CAN A NEW DIRECTOR SEND THE IMF IN A NEW DIRECTION?
And now it’s down to two effectively. No, in fact it’s down to one – or at least it’s the frontrunner’s to lose. And that’s France’s Christine Lagarde.
There is an alternative of course and that is Mexico’s governor of the central bank, Augustin Carstens. Carstens has impeccable credentials including an economics PhD from the University of Chicago. He has served as deputy managing director of the IMF from 2003 to 2006 and then as finance minister from 2006 to 2009 before becoming the head of Mexico’s central bank. But his candidacy has not wrung support from many countries and has not served to coalesce support for anything but a European.
And for a time there was Stanley Fischer. Currently governor of the central bank of Israel, Fischer is something of legend to the economics profession. He is certainly the favourite of the bank officials. Though one had to surmise that his candidacy was a long shot at best, his short candidacy came to an end when the IMF board of directors kept in place a regulation that required the managing director to be younger than 65. Fischer is currently 67.
So there is in fact just Lagarde. The challenge for Lagarde has arisen from past appointments of the International Monetary Fund’s (IMF) managing director. The post has remained in European hands from the first appointment Camille Gutt in 1946 through to the recently resigned Dominique Strauss-Kahn. At the time of the appointment of Dominique Strauss-Kahn in 2007, vague statements were made that Strauss-Kahn would be the last European candidate. But these gossamer commitments aside, the sudden departure of the popular French managing director, after being charged with sexual assault, led to an early European coalescence around – yes, another European candidate – Christine Lagarde.
Notwithstanding her general popularity, many developing countries called for an election of a non-European. For many of the 187 member countries it was time to recognize the growing power and influence of developing countries and especially the large emerging market countries. There were repeated calls for a truly transparent merit-based and competitive process – read that as a choice other than a European candidate. The large emerging market countries – the BRICS, Brazil, Russia, India China and South Africa – through their IMF executive directors attacked the repeated appointment of European managing directors declaring that another European appointment “undermines the legitimacy” of the IMF. But as noted there has been no great stampede to unify around Augustin Carstens as the non-European candidate.
The concerns for the new managing director have changed significantly from the past. From a focus on developing countries, the new managing director, it seems must instead focus on the Eurozone. Today the Fund has pledged $55 billion about two-thirds of its total lending commitments to the Euro-area countries. And initially support was expressed for Lagarde for her knowledge and skill in negotiating with the other European countries. Indeed it is her negotiating prowess that appears to be most appreciated. Though she has been involved in difficult economic issues, Lagarde is not an economist. She is a lawyer by training and ran Baker Mckenzie, a global law firm, from Chicago before being recalled in 2005 to France to take up a ministerial post.
Lagarde is a pragmatist and politician. She is a woman – she would be the first woman to become managing director – and would be likely to change the culture that is now recognized as too macho. But it is hard to discern her economic views and ultimately will have to rely in part on economists around her to make some of the tough economic calls. And her presumed strength – knowledge of Europe – may prove to be a liability. The Fund is now deeply, possibly too deeply, engaged in the European sovereign debt crisis and there appears to be little interest on her part to demand debt restructuring for Greece or the other “peripheral” countries that now weigh down Europe. There appears therefore no end to the economic crisis. Among the large players – France and Germany especially – there is no appetite to bring restructuring to Greece fearing that their banks will bear the cost for such restructuring. Thus for the moment there appears only a continuing effort to “bail out” countries like Greece pushing out the day of reckoning though there is little prospect that Greece, or for that matter Ireland or Portugal can gain control of their outstanding public debt. In fact it is not Lagarde’s nationality that should be the question but her economic knowledge and her policy choices.
The world economy the managing director faces is complex – in fact it is a two-speed world. First you have the advanced economies. Stubborn high unemployment in most; anaemic growth; and growing concerns for public finances. For a number of these economies – except the US – there is a continuing concern over US monetary policy. The monetary easing has suppressed yields and encouraged capital flows elsewhere especially in the large emerging market economies. It has also caused appreciation in currencies to the discomfort of many monetary officials.
A different picture greets the Fund for the large emerging market economies. Their growth remains very strong. Some currencies are appreciating and decision-makers have varying concerns over capital inflows. Finally, and most worrisome, there are growing signs of inflation in Brazil, India and China. “In emerging markets, the big challenge is not to lower their guard in preventing and containing the risks of overheating and the building up financial imbalances,” said Jose Vinals, as quoted in the FTon June 17th. Vinals is the Financial Counsellor and Director of the International Monetary Fund’s Monetary and Capital Markets Department.
