Quo(ta) vadis?

There used to be a time when the annual meeting of the World Bank and the International Monetary Fund evoked a great deal of interest. It is a measure of their growing marginalisation in international finance that the 2006 annual meeting, due this week-end in Singapore, has elicited the equivalent of a bored yawn. For long years both advocated a greater role for the private sector as the only way to increase efficiency. Country after country has adopted their prescriptions, with the result that their own role has diminished. Private capital flows have all but completely replaced Bank lending outside of Africa and the poorest countries, and the appropriate financial sector policies have reduced debt defaults, which the IMF was designed to prevent. It is useful, in this context, to remember that both institutions were creatures of an era when dollars were in short supply. With the enormous increase in their supply and the emergence of a putative substitute, the euro, better banking norms and the build-up of reserves by almost all countries as a prudential measure, both have almost outlived their original usefulness. The Bank has a bigger problem on its hands, compared to the Fund, which at least serves as a proxy for American approval""essential for persuading private banks to keep on lending during bad times, and indeed for the IMF or the Bank also to lend. The ideas for re-invention thrown up so far""better surveillance, for example""don't inspire much confidence, not least because they smack of make-work.

Of more immediate interest is the vexed issue of quota reform, which seems poised to happen at long last. The quota and governance reforms will be a two-year programme to be completed by 2008. The reform will consist of an initial increase in quotas for countries like China, South Korea, Mexico and Turkey and a new formula to judge whether members' quotas are adequate. The latter is to be completed in a year. China's quota in the IMF will be raised to 3.72 per cent, from the current 2.98 per cent. There will also be an attempt to devise a new formula for quota increases. But the most important reform is the proposal to increase the basic votes of members. Such reform is long overdue, if only to properly reflect the relative importance of different countries in the world economy. But the second stage, which involves a revision of the formula to determine quotas, is more important because quotas determine each member's voting power and its access to IMF borrowing. In that sense they pack a certain amount of political content as well, especially if the interests of the low-income countries in Africa are to be protected.

Meanwhile, if the overall kitty is not to be increased for whatever reason (political or economic), the only alternative is to reallocate the existing quotas. The tricky question here is not whose quota will be increased but whose will be reduced. Common sense demands that some of the small European countries that now enjoy quotas disproportionate to their share in the global economy be asked to give up their current privileged positions. But since quotas also determine voting power, there is a political aspect that cannot be ignored. Reflecting the Old Economic Order, western countries account for almost half the quotas. Can they be persuaded to agree to a reduction? Singapore will see discussion on this, but don't expect immediate answers.