Since the scandal surrounding the resignation of Dominique Strauss-Kahn from the International Monetary Fund (IMF) broke, you’d be forgiven for thinking the inevitable because judging by the glowing words in leading papers across Europe and the US, it appears that it is a fait accompli that it will be Ms Lagarde, Finance Minister of France who will be replacing him.
A not so dissimilar thing happened when the American Robert Zoellick walked (some would say strolled) into the World Bank job when Paul Wolfowitz resigned. So the BRICs (Brazil, Russia, India, China) are right to challenge this and the continued duopoly of Europe and the USA over the IMF and the World Bank respectively.
The IMF & the World Bank were founded as the two main financial organisations of the post-war economic restructuring. Though their roles have changed over time, their symbolism remains constant, particularly in asserting the importance of economic co-operation against isolationism. However, this principal should be extended further so that the choice of leaders at their head becomes more transparent and open rather then a political stitch up. We could for example, learn from the appointment of the Director General of the World Trade Organisation. This was a hotly contested battle the last time with the two leading candidates splitting their term between Mr Michael Moore of New Zealand and Dr Supachai Panitchpakdi of Thailand.
However, it is not only the structural nature of the IMF, which has been called into question. It should also reflect on its stagnant economic ideology. Take for example the response to the Asian financial crisis of 1997-98. During the 1990’s, the IMF developed an economic philosophy whereby it issued large rescue loans contingent on extensive “conditionality” generally including tight fiscal policy, widespread privatisation and other structural reform. Namely, most fund members believe in markets and market-based solutions to problems, which is quite different from the interventionist instincts of many in Asia. The application of this philosophy in the Asian financial crisis of 1997/98 caused lingering resentment among some emerging market borrowers forced to undertake extensive medium term restructuring of their economies in return for short-term crisis loans.
Added to this mix is the rapidly evolving global economy which has changed radically particularly with the rise of the emerging economies. For example, the huge US current account deficit is financed by the inflow of surplus savings from countries like China. According to the IMF’s own statistics, the share of the EU in global output and purchase power parity, will shrink from 25 per cent in 2000 to 18 per cent in 2015 reflecting well the growth in South-South trade particularly between India & China. Appointing an IMF MD from outside Europe would be a belated but significant recognition of this shift in economic influence. Indeed the G7 forum of the main industrialised economies has naturally expanded to become G20, to reflect this change. Is it not time, therefore, for the IMF and World Bank to do the same with its share-holding make up? On the IMF Executive Board the US and European Union countries are dominant with their respective 17 and 32 per cent share blocks. How then, can the Dutch continue to sustain a similar shareholding to India?
Also the leading candidate is not without baggage. The first thing to land in the IMF in-tray for the new MD is the impending Euro zone crisis again. Ms Lagarde has a public record of defending the indefensible according to the Economist magazine, as she has already played a central role in forming the euro zone’s response to its debt crisis. Here the IMF would have to be an impartial arbiter of good economic policy and thus the only organisation, which could force a rethink of the euro zone strategy towards Greece, Ireland and Portugal. Could the poacher really become game keeper, and retain creditability on this critical issue? This when it is regarded that the IMF has been soft on Europe so far and a lot tougher with Asian countries during its financial crisis in the late 1990s.
So with the 10th of June deadline fast approaching, a stitch-up would truly be a disgrace. Such powerful and influential international posts like this should be filled according to merit. Otherwise, what’s the difference between this selection process and the FIFA election of its “President for Life”, Sepp Blatter which we recently witnessed?
At least each country’s football federation shared an equal vote, as opposed to the share percentage bias enjoyed by the US and Europe on the IMF Executive Board. This must change as well, but first Europe’s monopoly on the IMF leadership needs to end. If it refuses to change, then its very relevance within the global economy will inevitably be called into question, particularly with the increasingly relevant and influential emerging economies.
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