In her spring statement on the International Monetary Fund’s (IMF’s) work program, Managing Director Christine Lagarde stated that “completing the 2010 quota and governance reform is essential to the Fund’s legitimacy and effectiveness.

  • Quota and governance reform. We have met two of the three conditions needed for the 2010 reform to take effect. The remaining condition is to secure the 85 per cent of the total voting power needed for the Board Reform Amendment to enter into force. The Board will continue to be informed of progress on a regular basis.
  • Review of quotas/new quota formula. A paper updating quota calculations based on recent data, Quota Formula: Data Update and Further Considerations, will be presented to the Board in June. The Board will also revisit the work program on the 15th General Review of Quotas.” (Lagarde, 2013)

This is a polite “Fundese”[1] way to say that progress has stalled on implementing the modest 2010 reforms and on promised future progress. Unfortunately, as the managing director stated, the debate goes beyond the specifics of voting shares and representation, and raises critical questions about the Fund’s legitimacy and effectiveness.

The IMF 2010 agreement on reform was hailed by then Managing Director Dominique Strauss-Kahn as historic, although most commentators expressed a more modest view. Nonetheless, it was an important step forward and was achieved, in part, through the leadership of the United States and by their threat to withhold agreement on the size of the executive board if broader agreement was not reached. The IMF quota and governance reform proposed, among other things, a doubling of IMF quotas, a shift in quotas to dynamic emerging markets and under-represented countries, and reform of the composition of the executive board. These measures were meant to both scale up the resources available to the Fund to meet future crises and to rebalance the representation of fast-growing, but under-represented, middle-income countries at the IMF.

In order to come into effect, this agreement requires support from 85 percent of the Fund’s membership (usually through national legislative action). Since the United States controls 16.75 percent of IMF voting power, US approval (and by extension US congressional approval) is required for the 2010 agreement to come into force. However, the implementation of the 2010 agreement, which had been due to be completed in October 2012, has suffered a further setback. Both houses of the US legislature have refused to sign off on their government’s request to reallocate an existing $65 billion of the US commitment to the IMF (under the New Arrangements to Borrow) into a permanent increase in shareholding.

This request involved no new additional financial commitment by the United States, but simply a transfer of an existing commitment (to be called upon, as needed, in any major future financial crisis) into a different category. However, the request unfortunately coincided with politically sensitive negotiations over spending cuts and was not supported. The failure by the Unites States to deliver on its agreement after almost three years, seriously weakens the credibility of the Unites States to exercise leadership in the future, and leaves the IMF in limbo on its resources and governance reforms.

As for the January 2013 deadline for revisions to the quota formula, this date also passed without agreement and the process was incorporated into the schedule for the IMF quota review. The new deadline for this review is January 2014, but it is difficult to envisage progress with the previous quota agreement unimplemented.

IMF quota reviews have always been fraught with difficulties. The original agreement established the size of resources that were believed to be appropriate for the Fund to respond to anticipated crises, and an understanding was reached on a division of responsibility among the members at that time, based largely on economic size with a small political overlay to facilitate agreement. The current challenge is that there is no agreement on what the appropriate size of the Fund should be in today’s world of freely moving capital, and the current division among members is calculated with a large political overlay.

How does this translate in reality? As stated earlier, the US share is 16.75 percent. China’s share today is 3.81 percent. The United Kingdom and France each have 4.29 percent (How long has it been since their economies were equal to or bigger than China’s?). Eight constituencies, with a total share of 34.27 percent, are controlled by the Europeans, in addition to Spain’s membership in a Latin American constituency. China, the number two country economically in the world,[2] has a share that is less than either the United Kingdom or France, and the Europeans control one-third of the chairs on the executive board. Combined, the United States and Europe control over 50 percent of the voting power. The 2010 package would provide China with a 6.07 percent voting share, while the United Kingdom and France would drop slightly to 4.02 percent, and the 27 countries that make up the European Union would retain 29.4 percent of the voting power.

A February 2013 paper by the G-24 (Intergovernmental Group of 24 on International Monetary Affairs and Development), a developing country grouping at international financial institutions, makes clear the democratic deficit inherent in the current quota formula. The paper argues that the formula is “systematically biased against emerging markets and developing countries,” while at the same time, making “the quota for advanced Europe as a group a third larger than its relative weight in the global economy.” Amar Bhattacharya, director of the G-24, said that “achieving a more equitable and democratic governance structure is a prerequisite for the legitimacy of the Fund; and its capacity to fulfil its mandate effectively. The governance structure must recognise the growing role of emerging markets and developing countries in the global economy, and ensure that all members including the poorest have an equitable stake in the institution” (Bretton Woods Project, 2013).

Let us ponder for a moment how the current alignment may have influenced recent events at the Fund. First, the election of current Managing Director Christine Lagarde — who comes from Europe, as have all of her predecessors. Despite agreement that the competition should be open and merit-based, another European was chosen. Not to denigrate Lagarde’s many qualities, but would the result have been the same with a different voting structure?

