increased from SDR 238.5 billion (about $329 billion) to SDR 477 billion ($659 billion). This will enhance the effectiveness of the members in responding better to the crisis by increasing IMF's quota resources.
Second, the shift of more than six per cent of the quota share to the emerging countries will improve governance of the fund by making the countries and the members of the developing economies being better represented.
As a consequence, four emerging economies including Brazil, China, India and Russia, for the first time will be among the 10 largest members of the IMF.
Among others are the US, Japan, France, Germany, Italy and the United Kingdom. With these reforms and realignment of shares, though the powerful position of the advanced economies won't be affected much, but for the emerging economies, the shift in the share will push their respective ranking.
For instance, India's share of quotas that would rise from 2.44 per cent to 2.7 per cent, will push India's ranking from the 11th position to the eighth position. Similarly, increase in the share of Russia from 2.5 per cent to 2.71 per cent will move Russia’s ranking from the 10th position to the ninth position.
The biggest gainer, however, will be China with its share rising from four per cent to 6.39 per cent, pushing up its rankings from the sixth position to the third position after the United States and Japan. Major losers will be Saudi Arabia and Canada whose shrinkage in the share of quota will push them out of the first 10 lists.
The reforms also envisage shifting the voting shares of the developing economies, guaranteeing an increment of 2.6 per cent in voting rights to the emerging countries.
Third, the reform will enhance the effectiveness of IMF's decision-making, including in its 24-member Executive Board. For the first time, the board will consist of entirely elected executive directors. This will bring an end to the category of appointed Executive Directors which is appointed by the five largest quota-holders.
In line with this, the advanced European countries have also committed to reduce their combined Board representation by two chairs by the next regular election of the Executive Directors. The new change that will usher is yet another attempt by the fund to reform the distribution of the quota or voting rights of the members.
The quota and the governance reforms ushered by IMF are truly historic. However, the reforms leaded by the IMF is not indicative of any major revamp as it was stipulated by the developing economies.
The 2.6 per cent points in voting rights gained by the emerging economies is a far from the 20 per cent points gain in the economic gains over the past decade.
This is partly because of the quota-share calculations which only gives 50 per cent weightage to the gross domestic product. Other factors included which calculating share includes the size of the currency reserves, volatility of cross-border investment flows and openness of the country's financial system to the outside world.
Further, the power to amend any IMF Articles of Agreement lies with the US Congress and cannot be sanctioned unless the US authorises. Therefore, despite a historic move, emerging economies have not gained much.
This article originally appeared in The Pioneer.