IFI governance


New IMF head, same legitimacy problem

5 October 2007

Self-proclaimed “free market socialist” Frenchman Dominique Strauss-Kahn has been selected to take over as the managing director of the IMF, despite displeasure with both the undemocratic system that selected him and the strategic direction of the Fund.

Rodrigo de Rato’s end-June announcement of early retirement prompted immediate demands from civil society and developing countries for the leadership selection process to be open, transparent and based on the merits (not the nationality) of the candidates. However, in the first days after the announcement, European officials laid claim to the post for the continent.

By mid-July the IMF board had set out detailed candidate criteria and a timeline for the selection process, and EU finance ministers had already selected heir apparent Strauss-Kahn at the urging of the new French president Nicolas Sarkozy. However, the UK was public in its displeasure with the EU’s hijacking of the selection process, steadfastly refusing to support Strauss-Kahn’s candidacy at the time and adding its name to those demanding an open process.

Strauss-Kahn comes in on a wave of displeasure

Strauss-Kahn’s background, a Ph.D. in economics and a stint as French finance minister, and his global charm tour funded by the French finance ministry allowed him to start roping in the support of developing countries, starting with francophone Africa. US Treasury secretary Hank Paulson declared early on that he was in no position to change the unwritten agreement that the IMF post goes to a European while an American is selected to be president of the World Bank. Amar Bhattacharya, who represents the G24 group of developing countries, said that by announcing Strauss-Kahn’s candidacy, Europe had used its “first-mover advantage” to stitch up the nominations.

Despite mid-summer rumblings in developing countries, the only alternative candidate to emerge was the Russian nomination of Czech national Joseph Tošovský, the head of the Financial Stability Institute at the Bank for International Settlements in Switzerland. While Brazil, South Africa and Australia – in their capacities as the chairs of the G20, a grouping of the world’s largest economies – issued public statements lamenting the undemocratic nature of the selection, none of them put forward an alternative. Analysts believe that because it was a foregone conclusion that Strauss-Kahn would be selected, few qualified candidates from developing countries wanted their names put forward.

In the lead up to the official announcement of Strauss-Kahn’s appointment by the IMF board at the end of September, he managed to garner the official support of the United States and Argentina, as well as the UK’s begrudging vote. Strauss-Kahn and several European ministers declared that this is the last time that a European would be the presumptive nominee. David Woodward of the UK think tank new economics foundation was doubtful, “This isn’t the first time that the IMF and the Europeans have claimed that the position of MD is no longer in the gift of the European governments – they said the same thing at the last two selections, in 2000 and 2004. But each time, it just happened to be the European nominee that was selected. We need a clear demonstration that this isn’t just a European position. And the only way of doing that is for the Europeans not to make a nomination.”

Uninspiring alternative

For those hoping for an alternative candidate to shake up the selection process and the discourse about Fund reform, Tošovský was a big disappointment. Despite Russia’s critical stance (see Update 56), Tošovský was effusive in his praise for the Fund: “In my own career, I have come to be a great fan of the Fund. For many years I sat across from Fund missions—in both program negotiations and Article IV Surveillance discussions, in easy times and in crises. I have always been impressed.”

Tošovský’s statement to the board contained little acknowledgement of the mass of criticism that has been heaped on the Fund for both its past and current practices. The bigger question is what has happened to developing country demands for fundamental reforms of the institution? Despite fiery rhetoric denouncing the Fund over the years, not a single developing country stepped forward to nominate a candidate for managing director that would do push those fundamental reforms – spitfire leaders in Ecuador and Venezuela included.

Candidate of reform?

In an op-ed published in the Wall Street Journal, Strauss-Kahn called himself the “candidate of reform”. In his official statement to the IMF board, his admission that “most emerging, developing and less developed countries do question the legitimacy of the Fund”, though obvious to the outside observer, is a more candid assessment than many European officials have given to the public in a long time.

Displeasure is mounting in developing countries, not just over the way Europeans handled the selection process, but also over their continued stalling of reform of voting rights (see Update 55). The new managing director set out his views: “Who can believe that a change in some percentage points will be enough to rebuild the legitimacy of the Fund? … Reform cannot stop with a change in quotas. Voice and representation of most countries in a changing world have to be better taken into account by the board, but also by the staff – the diversity of which has to improve, as well as by management.” His rhetoric is guaranteed to please the developing world, but it is unclear that he will be able to force reforms.

One aspect of his reform plan is to first informally implement a double majority decision-making system for selected decisions at the board, taking up a recommendation that was made by UK-based NGOs One World Trust and the Bretton Woods Project. This would require that board decisions carry not just the requisite majority of the voting weight but also the support of the majority of the Fund members. Strauss-Kahn has yet to publicly reveal the exact details of implementation, but such a change should significantly improve the ability of developing countries to represent their interests at the board.

Aside from questions of legitimacy, Strauss-Kahn faces what he calls questions of “relevance”, addressing displeasure with the way the Fund has gone about its business. It is unclear how he will respond to the difficulty the Fund is facing in regards to its role in low-income countries, where it has been blamed for blocking increases in social spending (see Update 57). He has reaffirmed that he wants the Fund actively involved.

On top of his call for more developing country nationals to be hired by the Fund, Strauss-Kahn also hinted that he would like to see the Fund hire more mid-career professionals. This of course has created some worry about a revolving door between jobs at the Fund and jobs in finance ministries, which would increase the IMF’s ability to influence domestic economic policy.

While the debate over the Fund’s surveillance function is still smouldering (see Update 57), Strauss-Kahn has also called for greater efforts to be put into the Financial Sector Assessment Programme (FSAP), a joint Bank-Fund initiative that rates the quality of a country’s financial markets, banking institutions and financial sector regulation (see Inside the Institutions). If the Fund does universalise this programme – it is currently voluntary – as Strauss-Kahn proposes, this would mean an expansion of the IMF’s mandate.

The question is whether Strauss-Kahn will be able to push through both governance and role reform after coming in through European dominance of the selection process. Soren Ambrose of the Kenyan NGO Solidarity Africa Network was doubtful citing the negative reaction to Strauss-Kahn in some of the northern financial press. “There will be no honeymoon for Strauss-Kahn with the press and no positive bounce when he is ushered to the IMF podium next month. The knives are already out, and the credibility of the IMF, already foundering desperately in the eyes of many in the northern establishment, is dealt another big blow.”

Strauss-Kahn faces a hostile northern business press, continued moves by Latin American and Asian countries to move away from the institution, and the potential for a global economic meltdown. He may have wished he stayed in France.