The Case for a Non-European IMF Leaderby
The debate over choosing the next managing director of the International Monetary Fund is ostensibly about whether its succession process is transparent and merit-based. But this is code for a more important issue -– whether the time has come for Western Europe to give up control of the IMF. There is a valid economic case that the next chief should come not from Europe, as tradition dictates, but from one of the emerging markets. India, South Africa, China, Mexico and Brazil all have strong candidates.
One reason to make the shift now is that the IMF needs to rebuild its legitimacy in the emerging economies, particularly in Asia. The fund was criticized for causing severe damage in its handling of the 1997-98 Asian financial crisis. Not all the critiques were fair, but Asian leaders correctly feel they received far less favorable deals than Greece, Ireland and Portugal recently got. The IMF initially lent Greece, for example, almost twice what Korea was able to borrow in 1997, relative to each country’s size.
But the bigger reason for a change is that the economic tide has gone out on Europe, and it no longer can claim to be a bastion of sensible fiscal management. Either the IMF is running a U.S.-European club, with second-tier membership for “others,” or it is a truly international organization as specified in its Articles of Agreement between participating countries.
Those articles, drawn up in 1944, are silent on whether someone from a particular nation should be managing director (see Article XII, section 4). The charter makes it clear that this job is all-important: The managing director is both chairman of the executive board and chief of the operating staff. All other staff members are appointed by him (of the 10 managing directors to date, all have been Western European males).
The key to understanding the original IMF arrangements can be found in an arcane place -– under Quotas in Schedule A of the Articles of Agreement. In IMF terminology, a country’s quota measures its capital contribution, voting power and how much it can readily borrow from the fund. This lists how shares in the IMF were allocated among the original members. The U.S., which has always been the largest shareholder, had a quota of $2.75 billion in the original allocation. Britain was No. 2, with $1.3 billion.
The organization reflected the supremacy of U.S. and Western European economies after World War II. The most influential non-European shareholder was arguably India, with $400 million. Compared with France at $500 million, India was a significant shareholder (probably because British officials thought the empire would hold together).
At the time, most others among today’s middle-income countries were small in economic and financial terms, even compared with war-torn Europe. Brazil’s quota was $150 million, less than Belgium’s $225 million. Mexico’s quota was $90 million, while the Netherlands weighed in at $275 million.
In that original arrangement, it made sense to balance the power between the U.S. -– the biggest creditor to the world in 1945 -– and countries that were presumed likely to need financial help either from the IMF (for short-term balance-of-payments needs, so they could afford imports) or from the World Bank (for longer-term reconstruction and development investments). But it no longer makes sense now that roughly half the world economy lies outside the U.S.-Western European sphere and almost 50 percent of IMF votes are in the hands of emerging markets. The entire European Union has only about 30 percent of voting rights.
Today, the central issue for the IMF is burden-sharing. It must decide which banks and bondholders will bear losses, and in what amounts. To restore growth and assure repayment, it must negotiate terms that determine, for example, how much and how quickly the annual budget deficit and total debt must be reduced. And hardest of all is figuring out who within the troubled country will pay, either with fewer government services or higher taxes, or both. Borrowers and lenders want the other to bear the brunt of the painful measures that an IMF loan usually entails.
The Western Europeans are arguing that only a European managing director could possibly manage this process for the euro zone. This flies in the face of common sense. When Argentina had a crisis, no one suggested that an Argentine should become managing director, or even that the fund should be run by someone from Latin America.
The IMF head should be an experienced policy maker, preferably someone who has been a minister of finance or central bank governor during difficult times and succeeded in putting a country back on the path to sustainable growth. Hiring a satisfied IMF customer would be ideal. Agustin Carstens, a former IMF deputy managing director and now the governor of the Bank of Mexico, is one such contender. Arminio Fraga, the head of Brazil’s central bank from 1999 to 2002, a turbulent time for that country, is another.
The IMF isn’t a piggybank for European countries and must not be used to paper over fiscal cracks or to run an “extend and pretend” scheme that facilitates regulatory forbearance for French, German and other banks that made irresponsible loans to the euro zone periphery. German and French leaders are complicit in the errors of Greece, Ireland, Portugal, Spain, Italy and Belgium by allowing these countries to run current-account deficits financed by large inflows of bank credit. This is what it means to mismanage a currency union.
(Simon Johnson is a Bloomberg View columnist. The opinions expressed are his own.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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