Reforming IMF and World Bank
governance: in search of Simplicity,
Transparency and Democratic
Legitimacy in the voting rules
Dennis Leech
Warwick University and VPP, LSE
and
Robert Leech, Imperial College
LSE November 20th 2008
Outline
1. Voting rules in the IMF
2. Voting power
3. Latest board decisions to redistribute
votes
4. The 85% rule
5. Changes to Basic Votes
6. Democratic legitimacy and the
Penrose square root rule
Simplicity, transparency and
democratic legitimacy of voting rules
• Simplicity: How easy are they to understand?
• Transparency: Do they mean what they
appear to mean? We specifically focus on
voting power.
• Democratic legitimacy: can they be justified in
a world of representative democracy? How
can we reconcile weighted voting with
democracy?
1. Voting in the IMF/World
Bank
• 185 members; all have seats on the board of
governors
• Weighted voting
• Each country has
– 250 “basic” votes, and
– In IMF: 1 vote for each 100,000 units (SDR) of
quota
– In WB: 1 vote for each share (based on IMF
quotas)
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Determination of quotas
• How are quotas determined?
• The rules (Articles) contain no quota
formula
• Each country’s quota set by the board
(political process)
• Guided by a ‘simple’ formula
• …or rather 5 (complex) formulae:
Table 1 The Existing Five Quota Formulas
Bretton Woods: Q1 = (0.01Y + 0.025R + 0.05P + 0.2276VC) (1 + C/Y) ;
Scheme III: Q2 = (0.0065Y + 0.0205125R + 0.078P + 0.4052VC) (1 + C/Y);
Scheme IV: Q3 = (0.0045Y + 0.03896768R + 0.07P + 0.76976VC) (1 + C/Y) ;
Scheme M4: Q4 = 0.005Y + 0.042280464R + 0.044 (P + C) + 0.8352VC;
Scheme M7: Q5 = 0.0045Y + 0.05281008R + 0.039 (P + C) + 1.0432VC;
where:
Q1, Q2, Q3 , Q4, and Q5 = Calculated quotas for each formula;
Y = GDP at current market prices for a recent year;
R = t welve-month average of gold, foreign exchange reserves, SDR holdings and
reserve positions in the IMF, for a recent year;
P = annua l average of current payments (goods, services, income, and private
transf ers) for a recent five-year period;
C = annua l average of current rece ipts (goods, services, income, and private
transf ers) for a recent five-year period; and
VC = variability of current rece ipts, defined as one standard deviation from the
centere d five-year moving average, for a recent 13-year period.
For each of the four non-Bretton Woods formulas, quota calculations are
multiplied by an adjustment factor so that the sum of the calculations across
members equals that derived from the Bretton Woods formula. The calculated
quota of a member is the higher of the Bretton Woods calculation and the
average of the lowest two of the re maining four calculations (aft er adjustment).
2.Transparency: voting power
analysis
• Vote shares often described as voting powers
• Misleading: power connotes the ability to
influence decisions
• Voting power analysis studies the relation
between vote shares and voting power by
examining all possible outcomes of a vote
and calculating a measure of decisiveness
• Power indices
– Banzhaf index is a share in the decisiveness of all
voters (power share)
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Voting rule not transparent
• Vote shares very unequal by design
(dominated by quotas)
• BUT voting power even more unequal
– A ‘hidden’ redistribution of voting power to the
USA from all other countries due to weighted
voting
– USA has more than 7 percent more power than
weight
3. New vote distribution
• Singapore resolution Sept 2006:quota
increase for 4 countries
• Board resolution April 2008: New “simpler,
more transparent” quota formula
• Quotas to be adjusted in light of formula
– Some rich countries to forego formula increases
• Tripling of Basic Votes:
– Each country’s basic vote increases from 250 to
750
The Ne w Quota Formula
The proposed new quota formula includes four quota variables (GDP, openness,
variability and reserves), expressed in shares of global totals, with the variables
assigned weights totaling to 1.0. The formula also includes a compression factor
that
reduces d ispersion in calculated quota shares.
