The sense in business circles, that demand is weak and growth is slowing down, was…
The IMF Needs to Change, Whoever Becomes its Next Chief Jayati Ghosh
European governments have quickly rallied around the candidacy of Christine Lagarde, finance minister of France, for the top job at the IMF. For obvious reasons, this is not popular in the capital cities of major developing countries playing a more important role on the world stage.
For more than 60 years now convention, rather than any written rules, has dictated that the appointment of heads of the Bretton Woods institutions has been controlled by the traditional global powers. The US has provided the chief of the World Bank and Europe has provided the head of the IMF. These “conventions” emerged and were entrenched during a period when these two broad groupings controlled the global economy, and polity.
That is much less clear today. The medium-term future of the world economy is unlikely to be scripted only by these two players. Before the emergency exit of Dominique Strauss-Kahn had rendered the choice of the next head of the IMF an urgent matter, it was common to hear voices from developed countries suggesting that the next person to be in charge could and should be someone from the developing world. There is certainly no shortage of suitable candidates with sufficient international experience and knowledge of the workings of international finance.
In this context, the speed and strength of insistence with which European countries are pushing for a particular European candidate is notable. Even the support of the UK Prime Minister, David Cameron, for Lagarde cannot simply be ascribed to his dislike of Gordon Brown. The reason is not just because of European governments’ perceived desire to retain some semblance of control over global institutions. It is also because the major immediate work of the IMF is to do with Europe: several European countries are involved in economic rescue packages worked out with the European Union, the European Central Bank, and the IMF – and others are likely to be waiting in the queue.
The argument being made is that since European countries are likely to be involved in bailout packages in the immediate future, it is especially important to have a European to head the Fund. Yet this was precisely the argument used – by Europeans – against having a person from the developing world to lead the institution: that debtor countries could not and should not provide the leadership because of possible conflicts of interest! Once European debtor countries are involved, apparently the inverse logic holds.
But apart from symbolic value how important is the origin, or even gender, of the person heading the Fund? The experience at the World Trade Organisation shows that it can really not change very much: thus Supachai Panitchpakdi from Thailand made little appreciable difference to the functioning of the WTO when he was its director-general.
Rather, what is really important is to get someone who can change the IMF’s approach and orientation. The media discussion about Dominique Strauss-Kahn has, inevitably, been stressing that he was a successful IMF chief. But that completely ignores inadequacies of his abbreviated tenure: despite objections, the IMF continued to push procyclical policies on countries in distress that could magnify economic or financial fluctuations; barely provided non-conditional lending to poor developing countries even when the IMF was given carte blanche and huge resources by G20; and did not suggest compensatory finance to alleviate the effects of the food and fuel price rises, which is well within its powers.
The IMF should have recognised that the debt situation of many “peripheral” economies is simply unsustainable, and should have pushed for debt restructuring that forced banks to take a haircut as a step towards a more sustainable trajectory. Instead, it forced Ireland, Greece and Portugal to embark on counterproductive austerity measures that worsen the down-swing and therefore make all the debt indicators worse.
Would someone like Christine Lagarde be better? Unfortunately, she may even be worse, if her record as France’s finance minister is any indication. The irony is that she would pursue, even more enthusiastically, the same self-defeating and economically damaging measures whose only beneficiaries are the German, French, Dutch and British banks already heavily involved in lending to these countries.
The speed of the European official choice therefore reflects the continued political power of finance in Europe. For an outsider, it is a constant surprise to see how little public opposition there is to all this in most countries. But if the recent local election results in Italy and Spain, where youth protests grew ahead of the polls, the strikes in Greece and even the simmering student unrest in the UK are straws in the wind, all this may change quite soon.
