Opinion

Backroom deal would undermine confidence in IMF

(Agencies)
Updated: 2011-05-23 08:40

* Backroom deal over Lagarde would set back IMF gains

* China is third-largest IMF member country

* Global shifts make emerging markets more relevant

WASHINGTON - A backroom deal between Europe and the United States to select a new IMF chief could undermine the legitimacy of the global lender as well as a G20 commitment to give emerging economies a greater voice.

Developing powers are frustrated that Europe and the United States appear likely to decide between themselves who should head the International Monetary Fund, with French Finance Minister Christine Lagarde their probable choice.

The leadership of the IMF, which oversees global financial stability and is at the forefront of bailouts in Europe and elsewhere, was thrown open by the resignation on Wednesday of Dominique Strauss-Kahn. He is facing charges of sexual assault and has denied the allegations.

For more than six decades, a "gentleman's agreement" between Europe and Washington has guaranteed that the head of the IMF is a European and that a US national leads the World Bank, the main global poverty-fighting institution.

While Lagarde is widely respected, developing countries want to see a number of candidates from different nationalities seriously considered for the IMF leadership -- even if a European is selected in the end.

"We are trying to ensure we have a process where there is not a closed room deal," one high-ranking official from a large emerging market nation told Reuters.

In April 2009, leaders of the Group of 20 economic powers endorsed "an open, transparent and merit-based selection process," for heads of global institutions, although they could not agree that nationality should be explicitly ruled out.

The official said if the Strauss-Kahn succession process was rushed through in contravention of the G20 commitment, it would not only undermine the IMF and the legitimacy and effectiveness of whoever is chosen, but the G20 itself.

With advanced economies struggling with low growth and a financial crisis, emerging powers like China and India have become important drivers of global demand and have sought more sway at the Washington-based institutions.

After tough negotiations, in which France and Britain initially fought back, China surpassed both of those nations to become the IMF and World Bank's third-largest voting member after the United States and Japan.

The votes of other under-represented emerging market economies in the IMF were also increased, giving countries like Brazil, India, Turkey, Mexico and South Korea a greater voice. That meant emerging markets will be contributing more resources to the IMF and toward emergency loans for countries in need.

Now these nations want a fair shot at the top job.

WASHINGTON IN A BIND

The Obama administration finds itself in somewhat of a bind. If it were to throw its weight behind an emerging market candidate, it would have to be willing to give up its captaincy of the World Bank, which could anger the US lawmakers who control contributions to the institutions.

US Treasury Secretary Timothy Geithner, who as a former senior IMF official is no newcomer to the sensitivities around the issue, said on Friday that the United States was talking to emerging markets as well as advanced economies.

There has not always been agreement on candidates between the trans-Atlantic allies. In 2000, the United States objected to German finance official Caio Koch-Weser's nomination, forcing Germany to withdraw his name and nominate Horst Koehler, who served until 2004.

The IMF board, led by Egyptian Shakour Shaalan, on Friday said it hoped to conclude the selection process for a new IMF chief by June 30 and outlined a process whereby more than one candidate will be interviewed.

But there is still a widespread belief that Washington will end up backing Europe's candidate.

During previous leadership changes at the IMF, the shots were called by the smaller Group of Seven rich nations -- the United States, France, Germany, Japan, Italy, Canada and Britain -- or the Group of Eight, which includes Russia.

Since then, the G20 has superseded the G7 as the main group overseeing the global economy, giving emerging nations a stronger perceived right to claim leadership of institutions like the IMF and World Bank.

Arvind Subramanian, a senior fellow at the Peterson Institute in Washington, said it was vital that Strauss-Kahn's successor had the backing of all IMF member countries.

"If you throw up a European, you raise the question of was this truly a meritorious candidate," he said.

China uncharacteristically flexed its muscle early on last week with a call for a merit-based, transparent selection process. Brazil, South Africa and Mexico echoed that call.

Such unity was absent among emerging market economies in previous IMF leadership battles, with each region having different demands and some more willing to speak up.

Surin Pitsuwan, secretary general of the ASEAN Secretariat, an association of Southeast Asian nations including Vietnam, Indonesia, Malaysia, Singapore, Thailand and Cambodia among others, said it was time to open up the selection process.

"It's very much relevant to the times that everything should be opened up," he told Reuters during a visit to Washington on Friday.

"The G20 itself is recognition that the rest of the world should come in to a forum that would decide the fate of the global community ... so it would very nice to have someone from outside of the North in that position, which is becoming more and more important," Surin said.