IMF meeting at Washington, May 18, 2011

An international organization with a capital and lending capacity of hundreds of billions of dollars will have a vacancy at its top almost immediately as a result of the personal indiscretion of its managing director that has been an acute embarrassment to himself and the International Monetary Fund. Everyone may agree that the IMF requires a comprehensive overhaul under visionary leadership. But the race to lead the IMF is not open to the swifter, higher, stronger — in the words of the Olympic motto — but confined to a narrow clique of European central bankers and politicians. This is because, by convention, the IMF’s chief executive is appointed by the Fund’s 24-member executive board, and to date, the chief executive has always been chosen from a West European country. The latest and tenth managing director, Dominique Strauss-Kahn, from France was to retire in any case in October. In 2009, after a full decade of working groups, position papers and learned reports, it was agreed that the IMF should adopt “an open, merit-based and transparent process” of selection for the top management, but this formula, apparently, has not yet been applied to the selection of its chief executive.

The Bretton Woods institutions, the IMF, the World Bank and the World Trade Organization, are part of the United Nations family. The governing structure of the IMF and the World Bank is heavily weighted in favour of the industrialized countries, although their clientele, in numerical terms, is from the developing world. At the end of 2010, India and Brazil were given additional quotas to join China and Russia among the top ten IMF shareholders, but strong economies like India and China, even with the added powers, together still possess less than 10 per cent of the voting strength. This anachronistic dispensation requires revision in keeping with the changed world order. To restrict the leadership of the World Bank to the United States of America, and that of the IMF to Europe — the two regions responsible for the global meltdown and financial panic in the first decade of this century — is patently absurd.

When this writer asked an economics professor, one closely identified with the now discredited and disempowered Communist Party of India (Marxist) regime in West Bengal, whether the IMF should mark a departure by appointing a non-European at its head, he loftily enquired why it should matter who takes over the leadership of that international financial organization. The riposte to the academic’s pomposity is that the leadership issue does matter, and it is something the developing world has been struggling to extract from the grip of the developed countries in recognition of the shift in the balance of power from the industrialized economies to the new emerging powers illustrated by the Brics — Brazil, Russia, India, China and South Africa.

Gordon Brown, until last year the Labour Party prime minister of the United Kingdom, has said that had he known better, he would have more strictly regulated the banking industry. This sent his former finance minister, Alistair Darling, into a sharp reaction. Darling alleged that he had repeatedly urged the then prime minister to do just that, and had been rebuffed. While the Labour Party shows disunity even in its retrospective reflections on the parlous state of the British economy, the Conservative prime minister, David Cameron, is mulling over whether to support Brown’s undeclared but obvious plan to be the next managing director of the IMF. Cameron has declared that this international financial organization needs someone who understands the dangers of excessive debt and excessive deficit, implying that the present British government is more aware of the problems and their remedies than its predecessor. This is interpreted as a thumbs-down for Gordon Brown.

If the credentials of the new managing director are such that will make him or her wary of debts and deficits, as suggested by Cameron, such views will be of relevance to the world. But that is hardly the full prospectus of what the IMF badly needs at this time, which is nothing less than root and branch reform. The organization was shown to be ineffective during the Asian financial crisis of 1997, and its advice was resented and discounted by the affected countries in making their recoveries, especially in matters of capital controls that placed restrictions on free movement of currencies across trans-national borders. The IMF also failed to anticipate or deal with the global financial meltdown of 2008, which was caused by, and afflicted most gravely, its leading shareholders, namely the western developed economies, all of whom are still languishing in various phases of the financial doldrums. In fact, the IMF’s favoured policies of free capital flows have pushed several countries into crises, such as Spain, Portugal, Greece, Ireland and Iceland. Its prescriptions are rigid and its one-cap-fits-all solutions are belatedly considered to be ill-conceived, to say the least.

The IMF has lately been progressively overshadowed by the G20, a body that sets out policies for the world economy but without any executive ability. The G20 agreed to expand the IMF’s ability to lend to countries hit by recession, but the Fund has managed to advance only about 15 per cent of the monies at its disposal, and its conditions remain stringent, emphasizing the restoration of fiscal balance through restrictions of wage and employment opportunities, essentially through cuts in social spending. At the same time, volatile capital movements have continued unhindered, and they threaten to create instability in the finances of vulnerable nations. Poor and middle-income countries complain bitterly that their economies are being knocked off the course as a flood of hot money assails their markets as a result of policies adopted in the West.

Whether the IMF has finally learnt to slip out of its monetarist straitjacket is very debatable. It is still wedded to controls being used sparingly, in specific conditions and only temporarily. It prefers to concentrate on capital inflows, investments, reserve requirements and lock-in periods rather than outflows, which have always had a more pernicious effect. Countries that have large capital inflows are unlikely to be the developing countries, where such a phenomenon would, in fact, be welcomed as providing Bottom of the Pyramid support. In other words, these are nations that would have no need for advice from the IMF in the first place. Chile, Brazil, Thailand and Malaysia had instituted controls on capital inflows well before the IMF changed its traditional tune. In countries with BoP problems, the IMF still persists in advocating open capital accounts and further liberalization to secure investor confidence, and there is no evidence of any introspection despite IMF nostrums having made the maladies worse for several patients in the past.

What does the IMF think about the high food and fuel prices, commodities futures markets, or financing facilities without conditionalities? Would the forthcoming leadership change in the IMF be able to make any difference? It is facile for the economist in Calcutta to scoff and be cynical, but at one of the most turbulent times since World War II, the appointment of the next IMF head acquires considerable significance. The new leader should give due recognition to the essential role of State spending in maintaining incomes and employment. Historian Hugh Trevor-Roper once wrote, “it is European techniques, European examples, European ideas which have shaken the non-European world out of its past, and the history of the world for the past five centuries, insofar as it has significance, has been European history.”

Such opinions have no contemporary relevance. The membership of the Fund has increased from the initial 29 to 187. While the Eurozone has lurched into an existential crisis, a so-called advanced European economy is as likely to apply to the IMF for a bail-out as one in Saharan Africa, and the biggest borrowers in value terms are now Greece, Portugal and Ireland. A massive change has taken place in moving the centre of gravity of the global economy away from the industrialized West, and solutions and practical examples offered by the new emerging economies will be more apposite for the IMF’s role than the failed policies of the past. An IMF managing director from outside Europe will be better placed to re-position the organization. Such an appointment will also reflect a welcome and overdue awareness that history has moved on from a handful of nations in the West to a much larger group in the South. It is an irony that one of the few world leaders who had consistently pressed for the reform of the IMF and a new global financial architecture is none other than Gordon Brown. Even if he is ruled out by his successor, it is far from clear if any non-European candidate is ruled in.