There could be no worse time for the International Monetary Fund to be hit by sexual assault charges against its head, Dominique Strauss-Kahn, hence the growing calls for his immediate replacement (Update: now heeded).
First, the IMF is in the midst of complex negotiations over the E.U.’s Greece bailout. John Lipsky, Strauss-Kahn’s deputy, has stepped into the breach, at least until his already announced departure from the IMF in August. The American is a more than talented economist whose career has switched between the IMF and Wall Street but he is not a political animal like Strauss-Kahn, once dubbed Metternich with a BlackBerry. The eurozone crisis needs political solutions more than economic ones, and Strauss-Kahn has deftly championed the current bailout plan against internal doubters at the Fund and external critics around the capitals of Europe. That the IMF is again relevant in such matters is much down to Strauss-Kahn’s revitalization of the institution.
Second, and more significantly for the IMF and its shareholder governments–and regardless of the outcome of the legal case against Strauss-Kahn–the scramble has intensified to succeed him. That had been discreetly underway for some as Strauss-Kahn was anyway expected to end his term early to run for the French presidency next year. Now the jockeying for the post is in earnest.
Traditionally, the IMF’s head has been in the gift of the Europeans, just as the U.S. picks the head of the World Bank. The tilt of the world’s economic power east and south has upset that cosy convention. Brazil, Russia, India, China and South Africa (the Brics), have demanded a greater role commensurate with their growing economic clout. China has now been elevated to the IMF’s third largest shareholder after the U.S. and Japan.
Strauss-Kahn’s troubles provides a moment for the emerging economies to push to choose one of their own as the IMF’s head sooner than would otherwise have been the case. With it could come a tilt in the Fund’s philosophy. That has been largely Anglo-Saxon: free markets, deregulation, privatization and balanced budgets–Chicago school austerity as remedy for ailing nations. Neither has that been popular medicine in many emerging economies nor do the Brics run their economies that way.
That potential change raises a red flag in Washington, especially among fiscally conservative Republicans in Congress, which has a bully pulpit from which to address the Treasury’s support of any nomination and a direct say over the U.S.’s funding for the IMF. It raises a different red flag in European capitals, where a European is seen as essential while the IMF still has bailouts of struggling euro zone countries as its first order of business and wouldn’t necessarily want an IMF managing director whose main agenda items were around, say, exchange rate regimes and reserve currencies or financial market participant regulation.
The IMF appoints its managing director by consensus of its executive committee, essentially a process of horse trading between its government shareholders, in which the European countries and the U.S. now control barely half the votes. The front runner among candidates who might be acceptable in Washington, Brussels, Berlin and beyond is Kemal Derviş, the formidable Turkish economist and politician, a scion of a wealthy, cosmopolitan secular Muslim family, and well connected in European capitals and in Washington. He is now at the Brookings Institution. His sorting out of Turkey’s financial crisis in 2001 impressed and his Dutch-German mother may assuage German concerns about the appointment going to someone from an emerging economy or for whom the eurozone crisis wouldn’t be a priority. He speaks German, French and English fluently as well as Turkish, having been schooled in Geneva and Paris and taken bachelor and master’s degrees at the London School of Economics before heading to Princeton for a Ph.D. and eventually a position on the economics faculty there.
Also in the frame are Trevor Manuel, a former South African finance minister, Tharman Shanmugaratnam, Singapore’s finance minister, Agustin Carstens, governor of Mexico’s central bank, Brazil’s ex-central bank president Arminio Fraga. None have quite the all-round chops of top-level economist and astute politician that Derviş offers, but all are feasible compromise candidates if the Turk is seen east and south of this homeland as “too-American” (he has also worked at the World Bank in Washington and for the UN, and his second wife is a Polish-born American he met when she was at the U.S. Library of Congress). The IMF can console itself that it is spoilt for choice.
Among the outside bets are Mohamed El-Erian, Egyptian chief executive of PIMCO,the bond investment firm, who has twice before been proposed for the job, Montek Singh Ahluwlia, economic advisor to India’s prime minister, Manmohan Singh, and another who would find favor in Washington, Stanley Fischer, the American economist (he was Fed chairman Ben Bernanke’s thesis adviser) who is now a governor of Israel’s central bank. At 67, age counts against the latter two while the first lacks political experience.
Christine Lagarde, France’s current finance minister and formerly the first female chairman of U.S. law firm, Baker & MacKenzie, is the leading European candidate, given that Axel Weber, the head of the German central bank, has burned too many political bridges and the lack of support from the British prime minister, David Cameron, for his predecessor, Gordon Brown.
The timing is awkward for a Largarde candidacy given next year’s French presidential election and she is under scrutiny in an abuse of authority case in France; the IMF will want to steer clear of further scandal. There is also a danger the job will start looking like one for superannuated French finance ministers. However, she would be highly acceptable to Washington, and meets the requirement of being a political heavyweight. She has also had open support in Asia, if not from any of the region’s big three, Japan, China and India.
It might be a generation too early for China shove a candidate into the spotlight, though central bank governor Zhou Xiaochuan is one name that frequently comes up along with that of the highly polished and U.S.-educated Zhu Min, the most senior Chinese official at the IMF. For now Beijing may be happier to play kingmaker than be king–and to ensure that the honor of being the first non-Western European head of the IMF doesn’t go to a candidate from either of its regional rivals, a game, be assured, that is being replicated in Tokyo and Delhi.