In contrast to the circus atmosphere that surrounded the World Bank presidency, a surprise handover of the reins at the International Monetary Fund (IMF) should prove to be a quiet affair. It will be conducted mostly out of the media spotlight and by the prevailing tradition, meaning that another European male will govern an institution that because of its checkered past is facing serious questions about its future. If the United States and Europe continue to throw away chances for reform, the IMF will become even more marginalized.
In the wake of the Wolfowitz/Zoellick debacle, most are now aware of how power at the World Bank and the IMF is divided up. The United States appoints the president of the Bank while Europe gets the managing director of the IMF. Robert Zoellick’s coronation in July has made Europeans even more reluctant to give up their own spoils. It is now all but certain that French socialist Dominique Strauss-Kahn will replace Rodrigo de Rato, a former Spanish finance minister whose surprise resignation as IMF managing director was announced at the end of June and goes into effect at the IMF and World Bank’s annual meetings in October.
Lacking a juicy scandal that involves money and sex, the media will no more than blink. The IMF, a sister institution of the World Bank, has always kept quieter than its bigger, brasher sibling across 19th Avenue in Washington, DC. Perhaps the furor over Wolfowitz exhausted the media and civil society alike, who mostly seem unfazed by the selection of yet another leader by a 60-year-old “gentleman’s agreement.”
Developing countries, on the other hand, are definitely taking notice of the IMF’s leadership selection process. Given the carve up of votes at the Fund, they have no power to prevent Strauss-Kahn from taking the post, as the United States has already offered its unconditional support for any “suitable” candidate with European backing. Together the IMF executive directors from North America and Europe wield 56% of the voting power on the board. Adding in the Japanese means there is no question of anyone challenging the process. However, the continued resistance to change at the IMF, in terms of policy, voting rights, and leadership has led any developing country that can, to walk away from the Fund.
After its perceived and real failures in Asia, Argentina, and Russia in the late 1990s and the early part of this decade, few countries want to borrow from the IMF. And recent economic trends have seen the private sector and credit markets provide ample cash for many middle-income countries. Thus, Fund lending volumes are at historical lows. As the Fund pays for its expenses, such as its nearly 3,000-strong workforce, out of interest income, it is now running an operating deficit projected to pass $200 million next year. Despite having over $10 billion in reserves, the expectation of increasing deficits is rattling nerves.
The IMF’s loss of credibility stems not just from the spectacular failures of the last decade, but also from continued resentment at the Fund’s activities. The conditions the IMF places on desperate borrowers have long caused bitterness, particularly when they involved forced privatization and liberalization of public services. The evisceration of capacity in the state sector as part of structural adjustment programs in the 1980s and 1990s has left many developing country governments unable to govern effectively. And conditionality has resulted in the loss of a state's authority to govern its own economy as national economic policies are seen to be decided in Washington not in national capitals. These policies, along with the accusation of the Fund using a one-size-fits-all approach, have left the institution facing a rebellion.
The tenth anniversary of the Asian financial crisis this year brings with it the continued emergence of China as a global economic powerhouse. The Chinese – with the Koreans, Malaysians, and others from the region who are determined never to face IMF discipline again – have amassed huge foreign exchange reserves to prevent financial crisis. Latin Americans, like the Asians, are considering forming a regional institution that would supplant the IMF and may even eclipse the World Bank and the Inter-American Development Bank in size and importance to the region. These new regional institutions present serious challenges to the hegemony of the Washington-based World Bank and IMF.
The Fund has tried to right itself by proclaiming that it will focus on financial crisis prevention and global economic stability. Having another European in the driver’s seat is not going to win confidence from most developing countries. And if voting reform at the Fund, which has been under intense negotiation since early 2006, stalls as many predict, the Fund will be left without the reforms it needs to be relevant to the world today. Of course global economic conditions will not always allow so many developing countries to keep financial crises at bay, and the Fund will again find itself lending to more than just Turkey and the most impoverished countries in Africa and elsewhere. But with the loss of so many customers and dwindling credibility, the Fund may be in a tailspin from which it cannot fully recover.
The industrialized world ceased listening to the IMF more than 30 years ago. Now the Fund’s largest emerging-market members, those with the ability to avoid the IMF by accessing other sources of capital, will also break the Fund’s grip over their economic policy. While we can congratulate the Brazils and South Koreas of the world for their coming of age, let’s not forget that the world’s most impoverished countries, especially those in Africa, will continue to face the market-fundamentalist diktats of the IMF. We should not wish that on our worst enemies.
FPIF contributor Peter Chowla analyzes IMF policy for the Bretton Woods Project, a London-based watchdog of the IMF and World Bank.
