Monday, October 15, 2012

IMF Quota Formula Flawed: A simple test

The Emerging economies, particularly Brazil, India and Russia, have called for a fundamental reform of the IMF Quota Formula, arguing that the formula is fundamentally flawed.  The Advanced Economies, particularly rich countries of Europe, have asserted that the formula is just fine and minor tweaking may be all that is required.  Our earlier blogs and papers have addressed this issue from the philosophical and analytical angle. This blog presents a simple test to determine whether the formula is flawed.  the same test can also be applied to check whether any proposed change in the form represents a serious effort at reform.
One simple numerical measure of the flaws in the formula is what in the IMF’s esoteric parlance is known as “over representation” and “under representation” of member countries.  This is the difference, for each member, between the actual quota share (AQS) and the calculated Quota share (CQS).  We can easily calculate the AQS and CQS which would prevail after the 14th General Quota review based on data available in 2010 (termed the 2010 quota reform) and calculate the difference X=AQS – CQS.  In IMF parlance countries with a positive X (AQS > CQS) are defined as “over represented” at the IMF, while those with a negative X (AQS< CQS) are defined as “under represented.” Table 4 summarizes the number of such countries among the set of Advanced Economies (AEs) and Emerging Market and Developing Countries (EMDCs).
Table 1: Statistical Measure of Bias in Flawed Formula
Number (%) of countries
                                                     Over represented         Under represented
Advanced Economies (AEs)                5 (24%)                         16 (76%)

Emerging Economies (EMDCs)         100 (70%)                       42 (30%)

          Table 1 shows that 76% of the AEs are “Under represented” while 70% of the EMDCs are “Over represented.”  Thus the formula is clearly biased in favor of the AEs and against the EMDCs and needs to be reformed. 
A minimal test of a Quota formula reform would be whether the quota formula reform removes this statistical bias i.e. whether the new formula yields a CQS that evenly distributes the number of AEs and EMDCs in the two categories.