The proposed new formula is:
CQS = (0.5*Y + 0.3*O + 0.15*V + 0.05*R )
k
Where CQS = calculated quota share;
Y = a b lend of GDP converted at market rate s and PPP exchange rates
averaged over a three year period. The weights of market-based and PPP GDP
are 0.60 and 0.40, respectively;
O = the an nual ave rage of the sum of current pay ments and current receipts
(goods, services, income, and transfers) for a five year period;
V = var iability of current rece ipts and net capital flows (measured as a standard
deviation from the centered three-year trend over a thirteen year period);
R = t welve month average over a year of official reserve s (foreign exchange ,
SDR holdings, reserve position in the Fund, and monetary gold); and
k = a co mpression factor of 0.95. The compression factor is applied to the
unco mpressed calculated quota shares which are then rescaled to sum to 100.
Hype
“… the reforms will realign quota and
voting shares to member countries'
weight and position in the global
economy and enhance significantly the
voice and participation of emerging
markets in low income countries.” (IMF
senior official)
New vote shares do not justify
the hype
• Changes to the formula and tripling of
basic votes make almost no difference
in voting power
• Serious lack of transparency
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4. The 85% voting rule
• This analysis for Ordinary Decisions
requiring a 50% majority
• But major decisions require an 85%
majority
• (Ensuring the USA a unilateral veto)
• But this is even more seriously
distorting…
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5. Increasing basic votes
• Increasing share of basic votes makes the
distribution of vote shares, hence voting
power, more equal.
• How important is this?
• We consider increases to
•
•
•
11% (restoring the 1946 level)
25%
50%
• The effect is surprisingly weak - restoring the
1946 level makes very little difference
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6. Square root rules
• Consider vote shares proportional to square
roots of
(1) Populations
(2) Quotas
• (1) can be justified by democratic legitimacy OPOV (Penrose square root rule)
• (2) needs a justification in terms of one-dollarone-vote
• These rules are almost transparent in
practice
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Democratic legitimacy
The square root rule
• Simple
• Almost transparent
• Population rule has democratic legitimacy
through Penrose square root rule:
– Democratic vote at country level, OPOV, then
weighted voting in the international body, with vote
shares square roots.
– Gives equal indirect voting power to all citizens
• Can an analogous justification be given to the
square root of quotas? One dollar one vote?
References
• Buira Ariel (2005) Reforming the governance of the IMF and
World Bank, London: Anthem Press.
• Felsenthal, Dan and Moshé Machover (1998), The
Measurement of Voting Power, Cheltenham: Edward Elgar.
• IMF (2008)). “Reform of Quota and Voice in the International
Monetary Fund—Report of the Executive Board to the Board of
Governors”. March 28, 2008. Washington:IMF.
• Kirsch, Werner (2005), “What is a Fair Distribution of Power in
the Council of Ministers of the EU?”, Brussels: Centre for
European Policy Studies.
References
• ---------------------, Moshé Machover, Wojciech Słomczynski and
Karol Zyczkowski (2004), “Voting in the EU Council – A
Scientific Approach”, http://www.ruhr-unibochum.de/mathphys/publikationen/voting.pdf
• Leech, D. (2002) “Voting Power in the Governance of the
International Monetary Fund”. Annals of Operations Research
109, pp. 373-95, 2002.
• --------------and Robert Leech (2006a) “Voting Power in the
Bretton Woods Institutions”, ch. 1 in Alberto Paloni and Maurizio
Zanardi (eds.), The IMF, World Bank and Policy Reform,
Routledge.
• ------------------------------------------website: Algorithms for Voting
Power Indices, www.warwick.ac.uk/~ecaae
References
• ________ and Haris Aziz (2007), “The Double Majority Voting
Rule of the EU Reform Treaty as a Democratic Ideal for an
Enlarging Union: An Appraisal using Voting Power Analysis”
(with Haris Aziz) Warwick Economic Research Papers no. 824;
forthcoming in Słomczynski, Wojciech and Karol Zyczkowski,
eds., The Distribution of Voting Power in the EU, Warsaw.
• Penrose, L.S. (1946), The elementary statistics of majority
voting, Journal of the Royal Statistical Society 109: 53-57.
• Słomczynski, Wojciech and Karol Zyczkowski (2007), “The
Jagellonian Compromise: An Alternative Voting System for the
Council of the European Union”, Institute of Mathematics,
Jagiellonian University, Krakow,
http://chaos.if.uj.edu.pl/~karol/pdf/JagCom07.pdf