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Row Over New IMF Chief Intensifies (Updated)

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We wrote a couple of days ago about the young versus old economy struggle over who will be the next leader of the IMF in the wake of Dominique Strauss-Kahn’s resignation. Ever since its inception, the IMF had had a European in charge. Christine Lagarde, the finance minister of France, is the favorite, and the US and Europe have enough votes to determine the outcome.

Representatives of several emerging economies voiced their objections, pointing to a comment made by Jean-Claude Junker, president of the Euro group, in 2007: “The next managing director will certainly not be a European”.

The Financial Times reports that the unhappiness has gone beyond complaints in the media to an open rift. The IMF executive directors from China, India, Russia, Brazil, and South Africa issued a statement calling for “a truly transparent, merit-based and competitive process.” Good luck with the “merit” part; meritocracies are nice aspirations but unattainable in practice. Once you establish that candidates have the core skills needed to do a job, the decisions typically boils down to matters of taste (what vision for the organization do they represent) and politics. It also managed to get in a dig:

The recent financial crisis which erupted in developed countries, underscored the urgency of reforming international financial institutions so as to reflect the growing role of developing countries in the world economy.

I’d put the odds of a non-European getting the nod given the parlous state of eurozone finances at close to zero. The FT claimed the developing economies aren’t in a great position to be making demands given that some countries (but none of the letter signatories) have not yet paid their IMF dues, but that does not sound like a terribly persuasive argument. And given the insistent tone of the letter, throwing developing nations a sop in giving the number two post to an emerging economy candidate will probably not prove sufficient.

While the immediate consequences of rebuffing the BRICs + South Africa demand may seem to be nil, a snub may accelerate some of the centrifugal forces on the international finance scene. We pointed out that during the Asian crisis, Japan tried to organize an intra-regional solution, only to be swatted down by the US. It’s reasonable to expect younger economies to try to strengthen the position of other venues for economic cooperation, such as ASEAN.

This snub also runs the risk of securing less international cooperation in a pinch. We pointed out that China and India are moving in the direction of strengthening ring-fencing of their financial firms by requiring foreign banks to hold enough reserves to meet local regulatory standards (the current regime, “home-host”, takes the view that the home country regulator has primary responsibility for capital adequacy and the local subsidiary can carry very little in the way of reserves in the local market; the assumption is that it will ring home to the mother ship if it needs help.

This tempest may simply appear to be a matter of national ego. But if the West does not accede to the demands of the emerging nations, the ill will it creates at a time when the global economy is more fragile that the recent growth figures suggest could undermine other efforts to achieve greater international regulatory cooperation.

Update 4:00 AM: I managed to write this post without seeing that the FT’s Martin Wolf had weighed in on this topic. He argues forcefully that the IMF reasons for continuing to prefer Europeans do not stand up to scrutiny. Key extracts:

While I find this European argument has some force, it does not have enough force. The counter-argument is that it is in the Europeans’ interest to receive unbiased and independent advice from the IMF. That, Mr Strauss-Kahn could not give. Mme Lagarde will not be independent either. But someone is going to have to make Europeans recognise that debt restructuring will almost certainly be needed and that, given this, it would be better to fix financial systems directly, rather than indirectly via lending to quite possibly insolvent governments.

On balance, then, I do not think the case for a European head of the IMF is made overwhelming by the current crisis. Then one has to recognise the enormous advantages in terms of the global legitimacy and effectiveness, not just of the IMF, but of the multilateral institutional order, of making a transition to open global selection of the IMF’s new head. It has to be recognised that the place of the old advanced countries and of Europe, in particular, in the world economy is declining rapidly. According to the IMF’s own statistics, the share of the EU in global output, at purchasing power parity, will shrink from 25 per cent in 2000 to 18 per cent in 2015 – an astonishingly rapid rate of decline (see chart). The EU remains over-represented in the IMF: even after all the reweighting, the voting share of the Netherlands will be 1.76 per cent, against 2.62 per cent for India….

