A new way forward on IMF quota reform

At the UN’s Monterrey Summit in March 2002, heads
of state and government agreed to broaden and
strengthen the participation of developing countries
and economies in transition in international decision making
and norm setting. But five years later, it is clear that the
reform of the IMF’s governance—which encompasses, among
other things, quotas, voting rights, and voice—has progressed
rather slowly. This situation urgently needs to be turned
around, as recognized by the International Monetary and
Financial Committee, which regularly reviews progress on
the Monterrey consensus. Its April 2006 communiqué stated
that the IMF’s effectiveness and credibility as a cooperative
institution must be safeguarded and its governance further
enhanced, emphasizing the importance of fair voice and representation
for all members.
In an effort to further the debate on how best to formulate
a proposal for quotas and voice reform in the IMF, we have
looked to John Rawls, arguably the greatest political philosopher
of the 20th century, for guidance. We feel that his theory
of justice provides an appropriate method for understanding
the core issues in this debate. We use the Rawlsian notion of
“justice as fairness” to demonstrate that justice in the governance
structure requires a distribution of voting power that
participants accept as the end result of a fair process—and
that a major revision of the quota formulas is long overdue.
Problems with current governance
So how are quotas calculated? When the IMF was established
in 1944, a formula—which would become known as the
Bretton Woods formula—was developed. It contained five
variables: national income, official reserves, imports, export
variability, and the ratio of exports to national income. In the
early 1960s, this formula was supplemented with four more
formulas (which contained the same basic variables but with
larger weights for external trade and external variability). But
two different data sets were used, making, in effect 10 formulas.
In 1981–82, the number of formulas was reduced and the
variables used were simplified.
What we are left with today are five formulas that try to
capture economic size, openness, and the demand for and
supply of IMF resources. The calculated quota serves multiple
purposes—including voting power and a country’s access to
financing—meaning that it has to balance competing considerations
about what variables to include in the formulas and
the weight to attach to each variable. Over time, members’
quotas have become increasingly out of line with their economic
weight in the global economy. In addition, the current
quota formulas do not capture some important aspects of
members’ economic situation and other variables that should
have a bearing on voting rights.
Another problem is that the Bretton Woods founding
fathers of the IMF and the World Bank reached a compromise
to balance the Westphalian principle of the legal equality
of states (which called for one country, one vote) and the
economic argument for basing votes on capital contributions—
but the balance has been eroded over time. In 1944, they
decided to allocate 250 “basic votes” to each member country,
ensuring that each country would have a voice. However,
since then, IMF quotas have increased 37-fold, with basic
votes remaining unchanged. The result has been a drastic
reduction in the participation of small countries in decision
making.
What Rawls would say
As we weigh how to improve IMF governance, Rawls helps
us by stressing in his theory of justice that we should imagine
a situation in which a group of individuals are brought
together to agree on the basic constitution of an international
institution that they are about to enter, but in which,
to ensure their impartiality, they are placed behind a veil of
ignorance—a device that screens out information about,
among other things, population, national output, and level
of development. In deciding what the quota formula should
be, the representatives must make a choice without knowing
what type of country they would represent. With the expulsion
of bias-inducing knowledge, the participants are forced
into the moral point of view, which allows Rawls to claim that
he has set up an inherently fair procedure.
We cannot know for sure what quota formulas would
be chosen by rational actors in the hypothetical situation
postulated by Rawls. But this should not stop us from
doing our best to imagine what that outcome might be,
even while recognizing that reasonable people can disagree.
That said, it is much easier to demonstrate what does not
satisfy Rawlsian principles than what does, and the quota
formulas and the IMF’s current governance structure do not
even come close to justice as fairness. Thus, it is clear that a
rational representative considering the governance structure
behind the Rawlsian veil of ignorance would not support
the current voting distribution that gives almost no weight
to the Westphalian principle of “one nation, one vote” and
an exact zero weight to the democratic principle of “one
person, one vote.”
A d e v e l o p i n g c o u n t r y v i ewp o i n t