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IMF must choose its chiefs on merit

24 May 2011 00:12 (UTC +04:00)

Baku â€“ APA. THERE’S a vacancy at the top of the International Monetary Fund, following Dominique Strauss-Kahn’s resignation in the wake of being charged with sexual assault offences, APA reports quoting â€œThe Sydney Morning Heraldâ€.
Since the position of managing director of the IMF was created almost exactly 65 years ago, it has always been held by a European, as part of an ’’understanding’’ with the US, which has also ensured that the IMF deputy managing director and the managing director of the other ’’Bretton Woods twin’’, the World Bank, have always been Americans.
And although the first IMF managing director was a Belgian, and the next two were Swedes, for all but 12 years since 1963, a Frenchman has held the post.
Since Strauss-Kahn’s resignation last week, Europeans have been moving swiftly to ensure that this position remains their property. German Chancellor Angela Merkel has argued that ’’with serious problems with the euro, and the IMF strongly involved [in efforts to resolve Europe’s ongoing sovereign debt crisis], there is a lot in favour of a European candidate being put forward’’.
With all due respect to French Finance Minister Christine Lagarde, who seems to be emerging as the Europeans’ preferred candidate, this argument is bogus. It is not as if Europeans have been doing such a stellar job of managing their sovereign debt crisis that being a European would constitute incontrovertible evidence of the skills required to carry out that task.
The mire into which Greece has sunk is partly the result of the persistent failure of European institutions to discern the true state of Greek finances, and to insist sooner that previous Greek governments put them in order.
Even today, there are deep disagreements between the European Central Bank and European governments, including Germany’s, as to whether Greece should be permitted to ’’reschedule’’ or ’’reprofile’’ (that is, to default on part of) its outstanding debts.
And given that much of the debt owed by Greece, Ireland and Portugal is owed to European (and especially to German, French and British) banks, which might in turn need to be bailed out by their respective governments in the event of a default by Greece, Ireland or Portugal, there might even be grounds for concern that a European with political aspirations beyond his or her term as IMF managing director might be tempted to offer greater financial support to a European government in difficulty than a non-European would do.
I certainly do not recall any suggestions that it would have been good to have an Asian heading the IMF during the Asian financial crisis that took place in 1997-98, or that it would have been an advantage to have had a Latin American in charge of the IMF during any of myriad financial crises that have afflicted Latin American countries during the past 30 years.
The selection criteria outlined by the IMF’s executive board stipulate that the successful candidate will have ’’a distinguished record in economic policymaking at senior levels’’, an ’’outstanding professional background’’, ’’demonstrated the managerial and diplomatic skills needed to lead a global institution’’, ’’capable of providing strategic vision for the work of a high-quality, diverse and dedicated staff’, ’’a proven understanding â€¦ of the challenges facing the fund’s diverse membership’’, ’’a firm commitment to, and appreciation of, multilateral co-operation and â€¦ a demonstrated capacity to be objective and impartial’’, and ’’will also be an effective communicator’’.
Someone who meets all these criteria - but not the unofficial one of being a European - is the immediate past governor of the Reserve Bank, Ian Macfarlane (pictured right). He was in that position for a decade - longer than anyone else, except ’’Nugget’’ Coombs - after a career that included six years at the Organisation for Economic Co-operation and Development in Paris.
He certainly has ’’a distinguished record in economic policymaking at senior levels’’. During his decade at the top of the RBA, there was only one quarter in which the annual underlying inflation rate exceeded the top end of the 2-3 per cent target agreed between the bank and the government at the start of his term. Yet this was not achieved by sacrificing economic growth: there was only one quarter of negative growth on his watch; and the unemployment rate fell from 8.4 per cent, when he became governor, to 4.7 per cent by the time he left it. And while that record was obviously in part shaped by circumstances beyond his control or influence, his preparedness to raise interest rates when necessary (in the face of covert political pressure to refrain from doing so), and willingness to avoid doing so at other times (such as when the Australian dollar fell sharply during the Asian crisis and again during and after the ’’tech bubble’’) certainly contributed to those outcomes.
More importantly, from the standpoint of fulfilling the criteria for IMF managing director, he has had ’’hands-on’’ experience of dealing with a banking crisis, having been RBA deputy governor in the early 1990s when two state-owned banks failed, and two of the four big private banks came perilously close to a similar fate. Under his leadership, the RBA was one of few in the industrialised world (and the only one among the ’’advanced’’ members of the G20) not to have made the mistake of leaving interest rates too low for too long in the aftermath of the 2000 ’’tech wreck’’ and the terrorist attacks of September 11, 2001.
And unlike most of his peers, Macfarlane knew a ’’bubble’’ when he saw one, in the Australian housing market of 2003-04; and unlike any of them, actually did something about it - by raising interest rates (when most other central banks were still lowering them), and giving a series of explicit warnings about the dangers of excessively leveraged investment in residential property.
Macfarlane, with his then deputy Stephen Grenville, was among the first to recognise that the IMF was taking the wrong approach to dealing with the Asian crisis, that raising interest rates aggressively and tightening fiscal policy sharply (which the IMF, under its French managing director, Michel Camdessus, urged Thailand, Korea and Indonesia to do) would worsen the crisis rather than end it.
The very different approach that the IMF under Strauss-Kahn has taken to the European sovereign debt crisis has vindicated Macfarlane’s judgment.
In these pages last week, William Pesek also suggested four highly qualified Asian candidates - Haruhiko Koroda, who has been Asian Development Bank chief since 2004; Sri Mulyani Indrawati, the highly effective Indonesian finance minister from 2005-10; Malaysian central bank governor Zeti Akhtar Aziz; and deputy head of India’s Planning Commission Montek Singh Ahluwalia (who has also worked at the IMF). The Europeans and Americans need to realise that they do not run the world economy any more and that appointments should be made on merit, not nationality.