IMF stitch-up locks out developing countries

Ben Fox reports on the appointment of Christine Lagarde as head of the International Monetary Fund (IMF) - at the expense of candidates from other countries.

Christine Lagarde’s appointment as the International Monetary Fund’s new Managing Director is certainly the biggest political surprise since Sepp Blatter was ‘re-elected’ FIFA President last month. Ms Lagarde is able (she chaired one of the IMF’s leading policy committees) and politically astute but she is the wrong candidate at the wrong time.

For all the talk about appointing the best candidate for the job and giving more emphasis to developing nations, Europe and the US have again used the position as part of a wider political carve-up. An American is in charge of the World Bank while Frenchman Jean-Claude Trichet is soon to retire as President of the European Central Bank.

Initially it was widely believed that the Bundesbank governor Axel Weber would succeed him – instead the ECB post went to another fiscal hawk, Italian Mario Draghi. The result is that Angela Merkel and Nicolas Sarkozy were determined that their candidate of choice would get the IMF job after Dominique Strauss-Khan’s sudden departure. Watch out for a German to get the next big post in the EU or global economic governance.

The last thing Europe, and particularly the eurozone, needs from the IMF is one of its own in charge. Ms Lagarde is clearly extremely able, but it would be in the eurozone’s interests for the IMF head to have the freedom to tell its leading countries, such as Germany and France, some truths they will not want to hear. That is why someone from the developing world, like Mexican candidate Agustin Carstens or South Africa’s Trevor Manuel, who was finance minister from 1996-2009, would have been a better fit.

During the series of botched deals, panicked bail-outs and austerity packages, Strauss Khan had been the most influential curb on the likes of Angela Merkel, Christine Lagarde and George Osborne. If all three had had their way, the terms attached to the Greek and Irish bailouts would be far tougher.

The narrative still being pursued by the French and German governments is that debt restructuring cannot even be contemplated. The likes of Greece and Ireland must live up to their commitments to sell off their state-owned assets and slash spending even deeper than the huge cuts they have already pushed through.

The evidence of the last year is that this approach has simply not worked. However, the main point about the IMF selection is that Europe clearly sees this post as its own. This is not consistent with the principles behind the IMF. The IMF is arguably the most important institution in global economic governance and was established as such in 1945. It should not remain the preserve of the West.

Yet as soon as Mr Strauss-Khan was forced to resign, European leaders lobbied for another European at the head of the IMF. Belgian Finance Minister (and aspiring candidate) Didier Reynders argued that:

“…it would be preferable if we (Europe) continued to hold these posts in the future.”

Angela Merkel, meanwhile, stated:

“We know that in the mid-term developing countries have a right to the post of IMF chief and the post of World Bank chief… [but that] in the current situation, when we have a lot of discussions about the euro, Europe has good candidates to offer.”

However, although the eurozone crisis is one of the biggest challenges that will face the IMF over the coming years, it is not the only one. The long-running trade and currency battle between the US and China is symptomatic of the increasing dominance that China and India, as well as the likes of Brazil and South Africa, are gaining in world trade. Despite this, EU countries hold 30% of the voting rights in the IMF. China, India, Brazil and South Africa, by contrast, have a mere 10% between them.

That Ms Lagarde’s appointment was virtually guaranteed as soon as European leaders rallied round her candidacy demonstrates that the US and Western Europe still run the IMF. For the institution to maintain its credibility it must change its structure if it is to be more than just a relic of the Cold War.

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