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Monday, July 9, 2007
Breaking locks on the pillars of finance
CAMBRIDGE, Mass. — One has go back to the "Year of Three Popes" (1978) to find a succession drama as strange as what has been happening at the International Monetary Fund and the World Bank, the two pillars of global finance.
Two months ago, World Bank President Paul Wolfowitz resigned amid an extraordinary staff mutiny and governance debacle. Now, his counterpart at the International Monetary Fund, the former Spanish Finance Minister Rodrigo Rato, has shocked major stakeholders by announcing that he, too, will leave in October.
To lose one international lending institution head is misfortune; to lose two looks like carelessness. Coming on the 10th-year anniversary of the Asian financial crisis, the caldron in which today's ultra-liquid capital markets were forged, conspiracy theories abound.
Frankly, sticking to the public record, the two resignations seem like night and day. When Wolfowitz was finally pushed out after a bruising battle, bank staff were beside themselves with joy. By contrast, most IMF staff seem genuinely depressed by Rato's departure.
Wolfowitz's earlier claim to fame was his role as an architect of the Iraq war, arguably one of the greatest strategic debacles since Napoleon's invasion of Russia. Rato, by contrast, was Spain's finance minister during the country's best economic era since the 16th century.
Under Wolfowitz, the World Bank failed to introduce any serious governance reforms to reflect the rising economic power of Asia. Under Rato, the IMF at least took some modest steps toward giving China and other rapidly emerging markets more say in running the place. At the same time as Rato pushed reluctant European nations to yield some of their power in the Fund, he introduced reforms that clarified and strengthened the Fund's role in managing exchange rates.
Indeed, a week before Rato's resignation announcement, the Fund asserted that it had the right to censure countries whose intervention policies threaten to undermine global economic stability. The Fund's policy change drew the ire of Chinese officials, who have been intervening on a biblical scale to hold down the value of their currency, the yuan.
When the Fund gets the big boys to complain by saying perfectly sensible things, it must be doing something right. True, the Fund has been notably soft on the United States of late, downplaying the continuing vulnerabilities posed by the gaping U.S. current account and trade deficits. One imagines this compelling theme will return soon enough.
Although there are vast differences surrounding the departure of the IMF and World Bank heads, there are some worrisome similarities.
First, there is every sign that the Europeans will use Rato's sudden announcement as an excuse to avoid a serious debate about relinquishing their privilege of always appointing the Fund's head. True, the U.S. was able to essentially blackmail the world into choosing yet another American to replace Wolfowitz by balking at efforts to push him out peaceably. But the Europeans have no such leverage at the Fund, where Rato has elected to go out under his own steam.
There is ample time between now and October for the IMF to install an open and fair selection process that will lead to the best person being chosen, regardless of nationality. Central banks around the world have been enormously successful by choosing technocrats and people with proven knowledge and experience to head their institutions, rather than accepting purely political appointments.
On merit, some of the obvious candidates for the Fund job, such as Brazilian Arminio Fraga, and Egyptian-born Mohamed El-Erian, are not European.
A second similarity is that both institutions face deep existential crises. In today's world of deep and liquid global financial markets, the main lending instruments of the IMF and and the Bank are largely unnecessary and redundant.
Absent serious reform, both are on track to go into deep hibernation as the Bank for International Settlements did for 40 years prior to its recent resurgence. The BIS, founded in 1930 to help manage German reparation payments and to coordinate activities among central banks, served as little more than a repository for gold reserves in the years following World War II.
As central banks have gained status in recent years, and thanks to imaginative leadership, the BIS has reawakened and taken on a number of important roles, including setting international regulatory standards for global banking.
While it is encouraging to know that a hibernating IMF and World Bank may some day reawaken, it would be far better to see them invigorated now. A more globalized world needs global financial institutions, but ones that focus on coordination, supervision and technical advice, not redundant lending mechanisms.
Before any real change can take place, both institutions require fundamental governance changes. The puzzling circumstances of the IMF head's sudden departure announcement do not justify a business-as-usual approach to his replacement.
Nor does the closed-door succession process at the World Bank, where the U.S. continued its 60-year lock on the presidency, justify continuing European monopolization of the Fund job. Two wrongs do not make a right.
Kenneth Rogoff is professor of economics and public Policy at Harvard University, and was formerly chief economist at the International Monetary Fund. Copyright 2007 Project Syndicate (www.project-syndicate.org)