Wednesday, June 13, 2012

Quota Formula Reform is about IMF Credibility

The Euro crisis has overwhelmed all other debates about the reform and development of global governance institutions dealing with the World Economy.  It is therefore necessary to remind ourselves why we need a reform of the IMF Quota formula.  In one word it is all about the "Credibility" of the IMF in a rapidly changing World Economy.  Unless the power balance in the IMF changes to reflect the changes in the economic power in the World economy, the IMF will inevitably loose credibility as an "International" institution! Maybe my eye sight and hearing are not as strong as in my youth, but in the past year I have heard nothing (in the IMF or G20 setting) that would indicate that there is any recognition by the European Powers of the need for formula reform (and vote shares) to maintain credibility.

  The following table on the contribution of major economies to World growth during the past three decades encapsulates succicinctly the point about global change and credibity.  In the decade of the 1980s the US and Euro Area +  UK contributed over 1/5th each with Japan contributing about 1/10th.  In the decade of the 2000s the contribution of each of these had declined sharply with the USA contributing less than the 10% contribution of India, and all three together contributing about half that of China. The contribution of the Euro area+ UK has declined progressively from 20.6 percent in the 1980s to 17.3% in the 1990s to 6.4% in the 2000s.  This reflects a fundamental transformation of the World Economy and an emerging shift in economic power.  Unless this shift in economic power is reflected in the IMF an institution for monitoring/managing the global economy, it is not difficult to imagine it going the way of other UN institutions that have completely lost Global credibility and are increasingly being bypassed!.

Table  Contribution to World Growth
1981 to 1991 to 2001 to 1981 to
1991 2001 2011 2011
United States 21.2% 26.3% 9.6% 17.0%
Euro Area+ UK 20.6% 17.3% 6.4% 12.6%
Japan 11.4% 2.4% 1.0% 3.7%
China*# 8.7% 17.9% 29.6% 21.6%
India*# 4.4% 6.5% 10.1% 7.8%
Rest 33.8% 29.7% 43.4% 37.3%

There is one other very important fact that is often obscured, sometimes deliberately.  The contribution of the "Rest of the World" has increased by 10 per cent points from 33.8% in the 1980s to 43.4% in the 2000s.  A formula that fully reflects the changes in the Global economic power will add to the vote share of  the smaller countries, not reduce it!
    The US share of the World economy has declined from 23% in 1980 to 19% in 2010.  Yet they have wisely chosen to hold a little over 15% of the quota shares and continue to remain below their share of the World economy.  The Euro area + UK's share of the World economy has declined from 25% of total in 1980 to about 18% in 2010, while their calculated Quota share (CQS) is 27.5%. At the same time their share of total borrowing from the IMF has increased dramatically.  Three decades ago the rich countries had the money and controlled how it was lent to the poor countries who were the main borrowers.  The objective situation has now reversed with the rising powers perfectly willing to contribute as much as needed as long as their quota share is adjusted appropriately, while the major borrowers are the rich countries of Europe. The earlier arguments are therefore being turned on their head to justify the continued control of the European powers.  Unless the Quota Formula is changed to align the voting rights in the IMF to that of economic power in the global economy there is a danger of Global public opinion beginning to question the 'International' in IMF and to wonder whether it is the European Monetary Fund(EMF)?

1 comment:

shruti said...

hello sir,
i am a student of Narsee Monjee College, Mumbai.i am doing a project pn dollarisation and i would like to have your reviews on it,As you are on of the famous economist can you please mail me your email id.
thank you for your time.looking forward for a positive reply.