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Amid the prevailing global uncertainty where the US is preoccupied with an ongoing shutdown and the prospect of a default, Finance Minister P Chidambaram who is in New York to attend the annual meeting of the International Monetary Fund (IMF) and World Bank, would be pitching for an early resolution of the long pending demand of emerging economies: the quota reforms which have been stalled for the past three years.
What are these quota reforms?
The quota reforms call for an increase in voting shares of emerging markets at the IMF, to reflect the new economic realities of the globe. They also seek to give emerging superpowers like India and China better representation on the IMF board of 24.
The fund’s power structure was shaped in the wake of World War II by the victor nations of the war such as the US, UK, France etc. It is traditionally headed by a European with voting powers of even smaller European Union countries far outweighing those of big developing economies from the BRICS. India and others have complained that the existing composition is archaic as it doesn’t reflect the new economic heft of these countries.
A comparison…
A study done by the Economist magazine in 2011 shows that while Brazil, Russia, India, China and South Africa make up for 21% of world GDP, they only have an 11% representation in terms of vote share. The EU on the other hand has a 32% voting share even while representing just 24% of the global economy. A tiny country like the Netherlands which has a GDP less than half of India’s enjoys a 2.08% vote share, almost equivalent to India’s 2.44%. Between them, the US and Europe have nearly 50% of the votes, with the United States enjoying the largest vote share of 17.69%.
What’s the big deal?
The reformed quotas are a big deal because they will determine how much more (or less) each country will contribute to and borrow from the IMF. They will give larger voting shares to developing countries shifting more than 6% of quota shares from over-represented members.
India’s voting share is likely to go up from 2.44% to 2.75% if reforms go through. China will become the third largest member of the IMF while India, Russia and Brazil will be among the 10 largest shareholders of the fund.
The quota reforms also doubles SDR or Special Drawing Rights (supplementary foreign exchange reserve assets that represent a claim to currency held by an IMF member country) from the current SDR 238.5 billion to SDR 477 billion (USD $725 billion at current exchange rates). This increases the IMF’s firepower to tackle potential crises and safeguard global financial stability.
What’s expected this time?
The deadline for this review is January 2014 but the final approval has been stalled for lack of approval in the US Congress. Reuters reports that the “US Congress has to sign off on shifting $63 billion from an IMF crisis fund to the Fund's general accounts to ratify the agreement. But some Republicans view that as tantamount to approving fresh funding in a tight budget year, and the request has taken a backseat to more urgent issues.”
The not-yet-ready other alternative
Sluggish reforms at the IMF have led to other alternative proposals such as the $100 billion BRICS Bank - an institution inclined to the needs to the developing world, being mooted in the past. But the modalities of this proposal are still being worked out and it will take some time before the BRICS fund becomes a reality.
