Who Should Lead the IMF?

Barry Eichengreen

BERKELEY – The International Monetary Fund, many say, has had a good crisis. As recently as three years ago, many observers thought that the Fund had outlived its usefulness and should be closed down. Since then, it has intervened in Hungary, Latvia, Iceland, and Ukraine, among other crisis-stricken countries – and has received a massive infusion of new resources.

Part of the explanation for the higher esteem in which the IMF is now held is its recent display of intellectual flexibility – a rare virtue for a big, lumbering bureaucracy. It has rethought its traditional opposition to capital controls. It has suggested that central banks may want to consider higher inflation targets in order to avoid hitting the zero bound in the event of deflationary shocks. For this, it drew a stern reproach from Germany’s Bundesbank – a clear sign that it is doing something right.

The IMF has also put in place a Flexible Credit Line to disburse funds quickly – and free of onerous conditions – to countries buffeted by financial crosswinds through no fault of their own. The problem is that, despite its alluring name, the new facility has had few takers, and no Asian takers in particular.

Indeed, it is revealing that when South Korea was desperate for dollars following the failure of Lehman Brothers, it borrowed from the United States Federal Reserve, not from the Fund. After their experience in 1997-1998, Korean policymakers would sooner jump off a cliff than borrow, even without conditions, from the IMF.

Nevertheless, while not all is sweetness and light, there has been progress. And for this the IMF’s strong, politically astute management – not exactly something from which the Fund has regularly benefited in recent years – deserves credit.

Now, however, the rumor mill is heating up with gossip that the Fund’s managing director, Dominique Strauss-Kahn, will leave in order to oppose Nikolas Sarkozy in the 2012 French presidential elections. Sarkozy’s popularity is hitting new lows, and Strauss-Kahn’s friends say that he has never made a secret of his political ambitions.

A lame-duck managing director would hamstring the Fund. Already there is a sense that the IMF is reluctant to tell Europe more forcefully how to handle its problem with Greece because the managing director must be careful to avoid meddling in Europe’s internal politics.

On top of this now comes the interesting news that the IMF has appointed Zhu Min, previously a deputy governor of the People’s Bank of China, as special adviser to Strauss-Kahn. Zhu will thus be part of the core management team.

This, in turn, has fueled speculation that Zhu will be a candidate to become the next managing director. It is the turn of someone from outside Europe to head the IMF – Europe having had a monopoly on the position since the Fund was created following World War II. The bargain then was that the US could pick the president of the World Bank while the Europeans would get the top slot at the IMF (US policymakers in their wisdom believing that the Bank would become the more important institution).

But today’s world is more multi-polar. It is no longer dominated by the Atlantic economies, so those economies should no longer dictate who holds the top jobs at the two Bretton Woods institutions. It is now, the argument goes, another region’s turn.

The obvious choice is Asia, home to the most dynamic emerging markets. It is the region to which the world’s economic center of gravity is shifting. If you ask Asian leaders what would make them consider again approaching the Fund after their traumatic experience with IMF “assistance” in 1997-1998, they will answer: an Asian managing director.

In fact, this is precisely the wrong way to think about the problem. The IMF’s problem in the past has been parochialism and lack of accountability. The best way to ensure that the Fund remains open to new ideas is by selecting the person with the best ideas to lead it. The best way to ensure that the IMF’s management is accountable to all of its governmental shareholders is to prevent the top job from becoming the sinecure of any region, whether Europe or Asia.

The next managing director should be selected on the merits, not on the basis of nationality. There should be an open competition, in which the best candidate wins on the basis of his or her ideas.

Asia has plenty of competent economic officials who might be considered as the next managing director of the IMF. But just because they are Asian is not reason enough to select them.