We wrote a couple of days ago about the young versus old economy struggle over who will be the next leader of the IMF in the wake of Dominique Strauss-Kahn’s resignation. Ever since its inception, the IMF had had a European in charge. Christine Lagarde, the finance minister of France, is the favorite, and the US and Europe have enough votes to determine the outcome.
Representatives of several emerging economies voiced their objections, pointing to a comment made by Jean-Claude Junker, president of the Euro group, in 2007: “The next managing director will certainly not be a European”.
The Financial Times reports that the unhappiness has gone beyond complaints in the media to an open rift. The IMF executive directors from China, India, Russia, Brazil, and South Africa issued a statement calling for “a truly transparent, merit-based and competitive process.” Good luck with the “merit” part; meritocracies are nice aspirations but unattainable in practice. Once you establish that candidates have the core skills needed to do a job, the decisions typically boils down to matters of taste (what vision for the organization do they represent) and politics. It also managed to get in a dig:
The recent financial crisis which erupted in developed countries, underscored the urgency of reforming international financial institutions so as to reflect the growing role of developing countries in the world economy.
I’d put the odds of a non-European getting the nod given the parlous state of eurozone finances at close to zero. The FT claimed the developing economies aren’t in a great position to be making demands given that some countries (but none of the letter signatories) have not yet paid their IMF dues, but that does not sound like a terribly persuasive argument. And given the insistent tone of the letter, throwing developing nations a sop in giving the number two post to an emerging economy candidate will probably not prove sufficient.
While the immediate consequences of rebuffing the BRICs + South Africa demand may seem to be nil, a snub may accelerate some of the centrifugal forces on the international finance scene. We pointed out that during the Asian crisis, Japan tried to organize an intra-regional solution, only to be swatted down by the US. It’s reasonable to expect younger economies to try to strengthen the position of other venues for economic cooperation, such as ASEAN.
This snub also runs the risk of securing less international cooperation in a pinch. We pointed out that China and India are moving in the direction of strengthening ring-fencing of their financial firms by requiring foreign banks to hold enough reserves to meet local regulatory standards (the current regime, “home-host”, takes the view that the home country regulator has primary responsibility for capital adequacy and the local subsidiary can carry very little in the way of reserves in the local market; the assumption is that it will ring home to the mother ship if it needs help.
This tempest may simply appear to be a matter of national ego. But if the West does not accede to the demands of the emerging nations, the ill will it creates at a time when the global economy is more fragile that the recent growth figures suggest could undermine other efforts to achieve greater international regulatory cooperation.
Update 4:00 AM: I managed to write this post without seeing that the FT’s Martin Wolf had weighed in on this topic. He argues forcefully that the IMF reasons for continuing to prefer Europeans do not stand up to scrutiny. Key extracts:
While I find this European argument has some force, it does not have enough force. The counter-argument is that it is in the Europeans’ interest to receive unbiased and independent advice from the IMF. That, Mr Strauss-Kahn could not give. Mme Lagarde will not be independent either. But someone is going to have to make Europeans recognise that debt restructuring will almost certainly be needed and that, given this, it would be better to fix financial systems directly, rather than indirectly via lending to quite possibly insolvent governments.
On balance, then, I do not think the case for a European head of the IMF is made overwhelming by the current crisis. Then one has to recognise the enormous advantages in terms of the global legitimacy and effectiveness, not just of the IMF, but of the multilateral institutional order, of making a transition to open global selection of the IMF’s new head. It has to be recognised that the place of the old advanced countries and of Europe, in particular, in the world economy is declining rapidly. According to the IMF’s own statistics, the share of the EU in global output, at purchasing power parity, will shrink from 25 per cent in 2000 to 18 per cent in 2015 – an astonishingly rapid rate of decline (see chart). The EU remains over-represented in the IMF: even after all the reweighting, the voting share of the Netherlands will be 1.76 per cent, against 2.62 per cent for India….
I would not myself exclude a European, as some I respect would. But the time has come for the incumbent powers to recognise that they cannot continue to dominate the global scene. If they persist in running these institutions, the rising powers will, inevitably, turn away from them altogether, to create replacements they can control. This would Balkanise management of the global economy, to no one’s true long-term advantage.
Regimes that do not bow to the winds of change get blown away. The Europeans need to recognise that truth in time. They will not do so. But it will prove a big mistake.
This post originally appeared at naked capitalism and is reproduced here with permission.
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