Next steps for the IMF Managing Director

22 December 2016

Christine Lagarde kept her job as IMF Managing Director. On 19 December, she was convicted of negligence, though not fined, by a French special court for awarding a controversial settlement in 2008 of EUR403 million (USD636 million) to French entrepreneur Bernard Tapie from her time as French finance minister. Ms Lagarde’s conviction now risks debilitating her and the IMF. Here are therefore some suggestions for next steps for the IMF MD:

 

• Champion of multilateralism: The world has seemingly no appetite for international economic policy coordination. The message got lost that international economic problems are an international responsibility and can only be addressed effectively through international cooperation. Countries need to acknowledge that there is no conflict in pursuing national and international interests at the same time. The IMF has to show that it is best at spotting global economic problems and best at offering solutions to address them. It has been losing its convening power to address difficult situations promptly. The emergence of new regional arrangements will further weaken the IMF as a multilateral institution. The European Stability Mechanism (ESM) is the most advanced and will likely lead Europe to go it alone. This risks producing inferior regional outcomes with possible adverse effects for the rest of the world (as attested by the large external surpluses produced by the Euro Area). The MD ought to strengthen the case for multilateralism.

 

• Neutral broker: Politics have always weakened the IMF and some IMF member countries are known to have exercised heavy political pressures on the operations of the institution. The Euro Area crisis with the establishment of the Troika has institutionalised political meddling (see The IMF must quit the Troika to survive). This has eroded the IMF’s status as a neutral broker, an essential quality if it is to be trusted. The IMF needs to ensure that it is perceived as driven by technocratic considerations and that measures adopted enjoy broad ownership in the country in need and are consistent with international stability. The MD should not engage and disengage unless the IMF is in full control of the economic programme negotiations.

 

• Stigma: Countries most of the time ask for help from the IMF when everything else has failed. Hence IMF adjustment programmes often face unprecedented and extremely difficult situations and are often perceived as unduly harsh. This is not efficient. It is at least in part related to the negative stigma associated with IMF lending. Some innovation in lending conditionality may help and some progress has been made through new lending facilities. The IMF’s importance has mostly been linked to lending to systemically important countries. It is ignored largely when it does not. Ideally this should change to allow for more preventive and proactive engagement. The MD needs to promote greater balance in dialogue between creditor and debtor countries to change behaviour and perception.

 

• Financial resources: The IMF requires more financial resources to stay relevant and be effective as an international lender. Its current resources of about USD1,148 million are simply inadequate by any economic metric. More than half of those resources are now obtained through borrowing arrangements including the NAB, GAB and bilateral borrowing. The last increase of its so-called quota resources, the financial subscriptions of each member country of the IMF, was an unduly long and arduous process largely due to lack of support by some member countries. Meaningful endorsement of the IMF will have to translate into more permanent resources. The IMF’s resources need to be made of quotas to ensure alignment with the governance provisions of the institution and financial independence. The MD needs to convince member countries that it is essential for the IMF to remain financially strong.

 

• Governance: The legitimacy of the institution has been called into question for some time amid a perceived persistent bias towards large advanced economies in the conduct of the institution. This has reduced ownership in the institution. The now completed 2010 quota reform has alleviated some of those concerns by shifting voting power more towards emerging markets. It may not be enough to eliminate concerns that the new representation is adequate and more progress as has long been recognised is necessary. The MD needs to appoint more emerging markets nationals as senior staff and ensure that especially emerging markets send their best to the IMF Executive Board, the 24-member body overseeing the IMF’s day-to-day work, to strengthen their voice.

 

• Vision: The IMF lacks a vision of what it wants to be. It has diversified into many new areas mostly to attend the wishes of its membership. It also faces increasing competition from new institutions at the regional level. Yet, it has shown little leadership on issues intimately linked to its remit. The international economy has for decades been marred by large external imbalances and repeated bouts of considerable exchange market volatility. The IMF is meant to contain those. The MD should more vigorously and narrowly pursue an agenda targeting international monetary conditions.

 

• Succession: Ms. Lagarde is the fifth MD from France. Since the IMF began operations in 1946, 60 percent of the time it was headed by a French national. This seems inconsistent with the multilateral character of the institution. This has now been broadly acknowledged. The recruitment for Ms Lagarde’s successor should be open and transparent but with an understanding that he or she will not be European. The next MD should ideally be from emerging Asia. Notwithstanding, rather than leaving the succession entirely open and subject to some ad hoc nominations, the MD should start grooming potential successors now to ensure a smooth and orderly transition when her mandate ends.

The IMF matters if it can convene member countries and foster multilateral dialogue to address key international economic and financial issues. It is not enough to be invited to sit in. The IMF should place the call rather than being called. The MD needs to ensure it does.