I would not myself exclude a European, as some I respect would. But the time has come for the incumbent powers to recognise that they cannot continue to dominate the global scene. If they persist in running these institutions, the rising powers will, inevitably, turn away from them altogether, to create replacements they can control. This would Balkanise management of the global economy, to no one’s true long-term advantage.

Regimes that do not bow to the winds of change get blown away. The Europeans need to recognise that truth in time. They will not do so. But it will prove a big mistake.

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51 comments

  1. Jumpjet

    I’ve got a wacky idea. If the developing nations don’t like it, they should just leave the IMF.

    THAT would turn some heads. It’s not like they need it at this point.

    1. bill o'rielly

      “The IMF executive directors from China, India, Russia, Brazil, and South Africa issued a statement calling for “a truly transparent, merit-based and competitive process.”

      China and Russia do not have merit-based processes to elect their own leaders, how can they ask the same from the IMF?

      1. Skippy

        “China and Russia do not have merit-based processes to elect their own leaders, how can they ask the same from the IMF?”

        Skippy…Hubert Spencer would like to have a word with you.

      2. DownSouth

        bill o’rielly said: “China and Russia do not have merit-based processes to elect their own leaders…”

        And you think the United States and European countries do?

        1. aet

          Cream always rises to the top, but so does scum.
          It depends on what’s in the underlying liquid is.

          1. DownSouth

            But that begs the question: What is the ‘underlying liquid’?

            I don’t know what the situation is in Europe, but if recent US polls are any indication, America’s oligarchs have badly misjudged what the ‘underlying liquid’ in America is.

            For a good example of this, there’s the last 15 minutes or so (beginning at Minute 1:42:00) of Lifting the Veil:

            • More than 2/3 of Americans say the government should care for those who cannot care for themselves

            • 64% would pay higher taxes to guarantee healthcare for everyone

            • 60% are favorable towards unions

            • 70% want nuclear disarmament

            • 72% want the U.S. completely out of Iraq

            • 81% favored taxing the rich and/or cutting military spending as the best way to cut the deficit

            • Only 3% recommended cutting social security

            So I don’t read the current situation in the U.S. as being analogous to, for instance, 1942 Germany where, as Hannah Arendt put it in Eichmann in Jerusalem, “the overwhelming majority of the German people believed in Hitler” and Adolf Eichmann and the world he lived in were “in perfect harmony.”

            That will not, of course, prevent the “children of darkness” from trying to promote the most pessimistic portrayal of the American people as they possibly can.

          2. Anonymous Jones

            I agree with DS, and I think despite its odd origins, the metaphor of the liquid and the scum turned brilliant.

            The underlying liquid is, in many respects, good. What an awful way to live life than to believe anything else about the liquid.

            As confusing as it gets here, I still maintain that encouraging people to work together for the good (not the perfect) is the best plan. The majority generally believes in policies that seem reasonable. They just need to stop tearing each other down and come together to put into effect the policies that they say they want. And they need collective power to combat the sociopaths and the greedy who fear ceding any amount of power or control.

      3. F. Fondrement

        Typical response of a provincial flag-waver. Oriley, you need to get out more, you evidently missed seeing Putin and Hu run rungs around the dimbulb Bush and the mediocrity Obama. Either American president would have been quickly pulped in their counterparts’ selection process.

        1. aet

          Competent to judge that, are we?
          How do you figure?
          Fluent in Russian and Chinese, are we?
          Comfortable that you don’t have any blind spots?
          How can you be confident of that?

          A person alone can do nothing.

          1. Nathanael

            China and Russia most certainly do have more competent and effective leaders right now than the US has had since at least Clinton and probably longer.

            This isn’t to say they have good selection *processes*. Augustus Caesar was a great leader of Rome, but it was clear the selection process was completely whacked. He was followed by 10 terrible leaders, and then Marcus Aurelius, and then a whole bunch more terrible leaders.

    2. Allen C

      This is a logical. The realities are that China is the second largest economy, China is a creditor nation, and most of Europe and the US are financially challenged (putting it nicely).

    1. Steve

      Well, you’re exactly right. They are playing for time so that the French and German banks can re-capitalize.

