What’s at stake
Amid the hubbub over Dominique Strauss-Kahn's sex scandal, an important question for the legitimacy and the efficiency of the Fund has resurfaced: the selection process of its next leader. The resignation of the IMF Managing Director last Wednesday has reopened the race for his succession but the context has profoundly changed since DSK’s appointment in 2007 as calls for an end to the tradition of having a European head the institution are getting louder and merging economies have no shortage of skilful candidates. But the current involvement of the IMF in Europe as well as the lack of clear signals from the US administration that it is ready to give up the helm of the World Bank – which most argue is a necessary quid pro quo for a truly merit based selection process – might constitute a supporting factor for a European candidate
The Leadership challenge
The Economist - as well as Nicolas Veron and Arvind Subramaniam – has a table of potential successors to DSK. A win for a non-European would be a first for the IMF, as would the appointment of Christine Lagarde, who would be the first woman to head the organisation.
Harold James writes that any organization is always much more than simply the person who happens to lead it, but a weak or politicized figure at its head can do great damage. Unfortunately, about half of the IMF’s past managing directors have been either weak or overly political – or both. The IMF’s two most recent managing directors before DSK, a German and a Spaniard, were also weak.
The IMF oddsmakers
A British bookmaker (William Hill) is taking betson the outcome and the evolution in the odds is very interesting. Kemal Dervis was close to 40% of being appointed to the job according to the betters on Wednesday and Gordon Brown was still at 12.5%, which seemed clearly high given that he is not supported by his own country (it was probably due to some sort of betting home bias). We had some interesting betting strategies for you but the arbitrageurs apparently worked them out: we were recommending buying Thaman Shanmuragatnam and selling Gordon Brown at 0 cost. Lagarde was clearly underpriced at 6.5% chance of winning on Wednesday but has become the front runner over the last two days. When we first drafted the weekly review we had not noticed this entry by Felix Salmon. We now suspect himof being the arbitrageur in chief and that he will soon retire from blogging.
Europe: united we stand
Wolfang Munchau acknowledges the principles that the job should be purely merit based and goes to the most capable candidate but firmly believes that the current problems facing Europe and the political intricacies of the continent require an IMF Managing Director who can sway European politicians and navigate EU institutions immediately as he takes office. The eurozone clearly needed the IMF’s technical competences in dealing with its sovereign debt crises. But the IMF’s single most important influence in eurozone crisis resolution has been political. In a situation marked by a lack of political leadership, the IMF filled a vacuum. A PhD in economics and an extensive experience in dealing with financial instability may be desirable qualities. But at a time like this, they are not sufficient. The game has changed.
Nicolas Veron and Arvind Subramaniam argue that Europe can not longer claim the top job and that the logic that the current involvement of the IMF in Europe would have suggested that the fund takes an Asian MD in the 1990s which it didn’t. There are important pitfalls to avoid however, one is that the jockeying between the US and Europe leading as a compromise to perpetuate the status quo. The other is that emerging economies fail to coordinate their position in support of one candidate which would also favour the status quo.
Edwin Truman argues that the presumption that the IMF should be led by a European at this time because the IMF is central to addressing the economic and financial problems within Europe makes no sense. The IMF exists to support each of its 187 members. The IMF has financial arrangements with 26 countries, excluding those involving low-income countries. Only five of those are members of the European Union: Greece, Ireland, Latvia, Poland, Romania, and soon Portugal as the sixth – not counting Iceland as a European country. Only 47 percent of IMF financial commitments of about $240 billion are to members of the European Union, although that share will rise a bit with the addition of a program with Portugal. Maybe the next managing director of the IMF will come from Europe, but there is no reason that the person should come from Europe.
EM: divided we fall
The Curious Capitalist writes that it's much more likely an emerging market candidate will win the job now than back when Strauss-Kahn was selected in 2007. One of DSK's major achievements at the IMF has been revamping the institution's voting structure to give downtrodden countries and up-and-coming economic powers greater voice. Those changes put China in the number three voting position and boosted the voting powers of the other BRICs, Brazil, India, and Russia, to the top 10. But even with those shifts, the arithmetic still favors the good old “gentlemen's agreement.” China still doesn't have enough voting shares to constitute a veto, and the G7 developed countries added together still have enough voting power to get their way.
