Thursday, 30 June 2011

Christine Lagarde - Plus ça change

By Stephen Spratt

So here we are again. Europe’s stranglehold on the top job at the IMF – just like the US grip on the World Bank Presidency – continues. Christine Lagarde, the French finance minister, is to be the eleventh Managing Director of the Fund, all of whom have been Europeans, five of which have been from France. Yes… plus ça change.

The manifest unfairness of these arrangements is so obvious that the case does not really need to be made. For those who remain unconvinced that people who head vital international institutions should be appointed on merit rather than nationality, I refer them to the excellent work of the Bretton-Woods Project.

And this matters. The Managing Director at the Fund is no mere figurehead. In his time at the IMF, Dominique Strauss-Kahn made real efforts to reform the institution, pushing for the Fund to have a much stronger macroeconomic coordinating role to deal with large and persistent global imbalances, for example. Given many see these imbalances as at the root of the global financial crisis this seemed a rather good idea.

But perhaps who runs the IMF doesn’t matter as much as it should. The head of the Fund is heavily constrained by vested interests, even when they try to do sensible things that are evidently just. The global policy coordination initiative, for example, came to little, as have other major reforms of recent years, notably efforts to make voting rights more democratic.

Why is positive change at the IMF so hard to achieve?
  1. It requires those in positions of power to vote away this power.
  2. For policy coordination to work, countries need to consider the (long-term) ‘global interest’ as well as their own (perceived and often short-term) national economic interest.
  3. Large developing countries are rightly unwilling to allow economic policy to be heavily influenced by an institution which the US and Europe still effectively control. Both retain a veto over major policy changes at the IMF, while China and India, for example, have a fraction of the voting rights needed to enforce a veto.
  4. The IMF is still seen as overly ideological and as acting in the interests of its most powerful members. Although this has changed somewhat in recent years, it is still too redolent of the ‘Washington Consensus’ for many and too swayed by the views of vested interests in financial markets. 
In some ways, the final point is the most depressing aspect of the recent ‘election’ for the top job. Christine Lagarde’s only real competitor was Agustín Carstens, Governor of the Mexican central bank. Both sang from a familiar hymn sheet in many respects, and no credible alternative emerged with a different song.

Although the ‘Chicago-trained economist’ is more pragmatic than critics give him credit for he was quick to stress the solution to Europe’s debt crisis was more austerity in countries buckling under a mountain of debt. Ms. Lagarde’s diagnosis has been the same. Neither argued for a more sensible and just approach that would see bondholders shouldering a fair share of the burden - Plus ça change...

We need an IMF Managing Director that is prepared to stand up to its members, and to vested interests in the financial sector. That really would be a change worth having.