So the challenges for the new managing director are multiple and may not just focus on European sovereign debt. Instead the concerns may be more over macroeconomic flows, currency instability and macroeconomic surveillance. And in these areas Lagarde remains annoyingly vague.
RELATED MATERIAL FOR THE WEEK OF JUNE 20
BACKGROUND
Dominique Strauss-Kahn’s decision to step down from his role as Managing Director of the International Monetary Fund – in the wake of an ongoing criminal investigation – has sparked a contest over who will take his place. IMF member states are due to choose a new Managing Director by the end of June, with the nomination process for candidates closed after June 10th.
The current debate over IMF leadership should be grounded in the Fund’s 20th and now 21st century history. The IMF (often referred to as the ‘Fund’) came into existence with the 1945 Bretton Woods Agreement, and began operations in March 1947. The IMF’s governance structure consists of interactions between a Board of Governors, where each member state is represented by one governor, the Executive Board, where 24 board members represent 187 member countries, and the Ministerial Committees, which advise the Board of Governors on matters related to international finance and development. IMF member states’ voting power and financial obligations are determined by a system of quotas, which assign member states’ voting share based on their relative economic position. The IMF Managing Director acts as an intermediary between the Executive Board and IMF staff, which carries out the IMF’s daily work. The Managing Director also represents the IMF at the G8 and G20 meetings.
The Fund’s original mandate was to provide assistance to oversee the ‘par value system,’ by which IMF member states’ currencies were pegged to the US dollar, which in turn was convertible to gold. However, the original Bretton Woods system collapsed in the early 1970s, when United Sates President Nixon suspended the dollar’s convertibility to gold.
In the wake of this ‘collapse’ of the original Bretton Woods system, the IMF assumed a new mandate – providing conditional loan assistance to developing countries experiencing balance-of-payments problems and post-oil shock debt crises. The IMF was heavily involved in the 1982 Mexican debt crisis, engaging commercial banks in negotiations to create loan conditions and imposing strict economic reforms on the Mexican government. This model was used in many other contexts, across Latin American, Africa, and the Middle East. IMF financing to poor countries was provided through Structural Adjustment Facilities (SAFs), later called Enhanced Structural Adjustment Facilities (ESAFs).
The IMF’s policies in the developing world were often referred to as one part of a broader so-called ‘Washington Consensus,’ whereby Washington-based IFIs – the IMF and the World Bank and the United States Treasury carried out an economic agenda that emphasized the private sector and reducing barriers to trade and capital in developing countries. By the early 1990s, the IMF structural adjustment and loan conditionality began to face criticism for imposing harsh cuts in poor countries’ public sector services and inducing deflation and slow growth in much of the developing world. In the late 1990s, the IMF faced criticism for its role in exacerbating the East Asian financial crisis by encouraging East Asian economies to strengthen their currencies, advice that ultimately led to inflows of destabilizing capital. By April 2000, a commission appointed by the United States Congress’s International Financial Institution Advisory Committee proposed major cutbacks to the IMF’s responsibility, suggesting a reduction in its mandate to that of a short-term loan facility to countries experiencing balance-of-payments shortfalls.
However, the global financial crisis of 2008-2009 may have revised the role the IMF. Under the chairmanship of Dominique-Strauss Kahn, the IMF emerged from the 2008-2009 global financial crisis as a lender of last resort to European countries like Greece, Ireland, and Portugal, and as a major global financial rule-setter for the G20. The G20 has also been a major forum for the push to reform voice and participation representation in the IMF, which has resulted in the Amendment on Voice and Participation to the IMF Articles of Agreement. Moreover, the IMF has begun reviewing and overhauling its lending policies, with an eye to making loan conditions more flexible and opening lines of credit to strong-performing economies. These developments indicate the resurgence of the IMF as a globally significant international financial institution.
RELATED MATERIALS AND SITES
- As of June 9th, Grigori Marchenko, the candidate for IMF Managing Director backed by the former Soviet bloc, had declared Christine Lagarde’s victory a ‘done deal.’
- The IMF released a factsheet on the selection process for a new IMF chair, outlining the role of the chair and detailing the nomination process.
- Another March 2011 IMF factsheet outlines ongoing changes in IMF policies and mandates. For instance, the IMF aims to be a major actor in the creation and maintenance of post-crisis global financial architecture.
- Steven Dunaway, Adjunct Senior Fellow for International Economics at the Council on Foreign Relations, outlines in an interview the significance of Dominique Strauss-Kahn’s tenure as IMF Managing Director, as well as the consequences of his resignation for the institution’s future.
- A statement issued by the African Union’s Department of Economic Affairs called for the appointment of a non-European, and potentially an African, Managing Director to the IMF.
