Who should lead the IMF?

May 28, 2011

Who should lead The International Monetary Fund(IMF)?

by Jeffrey Frankel

CAMBRIDGE – Every time the International Monetary Fund (IMF) awaits a new managing director, critics complain that it is past time for the appointee to come from an emerging-market country. But whining won’t change the unjust 60-year-old tradition by which a European heads the IMF and an American leads the World Bank. Only if emerging-market countries unite behind a single candidate will they have a shot at securing the post.

Unfortunately, that is unlikely this time around, too, so the job will probably go to a European yet again. After all, the oft-repeated principle that the IMF’s managing director should be chosen on the basis of merit rather than nationality need not mean a departure from past practice. French Finance Minister Christine Lagarde (Europe’s choice) is impressive and capable.

But the proposition that the ongoing sovereign-debt crisis on Europe’s periphery is a reason to appoint a European is wrong. (Lagarde herself seems to acknowledge this.)

Europe has lost its implicit claim to be the best source of serious people with the experience needed to run the international monetary system. At one time, there may have been a kernel of truth to this. In the 1980’s, for example, the IMF was run by highly capable managing directors from France, during a period when huge budget deficits and even hyperinflation ran wild in the developing world. But that time is past.

There are three respects in which Europe can no longer claim to be a special seat of wisdom and responsibility. First, many large emerging-market countries have done a better job than Europe at managing their economies over the last decade. These countries do not have the excessive budget deficits that many European countries ran up during the last expansion – and that are culminating in today’s mismanaged sovereign-debt crisis.

Second, the Europeans have now chosen three managing directors in a row who resigned before the end of their term. True, neither of Dominique Strauss-Kahn’s two predecessors left amidst scandal as he did. Then again, both of those resignations suggested that the men in question had not taken the job seriously enough.

Finally, many of the best candidates this time around are from emerging economies. So the merit criterion happens to coincide well with the much-recognized but never-honored need to give emerging-market countries more weight in the IMF’s governance, in line with their new weight in the global economy.

Indeed, the number of excellent emerging-market candidates is remarkable. Of course, not everyone being put forward by his or her government is a good candidate. When Turkey’s leaders say they have at least ten good candidates, they show that politicians often don’t know what the job requires. (No country has ten good candidates.)

I count nine emerging-market candidates who are unusually well qualified to lead the IMF. Six seem to be live candidates, and they come from all parts of the world:

·        Agustín Carstens, the governor of Mexico’s central bank, has been described as the leading prospect among the group. But even Latin America is not unifying behind him (Brazil has not been supportive), let alone other developing countries;

·        Arminio Fraga, the former governor of Brazil’s central bank, is another good candidate with extensive experience. But it is not clear that Latin America’s other governments are prepared to unify behind someone from the region’s largest country. Indeed, it seems that any candidate linked to a large regional power is more likely to provoke jealousy than solidarity from others;

·        Tharman Shanmugaratnam, who has excelled as Singapore’s finance minister and was just promoted to Deputy Prime Minister, is my favorite. (Full disclosure: he was my student at Harvard in 1988-1989.) In March, he was chosen to head the International Monetary and Financial Committee, the panel of ministers that advises the IMF on strategy twice a year. He has strong political skills, and, coming from a non-threatening country, might be the sort of candidate behind whom emerging markets could unite;

·        Sri Mulyani Indrawati is another highly qualified candidate from Southeast Asia. She became one of the World Bank’s three managing directors last year, after apparently being forced out as Indonesia’s finance minister for doing too good a job. Incidentally, she is young and could be an excellent candidate next time around too (as could the first three);

·        Leszek Balcerowicz, Poland’s former finance minister and central bank governor, is also a credible candidate. Poland would be a compromise with respect to nationality, because it is both a European Union member and an emerging-market country;

·        Trevor Manuel was a great success as South Africa’s finance minister. It would be good to make better use of him than the current government is doing.

I can think of at least three other candidates who would perform well, but are apparently not actively in contention:

·        Kemal Dervis, Turkey’s former minister of economic affairs, would have been excellent, but he took himself out of the running early.

·      Stanley Fischer, whom I thought should have been picked in 2000 (he was Deputy Managing Director at the time). Doing so would have been a first step toward accommodating developing countries’ legitimate desire to break the monopoly of European and US officials on the top jobs in the IMF and World Bank (Fischer was born in Zambia).

