Emerging Markets Might Name Strauss-Kahn Heir: Simon Johnson

Even before the shocking events of the past few days, the international policy community had been contemplating a successor to Dominique Strauss-Kahn at the International Monetary Fund.

Strauss-Kahn, the IMF managing director, was expected to begin campaigning soon for the presidency of France. Now, whatever happens in the New York legal system as he defends himself against attempted rape allegations, it seems likely that the IMF will be searching for a new head sooner rather than later.

The idea that the job has become an attractive sinecure with nice fringe benefits should have been laid to rest by German Chancellor Angela Merkel’s preemptive strike earlier this week, when she said there are currently “good reasons” for the European Union to have a candidate. That produced similar expressions from other leading European politicians, although not all of them are willing to say that Strauss-Kahn is finished. Yesterday, the Chinese Foreign Ministry pronounced that the selection process must emphasize “fairness, transparency and merit.” Translation: China is pushing back against the idea that Europe necessarily gets to name Strauss- Kahn’s heir.

The managing director has a great deal of discretion over the policies and resources of the fund. The managing director needs to bring along the 187 member countries, particularly those with the most votes. Voting is based on a formula that broadly reflects economic size and is weighted heavily toward Western Europe for historical reasons.

Judicious Thumb

A judicious thumb can be placed on the decision-making scales -- tilting the balance, for example, in favor of more generous bailouts or toward less onerous lending conditions, as has been the case for euro-zone countries. (Full disclosure: I was the IMF chief economist from March 2007 through August 2008, before it began lending to Western Europe.)

Through more than six decades of informal agreement, a West European has always headed the fund while the president of the World Bank has always been an American. West Europeans want to keep it that way. That makes it easier for them to name the terms of loans to bail out Greece, Ireland, Portugal and anyone else who may be in trouble.

It also makes it possible for the Europeans to protect their banks from potential losses. If they can overcome the political inclination to rotate the job across countries, the Europeans’ most likely candidate will be Christine Lagarde, France’s Minister of Finance. The name of Axel Weber, former head of the Bundesbank, was also circulating yesterday.

Other Ideas

The world’s big emerging markets have other ideas. They have waited a long time for an opportunity to compete for the IMF job. Events since the financial crisis of fall 2008, and Strauss-Kahn’s legal problems, now conspire to throw the succession process wide open.

The communique from the April 2009 London summit of the Group of 20 nations was interpreted as signaling that Europe should give up its guaranteed hold on the IMF’s top position. But even as the U.S. and the rest of the world turned the economic corner, Europe slid deeper into crisis -- with first Greece, then Ireland, then Portugal, and now Greece again in need of bailouts.

Led by Strauss-Kahn and armed with additional resources approved at the G20 London summit, the IMF helped make possible a sequence of bailouts for euro-zone countries. The fund handled this well -- prodding the Europeans to take action despite the tendency to procrastinate in Berlin, Paris and Brussels.

No Way

But, emerging markets grumble, the standards here are double: there is no way that one of them would have gotten such generous terms from the fund. And there is increasing skepticism over whether the new “softly, softly” approach of the fund will produce results. All eyes are currently on Greece in this regard.

There are at least seven strong emerging-market candidates for managing director and all of them would likely be tougher on troubled European countries than would Lagarde. All of these candidates have had hands-on experience running tight policies under difficult circumstances while working hard to sustain growth.

The current front-runner is Kemal Dervis, former economic affairs minister of Turkey and former head of the United Nations Development Program. He should be able to draw on broad international support, including perhaps from the U.S. Trevor Manuel, former minister of finance in South Africa and former head of the World Bank Development Committee, one of the bank’s supervisory panels, also has potential to break away from the pack.

Latin America

From Latin America, Agustin Carstens, now the governor of the Bank of Mexico and a former IMF deputy managing director, would be a smart choice. Arminio Fraga of Brazil has a track record of brilliance, including as head of the central bank during a turbulent time, from 1999 to 2002, but not everyone may appreciate his hedge-fund connections. Fraga used to work for George Soros and just sold his own hedge fund, Gavea Investments Ltd., to JPMorgan Chase & Co.

Asia has three strong names: Montek Singh Ahluwalia, a long-term top Indian official with deep international experience; Tharman Shanmugaratnam, minister of finance in Singapore and current chairman of the IMF’s oversight panel, the International Monetary and Financial Committee; and Min Zhu, a top Chinese official who is a special adviser to Strauss-Kahn.

The big political question is whether the largest emerging markets -- Brazil, China, India, South Africa, Turkey and perhaps Saudi Arabia, South Korea, Russia, Indonesia and Mexico -- can unify behind one candidate. That would be a breakthrough but it’s still not clear who will provide the diplomatic initiative to organize them into a coalition that speaks with a single voice. This is what the French excel at within Europe.

Presumably any contender, at least for now, would need to placate the Europeans with a promise to continue generous bailouts for a while. Still, such a change at the top of the fund might open the way to more even-handed policies over a longer period of time. Whether that means less generosity for Europe or more generosity for everyone else remains to be seen.

(Simon Johnson, co-author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown” and a professor at MIT’s Sloan School of Management, is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Simon Johnson at sjohnson@mit.edu

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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