IMF quotas reconsidered
The G20 summit takes place annually since the fall of 2008. The agenda includes the reshape of world financial system, fight against offshores, global banking system stability, tackling the debt crisis (first of all in Europe), enhancing the effectiveness of financial regulation, further liberalization of financial markets and international trade, world energy issues etc. I should note that there is no tangible progress achieved as yet. The only real issue discussed in concrete terms at G20 meetings is reviewing the quotas for International Monetary Fund (MF) members. It will be on the table at the September 5-6 G20 summit in Saint-Petersburg. This subject is a thorny one being related to vital interests of major groups of countries and each state individually.
An IMF quota is the contribution of a state into the common fund intertwined with the country’s share of votes in decision making process. The size of quota defines the total amount of credits a country is entitled to. The larger a quota is, the bigger is the country’s influence upon the IMF decisions. As yet, the largest quota – 17, 8 percent is the one of the United States of America giving it the possibility to block the decisions running contrary to its interests because they are taken on the condition of 85 percent support. Then the quota contribution goes as follows: Japan - 6,13 percent, Germany -5,99 percent, Great Britain – 4,95 percent, France – 4,95 percent, Saudi Arabia – 3,22 percent, China – 2,94 percent, Russia – 2, 74 percent, the European Union 15 members (totally) - 30,3 percent. All the countries of «gold billion» (29 states – members of the Organization for Economic Cooperation and Development - OECD) – 60, 35 percent. Other countries making up 85 percent of all members have the quota of 39, 65 percent. Evidently, the correlation of quotas makes the International Monetary Fund an instrument of protecting the interests of the «gold billion» members.
From time to time, depending on the ups and downs of global economic and financial situation the quotas are reviewed. It is done in accordance with the total amount of the Fund’s capital and individual contributions of the member-countries. The decision to review the quotas is taken by Board of Governors with the minimum 85 percent of votes support. So, this issue is a key one and the decisions are controlled by the United States with its 17 percent quota.
There have been 14 reviews in the International Monetary Fund’s history. The last one took place in 2010. The review stands out for its unprecedented decision to increase the Fund’s capital by 100 percent from SDR (Special Drawing Rights) 238, 4 billion dollars to SDR 476, 8 percent. Putting it into figures the decision is to increase the capital up to 720 billion dollars. The quotas realignment envisions a shift more than 6 percent of quota shares from over-represented to under-represented member countries. The last ones are all situated at the periphery of world capitalism beyond the boundaries of the ‘gold billion’. China’s share is to significantly grow from 2, 94 percent to 6, 39 percent, making it the third largest International Monetary Fund contributor. Brazil, India and Russia are among the leading ten nations on the list. In particular, Russia’s share is to grow from 2, 49 percent to 2, 71 percent. All in all, it’s a tangible shift increasing the weight of BRICS states. 10, 71 percent falls on Brazil, Russia, India and China at present, but their reviewed total quota is to go up to 14, 18 percent.
It’s not just reviewing but rather remaking the quotas determination formula that is important
The 14th review is based on the traditional determination formula. How does it function? The formula is based on such indicators as 1. GDP. 2. openness 3. economic variability 4. international reserves. The indicators are «weighed» and their shares amount accordingly to 50 percent, 30 percent, 15 percent and 5 percent. The second and third indicators (openness and economic variability) are rather murky, at that, their «weight» is 45 percent. The developed states have maximum indicators while the countries at the periphery of capitalism have minimum ones. Still these are the states the major amount of international reserves is accumulated in. China, Russia and India totally have the reserves exceeding $4 trillion. But the fact has little relation to their clout in the Fund. The discrepancy between the existing correlation of contributions into the world economy and the determination of quotas in the International Monetary Fund has become too obvious. The BRICS members – the states with dynamic economies – are the chief initiators of the idea to reconsider the formula used for determination of IMF quotas…
Europe and Japan are the least interested states. The plight of Europe is especially hard today (the debt crisis), it is seeking money throughout the whole world, including the International Monetary Fund, so that it could fill the budget gaps and refinance the growing state debts. It’s hard for Europe to get new IMF bailouts because in the period of 2010-2013 it received unproportionally large share of loans (mainly granted to the Eurozone member-states). Now the voices against such favoritism are getting stronger among non-European IMF members.
