As a Finance Minister of France, Lagarde had barely a week to hand over her duties, but the first challenge she faces in her new role is no different from what she was dealing with in her previous designation. The Greek debt crisis is lingering for a year now. Greek Prime Minister has shown boldness in implementing critical reforms aimed at correcting the situation amidst the serious uproar of opposition parties and brick-batting youths who see reforms as constraining the job market and social security. Both Europe and IMF need to work together so that the hands of Greek authorities are strengthened.
In just two days after Lagarde’s selection, a New York court releases Dominique Strauss-Kahn from house arrest thus allowing him to travel anywhere inside the United States. The decision has raised suspicion that there was conspiracy to remove Strauss-Kahn, although credible evidence was produced in support of sexual assault that the old man committed. Few days after Strauss-Kahn was nabbed by New York Police and sent to confinement, US Treasury Secretary Tim Geithner was quoted as saying "of course, I cannot comment on the case, but he is obviously not in a position to run the IMF.” The underlying message here is clear: Whatever the nature of the offence, Strauss-Kahn was/is not fit to continue leading IMF.
Everyone knows Strauss-Kahn wanted tougher regulations on banks, while he was flexible on developing countries in imposing conditionalities for IMF programs. He was committed to reforms in IMF. Presenting before the Executive Board during the selection process, Lagarde herself had appreciated the role of Strauss-Kahn and subsequently announced that she would consult with her predecessor on approach to global economic challenges. This is good, but also a challenge for Lagarde. If Strauss-Kahn was the “victim of a plot” that almost 57 percent of the French public believed as per an opinion poll, then Lagarde would also meet similar fate by following the same policies and approaches.
Last financial crisis is the testimony of the fact that global economy is highly interconnected and the policies that may suit for a country can be seriously detrimental to other countries. IMF needs to be bold enough to criticize such policies no matter how big and powerful the concerned country may be.
Lagarde would need to know the environment and boundary within which she can implement her vision successfully.
Developing and emerging countries are clamoring for a bigger say in the management of the Bretton-Woods institutions. First and foremost, among the changes they are seeking is in the way the top leadership of these institutions is selected. The challenge before Lagarde is implementing what she herself has professed: “I truly believe in an open, transparent and merit-based selection process, allowing for a large consensus to form around the incoming Managing Director.” Question then is: Will she be able to hand-over the leadership of IMF—on the expiry of her term—to a person selected through open and merti-based competition?
The latest G-20 ministerial meeting held in Gyeongju, South Korea, has made significant decisions that aim at improving governance and increasing ´voice and accountability.´ Although these decisions do not fully meet the expectations of emerging market countries, this is a significant step if implemented sincerely. By doubling the member quotas and agreeing to shift 6 percent of the quotas in favor of dynamic emerging markets and developing countries (EMDCs), the G-20 meeting has shown the right attitude. Even with this shift, the ratio of voting rights would be 54 to 46 between advanced countries and emerging market and developing countries. The latter group has been pushing for 10 percent shift while 2009 Pittsburgh Summit of G-20 countries had agreed on mere 5 percent shift.
Lagarde’s credibility will receive a boost if she can implement this before the deadline set. There is a need for another review of quotas that reflects the economic weight of member countries. Shift of the voting power balance alone will not increase EMDC´s voice. It has to be accompanied by a change in the composition of IMF’s Executive Board. The current agreement that the advanced European countries will concede two chairs in favor of EMDCs needs to be implemented at the earliest. The Board composition needs another revision and multi-country constituencies should get a better representation through the provisioning of additional alternate directors.
IMF had never been strong in disciplining the advanced countries as it has done and continues to do in the case of developing countries through a numbers of measures such as those known as Article IV Consultations and Report on Observance Standards and Codes. This is the reason why IMF remained a silent spectator in the face of the banking crisis that erupted in the United States and sent shockwaves to banks all over Europe and parts of Asia. Even today, its approach to a developed country is like that of a weak teacher talking to a brilliant student. Recently published concluding statement of the IMF after Article IV Consultations with the US authorities clearly indicates a softer tone for developed countries which is rare in cases of developing countries with or without IMF programs. The statement welcomes “limited recourse to protectionist measures,” which is quite a contrast to what the IMF preaches elsewhere.
Building on the success of concerted efforts made by advanced countries in achieving recovery from financial crisis sooner than initially expected, the G-20 Pittsburgh Summit put forward the idea of the Mutual Assessment Process (MAP). The Fund will be providing technical analysis needed to evaluate how members´ policies fit together. If Fund does not take a very critical view on the policies, then the technical analysis will not lead to a meaningful harmonization of policies. IMF will need to be taking tougher stand at times. And this is where Lagarde´s leadership will be tested.
Last financial crisis is the testimony of the fact that global economy is highly interconnected and the policies that may suit for a country can be seriously detrimental to other countries. IMF needs to be bold enough to criticize such policies no matter how big and powerful the concerned country may be.
The G-20 countries have agreed that in upcoming Cannes Summit they will endorse specific policy actions that can help correct imbalances and ensure progress towards strong, sustainable and balanced growth. As Lagarde has rightly put, "the fund belongs to no one but its 187 countries." It is incumbent upon her to ensure that the action plan that G-20 countries endorse does not, in any way, jeopardize the interests of EMDCs.
In the last three years, IMF has withdrawn its presence from different countries in the name of austerity. This is not good. Small developing countries are vulnerable to external shocks and their domestic economic policies also need an independent verification so that they produce the results that are needed to reduce poverty and achieve sustainable growth. IMF´s off-site monitoring will not help. If it has to get in through some program after an economic shock then the cost of doing so would be too high compared to what it saves by way of ill-designed austerity measure. Reconsidering IMF´s engagement with developing countries should be prioritized agenda for Lagarde.
The writer is former Finance Secretary
rameshorek@gmail.com
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