Saving the IMF for the world

Only a stronger fund will continue to be relevant

No one foresaw the manner and suddenness of Dominique Strauss-Kahn’s departure from the helm of the International Monetary Fund. Thankfully, the transition to a new leadership has so far been less disruptive than one might have feared. By the end of the month, the next managing director will have been appointed. He or she – almost certainly she – will have to steer the IMF through big transformations, starting with the recruitment process itself.

The swiftness of this leadership transition is about the only thing to recommend it. The emerging world already suspected the eurozone of using the IMF as a piggy bank for its own sovereign debt crisis. Now European countries have short-circuited the recruitment process in favour of Christine Lagarde, the French finance minister, in violation of admittedly vague undertakings that Mr Strauss-Kahn would be the last stitched-up European placement. It would have been better for all, starting with Ms Lagarde herself, if she took office having prevailed in a genuinely open contest.

Next time, this will have to be different. The focus must shift from the geography of candidates’ origin to their programme for what the IMF should do. Would-be managing directors should have to present their plans in much more detail than was the case this time.

For their part, member countries should not undermine the process as the Europeans have done by anointing a preferred candidate before the full list of nominees had even been drawn up.

A better recruitment process for the top IMF leadership will be one of the many things the next managing director will owe to poor and middle-income countries, especially if it is Ms Lagarde. This should begin with the position of first deputy director, which John Lipsky is due to vacate this year. The new leadership should also continue increasing the influence of emerging economies in the organisation’s governing bodies.

The most immediate policy decision facing the IMF is how to manage its deep involvement in the eurozone. The size of the funds committed is extraordinary. They bring with them an unprecedented degree of IMF scrutiny of countries that are not only rich, but also members of a monetary union that constitutes the most ambitious project of European integration in recent history. The IMF would probably not have put its money at risk in projects such as the Greek one had it involved non-European countries with similar numbers.

The pecuniary risk is more notional than real: even if the programmes ended in tears, the stronger eurozone countries would surely make the IMF whole. However, that does not diminish the reputational risk. The IMF cannot afford to be seen as a European monetary fund guaranteed by the treasuries of non-European nations. But this becomes more likely every time it deepens its eurozone involvement, as it just did by relenting on the demand for full funding of the next 12 months of Greece’s programme.

So the next managing director must devise a gradual exit strategy from the eurozone. The alternative is that other countries prioritise regional solutions to the problems the fund is meant to address. The IMF’s marginalisation in favour of regional monetary funds is a real possibility.

Such a development would not be without logic. Regional swap line networks such as the Chiang Mai initiative have played a useful role in countering financial protectionism. However, the biggest challenges for governance of the world economy can only be addressed globally, and there is no substitute for the IMF.

These include sources of instability in global macroeconomic imbalances – both the trade patterns they embody and the financial flows that reflect them. The technical expertise of the IMF is not sufficient for co-ordinating macroeconomic policy, but it is necessary. No one is better placed to monitor international financial flows, point out where they are inadequately regulated, and promote policies to frustrate illicit flows such as those involving cross-border tax evasion. Above all these issues looms the US dollar’s role in a world where more and more economic and financial transactions take place between emerging countries and bypass the core of the global economy altogether.

So if the IMF did not exist, we would have to invent it. As it is, it must be reinvented so it can do its part in managing the shift of economic power to the emerging world. Its next boss should make clear that the IMF will be more useful to all its members the less beholden it is to any one of them.

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