Washington: Frenchman Dominique Strauss-Kahn is taking the reins of the International Monetary Fund (IMF) under pressure to give emerging economies such as China a bigger say in the global financial institution.
Challenges ahead:Dominique Strauss-Kahn.
A former French Socialist finance minister, Strauss-Kahn, 58, got the job on promises that he would pursue reforms of an institution whose makeup still reflects the global economic order following World War II, with the US and Europe as the dominant powers.
As he takes the helm from Spaniard Rodrigo Rato, one of the most intense political issues he faces is finding agreement among the 185 member countries by a 2008 deadline on how to boost the voting power of under-represented emerging powers. His biggest challenge, analysts say, will be to persuade reluctant European countries to relinquish some voting power.
“Historically, we have been used to thinking of Washington being the blockage, but right now the blockage is in fact in Europe,” said Domenico Lombardi, president of the Oxford Institute for Economic Policy, which aims to bridge the gap between academics and policymakers.
With China and India driving the world’s economic expansion and concern increasing about the growth prospects in the US and Europe, developing countries are demanding a greater stake in the institution that overseas global financial stability. While the US is holding on to its veto power over decisions in the IMF, it has said it will not seek an increase in its voting power.
Countries such as France and Britain are nervous that an adjustment in the IMF’s votes could push them below China, whose rapidly growing economy is now the fourth largest in the world behind the US, Japan and Germany.
With Strauss-Kahn at the helm and Italian finance minister Tommaso Padoa-Schioppa recently appointed to head the IMF’s steering committee, Lombardi said together they could persuade Europe to accept change.
“Europe will have to accept an erosion in its voting power, there is no question about it, but at the same time it could enact some measures that will by far increase its leverage within the institution,” said Lombardi, who is also a senior scholar at Washington’s Brookings Institute think tank.
One way Europe could do this, Lombardi said, would be for European countries to pool their voting power into a single chair at the IMF’s board. Currently, European countries occupy eight of the board’s 24 chairs. “It’s in Europe’s long-term interest to have a global monetary institution that is well functioning and that can really contribute to global financial stability,” he said.
Some developing countries such as Brazil and Argentina have bluntly warned that emerging countries are likely to abandon the fund unless there is a shift within the IMF.
New leadership at the IMF also comes as member countries call for sharper focus by the institution on monitoring the global financial system and shifts brought on by recent market turmoil, a falling US dollar, rising oil prices and global economic imbalances.
Strauss-Kahn’s attention will also be on reshaping an institution whose advice has largely been ignored by rich developed countries such as the US, from where the recent credit market turmoil sprang.
While the IMF repeatedly warned about dangers of reckless lending in the US subprime mortgage market, some countries believe the fund should have ensured its message was heard by markets.
The market disarray prompted calls by finance ministers during the IMF’s October meetings to step up its scrutiny of the range of complex new financial instruments that lay behind the credit turmoil. Meanwhile, the IMF’s authority among developing countries has also waned with less need for its emergency loans and large borrowers such as Brazil and Argentina repaying their IMF debt.
Strauss-Kahn will also have to oversee planned budget cuts in the IMF and seek alternative sources of income for the fund, that may include the sale of a portion of its gold stockpiles.