The old order refuses to bow away

“It is European techniques, European examples, European ideas which have shaken the non-European world out of its past, and the history of the world for the past five centuries, insofar as it has significance, has been European history.”: Hugh Trevor-Roper, historian.

Let me do my two-bit in support of the widespread call to make sure the next IMF managing director is not chosen after a one-horse race. It is not that selecting a non-European, or more specifically, someone from the emerging countries, will by itself change a great deal. As Onno de Beaufort Wijnholds, a former IMF executive director, has explained, with an insider’s insight and hindsight, the top spot is only one square on a chess board. The Fund is, and will continue to be, run by a whole management team, and it is the composition of the team that is to be considered.

In the event that one of the several outstanding (potential) candidates from the emerging countries does get the job, an inevitable casualty would be the present geographical composition of the rest of the IMF management. Since there is no reason to expect the USA to give up its number two position, the First Deputy Managing Director, there would be no European on the management team, as the other pesent deputies, with much of their five-year terms still to go, are from Japan and Egypt. Europe has 32% of the voting power in the IMF and is the largest contributor to its financial resources, so its total exclusion from the top echelon may not be prudent.

So may be, in case a European is not given the top job, the US would cede its claim on the number two position in favor of a European. The same logic would demand that if a European does become the chief, the developing countries would press for  the first deputy to come from their ranks, again displacing the USA. The term of the present World Bank president who is American, ends next year, which is also election year in the US, and losing influence in both organizations is an unlikely choice for any US administration. And reality cannot be ignored. If the US does give up on the old bargain, which gives it a permanent lock on the presidency of the World Bank, its Congress, particularly in the present state of the country’s finances, will almost certainly hold back funds for World Bank programmes, above all for its concessional lending arm, the International Development Association.

I am by no means urging the survival of the ancien rйgime or supporting the European determination to hold on to what they hold.  Indeed, the French Finance Minister’s presentation of herself as a candidate from Europe, but not a European candidate, to emphasise that her general suitability overrode her specific nationality, was an argument worthy of a compatriot of Descartes. By convention, the IMF’s chief executive is appointed by the Fund’s 24-member executive board, and to date, the choice has always been from a West European country. In 2009, after a full decade of working groups, position papers and learned reports, it was agreed that the IMF should adopt “an open, merit-based and transparent process” of selection for the top management, but as soon as Ms. Lagarde declared her intention, European capitals fell into lockstep behind her candidacy, forgetting all promises that international orgamizations would no longer be a fiefdom.

Europe’s main contribution appears to be its influence on the IMF’s managerial style. Many feel essentially the fund is a Eurocracy, with the management style of the institution largely European – hierarchical and bureaucratic. However, the dominance of economists, especially those educated in the US, means that most people in the fund fundamentally believe in markets and market-based solutions to problems. It is an approach quite different from the interventionist instincts of many Asian and European politicians.

The economic philosophy that shapes its lending programmes has also owed a great deal to the US. In the 1970s, when the IMF reinvented itself from being an upholder and guarantor of the Bretton Woods fixed exchange rate system to a more general purpose crisis lender, its dominant model became what some Europeans disparagingly call “Anglo-Saxon” economics. The fund instinctively favoured securitised financial markets over the long-term banking model of Rhineland capitalism and pushed an all-encompassing view of globalisation, encouraging financial sector deregulation and the liberalisation of capital accounts. I shall come back to this later.

To be fair to the Europeans, the emergence of the IMF during the course of the current crisis as what is, in effect, a European monetary fund, gives an understandable urgency to their desire for control over an institution that has played a vital catalytic role in the response to the crises not just in Europe’s western and eastern periphery, but inside the eurozone itself. As of April 2011, 79.5 per cent of IMF credit outstanding was to European countries, 52.9 per cent in the east and 26.6 per cent in the west of the continent. The response of Europe’s critics is one of vociferous condemnation: did any one, they ask, think that the head of the IMF needed to be an Asian to deal with the Asian crisis of the late 1990s or a Latin American to deal with the crises in that continent in the 1980s or 1990s? Of course not. So why should a European be needed to clean up the mess the Europeans have now made of their affairs? The claim traditionally made by advanced countries is that their nationals should run international organisations, because they are relatively competent. Today’s European disarray gives the lie to this proposition.

Suggestions that the credentials of the new managing director must include an avowed wariness  of debts and deficits are relevant. But that is hardly the full prospectus of what the IMF badly needs at this time, which is nothing less than root and branch reform. The organization was shown to be ineffective during the Asian financial crisis of 1997, and its advice was resented and discounted by the affected countries in making their recoveries, especially in matters of capital controls that placed restrictions on free movement of currencies across trans-national borders. The IMF also failed to anticipate or deal with the global financial meltdown of 2008, which was caused by, and afflicted most gravely, its leading shareholders, namely the western developed economies, all of whom are still languishing in various areas of the financial doldrums. Its prescriptions are rigid and its one-cap-fits-all solutions are belatedly considered to be ill-conceived, to say the least.

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. Mindsets that do not bow to the winds of change get blown away. As  Agustнn Carstens,  governor of the Banco de Mйxico and a candidate to be the IMF’s next managing director, has written, “global collaboration requires trust among partners, with legitimate institutions at its core”. This trust will be strnegthened only if the next IMF head is  selected transparently and on the basis of ability and experience. The IMF’s 187 members all deserve a candidate who can lead the IMF as what it was originally intended to be: a fully global institution that addresses economic imbalances well before they send any country, or all of them, into another abyss.