The US stance
The United States of America has a special stance concerning the review of quotas. The US share is to go down from 17, 1 percent to 16, 4 percent. It may be telling, but it’s not the end, Washington still preserves its control package. When it comes to words, it seems to support the idea. Much time has passed since the 14th General Review of Quotas (approved by Board of Governors in December 2010). There is a long procedure ahead; the IMF rules require each member to ratify the adopted decisions. Russia did it in July 2012. It is ready to contribute about 10 billion euros additionally at the expense of its currency reserves. The United States is in no hurry to do the same; it just keeps on promising to follow the suit. There are serious doubts it will ratify the decisions. First, many Americans are reluctant to pay in order to increase the IMF funds. The sum is around $60 billion dollars. Second, the United States has come close the «red line» to lose the control package. The US global GDP share is constantly going down. According to World Bank, the its contribution was 21, 6 percent in 2011. To extrapolate the trend on the next ten years the US chunk of world Global Domestic Product is to dwindle to 14, 6 percent (according to the World Bank’s estimates). It won’t be enough for keeping the IMF control package, even if it takes advantage of the fact that openness and economic variability indicators are murky. Some among the ranks of those who oppose the US role in the IMF believe the US-practiced GDP statistics to be as obscure as the indicators allowing to exaggerate the Washington’s IMF quota.
Captain of ship IMF: better sink it than surrender
Many in Washington want to hear nothing about switching to the new formula of quota determination (exclusively on the basis of GDP). In case the 14th review is in force the BRICS member-states are to get the total quota of 14,2 percent. In this case finding one or two allies will be enough to block the Fund’s decisions. Soon they could do it on their own, no fellow travelers needed. According to World Bank’s data, if the 2001-2011 trends of economic growth continue to take place, then some countries will have the following contributions to the global GDP in 2021 (percent): China-26,52, Russia- 7,38, Brazil – 7,27, India – 4,55. The total share of the four in the global economy will be 46 percent at the beginning of next ten years. Around a quarter of votes in the Fund could belong to the four countries all situated outside the «gold billion». It’s about the same share that falls on the United States, Japan and some leading European states today. No doubt the West does not want it to happen!
As some analysts believe, if the countries of world capitalist periphery will exert too much pressure on the «gold billion» demanding review of IMF quotas, then the West could make sink the ship called the International Monetary Fund and jump on board of another vessel. They will need to create something similar to the Monetary Fund. Europe is already on the way. It created the European Financial Stability Facility (EFSF) in 2010 to fight the debt crisis. To some degree the organization resembles the IMF though it functions only within the United Europe boundaries. In 2013 the Facility is to become a thing of the past to be substituted by the European Financial Stabilisation Mechanism (EFSM). At the start its resources will be equal to 750 billion euros – more than the International Monetary Fund has at its disposal taking into consideration the 14th General Review of Quotas. There are prospects on the agenda to make it 1 or even 2 trillion euros.
So, as is planned, the Saint-Petersburg’s summit on September 5-6 will discuss the 15th quota review based on the new formula. A rather peculiar situation. The 14th review is not in force yet. Some believe the quotas issue may hang in the air as a result of endless empty discussions. The West has no intent to cede; it would rather make sink the ship called the international Monetary Fund, which has been braving the waves of the world financial seas and oceans under its command since 1945.
IMF and G20 summits enter the crisis phase
The first day of September news agencies reported the BRICS member-states have prepared a draft project for setting up a development bank. The draft document is to be submitted for consideration to the G20 Saint-Petersburg summit. The five states (Brazil, Russia, India, China and South Africa) will meet in Saint-Petersburg once more to discuss the details of the project. Then they will put forward the bank establishment proposal at the official G20 summit. The details of the project are not known as yet. Some reports say it’s not a traditional development bank to finance large-scale investments, but rather a fund destined to support the stability of BRICS members national currencies. Or, in other words, it is affirmed that the five states are to create their own monetary fund similar to the IMF. Some reports say there are two entities to be created within the BRICS structure: a development bank and a fund. China has the largest economy in the group, it’s a leader in foreign trade turnover and accumulated gold reserves, so experts and observers believe that Beijing will have the heaviest weight in the international organizations to be created. Its share in the accumulated capital funds may be as large as 50 percent. These reports go to show one more time that:
a) The International Monetary Fund is entering the phase of going through grave crisis while competitors are emerging;
b) The financial and currency decisions are taken by narrow or homogeneous groups: G7 (the developed states of the West) and the Big Five (the BRICS member-states);
c) The G20 summits start to look more like grand performances.