Abstract:

The current realities of the global economy are far from being reflected in the Fund's quota structure, with EM economies accounting for the bulk of the under- representation. This paper explores the characteristics of the representation distortions using cross-section regression analysis and the results indicate that economic growth, population, credit rating and dummies for the United States and China explain most of them. To the extent that the faster growing countries are not recognized as such in their IMF quotas, the distortions will continue to increase. Eliminating such distortions requires adjusting the quota structure in line with the relative participation in global economic activity, but to the extent that individual quotas cannot be reduced, a large increase in total IMF quotas would be required. Simulations performed under the assumption that all over-represented advanced economies would accept to reduce their quotas indicate that only about one-half of the rate of increase in total quotas would be required. As an initial step towards the elimination of distortions in representation, rules for a professional IMF board are proposed, including that all Executive Directors (EDs) should be elected and be independent from the influence of a permanent employer, that all countries with a common currency be represented by the same ED and that each chair should represent at least three member countries and at most fifteen. In a scenario using these rules and attempting to preserve the existing regional representation, advanced economies would lose three chairs, emerging markets would gain two and developing countries would gain the remaining one.