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Wednesday, July 6, 2011

Lagarde in the IMF inferno


Special to The Japan Times

HONG KONG — Christine Lagarde has leaped into a hot job, an inferno, as the first woman to head the International Monetary Fund less than a week after after having been chosen.

She has already made several comments, one sensible, another nonsense, and a third that smacks of political naivete, all illustrating a multitude of problems facing her. The sensible one was that "The IMF does not belong to anybody. It belongs to the 187 members of the fund, and the management of the fund does not belong to any particular nation or region." She pledged: "I will make it my overriding goal that our institution continues to serve its entire membership with the same focus and the same spirit."

Too bad that Lagarde did not appreciate this in campaigning for the job, and giving a loud and clear "Vive l'Europe" as one of her opening slogans. Her overwhelming victory by consensus after Europe was joined by the United States, China, Japan and India only masks still widely felt resentment that the Europeans, and particularly the French, have again stolen the top IMF job.

A leading question is what promises did Lagarde make on her seduction campaign? Reports said that she had promised, if elected, to give China a "greater say" — whatever that means — in running the IMF. After being chosen, Lagarde claimed that, "We can't effectively represent the world economic balance of power if certain economies are under-represented."

Largarde's reported promise to China was interpreted to mean either increased representation and/or one of the top plum jobs at the IMF.

The first refers to the shareholding in the IMF. China is on the brink of becoming the third largest shareholder, marginally behind Japan with slightly more than 6 percent each of the votes. It is matter of dispute whether China should be a bigger shareholder than Japan, but the hard political reality is that it took years of haggling and it will be some time before China actually takes the third slot with the ratification of new quota increases.

The U.S., China, Japan, India the UK and Italy will all have fewer votes in the new IMF than their share of global GDP, according to the IMF's formula using a blend of market and purchasing power parity exchange rates. The 27 European Union countries will still have more votes than their share of global GDP, 29.4 percent against 27.8 percent of global GDP, but would Lagarde lead the fight to cut Europe to size?

Her easier way would be to appoint a Chinese deputy managing director, but this would risk further politicizing the IMF management. A better way would be to depoliticize all the top jobs, which would mean refusing to allow the U.S. to appoint the senior deputy managing director, refusing to allow Japan to appoint a deputy managing director and refusing to have a deputy managing director alternating between Africa and Latin America. (Currently the last post is held by Nemat Shafik, who has Egyptian, U.K. and U.S. nationality and who, unusually, is not a politician but a former senior World Bank official who then became the top official at the U.K. development ministry.)

These are all jobs that should be done by professional IMF bureaucrats. There should be no objection to recruitment from outside, but all jobs should be open to competition and not handed as a gift to any government. Governments have their chance through their executive directors to throw their political weight around without the need for constant spies on the management floor. But does Lagarde have the guts to stand up against the U.S. and Japan and China?

Then she would be on stronger ground to insist that her successor should be chosen through open competition, an answer to the chattering heads on the BBC, CNN, Financial Times and Wall Street Journal who say that it should be Asia's or China's or India's "turn" to head the IMF. It should be no one's "turn," always the best person for the job.

Lagarde in a French television interview also appealed to "the Greek political opposition to support the party that is in power in a spirit of national unity," proof of President Nicolas Sarkozy's reported view that Lagarde is a political lightweight.

World stock markets rose on relief that Greece had passed the austerity program, but many economists doubt that Greece can live up to its severe terms and it may be better to consider orderly restructuring of the country's debts rather than throw new money to impose impossible hardships on the Greek people. How do you solve a problem like recalcitrant Greece, feasting on borrowed money for too long, a mere 3 percent of the EU economy, but with the potential to bring down the whole edifice?

Lagarde and her supporters claimed that her European origins would be her main asset in dealing with the debt crisis. That may also be mistaken if the IMF does its simple sums and calculates how much lending is going to sickly euro-zone countries without solutions in sight. The IMF has lent Greece, Ireland and Portugal about $111 billion, or twice the amount that the 19 other non-euro-zone countries receiving IMF loans are getting. Lagarde, representing all 187 members, will have to start raising awkward questions.

Dominique Strauss-Kahn had restored the fund to a central place in global finance with considerable firepower of $750 billion. But he also left lots of tricky questions, among them: the debt crisis and repercussions for global growth; the role of the dollar and global reserve currency; how to deal with potential tsunamis of capital movements; how the IMF and World Bank fit with the G-20 as the steering group for the world economy.

The most intriguing question may be how Lagarde copes with the male suits who dominate global finance. As French finance minister she wore her own power suits, with skirts, not trousers, and had a rather pointed mantra that testosterone-challenged men or men showing off their hairy chests — she used both expressions — were responsible for the global financial crisis. A "Lehman Sisters" would not have set the world in flames.

It is a challenging starting point, but even feminists might be nervous as seeing it as a substitute for a policy of how to deal with the IMF and all the burning issues.

Kevin Rafferty was editor of independent daily newspapers during the IMF annual meetings from 1988 to 1996.


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