The IMF: Nothing has changed yet
“People do not always practice what they preach. The IMF has to reckon with this reality when it comes to itself. It will be very difficult to displease Europe if Christine Lagarde is indeed Europe’s representative appointed as the head of the IMF and if for some reason or other she is found not to be up to the mark in the role that has been conferred upon her. We don’t think this will happen but the risk exists. With the on-going global economic distress, the world should have been given a chance to select from a broad panel the IMF captain who was best suited to steer the global Titanic out of harm’s way and give direction to the IMF as an institution that had run out of a clear mission statement for itself…”
– Murli Dhar
It will be recalled that the Frenchman Dominique Strauss-Kahn, former head of the International Monetary Fund (IMF), was arrested by the New York Police on 22nd May for alleged involvement in a sexual assault on a chambermaid at a NY hotel. He resigned his post and is now defending himself against the charges laid upon him. In the circumstances, the IMF had to seek a replacement for him. This has now been done. As from 5th July, DSK’s successor will be a Frenchwoman, Christine Lagarde, who was up till now the French Finance Minister.
When the IMF was set up in 1944 to see a transition to a system of orderly and sustainable exchange rates in the world financial system, Europe and America in particular were barely emerging from the Second World War. Economies had been almost flattened by the ravages of war. Institutions like the IMF and the World Bank were set up to help in the vast reconstruction effort and the need to maintain financial system stability. Europe and America were the centre of the world at the time while Japan was reeling under the enormous devastation wrought upon it by the Americans during the war. Other African, Middle Eastern and Asian countries operated in the backwaters of the global economic system which was itself ring fenced by exchange controls that the dominant economic empires at the time had set up against each other. There was a risk of competitive devaluations of currencies in this context in a bid by distinct economic blocs to secure trade advantages against each other; the IMF’s chief role was to prevent this kind of exchange rate war from wreaking even more havoc than World War II had already done.
Europeans and the Americans were the ones who subscribed to the larger part of the capital of the two major international financial institutions that were set up to deal with the situation, notably the IMF and the World Bank. Consequently, Europe and America acquired substantial voting strength in each of them. Subsequently, as countries emancipated themselves successively from the shackles of colonialism, they also joined as members of these institutions. Mauritius thus became a member of the IMF in 1969. However, despite all those countries joining in, Europe and America retained their dominant voting power. They still do. If they decide to back a decision by combining their voting strengths, they can overrule the rest of the membership. As a result of this structure of shareholding, an unwritten convention emerged between the two major stakeholders in the IMF and the World Bank to the effect that the President of the World Bank will always be an American nominee while the head of the IMF will be a European. This has been the case since 1944. The decision of the IMF Board on 28th June to endorse the nomination filed by Christine Lagarde to be head of the IMF just goes to confirm that, no matter how much the global economic structure has evolved in the meantime, the tacit agreement between the two major shareholders of the IMF continues to prevail.
One of the arguments put forward by protagonists working in favour of Christine Lagarde’s appointment stated that as Europe was currently beset by the threat of sovereign debts, of Greece in particular, it was better to appoint as the head of the IMF someone from the euro zone itself. As such, it was argued that, being familiar with the euro zone’s current problems, she would be more apt to run the IMF. If this kind of logic were to prevail, one would be set to wonder as to why a Latin American did not become head of the IMF when the Latin American sovereign debt crisis was threatening the world economic order in the 1980s or a Mexican in 1996 when the Mexican debt crisis became a major international financial system threat or an East Asian when the East Asian crisis of 1997 was spreading out like a conflagration to all the countries in the Far East and thence to the rest of the world’s financial architecture. All know that it is a European who has always been heading the IMF with or without a crisis in the euro zone. All know that the Deputy MD of the IMF has to be American. It is an unwritten rule that has been complied with because no one can overturn a decision in this regard once it has been endorsed by the Europeans and the Americans acting together, given their combined voting strengths.
Since the days of the creation of the IMF and the World Bank, many best practices have been introduced the world over in a bid to improve good governance of institutions. These best practices revolve, amongst others, on concepts like meritocracy, independence and calling appointees to account. The IMF is one of the world institutions responsible for overseeing the implementation of good governance across countries in the world. It insists that the standards of good governance should straddle both the private and public sectors of the country for the best economic and social outcomes to emerge. This process should therefore have been applicable all the more to it in the first place. We know that despite the IMF’s requirement that its Executive Board should choose its MD from among at least 3 shortlisted candidates, it barely had a second candidate facing Christine Lagarde on 28th June, in the person of Augustine Carstens, the governor of the Mexican central bank, who was nominated by certain Latin American countries. The rest of the world was unable to brace itself up to present a single brilliant replacement for DSK from among its many high profile economic achievers capable of grappling successfully with the threat of a global sovereign debt contagion risking to jeopardize the current feeble uptake of the global economy.
People do not always practice what they preach. The IMF has to reckon with this reality when it comes to itself. It will be very difficult to displease Europe if Christine Lagarde is indeed Europe’s representative appointed as the head of the IMF and if for some reason or other she is found not to be up to the mark in the role that has been conferred upon her. We don’t think this will happen but the risk exists. With the on-going global economic distress, the world should have been given a chance to select from a broad panel the IMF captain who was best suited to steer the global Titanic out of harm’s way and give direction to the IMF as an institution that had run out of a clear mission statement for itself in a changing world barely yesterday, even if at the end of the day Christine Lagarde was found to be the most apt from among the several candidates. This opportunity has now been postponed by another five years.
We hope and pray nevertheless that the IMF team supporting Christine Lagarde extends its best efforts to help the IMF play an objective role to keep stable the global financial system and help put behind the looming economic crisis.