Can a New Director Send The IMF in a New Direction?
And now it’s down to two effectively. No, in fact it’s down to one – or at least it’s the frontrunner’s to lose. And that’s France’s Christine Lagarde.
There is an alternative of course and that is Mexico’s governor of the central bank, Augustin Carstens. Carstens has impeccable credentials including an economics PhD from the University of Chicago. He has served as deputy managing director of the IMF from 2003 to 2006 and then as finance minister from 2006 to 2009 before becoming the head of Mexico’s central bank. But his candidacy has not wrung support from many countries and has not served to coalesce support for anything but a European.
And for a time there was Stanley Fischer. Currently governor of the central bank of Israel, Fischer is something of legend to the economics profession. He is certainly the favourite of the bank officials. Though one had to surmise that his candidacy was a long shot at best, his short candidacy came to an end when the IMF board of directors kept in place a regulation that required the managing director to be younger than 65. Fischer is currently 67.
So there is in fact just Lagarde. The challenge for Lagarde has arisen from past appointments of the International Monetary Fund’s (IMF) managing director. The post has remained in European hands from the first appointment Camille Gutt in 1946 through to the recently resigned Dominique Strauss-Kahn. At the time of the appointment of Dominique Strauss-Kahn in 2007, vague statements were made that Strauss-Kahn would be the last European candidate. But these gossamer commitments aside, the sudden departure of the popular French managing director, after being charged with sexual assault, led to an early European coalescence around – yes, another European candidate – Christine Lagarde.
Notwithstanding her general popularity, many developing countries called for an election of a non-European. For many of the 187 member countries it was time to recognize the growing power and influence of developing countries and especially the large emerging market countries. There were repeated calls for a truly transparent merit-based and competitive process – read that as a choice other than a European candidate. The large emerging market countries – the BRICS, Brazil, Russia, India China and South Africa – through their IMF executive directors attacked the repeated appointment of European managing directors declaring that another European appointment “undermines the legitimacy” of the IMF. But as noted there has been no great stampede to unify around Augustin Carstens as the non-European candidate.
The concerns for the new managing director have changed significantly from the past. From a focus on developing countries, the new managing director, it seems must instead focus on the Eurozone. Today the Fund has pledged $55 billion about two-thirds of its total lending commitments to the Euro-area countries. And initially support was expressed for Lagarde for her knowledge and skill in negotiating with the other European countries. Indeed it is her negotiating prowess that appears to be most appreciated. Though she has been involved in difficult economic issues, Lagarde is not an economist. She is a lawyer by training and ran Baker Mckenzie, a global law firm, from Chicago before being recalled in 2005 to France to take up a ministerial post.
Lagarde is a pragmatist and politician. She is a woman – she would be the first woman to become managing director – and would be likely to change the culture that is now recognized as too macho. But it is hard to discern her economic views and ultimately will have to rely in part on economists around her to make some of the tough economic calls. And her presumed strength – knowledge of Europe – may prove to be a liability. The Fund is now deeply, possibly too deeply, engaged in the European sovereign debt crisis and there appears to be little interest on her part to demand debt restructuring for Greece or the other “peripheral” countries that now weigh down Europe. There appears therefore no end to the economic crisis. Among the large players – France and Germany especially – there is no appetite to bring restructuring to Greece fearing that their banks will bear the cost for such restructuring. Thus for the moment there appears only a continuing effort to “bail out” countries like Greece pushing out the day of reckoning though there is little prospect that Greece, or for that matter Ireland or Portugal can gain control of their outstanding public debt. In fact it is not Lagarde’s nationality that should be the question but her economic knowledge and her policy choices.
The world economy the managing director faces is complex – in fact it is a two-speed world. First you have the advanced economies. Stubborn high unemployment in most; anaemic growth; and growing concerns for public finances. For a number of these economies – except the US – there is a continuing concern over US monetary policy. The monetary easing has suppressed yields and encouraged capital flows elsewhere especially in the large emerging market economies. It has also caused appreciation in currencies to the discomfort of many monetary officials.
A different picture greets the Fund for the large emerging market economies. Their growth remains very strong. Some currencies are appreciating and decision-makers have varying concerns over capital inflows. Finally, and most worrisome, there are growing signs of inflation in Brazil, India and China. “In emerging markets, the big challenge is not to lower their guard in preventing and containing the risks of overheating and the building up financial imbalances,” said Jose Vinals, as quoted in the FTon June 17th. Vinals is the Financial Counsellor and Director of the International Monetary Fund’s Monetary and Capital Markets Department.
So the challenges for the new managing director are multiple and may not just focus on European sovereign debt. Instead the concerns may be more over macroeconomic flows, currency instability and macroeconomic surveillance. And in these areas Lagarde remains annoyingly vague.