Simon Johson writes that the big political question is whether the largest emerging markets -- Brazil, China, India, South Africa, Turkey and perhaps Saudi Arabia, South Korea, Russia, Indonesia and Mexico -- can unify behind one candidate. That would be a breakthrough but it’s still not clear who will provide the diplomatic initiative to organize them into a coalition that speaks with a single voice. This is what the French excel at within Europe.
Roubini Global Economics writes that there are no clear EM candidates that one could see most EMs rallying around. The world of EMs is divided. The problems of MENA are a valid reason for someone from the region being picked. But the brilliant El-Erian may be happy to keep on running PIMCO; while the as-brilliant Fischer—who was supported by many EMs in 2000—including some in the MENA region—would have a harder time now getting the support of MENA given the political changes there and the fact that he has now been governor of the Bank of Israel for years. The able Dervis was Turkey’s finance minister for only two years and was involved more in development than macro issues. It may be too early or unlikely for EMs to coalesce around an African candidate (Manuel). Latin America countries are likely to push for a regional candidate (Carstens, Gurría, Fraga), but they may have a hard time convincing the Asians, who could effectively veto a Latin American. Asia, meanwhile, will have a hard time finding a candidate around which it can rally: The Chinese may not want an Indian (even a very able candidate such as Ahluwalia) to run the Fund. And Asia now has the chair of the IMF’s political body—the IMFC—following the choice of the smart Singaporean, Tharman Shanmugaratnam.
The Curious Capitalist argues that the problem for the US is that if the U.S. tries to back an emerging market candidate now, at a time when Europeans are insistent that the eurozone crisis take precedent, the Europeans may ask the U.S. to give up its #2 spot at the IMF. And that would be a tough pill for the U.S. to swallow.
Turkey is in Europe after all
Dani Rodrik argues that Kemal Dervis is the best possible candidate for the job. Consider the (almost) impossible combination of demands that must be met during the job search. The Germans insist the new managing director should be from Europe. Europe's weak periphery wants someone who will be sympathetic to their cause and hit the ground running. Emerging market and developing economies ask for a leader that departs from the usual mold and will reflect their outlook and preferences for a change. And the world needs simply the best man or woman for the job. Improbably, there is someone who meets all these criteria, and his name is Kemal Dervis. Dervis comes from an emerging economy that is part of Europe (if not part of the European Union). Aside from very strong connections with leaders elsewhere, he has excellent personal relationships in Europe, including with the Greek prime minister and minister of finance. He is a charismatic leader who knows how to check his ego (as the vignette above shows). He is a terrific mediator and problem-solver.
Le FMI svp
Ousmane Mandeng has a chart that clearly makes the point about the dominance of France at the IMF: between 1946 and 2011, the IMF was directed by a French MD for 35 years. France has held the top job at the IMF for 26 of the past 33 years. Alphaville argues that French managing directors have often possessed better political authority, global respect and managerial and technical competence than others. So no one should worry if there is another French citizen in charge of the IMF.
Roubini Global Economics writes it is true that the French have been running the Fund for three-quarters of the past three decades. But technocratic (with the finest bureaucratic and ENA schooling and training) Frenchmen with political and diplomatic savvy—Jacques de Larosière, Michel Camdessus and DSK—have done a much better job than other Europeans have done, such as Horst Kohler and Rodrigo de Rato. And Lagarde has the skills, the smarts, the diplomatic skills and the political gravitas to run the IMF. Moreover, with France having accepted Draghi—who had been another potentially excellent option for the IMF—as ECB governor, it can certainly make the claim to its fellow EU members that another French person should take over the Fund.
A policeman or a doctor?
Harold James writes that DSK tried to remake the IMF into a doctor of global finance, rather than a policeman. In mitigating or even preventing financial crises, however, sometimes policemen are needed. At the moment, the combination of excesses still evident in the financial sector and in public finance in many countries calls for some fairly tough police action. Christian Chavagneux argues that under DSK the IMF has become more open intellectually. For this reason, French Finance Minister Christine Lagarde is not appropriate as most of her economic positions seem to be on principles rather than on evidence.
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