NEW YORK ― Sooner than expected, the International Monetary Fund will have a new managing director. For more than a decade, I have criticized the fund’s governance, symbolized by the way its leader is chosen. By gentlemen’s agreement among the majority shareholders ― the G8 ― the managing director is to be a European, with Americans in the number two post and at the head of the World Bank.
The Europeans typically picked their nominee behind the scenes, as did the Americans, after only cursory consultation with developing countries. The outcome, however, was often not good for the IMF, the World Bank, or the world.
Most notorious was the appointment of Paul Wolfowitz, one of the main architects of the Iraq War, to lead the World Bank. His judgments there were no better than those that got the United States involved in that disastrous adventure. Having placed fighting corruption at the top of the bank’s agenda, he left in the middle of his term, accused of favoritism.
Finally, as a new order seemed to emerge in the aftermath of the U.S.-made Great Recession, the G20 agreed (or so it was thought) that the next IMF head would be chosen in an open and transparent manner. The presumption was that the outcome of such a process almost surely would be a managing director from an emerging-market country. After all, the IMF’s main responsibility is to fight crises, most of which have been in developing countries ― more than a hundred since the disastrous policies of financial deregulation and liberalization began some 30 years ago. There were many heroes of these battles in the emerging markets.
Crises need to be carefully managed. In 1997, the mismanagement of the East Asia crisis by the IMF and the U.S. Treasury transformed downturns into recessions, and recessions into depressions. The world cannot afford to repeat that performance.
Today, the imminent crisis is in Europe, where the European Central Bank seems to be putting its own balance sheet and those of European banks ― loaded with debt from Ireland, Greece, and Portugal ― above the well-being of these countries’ citizens. This debt almost surely needs to be restructured, but, having allowed the banks to leverage themselves beyond any level of prudence and load up on toxic derivatives, the ECB is now warning against any sort of restructuring or write-down.
But it is a bit late for the ECB to describe debt restructuring as “unthinkable.” The ECB should have done some thinking before it let this state of affairs arise. Indeed, more than thinking, it should have done some regulating to prevent Europe’s banks from becoming so vulnerable.
Now the ECB needs to think about how to help everyone, not just the bankers who bought the bonds. The new thinking should put people first, and banks’ shareholders and bondholders second. Even if the shareholders and bondholders lose everything, with the right restructuring, we can still save the banks and protect taxpayers and workers.
Where the IMF’s next managing director will come down on this issue ― and on whether fiscal salvation is to be achieved through austerity, with costs borne by ordinary citizens, even as bankers get only a mild slap on the wrist ― is critically important, but hard to predict. Despite the failure of the IMF’s strategy in East Asia, Latin America, and elsewhere, it still has adherents, even within the emerging markets.
The leadership contest has turned out differently from what many had expected. Some of the most qualified candidates (in both developed and developing countries) have not received the support of their own governments that the political process seems to require. Other qualified people from emerging markets have been reluctant to put their hats into the ring ― it is a brutal job, with a travel schedule that requires physical stamina to match wisdom and experience.
Much as I would like to see someone from the emerging markets and the developing world head the IMF, the first priority is to choose a leader with the requisite skills, commitments and understandings in an open and transparent process, someone who will continue along the reform path on which the fund has embarked.
Realpolitik might mean that there will be senior people from both China and the U.S. in the top management team, but the presumption that the number two position should be filled by an American also has to go.
Whatever the outcome, the IMF, the World Bank, and the international community need to reaffirm their commitment to an open and transparent process ― and ask how that process can be improved. For example, rather than nominations from governments, which often are reluctant to support excellent candidates from opposition parties, an international nominating committee could put forward names. Similarly, changes in voting procedures (public voting by countries, rather than through constituencies, or a requirement that candidates win the support of a majority of developing and emerging countries) could persuade more emerging-market officials to put their names forward.
What we are seeing now ― open campaigning, as opposed to selection behind closed doors ― seems to be a move in the right direction. But one hopes that campaign promises won’t tie the new leader’s hands, as so often happens in electoral politics. Simplistic ideologies got the world into the mess in which it now finds itself, and simplistic prescriptions (even of the “tough-love austerity” form) will only compound the problems.
One of the leading candidates to be the IMF’s next managing director has turned out to be a Frenchwoman, Christine Lagarde, who, as France’s finance minister, helped lead her country through the Great Recession. She has been an outspoken advocate of financial-sector reforms, and has won the respect of all of those with whom she has worked.
Politics is not always kind to good candidates. The world should be thankful that there is at least one. Where she was born should not be an impediment to her prospects.
By Joseph E. Stiglitz
Joseph E. Stiglitz is a professor at Columbia University, a Nobel laureate in economics, and the author of “Freefall: Free Markets and the Sinking of the Global Economy.” ― Ed.
(Project Syndicate)