Strauss-Kahn Case Bolsters Push for Change in IMF Selection

The arrest of International Monetary Fund Managing Director Dominique Strauss-Kahn may bolster a drive by Brazil and other emerging markets for a greater voice in the selection of the IMF and World Bank chiefs.

Strauss-Kahn, 62, was charged with attempted rape in New York, and his lawyer said he would plead not guilty. The former French finance minister was chosen in 2007 to a five-year IMF term in keeping with an informal agreement dating to the end of World War II, under which a European heads the Washington-based fund while an American leads the World Bank.

Policy makers such as Brazilian Finance Minister Guido Mantega say the arrangement sacrifices merit to diplomatic deal- making and doesn’t recognize the rising economic clout of developing markets, which are set to grow at more than twice the pace of their developed counterparts this year. The arrest will give them added ammunition, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.

“This event is likely to put into play the leadership and governance structure of the IMF in a dramatic and unanticipated manner,” said Prasad, a former IMF official. He said it’s “untenable” for Strauss-Kahn to keep his job, and that Europeans may be unable to make a strong case to maintain control of the post.

Prasad said potential candidates for the top IMF job include Singapore Finance Minister Tharman Shanmugaratnam, former South African Finance Minister Trevor Manuel and Kemal Dervis, who was Turkey’s minister of economic affairs at a time his country got aid from the IMF.

‘Frantic’ Agitation

“There’s going to be pretty frantic diplomatic agitation” if Strauss-Kahn resigns, said Nicolas Veron, senior fellow at Bruegel, a Brussels-based economics research group. “It’s the first time that the competition is so internationally open.”

The IMF’s No. 2 official, John Lipsky, last week said he would leave when his term expires Aug. 31. Lipsky is acting managing director during Strauss-Kahn’s absence from Washington.

Strauss-Kahn appeared in Manhattan criminal court today to face charges that he tried to rape a New York hotel maid and was ordered held without bail. He has denied the charges.

Lipsky’s position of first deputy managing director has been traditionally held by a U.S. citizen. The two other deputy managing directors now are Japanese and Egyptian. A Chinese citizen was named special adviser to Strauss-Kahn last year.

‘Extraordinary’ Candidate

For Europe, “only a truly extraordinary candidate now has any chance,” Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in an interview. He named French Finance Minister Christine Lagarde as one such person, saying she might be “brought into play not as another European candidate but as the first female head of the IMF.”

Even so, “the ball is in the court of the emerging markets because they really have to come up with a strong candidate that they can unify behind, and that’s going to be very tricky,” he said.

Germany prefers having a European as head of the IMF if Strauss-Kahn quits, Chancellor Angela Merkel said today. There are “good reasons” for Europe to keep the post amid the euro area’s debt crisis, even as the role of developing nations grows, Merkel told reporters in Berlin.

Another possible candidate to replace Strauss-Kahn is Zhu Min, 59, a special adviser to the IMF and a former deputy governor at China’s central bank, said Shen Jianguang, a former IMF economist now at Mizuho Securities Asia Ltd. in Hong Kong.

Currency Reserves

Emerging markets argue that having a greater say in the 187-member IMF would make them less prone to accumulate foreign currency reserves as insurance against a crisis and turn to the IMF for help instead, said Bessma Momani, a professor in the department of political science at the University of Waterloo in Canada, who specializes in the IMF and its policies.

“The fund had been reviewing its governance structure, particularly with respect to providing greater representation for the developing economies,” Philippine central bank Governor Amando Tetangco said in an e-mailed reply to questions. “The recent incident should hopefully not be a significant distraction.”

Established in 1945 to help oversee the construction of a new international monetary system, the fund has evolved into a lender of last resort to cash-strapped nations. Recipients of IMF aid ranged from the U.K. in 1976 to Mexico in 1982.

During last decade’s economic expansion, emergency lending plummeted from $66.4 billion in 2002 to just $58.7 million in 2006, when Paraguay and Albania were the only borrowers.

Global Panic

The global financial panic triggered by the bankruptcy of Lehman Brothers Holdings Inc. in September 2008 restored the IMF’s relevance as emergency loans soared to a record of $91.7 billion last year.

Strauss-Kahn played a key role in efforts to stem the European debt crisis that started last year in Greece, with a pledge to contribute about a third of future bailouts in the region by the European Union. The IMF has co-funded aid packages to Greece and Ireland and has negotiated aid for Portugal.

Emerging markets have also seen their clout grow under Strauss-Kahn. Last year, IMF nations agreed to rule changes that will give China the third-largest percentage of votes. In 2010, the U.S., as the largest contributor to the IMF’s resources, had 16.7 percent of the votes, followed by Japan and Germany with about 6 percent each.

Yi Gang, deputy governor of the People’s Bank of China, last month urged the fund to “continue to make substantive progress in reforming other parts of its governance, including the merit-based selection of the management.”

‘Strong Pressure’

“It is very clear that after Strauss-Kahn’s mandate ends there will be strong pressure for the next IMF director to be picked based on qualifications,” Martin Redrado, former president of Argentina’s central bank, said in an interview. Strauss-Kahn’s term ends in October 2012.

European countries will probably fight to maintain their hold on the managing director’s job, said Oh Jong Nam, who served at South Korean executive director at the IMF from 2002- 04 and is now a professor at Seoul’s National University.

“They understand that their role is declining as time goes by and because of that very reason they may want to hold on to the top leadership even more,” Oh said in an interview. “It’s not something they can give up easily.”

The Washington-based World Bank, which finances development projects, is headed by Robert Zoellick, a former U.S. trade representative whose term ends next year.

Steering Committee

Changes in the leadership of the IMF steering committee already reflect the growing influence of emerging markets, said Miranda Xafa, a former IMF board member from Greece. The 24- member group of finance ministers and central bankers meets twice a year to discuss the global economy and provide guidance to the fund.

In 2008 Italy’s Tommaso Padoa-Schioppa was succeeded by Egypt’s Youssef Boutros-Ghali. The post is now occupied by Singapore’s Shanmugaratnam.

“The time of the emerging markets has arrived,” said Xafa, now a senior strategist for IJ Partners, a Geneva-based investment firm, in an interview.

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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