The IMF was in the limelight for all the wrong reasons this past month. There is more to this story, however, than the charges laid against Dominque Strauss-Kahn. From the early days of his appointment, state capitals were anticipating the departure of Strauss-Kahn to French politics, and many expected that the next head of the organization would make IMF history by finally breaking the long convention of a European head. But where was the fight between European countries and emerging market economies on who would take the helm of this once obscure international financial organization? Why did we see the “coronation” of Christine Lagarde as yet another European chief of the Fund?
Emerging market economies like China, India, Brazil and others had long called for a transition to a merit-based selection process, whereby the European and US convention of nominating a European national to take the top job was passé and did not reflect the Southern shift of power in the global economy. These rising economies — often referred to as the BRICs or the N11 — had pointed out that the IMF suffered a legitimacy crisis during and subsequent to the Asian financial crisis and that this, in part, motivated a number of countries to amass foreign exchange reserves to self-ensure against resorting to IMF lending in the future. This contributed to what was referred to as the global economic imbalance in savings and to some extent may have facilitated unscrupulous actors in international capital markets to devise packaged toxic assets as innovative ways of shoring up market liquidity.
Long story short: some had argued that if emerging market economies had more faith in the workings of the IMF and accorded the IMF some legitimacy, perhaps they would not have amassed their global savings and instead deposited them into the international monetary system and the Fund itself.
Emerging market economies have long argued that one of the key and symbolic ways that the IMF and Western economies could demonstrate their sincerity in giving the emerging market economies more power and say in the organization would be to end the anarchic tradition of appointing a European to run an organization that mainly affects the developing world and the emerging market economies.
The cries of emerging market economies were finally acknowledged in 2009, as both the G20 and the IMF’s own executive board agreed that the next IMF managing director should be elected based on merit. For emerging market economies, this was code for saying that the Europeans and leading Western states would allow the rest of the world to put forth qualified candidates from their flock.
What a difference a few years can make. Few European leaders would have ever expected that many of their neighbours would move from being creditors in the organization and turn into debtors. Backpedalling from previous commitments, the European countries declared at the recent IMF spring meetings that having a European at the helm of the IMF was even more important today. Europe needs an IMF leader from the region who understands the political, economic and social challenges facing European capitals to effectively devise economic policies that are tailored to the needs of the fragile European economies.
How ironic that European states now recognized the great value of having the IMF head reflect the makeup of Fund debtors. The very same rationale had been used by former debtors in emerging market economies and developing countries on why they wanted an IMF managing director who understood the challenges of implementing loan conditions in fragile polities.
Beyond this ironic turn of events, why did the emerging market economies not fight for who should lead the IMF? Strauss-Kahn’s fall from grace was an opportunity to seize the moment and keep the G20 to its word for allowing a merit-based system, but the emerging market economies looked more like followers than leaders in the ensuing weeks.
This non-battle for IMF leadership is best explained by continued divisions among emerging market economies. Two heavyweights, China and India, continue to have geopolitical divisions, and neither would support the other’s candidates. The Chinese would also have little success in nominating a candidate of their own. After all, China is still a communist country that has yet to liberalize its exchange rate — two principles that are antithetical to IMF views of the proper workings of a world economy. Brazil, a prospective regional hegemon, would not support the Mexican candidate who, in its view, was a proxy vote for the United States. Finally, Russia has yet to garner geopolitical support beyond its own ex-Soviet sphere of influence. In short, the unity of Europe around Lagarde ensured her success, despite the missed opportunity for emerging market economies to claim their rightful role at the helm of the IMF.
The emerging market economies did not put up a fight for IMF leadership despite years of complaining about the Western convention of European leadership at the IMF. They are the only ones to bear the blame for failing to unite behind a candidate of their own.
An earlier version of this commentary appeared on The Huffington Post Canada blog.