Changing of the Guard at the IMF

Soren Ambrose and Bhumika Muchhala, Foreign Policy In Focus, October 31, 2007

Former French Finance Minister Dominique Strauss-Kahn, who becomes the International Monetary Fund’s new chief on November 1, has a lot of promises to keep.

Strauss-Kahn, known as “DSK,” traveled the world between his “nomination” by the European Union in July and his confirmation in late September by the IMF’s executive board, pledging a more open institution. Though he’s the latest beneficiary of the archaic “gentlemen’s agreement” that accords Western European countries the right to name the IMF’s head, Strauss-Kahn assured developing countries that he will be the last to be selected in this unfair manner, and that their position in the institution would finally be given due respect.

DSK replaces Rodrigo de Rato, who after three lackluster years at the IMF turned in his resignation. De Rato resigned as the Fund’s managing director two years before the end of his term, having failed to convincingly refute the common view that the IMF is rapidly losing its relevance in the global economy.

High Stakes

The stakes are high, and the challenge of recuperating the IMF’s reputation is formidable. Several high-ranking officials in Washington for the recent annual joint World Bank and IMF meetings privately denigrated de Rato’s three-year stint, saying that despite a number of internal reviews and a new strategic plan, the reform agenda seems to be stuck, and a wholly new effort will probably be required.

Over the last two years, many of the IMF’s largest middle-income clients, like Brazil and Indonesia, which still nurse bitter memories of the Fund’s involvement in their financial crises in the 1990s, have paid back their loans to the IMF early which deprives the Fund of anticipated interest payments. Meanwhile, these middle-income countries, especially in East Asia, have amassed currency reserves in order to “self-insure” themselves from having to borrow from the Fund again. And private credit markets offer cash in volumes that dwarf anything the Fund can possibly offer.

As a consequence, the role of the IMF has been sharply questioned even by its biggest shareholders. In his speech at the annual meetings, U.S. Treasury Secretary Henry Paulson stated that the Fund needs to re-evaluate its “core mission” and make “difficult decisions on priorities.”

Even more challenging, the IMF today finds itself made vulnerable through an income deficit, its first in decades, which approaches $100 million this year. The Fund’s loan portfolio has incurred a whopping $88 billion decline from $105 billion in 2003 to just $17 billion today, with most of this amount owed by Turkey and Pakistan. Although the Fund has gold holdings worth $76.9 billion, it is prevented by its bylaws from using them to cover its operating costs, and indeed from accessing them under almost any circumstance.

So, the IMF’s powerful shareholders (rich G7 countries) have called on the Fund’s executive board to cut costs and downsize staff in the next six months. Paulson urged the Fund to “reduce expenditures” at the recent annual meetings. Even Japan, which has traditionally been reticent on such matters, stated at the meetings that the Fund should cut spending significantly by “shedding non-core operations, organization, and staff.”

Better Voting Balance

Efforts to reform the IMF’s voting structure have also faltered, and its attempt to re-fashion itself as a convener of high-level negotiations about “global imbalances” (China’s controversial currency policies and the ever-growing deficits of the U.S.) has failed to produce any tangible results.

Strauss-Kahn is likely to be the most politically progressive IMF Managing Director ever (not that there’s much competition for that distinction). Hailing from the left side of France’s amorphous Socialist Party, as Finance Minister he boldly stood up to the neo-liberal consensus in Europe and implemented the still controversial 35-hour work week.

Although he failed to gain the Socialist nomination for President in the recent elections, he retains a strong following. Indeed, many believe that the new French President, Nicolas Sarkozy, pulled off a brilliant coup by finding a way to send a high-profile rival into exile by honoring him with a nomination for the IMF’s top seat.

Strauss-Kahn took a far more activist approach to his nomination than his predecessors. While de Rato and others certainly paid a few courtesy visits to prominent finance ministers and presidents, for the most part they allowed the forces of tradition to place them in the Managing Director’s chair. In contrast, Strauss-Kahn campaigned for the position despite having only one late entry as competition, Josef Tosovsky, a former Czech Finance Minister nominated by Russia and unable to attract the support of his own government.

