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Scraps off the G-7 table cannot suffice

Updated On: Jun 27, 2011

SIIA Council Member Ho Seng Chee discusses the expected appointment of France's Christine Lagarde as the new IMF managing director.

This commentary was featured in TODAY (Singapore) newspaper, 27 June 2011. 

Scraps off the G-7 table cannot suffice

Why the IMF will stay European - and what emerging economies must do to chip away at this dominance

by Ho Seng Chee

The International Monetary Fund's executive board is scheduled to meet tomorrow and decide who to appoint as its new managing director. It is almost certain that France's Christine Lagarde will emerge the winner. There are useful lessons and observations to be derived from this event.

Let us begin by recalling how it all started. On May 14, then IMF managing director Dominique Strauss-Kahn was arrested at New York's JFK International Airport on sexual assault charges. He resigned from the IMF on May 18. Media reports immediately surfaced of Ms Christine Lagarde as a prime candidate to replace him. By May 20 - two days after Strauss-Kahn quit - Ms Lagarde had apparently secured the backing of heavyweight Germany, and by May 25, the European Union had endorsed Ms Lagarde as its official candidate for the IMF post.

All these manoeuvres occurred within only nine days of Strauss-Kahn's arrest. The comment from Mr John Lipsky (the American No 2 at the IMF, pictured on right) that Ms Lagarde was an "excellent choice" even suggested that the Europeans may have lined up tentative United States backing for her early in the process. That the Europeans were able to coalesce around Ms Lagarde and bring the US on board so quickly is testimony to the institutional strength of their union.

In contrast, throughout this same period, the rest of the world appeared to have barely begun to mobilise themselves. Apart from ringside exhortations for a transparent and merit-based selection process, emerging and non-European countries failed to quickly put up candidates to take on Ms Lagarde. In the end, there was only one competitor against her - Mexico's Agustin Carstens.

Bare-Knuckled Politics

Seeing how these events unfolded, a Lagarde win should surprise nobody. Here are some reasons why:

  • Merit is good, but politics decide the winner. Arguments for an objective merit-based selection process were but a sideshow and red herring. An effective IMF managing director is part CEO, part technocrat and part politician/statesman, among other things. How can one even begin to objectively assess candidates based on such subjective criteria? Technical and professional competencies get you a candidates shortlist at best. Who gets appointed is ultimately a function of bare-knuckled politics, which the Europeans played very well in this case.
  • It pays to have friends who are ready. Ms Lagarde's appointment as IMF head was practically a done deal from the outset. It is a fait accompli not because she is the consensus European candidate. Her strength lies in being the only candidate who, from the moment of Strauss-Kahn's resignation, was already backed by a group of sizeable countries. Having that backing - European or otherwise - means she has already secured a chunk of votes and will need only a handful more to cross the finishing line.
  • Move fast to win. Speed and momentum are key to Ms Lagarde's triumph. Being the earlier candidate allowed Ms Lagarde to frame the policy debate and election agenda. Comments which followed hers risked sounding like either copies of her ideas or gratuitous electioneering rebuttals. Ms Lagarde was able to move quickly with European support because that continent has had over 50 years of regional integration, with established institutions in Brussels and other decision-making mechanisms.

 

What Next for Emerging Economies?

If other regions or countries want to be taken seriously in these matters, they need to build strong European-like collaboration structures that enable rapid decision-making when opportunities arise. That should be the longer term aim of regional integration initiatives like ASEAN.

Until then, emerging economies will no doubt continue to focus on achieving targeted and incremental gains that chip away at the G-7's domination of IMF governance. China's approach on this is instructive.

As the second-largest economy in the world, China should be an important player in IMF governance. Its influence is, however, hampered by an aversion to awkward questions about its economic policies, not least on the value of the yuan. Hence its relatively low public profile on headline issues like IMF leadership succession.

But China has been making gains behind the scenes. Under Strauss-Kahn's reign, former People's Bank of China deputy governor Zhu Min (pictured on left) was appointed to a new "special adviser" position in the IMF managing director's office. This was probably Strauss-Kahn's payback to the Chinese for backing his candidacy in 2007.

Now that China has supported Ms Lagarde in the recent race, we should expect to see Mr Zhu's position elevated to the deputy managing director level under a Lagarde-led IMF. That would signal a rise in China's status in the IMF and in international economic affairs.

There may be room yet for emerging economies to use similar tactics to gradually alter the balance of power in the IMF. For instance, one of the greatest obstacles to IMF governance reform is that nationality considerations dictate not just who becomes the managing director. There is also the rule that an American will be the first deputy managing director and a Japanese will be one of two deputy managing directors.

The remaining deputy managing director position is rotated among other regions, with the current occupant being Ms Nemak Shafik of Egypt. It is obvious that all nations vested with these positions would want to maintain the status quo in this system. Attacking the package as a whole would require considerable political effort.

To use the small gains analogy, emerging economies could try dividing and conquering, i.e. to zero in on contesting one position at a time, while assuring other interested countries that their positions would not be affected.

The danger of this approach, however, is that these small achievements can seem like scraps from the G-7 table. Countries and observers have long argued for more immediate and dramatic reforms. Strauss-Kahn's resignation has presented a golden opportunity to change the IMF in a big way. That opportunity will, with Ms Lagarde's appointment, be wasted.

All is Not Lost

Having gone the wrong way, can the IMF turn back?

Some emerging economies will see a Lagarde appointment as another reason to turn their backs on international collaboration and go their own way. That would be unfortunate.

The world - including emerging economies - needs the IMF; it is the only forum available to facilitate joint action by countries to address the risks that accompany modern financial and economic integration. However, for the institution to be effective, its governance structure must reflect modern economic realities. The process leading to Ms Lagarde's prospective appointment was hardly a step in this direction.

But all is not lost just yet. Mr John Lipsky, the IMF's No 2 and a US appointee, had previously announced that he would be stepping down in end-August. Might this be another chance to remake the institution? Regardless, emerging economies should start caucusing now and surface some strong consensus candidates to give the US nominee a serious fight.

As for the traditional G-7 powers, it is rare indeed that history would present an opportunity to right a wrong within such a short span of time. For all that has been said about "increasing the voice and representation" of emerging economies in the IMF, let it not be business as usual again when it comes to sharing real power.

Author: 
Ho Seng Chee
About the author: 

Ho Seng Chee is a Council Member of the Singapore Institute of International Affairs. He was a staff member of the IMF from 1997 to 2008.







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