AFTER CHRISTINE LAGARDE WON THE TOP JOB AT THE INTERNATIONAL MONETARY FUND, THE FIRST NON-ECONOMIST IN THAT POST NOW MUST SORT THROUGH A WORLD OF BAFFLING PROBLEMS.

Christine Lagarde took the top helm at the International Monetary Fund at one of the worst times in its history – not because of the rape charges against former managing director Dominique Strauss-Kahn, but because of reputational damage to the IMF itself. Lagarde, the Fund’s first ever director who is not an economist, has had to work her way through a number of top priorities.

Her most public challenge: to restore the Eurozone’s future and strengthen the standing of European sovereign debt. Less publicly, but just as important, she must improve the IMF’s reputation in the emerging market economies – especially by reforming its governance to include more of them. Overall, the new director must restore countries’ confidence in the IMF’s ability to predict – and then contain — the kinds of crises that have been rattling the international financial system for more than 20 years.

As a European – and former finance minister of France, a country at the heart of the Eurozone — can Lagarde take an objective view about the long term sustainability of Europe’s common currency? Some worry about whether these inherent conflicts of interest keep Lagarde from ushering Europe out of its crisis.

And even before the international financial crisis, many emerging market economies made bold statements about how they would never return to the IMF for financing again. It was believed then that the IMF’s reputation had reached rock bottom.  Fast forward to today and the IMF has done little to actually improve its reputation among many of the key emerging market economies – Brazil, Korea, Turkey, Thailand, etc.,. Throughout Lagarde’s so called campaign tour in emerging market economies, she identified this crisis of confidence and noted her desire to improve bilateral relationships. Beyond the obvious politicking, Lagarde surely realizes that the future of IMF financing will come from the emerging market economies.

To tame the fires in Europe with IMF funds, she will need the emerging market economies that are holding much of the world’s surplus capital to have faith in the organization’s ability to devise appropriate policies, to understand the reasons behind these continued economic crises, and to better predict fault lines and prevent contagion in the global economy. While a number of capitals in emerging market economies have argued that this requires the IMF to transfer decision making power to rising economies- most notably through shifting IMF quotas and giving an added number of IMF Executive Board seats to emerging market economies to countries like Brazil, China, Turkey, and others- there will be a lot more fundamental and internal reform before Lagarde.

Arguably, the IMF will require a serious rethink of how things are done and the perspectives the Fund brings to understanding how to repair the global economy. Clearly the Fund’s current toolkit has been inadequate – generally a strict adherence to neoclassical economics. Lagarde may be bold enough, possibly, to address the serious challenges posed by existing staff paradigms. As a lawyer, she may just bring a fresh perspective into how the organization can change and move beyond the narrow prism of neoclassical macroeconomic analysis.

Lagarde has a full plate of issues to address, but hopefully she will overcome her Eurocentric perspective and realize the interrelated nature of challenges before the IMF: fixing Europe, repairing IMF reputation, and freshening IMF analysis.

By Bessma Momani
Associate Professor
University of Waterloo

 

RELATED MATERIAL FOR THE WEEK OF JULY 11

BACKGROUND

Christine Lagarde was named the new head of IMF after a vote by its 24-member executive board on June 28, 2011. Lagarde was picked over Mexico’s Augustin Carstens, her chief rival for the job.  Lagarde received support from the EU, US and large emerging market countries such as China, India and Brazil, despite their initial reluctance to back a European candidate.

Lagarde is the first woman to become managing director since the IMF’s creation in 1944. She most recently served as France’s finance minister, appointed to the position in 2007 by current French President Nicholas Sarkozy. In her capacity as finance minister, Lagarde was known to have led liberalizing reforms to inject more competition into the French economy and boost public sector efficiency. Before she was finance minister, Lagarde served as minister for foreign trade and prior to that, she was global president at the law firm Baker & McKenzie, serving as such from the Chicago office.

Lagarde’s selection was not without controversy.  Leaders from emerging companies questioned the impartiality of the leadership selection process after the blanket endorsement of Christine Lagarde by Europe and the US. Campaigners comprising Bretton Woods Project, Oxfam and the Third World Network claimed that Europe and the US engaged in “gentlemen’s agreement” to ensure that the IMF Managing Director remained a European and the President of the World Bank an American. Moreover, representatives from the BRICS countries argued the urgency of reforming the Fund to reflect the growing role of the large emerging market countries in the world economy. They considered the selection of a non-European candidate a step in the right direction. The EU, on the other hand, argued that a European was more capable of understanding and addressing the socio-economic troubles caused by debt crises in Greece, Ireland and Portugal.

The call for increased representation for large emerging market and developing countries goes beyond the leadership selection process. The IMF has been pressed, as noted before, to reform its governance structure to reflect a shift in power towards the large emerging market states and address the issue of European over-representation (Europeans hold one-third of the seats in the executive board and constitute less than one-third of IMF membership). The G20 provided a forum for advancing the reform agenda, which calls for a reorganization of IMF “chairs and shares” to make room for emerging powers: At the 2010 G20 Summit in Seoul, an agreement was reached on a reform package which foresees the rising of BRICS countries among the Fund’s top ten shareholders and the redistribution of seats in the executive board in favor of under-represented members. As stipulated by the reform package, 2 of the 8 European seats in the executive board and over 6% of IMF voting power will be reallocated to dynamic emerging market states. These changes are to be automatic over a cycle of a number of years.Upon assuming office on July 5th, Lagarde will be responsible for ensuring that the reform package is ratified by the IMF membership.

Lagarde is set to face many challenges during her 5-year term. As the head of IMF, she will need to address rising concerns over high inflation in China, slow growth in the US and EU, and a risk of overheating in developing countries. But Lagarde’s most immediate priority lies in resolving the Greek debt crisis and preventing contagion to other eurozone economies. Her second most immediate concern involves bridging relations with IMF emerging country members and convincing them that she will fight for their interests as well as for Europe’s.

Immediately after her appointment, Lagarde called on the Greek government to approve the austerity plan that the IMF and EU said is a prerequisite for further aid. Further, Lagarde intends to restore the IMF staff’sconfidence in the organization following the turmoil of Strauss-Kahn’s arrest, and has asked to meet her predecessor to discuss his views on Fund and its team.

RELATED MATERIAL

  • In this BBC newsnight interview, Jermey Paxman talks to the French finance minister Christine Lagarde about how Europe should respond to the banking crisis.
  • The Economist’s correspondents discuss the appointment of Christine Lagarde as the IMF’s new managing director in A deft negotiator.
  • The Munk School Website’s related material for the week of June 20thgives an overview of the history of the IMF, its role and function and the transformation of its role since the 2008-2009 Financial Crisis.
  • Reuters blogs archive has a pagededicated to Christine Lagarde with analysis and opinion from various contributors.
  • Also from Reuters, Daniel Flynn suggests in his opinion articlethat Christine Lagarde would bring a change of style, not substance to the IMF and be unlikely to push for radical solutions to Europe’s debt crisis.
  • In this blog post, Domenico Lombardi from Financial Times outlines the challenges facing Lagarde in her new role as IMF’s managing director.
  • Click herefor Christine Lagarde’s press statement on her selection as IMF managing director.