Logging some 60,000 miles in a few months, DSK got finance ministers in Africa, Latin America, and elsewhere to put on the record their kind words about his nomination. In the process he managed to persuade not only developing countries but observers like the Financial Times, the foremost monitor of the international financial institutions, that he intended to use the IMF as a tool for addressing income gaps—which made the FT, a defender of the IMF’s customary role as lender-of-last-resort, far less happy than his target audience. Branding DSK “neither qualified or legitimate,” the Financial Times made little secret of its preference for Tosovsky, a well-known orthodox neo-liberal, though no one gave him a chance to gain the support of more than a few of the IMF’s executive board members.

Vision for the IMF

As part of his “campaign,” Strauss-Kahn published his “vision for the IMF” in the Wall Street Journal a few days before making his official appearance before the IMF’s board. In it, he stressed his commitment to rebuilding the Fund’s legitimacy and relevance, repeating his commitment to expanded voting powers for developing countries.

But on October 4, a month before his scheduled ascension, his efforts to re-cast the Fund’s image were dealt a blow by the board’s selection of a fellow European (Italian economic minister, Tommaso Padoa-Schioppa) as chairman of the International Monetary and Financial Committee (IMFC), the institution’s most powerful policy-advising committee, even after India’s finance minister, P. Chidambaram, had been widely tipped to become the first developing country figure to win the post. This move only further reinforced the widespread perception among its critics around the world of the Fund remaining a European Club.

DSK’s manifesto in the Journal did include at least one proposal with genuine promise: the use of “double-majority” voting on the IMF’s board for important decisions. This would mean that such decisions would require not only a majority of the board’s share-determined votes (in which count the U.S. has over 16% of the vote, and all of sub-Saharan Africa less than 5%), but also a majority of the “chairs,” or individual board members. Although board representation is also skewed (two members represent over 45 African countries, while eight wealthy countries have their own representative), such a mechanism would represent a greater move toward democracy than fiddling with a few percentage points of increase in the quota shares of just a few countries. (A civil society version of this proposal would require counting a majority of countries rather than board chairs, but DSK does not seem to be considering that).

One Currency, One Seat

At the recent annual IMF and World Bank meetings, it seemed that DSK may have gotten a little help from the new IMFC chair, Padoa-Schioppa, who said he agreed that Western Europe should occupy one seat on the board to make way for emerging economies — an idea long discussed but always resisted by the EU. The “IMF includes the word ‘monetary,’” stated Padoa-Schioppa at press conference on Sunday, October 21, “The EU has one money. It should consolidate.” However, the treatment of low-income countries, particularly African countries whose voting powers are almost negligible, is sub-par at best. Although French finance minister, Christine Lagarde, had stated in the French newspaper Liberation that the country would support the immediate tripling of African members’ basic votes, the outcomes of the annual meetings affirmed only doubling their basic votes—a wholly insufficient outcome according to the G-24, a body of developing country finance ministers and central bank governors, which has also called for a minimum of tripling the basic votes of the Fund’s low-income members.

How comfortable should we be with Strauss-Kahn’s seemingly more open and progressive attitudes? Most civil society organizations that monitor the Fund would like to significantly reduce its power to impinge on countries’ economic sovereignty and limit the scope of development spending. Strauss-Kahn, however, has reaffirmed that the Fund should remain involved in low-income countries (throughout Africa, the Caribbean, and Central America in particular), which are the last bastion of the IMF’s dwindling lending power.

What to Expect?

No matter who serves as the IMF’s Managing Director, it is probably too much to hope that he (all Fund chiefs have been white Western European men) would support reducing the institution’s role. If Strauss-Kahn proves to be as skillful a politician on the international stage as he was in France, it’s quite plausible that he could succeed in expanding the power and scope of the IMF’s work. This could intensify the negative impacts of the Fund’s policy influence, at least in low-income countries.

DSK has acknowledged that “It will be a hard task for all of us to rebuild both the relevance and the legitimacy of this organization.” But what should we expect of him? While his ideas and statements seem to be more assertive than de Rato’s, they may also be a tactical affirmation of the current-day critiques of the IMF in several circles ranging from academia, media, politics, and civil society.

Only time will tell if DSK will employ the determined political will necessary to walk his talk. His stated plans for governance reform may well get sidelined by the powers-that-be in IMF decision-making, namely, the E.U. and the United States. On the other hand, he may be able to pull through with some real reforms, particularly if he decides to augment the voices of the Fund’s low-income shareholders.

*Soren Ambrose is the manager of the Africa Program at Bank Information Center, based in both Washington, DC and Nairobi. Bhumika Muchhala is the associate of the IMF Program at Bank Information Center, based in Washington. They are contributors to Foreign Policy In Focus.

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