Quotas and Voting Shares in the IMF: Theory and Evidence
AbstractThe International Monetary Fund (IMF) is a financial institution founded in 1944 with the main purpose of assisting members facing temporary balance of payments problems. From an initial membership of 44 states, today almost all the countries in the world participate in it. Members of the IMF do not have equal power. They contribute a quota subscription of financial resources, and this quota is the basis for determining voting power. Historically, quota allocations have been based mainly on economic size and external trade volume. Heterogeneity among members in terms of population, wealth and integration to international markets has recently produced a debate about the methods used for quota determination. In response to this, and also in the face of mounting criticism from academics and policymakers, the IMF embarked in September 2005 on a large-scale program of modernization. Salient among its objectives was governance reform, including adjusting quota shares to “reflect better the relative weight of members in the world economy”. In April 2008, a reform proposal representing a step in this direction was approved. In the past decade there have been many reform proposals that focused on different aspects of IMF governance, but none of these, and other, reform proposals has been founded on a model of expected utility maximization. With the aim of contributing to this debate, we adapt the model of Barberà and Jackson (2006) of optimal voting rules in a heterogeneous union. In the model, votes at the IMF take place over two alternatives: whether or not to bailout a member country in crisis. An optimal voting rule seeks to maximize a welfare function that takes into account the utilities of all citizens represented in the IMF. When making a decision for a particular vote, representatives at the IMF weight the benefits and costs that a bailout would have on their respective countries' citizens. Benefits are assumed to relate to trade linkages, and costs are assumed to originate from moral hazard ineficiencies affecting net factor income from abroad. When benefits outweigh costs a country will vote in favor of a bailout. To determine how a crisis abroad affects the welfare of a member country’s citizens, we use a static model of aggregate demand and have the foreign crisis triggering a real exchange rate shock to each member’s current account due to trade linkages with the crisis country. The direct effect is proportional to the size of trade with the crisis country as exports to it would decrease, and imports from it increase. Since a country can dampen the effect that a crisis abroad has on its real exchange rate through the use of international reserves, the welfare impact would be decreasing in the stock of foreign reserves held. Under the assumption that the marginal utility of income is decreasing, welfare effects are larger for poorer countries. In this context, optimal weights are proportional to a country’s volume of trade. Given participation in world trade, quotas decrease with per-capita income and with holdings of foreign reserves. The model further predicts that the IMF would be more likely to provide assistance to bigger, more open countries. Another prediction of the model is that voting thresholds should be increasing in the importance of capital flows relative to trade flows. The model has implication for the reform proposals that have been presented to improve the legitimacy of the IMF (see, for example, Cottarelli, 2005 and Rapkin and Strand, 2006). In particular under the assumptions of the model, there is no rationale for a double majority system as the “count and account” proposal of O’Neill and Peleg (2000). Further research will be aimed at developing a more sophisticated model of income and consumption determination, incorporating moral hazard, and a more detailed formulation of bailout costs, relating them to capital injections in the Fund.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.
Volume (Year): 1 (2009)
Issue (Month): 55 (July - September)
current account adjustment; international organizations; optimal voting rules;
Find related papers by JEL classification:
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barro, Robert J. & Lee, Jong-Wha, 2005.
"IMF programs: Who is chosen and what are the effects?,"
Journal of Monetary Economics,
Elsevier, vol. 52(7), pages 1245-1269, October.
- Robert J Barro & Jong-Wha Lee, 2003. "IMF Programs: Who Is Chosen and What Are the Effects?," Departmental Working Papers 2003-09, The Australian National University, Arndt-Corden Department of Economics.
- Robert J. Barro & Jong-Wha Lee, 2002. "IMF Programs: Who is Chosen and What Are the Effects?," NBER Working Papers 8951, National Bureau of Economic Research, Inc.
- Roland Vaubel, 2006. "Principal-agent problems in international organizations," The Review of International Organizations, Springer, vol. 1(2), pages 125-138, June.
- Graham Bird & Dane Rowlands, 2005.
"IMF Quotas; Constructing An International Organization Using Inferior Building Blocks,"
School of Economics Discussion Papers
1305, School of Economics, University of Surrey.
- Graham Bird & Dane Rowlands, 2006. "IMF quotas: Constructing an international organization using inferior building blocks," The Review of International Organizations, Springer, vol. 1(2), pages 153-171, June.
- M. Nowak & Ketil Hviding & Luca Antonio Ricci, 2004. "Can Higher Reserves Help Reduce Exchange Rate Volatility?," IMF Working Papers 04/189, International Monetary Fund.
- Salvador Barberà & Matthew O. Jackson, 2003.
"On the Weights of Nations: Assigning Voting Weights in a Heterogeneous Union,"
220, Barcelona Graduate School of Economics.
- Salvador Barbera & Matthew O. Jackson, 2006. "On the Weights of Nations: Assigning Voting Weights in a Heterogeneous Union," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 317-339, April.
- Salvador Barbera & Matthew O. Jackson, 2004. "On the Weights of Nations: Assigning Voting Weights in a Heterogeneous Union," Working Papers 2004.76, Fondazione Eni Enrico Mattei.
- Salvador BARBER?Author-Email: email@example.com & Matthew O. JACKSON, 2003. "On the Weights of Nations: Assigning Voting Weights in a Heterogenous Union," UFAE and IAE Working Papers 597.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Barbera, Salvador & Matthew O. Jackson, 2004. "On the Weights of Nations: Assigning Voting Weights in a Heterogeneous Union," Working Papers 1196, California Institute of Technology, Division of the Humanities and Social Sciences.
- Carlo Cottarelli, 2005. "Efficiency and Legitimacy: Trade-Offs in IMF Governance," IMF Working Papers 05/107, International Monetary Fund.
- Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Federico Grillo).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.