With Dominique Strauss-Kahn stepping down as managing director of the International Monetary Fund (IMF), the search for a successor has begun. It was in July 2007 that the qualifications of a suitable candidate were drawn up by the IMF’s executive board, when, for the first time, it laid down specific markers for “candidate profile” and selection procedure.
The key requirements were that the managing director should (a) have a distinguished record in economic policymaking at senior levels, with an outstanding professional background and demonstrated managerial and diplomatic skills needed to lead a global institution; (b) be capable of providing strategic vision for the work of a high quality, diverse, and dedicated staff; (c) be firmly committed to advancing the goals of the IMF by building consensus on key policy and institutional issues, including through close collaboration with the Executive Board; (d) have a proven understanding of the Fund and the policy challenges facing the Fund's diverse global membership and be an effective communicator.
Mr Strauss-Kahn fitted the bill perfectly. Moreover, he possessed the additional unstated qualification: he was European, that too French! When the trans-Atlantic allied powers created two post-War economic institutions for global stability, reconstruction and development, the United States chose to head the World Bank and continental Europeans (Belgium (1946-51), Sweden (1951-63), France (1963-73 and 1978-2000), the Netherlands (1973-78) and finally a German (2000-04) and a Spaniard (2004-07) headed the IMF.
Till 2007, there was no set criterion for the selection of managing director. In July 2007, at the insistence of several “emerging” economies, these criteria were explicitly set out.
Interestingly, at the time of its creation in 1945, the Fund’s principal architects, John Maynard Keynes of Britain and Harry Dexter White of the US, were divided on this very issue. I recalled these divisions in a previous column (“Reinventing IMF”, April 5, 2010) from Robert Skidelsky’s biography of Mr Keynes. In short, Mr Keynes wanted a “professional” organisation, much like a central bank, with the managing director similar to a central bank governor and accountable only to the board, but not under its day-to-day control. Mr White, on the other hand, wanted a body that the West, and the US in particular, could dominate and control.
In falling prey to Mr White’s preferences, the IMF lost its credibility in much of the developing world. The low point came in southeast and east Asia in 1997-98, after a succession of failures, first in Mexico and then in Russia. An important lesson that Asia and other “emerging” economies learnt after that was to build up their own hard currency reserves so that they did not have to go to the IMF to seek good money and bad advice.
In Mr Strauss-Kahn’s first year in office as managing director, the IMF was desperately looking for borrowers, knocking on closed doors. Then came Lehman and G20. Being a good politician, Mr Strauss-Kahn sensed opportunity and quickly positioned the IMF as a source of new thinking and the lender of the last resort. At successive G20 heads of government meetings, everyone praised the IMF for its activism and positioned the organisation as the think tank of the G20.
None of this helped the IMF find borrowers till one European economy after another started queuing up! For 60 years the Europeans ran the IMF and doled out money and advice to Asians, Africans and Latin Americans. Now, it’s the Europeans who are tapping the IMF for money. But whose advice are they willing to follow?
If the European Union and the European Central Bank are not able to discipline crisis-ridden economies in Europe, what can the IMF do, especially if it is headed by a European who no one will listen to?
Clearly, the IMF is at a crossroads. The old “Washington Consensus” on which its policy mantras were based is long dead. The more recent pragmatism and do-it-yourself policies have not always worked either. The world economy is still in a “learning-by-doing” mode, with tentativeness attached to most new ideas about change.
Against this background, not only does the IMF have to salvage its reputation as an institution, after its managing director’s ignominious fall from grace, it has to regain its credibility as a source of thinking on economic policy. With so many having followed the IMF’s advice performing poorly, and so many having rejected it doing better, the IMF needs a paradigm shift in thinking and policy advice to remain relevant.
In choosing a new managing director, the IMF must go back to the basics and ask itself what role it wishes to play in the next decade and beyond. What exactly is the IMF’s relevance to the emerging world economy? What are the lessons that have been learnt from the trans-Atlantic financial crisis and the mess in Europe? What lessons do “emerging” economies have for the developed ones in terms of policy options?
Getting the right boss is not enough to restore relevance to a crisis-ridden institution. The IMF also needs relevant ideas. The educational base of IMF staff must become more global with a mix of talent from around the world, rather than the clubby US-educated lot that has dominated the organisation for so long.
Admittedly, international affairs are about power, not just personalities and policies. But at a time when global power structures are shaking, the IMF board can retain the institution’s global relevance only if it is able to balance the imperatives of power politics with those of professional credibility in naming a new managing director.
