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That job at the IMF

That job at the IMF
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First Published: Tue, May 24 2011. 09 01 PM IST
Updated: Tue, May 24 2011. 09 01 PM IST
The dramatic arrest of Dominique Strauss-Kahn in New York on charges of sexual assault and his subsequent resignation as managing director of the International Monetary Fund (IMF) have led to demands that the top job at the Fund be given to someone who is not a European. The names doing the rounds include Tharman Shanmugaratnam from Singapore, Kemal Dervis from Turkey, Trevor Manuel from South Africa and Montek Singh Ahluwalia from India.
It’s a battle between hope and reality. There has been a lot of glib talk about how emerging markets need more representation in the institutions of global governance. But reports suggest that the Europeans are in no mood right now to follow this up with any meaningful action. They are lobbying hard to get their candidate as the new managing director, as has been the unwritten tradition since IMF was set up. (The Americans have monopolized the top spot at the World Bank.)
There is no doubt that Asia, Latin America and Africa need more voice in global institutions, in tandem with their growing economic power and political influence. But the power of a managing director is severely constricted by the executive directors who are appointed by their respective national governments. US influence is still strong because it has the largest economy in the world and has bankrolled IMF over the decades. Its power over the institution follows from this. So, the unrecognized problem is that capturing the pinnacle will be a limited success if the rest of IMF sticks to its old ways of doing business. Broader reform will be needed—and that means addressing deep-set intellectual and political challenges.
Look at the asymmetric response to the Asian crisis of 1997 and the North Atlantic crisis of 2008. In Asia, the fund lost no time in pushing governments to slash spending in the midst of a downturn as well as keeping the capital account open. When the Western economies tumbled into recession after the financial crisis, IMF was quick to offer intellectual support for fiscal deficits and capital controls in times of economic stress.
IMF is staffed with very bright professionals and its successes are not adequately appreciated, but it has also been known to suffer from intellectual hubris. In an audit published in February, the Independent Evaluation Office of IMF gave a tough assessment of how the Fund’s economists did in the years leading to the financial crisis. Not only did the report point out that they did not provide adequate warnings about the risks being built up in the financial system, it went one step further to question the intellectual culture in IMF. “The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches. Weak internal governance, lack of incentives to work across units and raise contrarian views, and a review process that did not “connect the dots” or ensure follow-up also played an important role, while political constraints may have also had some impact,” the evaluation report said.
Some of the issues have their genesis in the very early days of IMF. Legend has it that John Maynard Keynes was so impressed by C.D. Deshmukh at the original Bretton Woods conference in 1944 that he thought the Indian would be the best man to head IMF as its first managing director. Robert Skidelsky also writes in his three-volume biography of the great economist about how Keynes fought for an independent managing director free from the political control of the executive directors (who are appointed by their respective national governments), almost akin to the role of a central bank governor. In contrast, the Americans wanted a more hegemonic IMF, with “a strong full-time executive board and a large specialist bureaucracy to police the policies of its members,” writes Skidelsky.
Keynes lost both battles. An Indian did not become the first managing director of IMF and it (as well as its sister organization, the World Bank) became a political institution under the control of the countries that won World War II.
Getting a professional from outside Europe to head IMF will undoubtedly be a useful first step. But countries such as India also need to know what to do in case their man is appointed managing director. Capturing power has limited use if you do not have a plan to use it to change an institution. In a different field and on a less important scale, India knew how to use its growing power to alter the way global cricket was being run. IMF is a different ball game, but perhaps there are some lessons there for the government.
Niranjan Rajadhyaksha is executive editor of Mint. Comments are welcome at cafeeconomics@livemint.com
To read Niranjan Rajadhyaksha’s previous columns, go towww.livemint.com/cafeeconomics
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First Published: Tue, May 24 2011. 09 01 PM IST