·        Montek Ahluwalia is Deputy Chairman of India’s Planning Commission, a position far more important than it sounds. But there is a presumption that the candidate cannot be over 65, which would exclude him (and Fischer).

June 10 is the deadline for nominations. Any of the nine would do a good job.  Personally, I would urge emerging-market countries to support Shanmugaratnam. But it is far more likely that they will remain divided. In that case, it will go to Lagarde.

Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University’s Kennedy School of Government.

Copyright: Project Syndicate, 2011.

12 thoughts on “Who should lead the IMF?

  1. Professor Frankel says it is time for someone from the emerging market countries to break the European monopoly of the IMF and become the Fund’s Managing Director to replace Dominique Strauss-Kahn. But the problem is that emerging market countries will not likely agree on one nominee. So come June 10 there is a very high probability that , with the backing of the US and the support of China, French Finance Minister Christine Lagarde will take charge of the IMF. She is smart, and capable. Why not?–Din Merican

  2. The IMF and World Bank have forced emerging countries to accept solutions that are the exact opposite to those proposed to the developed countries. If this isn’t humbug I do not know what is.

    They are beyond redemption so scrap the lot of them and let’s make a fresh start.

    A new international currency run by a new international body. That’s what is needed for a start.

  3. The advanced countries are afflicted by the warth of the invisible economy, in various degrees.

    It would the appear that their wealths are large compared to developing countries, therefore the argument for the IMF leadership.

    Therefore, it is not who should lead the IMF – France or somebody else. It is leader’s perspectives of the world’s financial problems that is important.

    IMF should stop being country dominated, and instead strive for a leader [this leader can come from Africa, for all we care] who can posit and brandish a philosophy to yank the world from future financial crisis on a long-term basis.

  4. “… a philosophy to yank the world from…financial crisis…” TLK.

    This was the original idea behind our current organisations. But they soon hit on the short cut to acquiring (at give-away prices) institutions in developing countries, with huge assets, after first “advising” them that the only way forward was to increase interest rates thus making them bankrupt
    and soft targets for take-overs.

    When similar crisis hit the developed countries we heard the opposite mantra – low interest rates were necessary because the institutions were too big to fail.

    Heads I win, tails you lose. Simple isn’t it?

  5. Hi Isa Manteqi

    We in the less developed countries have been taken for fools – but can we help it?

    First, we were made to believe that the economies of the developed economies are justifiably valued. Second, from that belief, the governments of less developed countries made their economies work overtime to pay for the debts in the currencies of the developed countries. Third, the economies of the less developed countries were stupidly (or inevitably) structured to export to the developed countries in the strange belief that the economies were richer.

    Would the 1998 Asian Financial Crisis have happened if the foreign loans were borrowed on exchange rates that were supposed to be lower? Maybe yes, most probably no.

    The economies of the developed countries are hinging on services which are essentially illusions. Therefore the values of their economies are also illusions. Take away or discount the service part of their economies, what is left for the developed economies? Almost nothing. That is why, we can see the reasons for the current financial crisis in Europe.

    That is why many firms from the developed countries are thronging into big countries like China to exhange their illusion riddled currencies for the Rmb. The Rmb is strong and has relatively more real value, because it is based primarily on real goods production, and the economy of China has the large volume.

    The next big task for the incoming leader would be to help the developed countries adjust to reality – their overvalued economies. The economic structures would have to change.

    Not only this would incur the displeasure of most developed countries, but also some less developed countries which are being soccured by the developed countries.

    If the new IMF leader has high political ambitions in his or her own developed country, he or she would not dare to put its own country into the realm of the painful reality even if in the expense of a world crisis.

  6. The IMF and World Bank are both old Washington based institutions in the new world.

    The problems are that: Europeans should lead IMF while US leads The World Bank. In reality, both Europeans and Americans are no longer able lead because they are now borrowers or debtors’ nations.

    Who should lead IMF? They must come from lenders or creditors’ nations, just like creditors, the banks who manage their loans to borrowers, the debtors.

    If Europeans were allowed to manage their borrowing and funding from IMF, it would be the end of the world!

  7. I would nominate Dr mahathir Mohamad as head of the IMF. If a man can rape the treasury and still fool the people , then i am sure he can do the same with the IMF and then say he did it for the
    Malays !

  8. MOID : Your suggestion is not that far-fetched if looked in another light. I am sure you recall that in the crisis that hit Asia, Dr. M ‘did it his way” and, according to many, made absolute fools of the IMF…

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