Dan Steinbock

Time for IMF to walk the talk

By Dan Steinbock (China Daily)
Updated: 2011-07-01 08:01
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On July 5, France's Finance Minister Christine Lagarde will replace Dominique Strauss-Kahn and begin her five-year term as the managing director of the International Monetary Fund (IMF).

At the 2010 G20 Summit in Seoul, world leaders promised to change the traditional selection procedure for the top positions at the IMF and the World Bank to widen the pool of candidates beyond the traditional an European for the IMF and an American for the World Bank. However, despite the promise, European authorities pushed through Lagarde's appointment.

To demonstrate her autonomy, Lagarde has to quickly demonstrate her independence.

The timing could not be more difficult. In Greece, new rounds of austerity programs and bailouts are causing increasing violence, while uncertainty is deepening in the eurozone. At the same time, the debt crisis is worsening in the United States and Japan, there is turmoil in North Africa and the Middle East, signs of overheating can be seen in some emerging economies, and rising commodity prices are posing a big challenge to low-income nations.

Lagarde is not an economist, but a trained lawyer, specializing in antitrust and labor law. Her credentials for the IMF job were strengthened during and after the global financial crisis in her role as France's finance minister. In the coming years, she must show that she can effectively manage the IMF's activities.

After all, she is taking over as IMF chief to boost its work on "spillover effects", that is, the impact that one country's policies have on other countries because of significant increase in trade, investment and financial links in the global economy.

For all practical purposes, the most immediate issue waiting for Lagarde as the IMF chief is the insolvency crisis of Greece and the eurozone crisis.

During the rivalry for the IMF job, several European countries argued that, since the eurozone is facing great debt pressure, the leaders of such economic powerhouses as Germany and France need to have trust in the management of the IMF.

Yet few Europeans saw the need for a Latin American to cope with the Latin American crisis of the 1980s and 1990s, or for an Asian to overcome the Asian financial crisis of the late 1990s. Conversely, in 1997, Japan introduced the idea of an Asian monetary scheme, which was vetoed by the United States. At the time, few in the US saw the need for an Asian to understand the financial crisis in Asia.

Thus far, the IMF has agreed to provide about one-third of the 270 billion euros ($391 billion) for the rescue packages for Greece, Ireland and Portugal. Although the eurozone crisis has barely begun, Europe already enjoys credit that is highly disproportionate to its share of the world economy. In the near future, Europeans will ask the IMF for additional help for a new rescue package for Greece with a debt of $136.3 billion, and assistance for Spain, where 20 percent of the workforce is unemployed and the debt amounts to 640 billion euros ($927.4 billion).

Under these extraordinary circumstances, it is vital that IMF remains neutral and impartial, even under great pressure. In the past, Lagarde has characterized herself as a "convinced European", now she has to rise above this and represent the IMF appropriately - even if that means standing up to European leaders and lenders.

Despite dramatic shifts in the world economy, the statutory purposes of the IMF remain pretty much the same as when they were formulated in the early 1940s. Today, the IMF describes itself as "an organization of 187 countries, working to foster global monetary cooperation." Yet the voting shares of Europe, the US and Japan remain almost five times as much as those of China, India, Brazil and Russia.

Because of their large quotas, the 27 member states of the European Union (32 percent) and the US (17 percent) dominate the IMF.

Lagarde must accelerate IMF reforms and enhance its legitimacy by granting emerging economies increased voting shares and greater representation that reflects their growing importance in the world economy. And she must move fast. Over the past decade, progress has been slow and limited. She should begin with the full implementation of the 2010 reforms and the review of the quota formula before IMF's annual meetings in September.

The pledges have been made. Now it is time for the IMF to walk the talk.

The author is research director of International Business at the India, China and America Institute, an independent think tank in the US, and visiting fellow at Shanghai Institutes for International Studies.