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IMF Succession

May 22, 2011 Editorial

When the international financial institutions (IFI’s) – the IMF and the World Bank – were set up in the 40s, the IMF was supposed to manage a system of fixed exchange rates. Essentially, the dollar was pegged to gold and other currencies to the dollar.
With the demise of the fixed exchange rate system in the 1970s, the IMF mission evolved to providing short-term loans to countries with sovereign debt issues. Control was divided up between the US and Europe with a wink and a handshake. The US would appoint the head of the World Bank and Europe, the head of the IMF.
While technically there was a vote of all the members of the institution (now numbering 187) to make such appointments, the winner must garner 85 per cent of the votes. With the US arrogating 16.7 per cent to itself, it has a built-in veto. The other top contributors and voting weights are: Japan (6.0%), Germany (5.8%), UK (4.8%), France (4.8%), China (3.6%) and Italy (3.2% ). China’s vote had only been increased to its present number last year after it was acknowledged that its cooperation was vital in pulling the US and Europe out of the recession precipitated by their financial wheeling and dealing.
Yet it still remained behind France, though it is now the second largest economy in the world.
All of this has risen to the fore in the wake of the resignation of the managing director of the IMF Dominique Strauss-Kahn following allegations of rape by a New York hotel maid. Even before his action, it was widely speculated that Strauss-Kahn would make a run for the French presidency next year – polls had shown that he was the front runner  – and would have stepped down from the IMF post. There was therefore already much speculation as to who would succeed him.
With the newly emerging economies of Brazil, Russia, India, China and South Africa (BRICS) playing an ever greater economic role in the globalized modern world, there is widespread speculation that they would make a pitch for someone from their ranks to take the top spot at the IMF. However, like the composition of the UN Security Council that still reflects a post-WWII order, the members of BRICS – supported by a wide cross section of the developing world, have criticised the structure of the IFI’s.
They are proposing that it is long past the time that the selection process for the heads of the IFIs must be opened up and not remain the sole bailiwick of the Europeans. The timing should be good for an Asian bid — their economies are mostly on solid footing in the aftermath of the 2008-2009 global recession while the European Union (EU) is hobbled by a debt crisis among some members. Strauss-Kahn, as a matter of fact was returning to Europe to wrap up arrangements to prevent Greece from defaulting on initial IMF support.
But in the face of several candidates from India, Korea, Singapore etc, the incumbent French Finance Minister Christine Lagarde, has suddenly emerged as the “front runner”.  The fact that she is a woman has clouded the issue and has served to divert attention that another European will head the IMF.
The EU is arguing that because of their economic crisis that is threatening to bring down the entire union, it makes sense to have a European at the helm of the IMF. The institution has extended US$141 billion bailout loans to the PIG – Portugal, Ireland, and Greece. The European person, it is claimed, would be most au fait with the details of what is needed to stabilize the world economy.
But during the eighties, when the economies in Latin America and Asia were roiled by financial turmoil, and the restructuring and democratizing of international institutions was very much on the agenda, the United States and Europe used to argue the exact opposite. Since the developing countries were borrowers, they could not be allowed to control the IMF.
If the US, with veto power goes along with the old formula, this will definitely send the wrong signal to the emerging powers in BRICs.

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