A Frenchman at the Helm
IN THE end, it was almost a rubber stamp. On Friday September 28th the IMF’s executive board officially chose Dominique Strauss-Kahn, a former French economy minister, to be the organization’s new managing director. Mr Strauss-Kahn’s nomination – and his nationality – had initially ruffled feathers.
He was the Europeans’ choice for a post that, traditionally, has been filled by a European, just as the president of the World Bank has always been an American. But in the wake of the fiasco surrounding Paul Wolfowitz, the Bank president who was forced out in June amid furore over special treatment for his girlfriend, pressure had been mounting to end such stitch-ups and open up important international posts to wider competition. Although Mr Strauss-Kahn is a trained economist, many wondered whether he was the best candidate for the job.
Mr Strauss-Kahn has proved to be an energetic, and effective, campaigner. He engaged public-relations firms, travelled 60,000 miles to lobby countries for their support, and even kept a campaign blog. His charm offensive paid off. Although there was an alternative candidate-in late August Russia put forward Josef Tosovsky, a former Czech prime minister and central-bank governor-Mr Strauss-Kahn won widespread support.
The energy with which Mr Strauss-Kahn campaigned suggests that he actually wanted the job and will stay in it for a while. That, in itself, is a step forward. For several years, the world’s top international financial institution has lacked effective leadership, in part because of a high turnover at the top. Mr Strauss-Kahn’s predecessor, Rodrigo de Rato, left the post after only three years, for personal reasons. Before him, Horst Köhler also quit before his term was up in order to become president of Germany.
Weak leadership has compounded more fundamental problems at the IMF. The organisation’s legitimacy is under increasing attack. Fast-growing emerging economies feel under-represented in an institution where Europe and America still hold sway. Even more worrying, there is a big question-mark over the Fund’s relevance. Its role in rich countries has long been modest. But ten years ago it was at the centre of emerging-market financial crises, acting as the world’s financial fireman. Now that many emerging economies have built up vast stashes of foreign-exchange reserves that role is dramatically diminished. And since the Fund’s income depends on its lending, growing financial irrelevance has also spawned a budget crunch.
Mr Strauss-Kahn is aware of the challenge, telling the Fund’s board recently that the institution’s “very existence” as the world’s leading financial institution might be at stake. He has touted himself as the candidate of “reform”. But his solutions are incremental rather than radical. The Fund is already in the midst of adjusting its “quotas”, the system for allocating votes and power, a process begun by Mr de Rato. The new boss wants to speed the process up and introduce new voting rules to boost the power of emerging economies. Like Mr de Rato, he is keen to keep the Fund involved in the poorest countries, but also wants to broaden the organisation’s global role. As part of its “multilateral surveillance”, for instance, he reckons the Fund should spend more time thinking about how financial turmoil spills over between countries.
As the Fund’s financial role in emerging markets diminishes, many reformers have latched on to “surveillance” as the right way forward. Even if fewer countries need a financial fireman, goes the logic, the world still needs an economic umpire, an objective analyst of problems and judge of fair play. The trouble is that this is a hard role to play. Rich countries have long ignored the Fund’s analysis when it did not suit them. And emerging economies seem no keener to receive a lecture.
As part of Mr de Rato’s reforms, and largely at the behest of America, the Fund has beefed up its focus on exchange-rate surveillance. It now produces reports on big economies that discuss whether or not those countries’ exchange rates are “misaligned”. China was furious about the new rules on currencies, regarding them as a thinly disguised American-sponsored tool for attacking Beijing’s currency regime. The IMF’s official report on China has been delayed. But the issue will come to a head soon. If the Fund declares China’s currency to be misaligned, America may be pleased, but relations with Beijing will be poisoned further. Mr Strauss-Kahn’s twin search for legitimacy and relevance will soon be put to the test.