Let us also look at the IMF’s recent involvement with the economic problems facing the euro zone. The Fund’s recently released examination of their involvement is to be strongly welcomed for its candid and refreshing assessment of both the substantive and procedural errors of judgment concerning their engagement in Europe. What is missing from this assessment, however, is an examination of how and why these errors were made. Rumours have abounded about the misgivings of many emerging countries to the programs. Even Canada’s minister of finance, Jim Flaherty, said Canada’s position is that any IMF funding program “should be subject to a more rigorous approval process,” echoing statements he made earlier pushing for change in the way the IMF is governed (CBC News, 2012).

Flaherty has lobbied for non-European countries such as Canada to get some type of veto power over any decisions the body makes to bail out Europe. “Because of the large number of European seats on the board of the IMF, some of us, and Canada certainly, is of the view that we ought to have two keys, in effect,” Flaherty said (ibid.). “We would have one vote by the eurozone countries and another vote for approval by the non-eurozone countries” (ibid.).

One cannot help but wonder whether, with a non-European managing director and an executive board with a more equitably balanced representation, different decisions would have been reached.

Now, a quota formula based solely on economic weight will not fly, because it would create new anomalies that would discredit the IMF in its policy-making role. For instance, the United States would gain even more voting strength and the impoverished countries of Africa would shrink even further from their already low levels of representation. This would not be acceptable; therefore, the search must be for a formula that is seen by the vast majority of the membership as being equitable.

But how can this be achieved? There is a mind-numbing debate currently taking place over various adjustment factors. One of the most important debates concerns the issue of “openness” and the extent to which it should be used to modify the results.  The European Commission position, for instance, given at the October 2012 annual meeting of the World Bank and the Fund in Tokyo, argues that “GDP and openness should remain the main variables in the quota formula” (Rehn, 2012) and that openness should carry an increased weight. While this sounds meritorious — who would oppose openness — in fact, this brings into account intra-European trade, which is one of the factors leading to European overrepresentation. Intra-American or intra-Canadian trade is not counted. Why should Europe be different? The answer is, of course, that it helps them maintain their privileged position.

Paulo Nogueira Batista, IMF executive director for Brazil and 10 other countries, decried the lack of a deal after two years of negotiations and warned that the IMF would lose credibility unless it changed. He said governance reforms had practically ground to a halt since 2011, when the Fund failed to enforce voting changes agreed in 2010. “Now we have an attempt to paper over the fact the review of the quota formula has not been completed either,” Nogueira Batista said in a statement. “The IMF is approaching what we could call a ‘credibility cliff’” (Wroughton, 2013).

In early February, Russian President Vladimir Putin stated at a finance ministers’ meeting in Moscow, his belief that “at the upcoming Russian summit, the G20 will be able to agree proposals for a new formula for calculating quotas that will take full account of the modern distribution of forces in the global economy” (Putin, 2013).

One can only hope that Putin is correct — but it is hard to see the breakthrough that would allow the power beneficiaries of the current system to give up their present positions. And a pious statement by the IMF that the commitment remains and progress is around the corner simply lacks credibility.

The G20 needs to make a clear commitment to make progress on revising the formula, adopting GDP as the main criteria, but also including a formula to protect those developing countries that would suffer the most. This may need to be accompanied with a new double-majority voting procedure. Without a strong, and specific, political impulse at the G20 summit in Russia, it is almost impossible to envisage any progress being made on this issue at the IMF. And without legislative action by the United States to allow the 2010 agreement to come into force, the January 2014 target date for a new quota increase will not happen.

Works Cited:

Bretton Woods Project (2013). “US deadlock stalls IMF governance reform.” April 8. Available at:

CBC News (2012). “Flaherty affirms no Eurozone bailout funds from Canada.” April 20. Available at:

Lagarde, Christine (2013). “Statement by the Managing Director On the Work Program of the Executive Board.” IMF. May 22. Available at:

Putin, Vladimir (2013). Speech by President Putin at the Meeting with G20 Finance Ministers and Central Bank Governors. February 15. Available at:

Rehn, Oili (2012). “Statement of Vice-President Olli Rehn to the International Monetary and Financial Committee on behalf of the European Commission.” IMF. October 13. Available at:

Wroughton, Lesley (2013). “IMF fails to agree on new formula for vote reforms,” Reuters. January 31. Available at:


[1] The term used to describe the often opaque language found in IMF documents.

[2] Ranked number two by The Economist.

It is hard to see the breakthrough that would allow the power beneficiaries of the current system to give up their present positions
  • Thomas A. Bernes

    Thomas A. Bernes is a CIGI Distinguished Fellow. After a distinguished career in the Canadian public service and at leading international economic institutions, Tom was CIGI’s executive director from 2009 to 2012. He has held high-level positions at the International Monetary Fund, the World Bank and the Government of Canada. He became a distinguished fellow in 2012.

The G20 summit in St. Petersburg, Russia will be held on September 5-6, 2013, and will mark the eighth time the G20 heads of government have met. The summit will bring together the leaders of the world's major advanced and emerging economies, with a focus on developing policies aimed at improving sustainable, inclusive and balanced growth, and jobs creation around the world. CIGI experts present their perspectives and policy analysis on the key priorities facing the G20 at St. Petersburg, including macroeconomic cooperation, sovereign debt management systems and stimulating international development.