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Look beyond Europe for the IMF’s new leader

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The International Monetary Fund (IMF) headquarters building in Washington DC, 8 April 2019 (Photo: Reuters/Yuri Gripas).

In Brief

The nomination of Christine Lagarde to succeed Mario Draghi as president of the European Central Bank (ECB) has created an unexpected vacancy at the International Monetary Fund (IMF). Lagarde was the first woman to lead the institution, and is widely credited with raising its global profile and relevance through her tireless advocacy of trade, global growth that aids the poor and middle classes, and women’s empowerment.

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While certain aspects of her tenure can be debated, few would question her legacy or able leadership.

Ironically, her rise to power was enabled by the old boy network that has historically favoured men and continues to favour Europeans over non-Europeans. The informal arrangement where a European is selected as IMF managing director and an American as World Bank president is now viewed as a relic of the past when Western Europe and the United States dominated the world economy.

With the rise of Asia, this assumption no longer holds. Many argue that a more meritocratic system in which geography or nationality plays no role is needed.

The first challenge to the system came in early 2000. An American was nominated by a group of African countries and a Japanese by the Japanese government. Curiously, while the US government openly objected to the consensus candidate nominated by the Europeans, it did not support the American candidate. The nominations were withdrawn to preserve the IMF’s long-cherished consensus culture, allowing the second consensus European candidate to be ‘unanimously’ selected as managing director.

This script has been played out ever since. Despite knowing the outcome ahead of time with virtual certainty, multiple candidates were put forward each time a new managing director was to be selected. In IMF parlance, this is what amounts to ‘an open, merit-based, and transparent’ procedure.

Selecting a managing director only requires a simple majority of the 24 directors of the IMF Executive Board, but executive directors are representatives of the member governments. Voting shares are tied to the quotas of the respective countries, with more important countries enjoying greater weights. The importance of the United States in this process is often overstated. While it can exercise veto power over certain decisions with its voting share of 16.52 per cent, the selection of a managing director is not one of them.

Similarly, the eurozone countries alone collectively claim a voting share of 20.38 per cent and Asian countries, if united, could claim a voting share of up to 24 per cent. The current system has worked well, not just for the United States, but for a sufficient number of countries.

The system that has given Europe a sense of entitlement in appointing the managing director has also given the United States a similar presumption to appoint the first deputy managing director. Through deputy managing director positions, Japan and China — the IMF’s second and third largest shareholders and Asia’s largest economies — have also been given access to the inner circle of decision making.

The combined voting share of the United States, Japan, China, the eurozone and a few other EU member countries exceeds 50 per cent by a comfortable margin. Based on short-term national interests alone, none of these countries holding a majority of the voting shares have a strong incentive to change the system.

The reason why the current selection process should end is beyond national interests. It is not designed to satisfy the demands of the 21st century and is contrary to every principle of good governance in public institutions. Those who think they are benefiting from the system are doing so at the expense of ‘their’ institution’s relevance and legitimacy.

For a cause bigger than themselves, European leaders should unilaterally and unconditionally give up their historical claim on the managing director role. They should honour the agreement they made in 2007 among themselves that their then consensus candidate would be the last to be selected under the existing system.

Irrespective of the individual merits of potential nominees, there is a compelling reason why the next IMF managing director should come from outside Europe. Choosing another European successor in 2011, three years after the European leaders had agreed to end the current selection process, was inappropriate, no matter how qualified the individual was.

At the time, the IMF was engaged in sensitive negotiations with the European Commission and the ECB over the evolving crisis in Greece. For the finance minister of a key party to the negotiations to become the managing director of the IMF then was like a major shareholder of a company under financial restructuring becoming the head of its creditor bank.

The IMF managing director gearing up to assume the presidency of the ECB is symbolic of the special relationship the IMF has fostered with Europe. Both Europe and the IMF should have learned a lesson or two from the debacle over Greece. With stronger institutions in place, Europe has no need of the IMF — at least for financial and technical assistance. It is time for Europe to reset its relationship with the IMF and redeem its moral turpitude by surrendering the privilege it has abused.

The IMF should step back from its hands-on involvement with Europe and define a new and constructive relationship more befitting the reality of the 2020s. Some good non-European names have been floated, including a few excellent Asian candidates such as Tharman Shanmugaratnam and Raghuram Rajan. One thing is for sure — the person best positioned to lead the IMF into the new decade is not European.

Shinji Takagi is Distinguished Research Professor at the Asian Growth Research Institute (AGI), Kitakyushu, and Emeritus Professor of Economics at Osaka University. From 2013 to 2018, he was Assistant Director at the IMF’s Independent Evaluation Office.

One response to “Look beyond Europe for the IMF’s new leader”

  1. At the last election in 2011, Australia discarded the old notion that the DG had to be a European. Australia voted for the Mexican candidate Carsten. (Australia also voted for a person qualified to do the job, instead of for a politican without qualifications for the job.)

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