IMF: a Swan Song in Two-Part Harmony

by Prof. Romano Prodi, Zoomlion Chair at CEIBS
For more than fifty years, the United States and Europe have shared control of the two institutions the world relies upon for financial stability and development. These entities were created to govern the international monetary system, and to provide assistance to countries that might falter without it. Traditionally, Europe (most often France) has directed the IMF, while the US has led the World Bank. This sharing of powers was natural, since the US and Europe—with the active participation of Japan at times—have charted the world’s economic course for most of the past 60 years.
Development of the world’s resources and stewardship of its assets have changed substantially over the past few decades. Today, the United States and Europe combined account for less than 45% of global GDP and their future outlook is anything but robust. Inevitably the leadership of these two institutions, which together serve financial cooperation and improved self-reliance, must be shared by countries who today contribute as major forces in the economic realm.
The very day Dominique Strauss-Kahn resigned from the IMF, the US and Europe jointly proposed Christine Lagarde, current Finance Minister of France, as their candidate for the vacant post. She is a strong nominee, with long experience and well-regarded skills for shaping compromise. Supported by both sides of the Atlantic, Ms Lagarde represents the best opportunity to keep the IMF’s position in seasoned hands, and to discourage less traditional candidates from active competition. Washington approved Lagarde’s candidacy without delay. This was expected to pave the path for appointment of an American as the next WB’s president, thus continuing the traditional pattern of leadership without a change of course. A quick accord was thus reached between the US and Europe, preempting the physics of a world economy writ more largely today, as seen through the rapid emergence of countries as important players on the international stage.
Immediately after the accord, Ms Lagarde commenced an electoral tour to gain the widest possible support, even before the formal introduction of other candidates. But the aim of this ‘global electoral campaign’ was not achieved. Ms Lagarde is certainly a prominent candidate in the contest for this leadership role, but China, India, Brazil and other emerging countries wanted to send a broader message to the world, stating that our global circumstances have changed—indeed, in more than one dimension. However, they were unable to jointly voice support of a suitable candidate, so other names were presented, but not as vigorously as more united support would have brought, most notably to Augustin Carstens and Stanley Fischer, governors of the central banks of Mexico and Israel, respectively.
Both of these leaders have excellent credentials. Carstens has marshalled the institution with great competence in a country harboring serious challenges, conflicts and uncertainties. Fischer served as first deputy managing director at the IMF from 1994 to 2001 and led the economics department at MIT where he has served as an esteemed professor for more than two decades. He has ended his candidacy, nominally because he is already 65 years old, and would have needed special dispensation from all 187 IMF member countries to be elected. He felt this would require too long a process at a time when a strong leadership mandate is especially important. An added concern, since Fischer’s name is closely associated with the US, was that naming him to the IMF role might discourage election of an American as the next head at the World Bank because of objections from members to an overrepresentation by any one country in the leadership of the two institutions. The US desire to keep the Bank’s presidency is thus another factor in letting Mr Fischer’s candidacy for the IMF’s top spot lapse without further consideration.
So, there are really only two competitors at this stage. Christine Lagarde faces a pending investigation into non-transparent management of past internal affairs in France, while Augustin Carstens—despite his abilities—still lacks international support, including that of Brazil and other Latin American member nations. Emerging countries are gaining in economic importance and thus the relevance of the views they express is ever keener; the evolution of this process seems unstoppable, but they presently lack unity of voice. Thus, while the European candidate is far from being universally favored, the alternative still lacks the strength to muster a majority of support. If Ms Lagarde’s past domestic issues are judged untroubling, it is likely she will win the post. She will benefit from the enduring objectives of both the US and Europe, and sustain the experienced practice of power-sharing. She will thus secure the World Bank members’ vote—which remains, based on allocated representation, in western hands.
But if this happens, there will be inescapable repercussions. It will likely be the last time that the world’s traditional powers will as a partnership anoint the leadership of the world’s foremost financial bodies. By the time the next election is at hand, the G8’s economic weight will account for less than 40% of the world’s GDP. A new era of leadership will have started—a new ball game with different rules and historical team alliances, new shares of financial responsibility to contribute, and newly allocated voting rights—and thus a different process for naming candidates will likely be in place well before the leadership’s next election.
It would be wise to be prepared for the changed landscape already on the horizon. Fixing the Eurozone’s myriad problems and tackling the contradictions surrounding the US dollar—fragile but still powerful—are cardinal tasks. Neither President Obama nor our present European leaders can prepare now for the new order. They just proposed their candidate.