On July 5, former French Finance Minister Christine Lagarde took the oath as the new managing director of the International Monetary Fund (IMF), becoming the first woman to take the organization’s top job since its inception in 1944.
The world’s most important international economic and financial organization finally ended a leadership crisis following the arrest of its former chief Dominique Strauss-Kahn on May 15 on rape charges.
Lagarde’s selection as the IMF’s new leader solves this problem. Now, Lagarde will face other problems as the IMF’s future seems clouded.
Reputation
The IMF has carried a birthmark of political compromise since its establishment. It long maintained the Bretton Woods system of pegged exchange rates that was centered on the U.S. dollar. After the system collapsed in 1971, it continued to center on the U.S. dollar and supervised the exchange rates of countries through consultation as well as fiscal and monetary policy guidance. All these make people question its independence as an international organization.
What’s more, if its independence issue has historical reasons, then the sequelae of Kahn’s management is a realistic problem. Eliminating Kahn’s style leftover in the organization is a severe challenge for Lagarde.
The IMF has been known for frequent failures to warn the world economy of impending doom. In June 2011, it was surrounded by another scandal involving presupposition of research results. According to a report of the IMF Independent Evaluation Office, IMF researchers often face the pressure of being forced to change their research results to support the IMF’s existing opinions. When people link the early warning failures with the presupposition scandal, they cannot help suspecting the IMF’s value orientation.
Although this speculation has not been
verified, for a long time the bad feelings have produced a negative impact on the development of the organization. As a result, despite its fame as a world first-level organization, it could only play the role of a second-level one in international economic governance.
Another challenge is that the organization has never been successful in crisis governance. It should be one of the basic functions of the IMF to save countries in
crisis. But in the past 60 years, few of its member states overcame any crises under its guidance. The reason lies in the intention of its aid. The organization regulates when a member state receives aid, it must accept attached conditions on economic system reform. These conditions embody a strong sense of the Washington consensus. They are mostly incompatible with the national conditions of the developing countries waiting to be rescued, and therefore it is difficult for them to be insisted on.
Now the IMF is faced with the European debt crisis, and the crisis in Greece is representative. After being nominated as the new chief, Lagarde still insisted on a tough stance against Greece. She requested Greece to realize an internal compromise in exchange for IMF aid. This is exactly the same as the organization’s previous practice.
The problem is the aid for the EU this time bears much bigger risks than before. On the one hand, the possibility of a successful rescue for Greece is quite slim. So it is difficult for the IMF to save its reputation through this crisis. On the other hand, to save Greece means a high price will have to be paid. Given the poor financial situation of the IMF, Lagarde will soon find this rescue mission is actually a dilemma.
Reform
If re-establishing credibility is a longterm strategy, then internal reform is an urgent task for the IMF. As early as Kahn’s taking office in November 2007, reform was put on the agenda. For a long time, the various suspects of the world on the IMF’s independence, executive ability and credibility have all stemmed from its backward governance structure.
Objectively, after World War II ended, of the 44 founding members, the United States was the only victorious country not damaged by the war. At that time, Europe was weak, and developing countries were even worse off. In that case, the IMF’s system featuring the United States paying more, working more, and the U.S. dollar dominating the financial regime was above reproach.
However, more than 60 years have passed, and the world has undergone great changes. Emerging countries and other developing countries are growing with more influence. But these changes have not been reflected in the IMF’s governance structure. Even after the realignment of quotas at the end of 2010, the emerging economies only accounted for 20 percent of the total source of funds, less than that of oil-producing countries and less than half of that of developed countries as a whole.
What’s more, the selection of senior
management staff is more fixed. For a long time, figures from developing countries have
been seldom seen at the top management level.
Can such a fixed governance structure
be improved in the future? The answer is, probably not. The first challenge is quota reform. Lagarde promised to continuously increase the representation of emerging countries as well as other developing countries, during her travels around the world after her nomination. But it is worth noting that until now the quota realignment agreement made at the end of 2010 has not been carried out.
During this adjustment, the United States
and Europe fought fiercely about who should give up certain quotas to developing countries. Although in the end Europe agreed to transfer two seats in the IMF Executive Board to developing countries, this process will be slow. And it needs the approval of other member states. These difficulties make Lagarde’s promise seem like the moon in the water. One can only appreciate it rather than truly obtain it.
The reform of the personnel system serves as another big challenge. The appointment of Lagarde is the most transparent one. But she is, again, a European that satisfies both the United States and Europe.
With the surge of emerging countries, people from developing countries will have a greater participation in the operation and management of the IMF. They are afraid the organization will only favor those with highly similar U.S. academic backgrounds and a U.S. way of thinking. The current personnel system seems diversified and not confined to nationality, but in fact it is quite rigid.
It may be still too early to conclude on the future role of the IMF. But at least, under the leadership of Lagarde, it is difficult for the organization to become the ruler of the world economy.
As is known by all, the United States has the final say in coordinating the global economy, issuing super-sovereign reserve currency and other major issues. Therefore, at the current stage, if the IMF wants to manage the world economy, it has to fight with the United States. This is impossible.
It could have played the roles of a coordinator and a consultant. Over the past decades, the IMF has failed to do a good job in this regard. In most cases, it carried out one-way coordination according to U.S. intentions. Possibly, Lagarde can improve this situation with her unique advantages, including a European face, U.S. mindset and unanimous support. Maybe she can promote the organization’s job in coordinating international economic policies and push the world to reform current international financial and monetary systems that are incompatible with the current economic situation.
The reality is, after the outbreak of the international financial crisis, the G20 has risen to be a major platform of economic policy coordination across the world. Under the guidance of the G20, the IMF has done much work in providing technical support and consultation on creating a strong, sustained and balanced growth. To some degree, its work in this regard has been recognized by the world. Therefore, maybe the best role for the IMF in the future should be an assistant in coordination of the world economy.
Lagarde’s Agenda
l Connectiveness: The IMF must keep track of the growing interconnectedness of the global economy and warn about possible spillovers from one economy to another.
l Credibility: For the IMF to be credible, its analysis and work need to be candid, credible and evenhanded.
l Comprehensive: The IMF should look at a country’s economy not only by tradi
tional macroeconomic measures, such as fiscal deficits. Other factors such as employment and social issues need to be taken into account as well.
l Legitimacy: Lagarde said the IMF’s members must complete 2010 reforms designed to improve the fund’s governance and provide major emerging markets and low-income countries with a greater say in the institution.
l Diversity: As the first female head of the IMF, Lagarde said diversity was not just
about gender. “It is about engaging, about breaking down the barriers, removing the obstacles, so that all participants can actually be at the table.”
(Source: www.imf.org)