      An IMF head from a developing country would be much more focused on pro-growth policies and less oriented toward big finance.

    2. Susan Truxes

      “Haircuts,” “Obligations,” whatever. From the article: the West runs the risk of pissing off the East and if this happens under the East’s possible new IMF regulations the “home country regulator also has primary responsibility for capital adequacy of the local subsidiary,” and no fudging. Oh dear. And so what if the West’s global output shrinks, how much do we owe? And how do we rationalize all our fake profits??? This could be a problem, Milly. Heaven forbid that the management of the global economy should be Balkanized.

  2. readerOfTeaLeaves

    This tempest may simply appear to be a matter of national ego. But if the West does not accede to the demands of the emerging nations, the ill will it creates at a time when the global economy is more fragile that the recent growth figures suggest could undermine other efforts to achieve greater international regulatory cooperation.

    If the post on Japan’s ‘post-growth economy’ is valid (and I think that it is), then any model that assumes Western heads of IMF is past its pull date.

  3. Anjon R

    I wonder if there will be a stepped-up call to re-structure the voting weights of the IMF after the probably snub? There is already a push by some countries to expand the permanent members of UN Security council. There might be more unity among the BRICs on IMF reform.

    Of course, the developing world has been protesting since the days of the Nehru-Nasser and others within the NAM movement, but not much success in terms of real structural reform has ever come out of it. Perhaps “this time it’s different” (famous last words), as the power dynamic has been shifting….

  4. Parvaneh Ferhadi

    That may just be posturing and bringing themselves into position for negotiations. I am not sure China, Brazil etc would gain much by placing a person of their choice at the top of the IMF. As long as that person in not in line with the forces who control the IMF (the US mostly), that person wont achieve much.
    The BRICS may have much more to gain by getting other concessions out of the US and the EU for their support of Lagarde.

    1. Carl

      Here is a question: Should the nationality of the leader matter? It SHOULD not. But it obviously does. What does this tell you?

      1. Parvaneh Ferhadi

        I am not sure that nationality ist the decisive factor. The IMF is an US/European imperialist tool and anyone who supports their agenda is acceptable for the top job. However, currently you are more likely to find such candidates in Europe or the US, but that doesn’t mean that the decisive criteria is nationality.

        1. DownSouth

          The neoliberals can always find a coconut* like Obama to carry water for them.

          However, you could fit the Grand Canyon into the ideological divide between the US/Europe and the BRICs.

          Many editorial writers here in Mexico express great admiration for Brazil, Russia, India, China and other countries for having said “no” to the neoliberal juggernaut.

          Neoliberalism is a totally failed paradigm. Since much of the developing world has “Just said no” to the nightmare of neoliberalism, the United States and Europe are now turning their guns on victims closer to home. We’ll see how that works out with Greece, Portugal, Spain and Ireland, as well as their own home populations.

          *”Coconut” is an expression I’ve heard used by Hispanic grassroots organizers in San Antonio. It means brown on the outside and white on the inside.

          1. Steve

            Did “neoliberalism” fail, or did “crony” finance fail? I would conflate the two.

            Trade would appear to have raised living standards in the BRICS, although maybe not as much as we would like.

    1. DownSouth

      I suspect what we’re seeing is the second, and last, major crisis of liberalism and capitalism.

      1. aet

        “last”?
        You been reading from Brother camping’s works?
        or do you have your very own crystal ball?
        How much did you pay for it?

        1. attempter

          You don’t need a crystal ball to understand Peak Oil and the maturity of all capitalist sectors, both of which mean the end of capitalism, i.e. the feudal-capitalist hybrid which characterized the Industrial Revolution and the Oil Age.

          That’s why they’re going full bore restoring undiluted feudalism.

        2. DownSouth

          aet,

          You need to emerge from your little bubble. Believe it or not, what’s going on in the United States and Europe does not constitute the totality of human existence.

      2. Nathanael

        Depends what you mean by “liberalism”. And “capitalism”. And “Second”.

        I’d say you made a very questionable statement there.

