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Saturday, July 9, 2011

EDITORIAL

A new face at the IMF

The International Monetary Fund (IMF), the world's most influential financial institution, has a new boss. Ms. Christine Lagarde, France's finance minister until her appointment last week, replaces Mr. Dominique Strauss-Kahn, who stepped down amidst allegations of sexual assault. Ms. Lagarde's selection — she is the first woman to head the Fund — is a victory for proponents of change at the IMF.

Real change demands the end to the holding of positions for particular regions: The IMF must become a genuine meritocracy in which the best-qualified person gets a job, regardless of his or her passport.

Traditionally, the top job at the IMF goes to a European, as Europe and the United States have divvied up the top posts at the two leading financial institutions: A European heads the IMF and an American takes the World Bank. But the growing clout of emerging economies has demanded a reconsideration of those traditions.

Voting rights at the IMF are being changed to reflect the new global financial balance of power, but progress has been slow.

Those emerging economies had a new opportunity to assert themselves in this latest situation. They were even able to buttress their claim to the top job by pointing to the financial troubles in Europe and using the standard IMF argument that it is better for the institution to maintain an arm's length from its clients; after all, that was long the European rejoinder when developing economies called for one of their own to head the IMF in the past.

This time, however, the Europeans were not so keen on the logic of that position.

Nonetheless, Ms. Lagarde is going to have to oversee real change at the IMF. She should begin by committing herself firmly to meritocracy. She has five years to lay the groundwork for a replacement who is not a European.

She can soften that blow by eliminating other appointments at the fund that are based on considerations other than merit. For example, the IMF's first deputy managing director is traditionally an American.

The current holder of that job announced he would leave a few days before Mr. Strauss-Kahn was arrested. That sinecure should end.

Just as important is finding seats on the executive board for emerging economies.

In her campaign for the job, Ms. Lagarde, echoing her predecessors, acknowledged the need for reform. That will also require her to battle fellow Europeans, as it is smaller European governments that are overrepresented on the board.

Larger emerging economies such as China, Brazil and India backed Ms. Lagarde's bid for the post, but only on condition that she accelerate the realignment process started by Mr. Strauss-Kahn. Some developing countries have threatened to leave the organization if substantive reform does not occur.

The need for realignment is likely to clash with the Ms. Lagarde's most immediate concern, the Greek financial crisis.

Immediately after her appointment, Ms. Lagarde called on Greece to push through the austerity package that the IMF and other European governments are demanding as a precondition of additional financial aid.

That is the right approach, but she must also address the seeming unreality that is guiding European thinking.

The IMF has provided about one-third of the 270 billion pledged to help Greece, Ireland and Portugal. The eurozone governments expect that largesse to continue, a view that feeds suspicions that the IMF has not been even-handed in dealing with crises.

Ms. Lagarde must demand that European banks and governments accept some form of restructuring, even if that entails losses, if she and her institution are to maintain any credibility. The IMF was never as light-handed when other regions were battling economic troubles.

A related challenge is the need to prepare the IMF's balance sheet for the losses that are likely to come from a restructuring of Greek debt and whatever cascade follows.

The Fund's exposure is substantial, but Ms. Lagarde must ensure that her institution does not fall into the same pattern as that of European governments — including the one she worked for until last week. Anything less will spur charges of favoritism and parochialism. (French President Nicholas Sarkozy's claim that her selection was "a victory for France" does not help.)

These difficulties are compounded by another, more basic problem: Ms. Lagarde has only limited training in economics.

In her former job as finance minister, the skill set was as much political as economic; the IMF head needs to master her economic brief if she is going to sell often hostile interlocutors on the need for tough reforms.

They know the politics; she has to persuade them on the economic merits. Moreover, the IMF handles a wider range of issues than do most finance ministers.

Ultimately, Ms. Lagarde will play a key role in resolving not only current (and future) crises, but in helping restructure the framework of international economic governance. That requires a vast skill set and a deft touch.

Difficult at the best of times, the complexity of that challenge is magnified by the fact that one set of reforms could undermine her ability to make other changes — taking a hard line on eurozone bailouts will make it even harder to get those same governments to agree to reforms in voting strength.

Good luck, Ms Lagarde, you will need it.



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