Ashima Goyal

For a non-European IMF head

ASHIMA GOYAL | Updated on August 10, 2011 Published on June 09, 2011

The next IMF chief must come from emerging economies to be able to withstand pressures and deliver the right solutions for Europe and the rest of the world. India should introspect on why it does not have a single acceptable candidate.

The new managing director of the IMF should come from an emerging market (EM). This would help the IMF to regain the credibility with EMs lost after the East Asian crisis, and help it become a truly global institution even as it is called upon to do more after the global crisis. Europe does not have a monopoly of talent. In fact, both Europe and the IMF have done badly in recent years with an IMF managing director from Europe.

Accountability for the many crises implies the next head must not be from Europe — 65 years is long enough to monopolise the post. Appointing a well-qualified candidate from an EM would show the West is serious about reforming the global financial architecture. The world has changed and choices made today must reflect current economic realities.

IN EUROPE'S INTERESTS

The argument that Europe is in a bad shape, so the appointment of a European IMF Managing Director who understands it is essential for global stability is flawed.

Europe brewed its current mess with a European at the helm in the IMF, and a new incumbent with similar perspectives may allow problems to fester —take the easy way in the short-term and create problems for the long term.

The post-crisis plight of the Commonwealth of Independent States (CIS) and Central and Eastern European (CEE) countries at the periphery of Europe illustrates this process.

The IMF was involved in the region since 1990s with its basic advice to decentralise, stabilise and restructure. Progress reports were glowing. But credit from European banks expanded, and current account deficits rose steeply.

Banks ignored currency risk as the countries were slated to join the EU. This was obvious in 2007 but there was no action. Prevention is a thousand times better than cure; it is puzzling why the dog did not bark as risks built up.

As these banks got into trouble and home countries were not willing to extend their bank rescue packages to the periphery, the IMF moved very fast. It redesigned its lending, offering context-sensitive, timely, macro-critical, and minimum conditionality loans, while avoiding large depreciation because of international debt and potential balance-sheet effects. But cynics said the speed and the revamped conditionalities were because of West European banks involved.

Did both the initial neglect of risks and the soft conditionalities after the crisis have something to do with signals from top management?

Adjustments have not really corrected underlying imbalances in Europe. The next MD must come from a neutral country to be able to withstand pressures and deliver appropriate corrective medicine. This is in Europe's own long-term interests.

EMERGING MARKET CONSENSUS

But Europe has rallied behind a consensus candidate who is already winging around the world to gather support, while EMs have not even announced a candidate. The last date for this is the June 10. If EMs are unable to come to a consensus, Europe will be able to push through its candidate. The view of many commentators that EMs are inherently divided is not correct. It is only that Europe has years of practice at reaching a consensus on this issue.

EMs must show they are quick learners and announce a consensus candidate before the deadline. If the US supports an EM candidate, it would give a strong boost to global cooperation, and help resolve many sticky international issues. For example, EMs may be more willing to allow greater exchange rate flexibility and reduce reserve accumulation if they have more ownership in the international monetary system.

The names of many eminently qualified EM candidates are floating around. One with a lot of support is Singapore's Minister, a Harvard educated ethnic Indian, Mr Tharman Shanmugaratnam. Coming from a small country equally distant from Asian rivalries and from the Western sphere of influence increases his acceptability. Talented candidates are not restricted to Europe. Not having its own candidate should not prevent India from backing a suitable EM candidate.

INDIA'S POSITION

There are those who argue that India must be at the head of the international table now after so long in the wilderness. But the latter is not an automatic qualification. India should introspect why it does not have even one acceptable candidate. The required expertise and international exposure tends to be limited in the country. A small elite group promotes only itself; younger people are not given responsibility.

As India's economic power rises and it becomes more visible on the international stage, it has to prepare itself for opportunities that will arise. Rotation is a facet of the Indian political-bureaucratic system that prevents development of in-depth expertise. Rarely does anyone stay more than three years in a particular job. Systematically involving domain experts as consultants, giving them some long-term association with the government and exposure to policy-making, may help build a range of qualified future candidates.

(The author is Professor of Economics. IGIDR, Mumbai. >[email protected])

Published on June 09, 2011
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