Once again a lawyer has scored over an economist at the International Monetary Fund (IMF). In choosing France’s Finance Minister Christine Lagarde, a lawyer by profession, as IMF’s managing director over Mexican central bank Governor Agustin Carstens, the Fund’s board mimicked the preference of the IMF’s founders. At its inception, at Bretton Woods in 1944, the original architect John Maynard Keynes, a distinguished British economist, was overwhelmed and irritated by the presence of far too many lawyers in the United States delegation. While Lord Keynes sought to build a global central bank and had an economist’s vision, his American counterpart, Harry Dexter White, and his legal eagles built a multilateral institution that the United States could dominate and control. In the end, the lawyers won!
Ms Lagarde takes charge of the Fund at an important point in the evolution of global geo-economics and geo-politics. The very process of her selection brought into focus the growing importance of China and other “emerging” and “re-emerging” economies. But in large part the focus has been on power politics, voting shares and managerial control. While these are important both in themselves and in determining the course of policy making, one must not lose sight of the implications of the change in global balances for policy thinking. While the US and the European Union were able to reassert their primacy and dominance in organisational terms, in ensuring Ms Lagarde’s victory, they must reckon with the fact that the ideas they have espoused for half a century through the Fund have come to be comprehensively discredited. The so-called “Washington consensus” on economic policy is in a shambles. If Ms Lagarde does not recognise the significance of the defeat suffered by the ideas that have ruled the IMF and is content with the victory she has won, she will continue to preside over the marginalisation of the IMF as a source of both funds and policy advice.
The challenge before Ms Lagarde is to bolster the Fund’s intellectual credibility even as she bolsters the Fund’s coffers. The old ways of running the world have become outdated, if not altogether discredited. A change in thinking was underway even during the tenure of the outgoing IMF chief, Dominique Strauss-Kahn. But the IMF needs a fundamental rethink on many policy ideas, not just fine-tuning at the margin, and this is not easy. Identifying what that new thinking should be is the first step before identifying the people capable of delivering on such new thinking. Indeed, getting new money into the IMF’s accounts may be less daunting than getting new thinking and new ways of thinking into the Fund’s policy papers. In short, Ms Lagarde’s brief will be more than a mere lawyer’s. She will need to brush up on her economics!
