The IMF Quota Formula: Linchpin of Fund Reform

Abstract

The current allocation of decision making in the International Monetary Fund (IMF), determined largely by the distribution of members' quotas, has failed to keep up with the changing world economy. The situation undermines the Fund's relevance and legitimacy in promoting global growth and economic and financial stability. A new simplified and transparent formula to guide the distribution of Fund quotas is key to IMF reform. The authors offer four recommendations to advance IMF quota reform: (1) The IMF executive board should complete its work on the new IMF quota formula by the 2007 annual meeting--rather than spring 2008--to ensure that the other necessary elements of a reform package can be completed by spring 2008 and ratified by the IMF governors at their annual meeting in fall 2008. (2) The new quota formula should follow the recommendations of the quota formula review group (QFRG), deleting an "openness" measure from the formula. The openness variable has no economic or financial justification, and the traditional measures are biased. (3) The traditional industrial countries should agree to a target of limiting their quota shares to 60 percent of their GDP shares to facilitate the further redistribution of quota shares toward the nonindustrial countries. (4) A reasonable benchmark would be an increase in the size of the Fund (total quotas) by at least 50 percent to implement the redistribution of quota and voting shares under the new quota formula.

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