        Liberalism in the *civil liberties vs. authoritarianism* sense is not going away until humans do, and thanks to the lust for power, it will have more crises. Capitalism in the sense of people trading at a small level and hoarding what goods they could get never did have a crisis and is also not going away. I’d be impressed if lending for profit went away, as it is about 7000 years old, though it would be nice.

        The current feudal-capitalist structure is fairly clearly exploding, as is the utterly failed neoliberal economics. The attempt to restore full-scale feudalism will also fail; that genie got out of the bottle back during the Enlightenment and no matter what attempts are made to push it back in, they will fail.

        I’m not sure what will come next.

    2. aet

      The Cold War has been over for decades…isn’t that what you meant by “post-World-War-2 World order?

      1. aet

        Maybe the USA will finally at long last de-mobilize from WW 2 and cut their military spending to a more appropriate level.

        1. ambrit

          Sorry aet;
          This view incorporates a somewhat naive view of the balance of power in post WWII America. Disarmament movements throughout human history have had short exciting lives.

  5. SteveA

    Lagarde is under investigation for her alleged role in the Tapie affair (which wound up costing French taxpayers nearly EUR 400 million); the court is expected to announce on June 10 whether a case will be brought against her. She clearly wants the job, and the French clearly think it is a job for the French, but I doubt Sarko will put on a full court press before the judicial decision.

    If anyone is unaware of her establishment cred, she was the Chair of McKenzie & Baker before becoming Trade Minister in 2005.

  6. attempter

    Good luck with the “merit” part; meritocracies are nice aspirations but unattainable in practice. Once you establish that candidates have the core skills needed to do a job…

    I’d say it’s worked out well and meritoriously from the point of view of the bankster interest and the IMF’s real function.

    From the point of view of the interests of peoples, of humanity, as well as of reason and morality, the result is a little different.

    I agree that this is posturing. The truly assertive pro-democratic move would be to reject the IMF as such, not pretend to be trying to reform it from within.

    Why would e.g. Brazil care about who’s heading the IMF? Clearly, Brazilian elites merely want a bigger piece of the action themselves. They don’t want the crimes to stop.

  7. Mamzer ben Yoni

    Maybe someone will:
    • play up Diabolique Straus-Kahn’s Moroccan origins,
    • argue that he was kind of “third-world-ish”, and
    • suggest that now it is time to back to having a European….

  8. Richard Kline

    The IMF is an integral neo-colonialist structure in the Transatlantic Hegemony, so to speak. When the there is a need for the ‘fix to be in,’ a Mr. Fixit has to do the dirty deed. No one who is not ‘reliable’ (i.e. a running dog leashed to the system) would be approved, regardless of the passport they hold. Now, it is entirely conceivable that a reliable person of such sort neither from North America nor Western Europe might at some point be appointed. Creatures of that kind are now routinely found to face the camera at the UN and other less prestigious structures, for example. But it must be the case that said Mr. or Ms. Fixit turns the spigots on and off when the plumbing bursts (as it quite frequently does). It must not be the case that the Managaing Fixer of the IMF is out to lunch when the fix has to go in. Do you think that those inthe Transatlantic Hegemony would be comfortable that a preferred appointee of, say, China would be ‘reliable’ when the spigots had to be wrenched? Not gonna happen.

    And then there is the matter of prestige. The last occupant of the office exited most ignominiously, and the Pale Atlanticans undoubtedly wish to end the sniggers and restore the grace of their putative place in the order of things. I’d expect a European to be chosen now exactly because those BRICheads think the old boys aren’t up to it. The slapdown argument on all of that is that clearly Europe is going to need several things ‘fixed’ before the end of the year, and I expect then can call in sufficient chits to ensure that they will be allowed to get _their_ Fixer in place for the mucky whack job; I mean, who ELSE would _want_ to to it?

  9. aet

    The IMF frequently gets it wrong….even the smallest of countries can give themselves better advice.

