French Finance Minister Christine Lagarde, now a formal candidate to become the International Monetary Fund’s next chief, enjoys decisive support and may well get the post. The chances of any non-European vaulting ahead of her were always remote, given that IMF voting power is tilted heavily in Europe’s favor. For the good of the fund, the next IMF boss should pledge to eliminate this inequity.
The emerging markets are not without leverage. They can use their increasingly powerful voice to demand that this election be the start of a transition away from Europe and toward Asia, Latin America and even Africa.
In return for one more Euro-centric election, IMF leaders should agree to accelerate voting-rights changes now under way, so that future elections are based on worldwide searches for the best candidate.
Willingness to back such changes would justify a full five-year term for the next leader. Otherwise, as Brazil is smartly arguing, the new chief’s term of office should last only through December, 2012. That’s when the tenure of Dominique Strauss-Kahn, the former managing director awaiting trial on sexual-assault charges, would have ended.
To see what’s wrong with the electoral math, consider Belgium and Brazil. Belgium is the world’s 20th largest economy, with a 1.86 percent voting share in the IMF. Brazil is a vastly larger and more populous nation, ranked in the world’s top 10 economies, with triple Belgium’s output. At the IMF, however, Brazil is the weakling with just 1.72 percent of the vote.
China, the world’s second largest economy, ranks sixth in IMF voting power, behind the U.S., Japan, Germany, France and Britain. The IMF has been gradually realigning voting shares since 2006, and China is due to rise to No. 3 in voting power next year. That still lags economic reality.
The distortions date back to the 1940s when the developed world of Europe and the U.S. had most of the world’s cash, know-how and leadership. Voting rights were skewed accordingly. Under a gentleman’s agreement among nations, the U.S. claimed the top job at the World Bank, which provides development aid, while Europe took the IMF, with its emphasis on government rescue loans and austerity plans.
Now, the notion of permanent European or U.S. leadership at either agency seems antiquated. When France’s Strauss-Kahn resigned May 18 after his arrest in New York, economists identified finance experts in Singapore, Mexico, India and South Africa who could become the IMF’s next chief. Well-qualified contenders abound.
Picking Lagarde keeps a well-connected European in charge of the half-finished work of resolving Greece’s debt woes. Even if second-guessers think the IMF should have treated Greece more sternly last year, a radical switch in strategy now risks chaos. But changing fortunes demand an IMF that transcends its European past.
Some $3 trillion of currency reserves, 31% of the global total, is held by China, according to Bloomberg News. Former IMF borrowers such as South Korea and Chile now sport single-A or double-A credit ratings. Singapore has a triple-A grade.
By contrast, debt troubles in Europe have touched off a flurry of ratings cuts and IMF rescue loans. Meanwhile, countries such as Brazil, India, Mexico, Singapore and South Africa are producing technocrats just as astute as their counterparts in European finance ministries. The IMF itself has trained an impressive cadre of international economists from non-European countries.
As leading non-European countries gain voting strength, they will need to provide more of the IMF’s capital. They can easily afford to do so. In fact, owning IMF shares generally has been a good investment. This new prominence will also require the emerging economies to recognize that with power comes responsibility: It will fall to them to look beyond their immediate self-interest and help resolve future financial crises.
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