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Why the IMF needs an Asian leader

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In Brief

It is doubtful that Washington politicians understand just how important the IMF leadership decision is. This decision is crucial because of a history that Americans have largely forgotten.

During the Asian Crisis of 1997-8, the IMF made two decisions that continue to threaten the world’s ability to have a coherent financial crisis management policy based on a single institution.

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First, with the strong support of the U.S. Treasury, it imposed an austerity program on Thailand that was intended to produce GDP growth of zero percent but instead caused an economic collapse worse than the worst years of the Great Depression. Second, it imposed the closure of a group of Indonesian banks connected to President Suharto without taking any measures to support the rest of the banking system, thereby causing the collapse of the entire banking system. This contrasts sharply with the measures the IMF and the U.S. Treasury have supported in developed countries, namely generous fiscal and monetary support and extreme care to avoid a systemic banking collapse.

Since then, Asians as a group have distrusted the IMF and engaged in a series of efforts to create Asian institutions to counterbalance it in the future. It is only a slight exaggeration to characterize the views of ASEAN countries as parallel to the Israeli oath:  Never again.

When Strauss-Kahn was selected to lead the IMF, Asians were focused on institution-building:  the Chiang Mai Initiative , ASEAN + 3, ASEAN + 6,  the East Asian Summit, revival of the idea of an Asian Monetary Fund, even a common Asian currency. But now attention is heavily concentrated on the choice of a new IMF leader. This choice offers the opportunity to heal a very deep and consequential rift between the IMF and the largest populations and fastest growing economies on the planet. Conversely, if their voices are ignored, the disillusionment will widen and deepen the rift. Much of the effort to create a global governance system will be lost. Much of the effort that has gone into creation of the G-20 will be wasted; already it is clear that real decisions, like the recent intervention in the Japanese currency, are taken by the G-7 without even notifying countries like China, and in addition it will be clear that governance of the world’s most important economic institutions is still a European-American monopoly.

If we really care about the future of global governance, we’ll look for, as Australia has recently said, the most qualified candidate — not the most politically influential, preferably French, European candidate. Christine Lagarde is an impressive, talented financial leader. But, to take just one example, she does not have the crisis management experience of Singaporean Finance Minister and Monetary Authority head Tharman Shanmugaratnam.  She does not have the healing power wielded by an ethnic Indian managing the finances of a predominantly ethnic Chinese city-state, a leader who bridges the West, China, Southeast Asia and India so smoothly that he makes it look easy.  Above all, someone like him would restore the global authority of an institution that will eventually prove ineffectual if it is not demonstrably inclusive.

Nobody in Washington wants to irritate the Europeans. But if we choose traditional politics over global unity, everyone in Washington will one day rue the loss of an opportunity to restore the global stature of the IMF.

William Overholt is senior Research Fellow at Harvard University’s Kennedy School and author most recently of Asia, America and the Transformation of Geopolitics (Cambridge University Press, 2008).

3 responses to “Why the IMF needs an Asian leader”

  1. This is exactly right. In fact, I would go further and argue that the EU is not qualified to run the IMF, at least for a round or two. Its macroeconomics before the Great Recession were bad; now they are appalling. Include the astonishing euro-mess too, and the EU most clearly lacks the competence. Further, the last 3 (European) MDs were poor. Koehler and Rato used the postition to jockey for office back home, and DSK’s alleged assault of an poor immigrant maid is straight out of the antiglobalization movement’s worst fears. Finally, the idea that a European should run the IMF because that’s where the IMF’s work will be in the near future is so self-serving and hypocritcal, it’s almost racist. No one argued that western bankers were unqualified to give Asians advice in the Asian Financial Crisis.

    The (glboal) IMF should not become an informal bail-out mechanism for the (regional) euro, and bringing Asia back (slowing the ‘self-insurance’ phenomenon) is critical to prevent the regionalization of global finance. It’s time for the EU to set aside, not just for fairnesss’ sake, but also for competence. For a longer version of this argument, please see my op-ed: http://www.koreatimes.co.kr/www/news/opinon/2011/05/137_87636.html.

    Great article. Thank you.

  2. Since 15 August 1971, when USA president Nixon broke Bretton Woods which linked the USA dollar to gold and all other currencies to the said dollar, the IMF has no more reason exist, except as pimp of the dollar regime.
    A non-western IMF president would restore some sanity to International Financial and Monetary System (IFMS) which is still the dollar-IMFS.
    A non-western IMF president would amputate the dollar from the IFMS.
    Chinese FreeGold could arise.

    Kazakhstan sells oil through a pipeline to China.
    As the renminbi/yuan is not yet convertible, China still pays for this oil with USA dollars.

    FreeGold means that the currency has a gold component and a paper component, but puts a “firewall” between the two so that gold’s valuation as a wealth-preserving asset cannot be pulled lower by the inevitable inflation of the paper component of circulating currencies. It is the (quarterly) marking to market (MTM) of the gold reserves of the People’s Bank of China, not to the model of $42-something like the USA central bank, by the PBoC which provides that wall.

    Kazakhstan produces gold

    With Grigory Marchenko, the governor of the Kazakh central bank, as IMF president,
    Mikhail Khodorkovsky, the jailed Russian OIL tycoon,
    will be freed.

    FREEgold, isn’t it?

  3. The flaw in this story is of course, why Asian? Why not simply the the most skilled and experienced person for the job. He/she could be from any country. They could be from Singapore, as suggested, or maybe somewhere else. To suggest they be from Asia merely prolongs the problem of selecting on some criteria other than merit.Not a good argument, but it does the highlight the flaw of selecting on the basis of something other than skills or experience.

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