    ” Estonia managed not only to learn from other transitions, but also to invent new lessons and paradigms of its own, mainly by defying advice from “wise” foreign experts. The classic example is the IMF’s advice to the caretaker (Tut Vahi) government not to leave the ruble zone by launching a new currency. (The IMF later admitted its mistake).”

    From:

    http://findarticles.com/p/articles/mi_qa3996/is_200310/ai_n9310197/

    I consider the IMF to be dangerous in that they give incompetent advice.

  10. frances snoot

    Who’s in charge of the puppet theatre? Isn’t it the Bank of International Settlements? What parts of the old system, if any, are to be carried through to the new system of multilateral exchange (fascist police power). Is the problematic one of entrenched power within the old system (aka central bank digress) or are we all being taken around the maypole in a ritual dance?

  11. frances snoot

    http://www.reuters.com/article/2011/05/23/us-g20-regulation-idUSTRE74M3VQ20110523

    “The FSB and Basel face the challenge of keeping up pressure over six years to implement Basel III and resolve key issues such as how much extra capital the biggest banks must hold.”

    What good capital if the exchange rate function for that capital is suddenly defunct? Is that what Juncker related to as as question of theology?

    We’re playing jenga but the real capital interests are elsewhere, right?

  12. john

    Europe needs continuity at the IMF for the same reason Obama wanted continuity at Treasury and the Fed: so that incumbent institutional structures will be protected along with the entrenched elites that run them. It really can’t last too much longer, but like Kadafi entrenched elites everywhere are capable of inflicting monumental devastation on their societies in the name of their prerogatives.

    I dont entirely agree with this:

    http://www.ted.com/talks/lang/eng/stewart_brand_proclaims_4_environmental_heresies.html

    but frames up nicely the world we now live in which looks very different from outside the wealth bubble of western elites.

  13. Doug Terpstra

    A ‘MS.’ Fixit at the IMF is unlikely to sodomize poor brown folk— fiscally?, of course —just not physically. She may be every bit the rapacious money-grubber, but at least you won’t get the embarrassing headline: “Extremely wealthy Jewish banker rapes poor African immigrant.”

    Tablet Magazine, “for obvious reasons” is pulling for one of two candidates: “Who You Got on Next IMF Head?
    Two Jews, including Israeli central banker, are in the running.”

    “Stanley Fischer, the Bank of Israel governor … is a distant 16:1 odds, which—it seems to me—might be a little high given that the MIT-educated economist has actually done several years as the IMF’s first deputy managing director. I mean, you’re telling me you get 16 times what you bet if he hits it? It’s a lock!”

    They then offer a Seinfeld clip with Kramer as compulsive gambler.

    http://www.tabletmag.com/scroll/67962/who-you-got-on-next-imf-head/

  14. Ken Ward

    South Africa is now a member of what has become the BRICS group, the term that commenter Parvaneh Ferhadi uses, so it is anachronistic for Yves Smith to write ‘BRICs + South Africa’.

  15. MyLessThanPrimeBeef

    This is like asking who should get the dead USSR’s nuclear bombs.

    How about just dismantle them all?

  16. Ethel Bramble

    Will someone who know their history better than I do please give us a report on the European monetary unit that was in effect sometime around 1900 to 1910, how it was created and how it failed, (Does it have anything to do with the unorganied rash of assassinations of the royalty across Europe and Russia that culminated in the Serajevo (sp?) assination that started WWI?). There were a series of economic “crisis” before 1900 too. I don’t want to be doomed to repeat this history because I didn’t read it, but I have very little information on this in my library. What are the similarities and differences between then and now?

    1. King Kotton

      Hi Ethel,

      Not to dodge your question but nearly all books published before 1928 are now online (head on over to archive.org), and when you find out the answer, I would like to know too.

  17. ethelbramble

    To Down South

    Thanks for the documentary Lifting the Vail. There went all my childish illusions! But I do still hope. After all if it werent for the idealists, we would have shot lower and not reached as far as we did. I also think if one doesn’t give one’s energy to evil, it will eventually do something right just to get some attention.

    1. aet

      Your comment seems to indicate a belief in dis-embodied spirits….perhaps you are the “idealistic” one in the conversation.

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