The IMF election. Time for a change

Oscar Ugarteche

28/05/2011

Opinión

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Since IFIs were created in 1944, it has been commonsense that the IBRD was led by an American and the IMF by a European. This unsigned agreement was a clubby arrangement by the then World leaders. Nevertheless, since the 1990s a new era is in the making. Highly indebted rich countries are today’s new problem economies. Emerging countries have become fast growing and stagnation seems to be the sign of the times for the richest ones. Suddenly the debt problems of developing countries yesteryear have come home to roost. From Japan to France, from the US and Great Britain to Belgium and the likes, the debt problem is a feature of the wealthiest countries and the international financial architecture to deal with these problems does not exist. Regional monetary stabilization funds have not been as swift and amiable as might have been suspected either in Asia or Europe. The IMF has been called on occasion to present conditions for emergency loans granted mostly by either the ECB or the European Commission with the Fund in the back seat in terms of resources.

Part of the problem is that the World economic structure is starting to shift. A new group of seven economies reflect 84% of the total GDP of the G7. These are China, Russia, India, Indonesia, Singapore, Korea, Brazil which also have four times the level of reserves, three times the expected growth rate, less than half the public debt, and a per capita income on average half the richest countries. According to IMF projections, by the end of the second decade of the XXIst century there will only be one European country in the list of seven largest economies: Germany. The US will also remain possibly as the second largest economy, and the other five will be mostly Asian economies plus Brazil. With these projections the issue of the nationality of the IFIs heads is an important matter.

Another part of the problem is that IMF adjustments bring about stagnation, income concentration, and the destruction of the welfare state. IMF credibility has plummeted to the floor and confidence in the institution is very weak. For all practical purposes it was extinct in 2008 when it had laid off 1,240 officials. The crisis revived it and put it center stage in Europe.

On the other hand, after the end of colonialism, issues of democracy have come to the fore. Transparency and representativity are important. Both the IMF and the World Bank are known for being opaque and for having electoral processes closer to that of religious orders than to open democratic institutions. Beliefs and nationality are more important than anything.

The issue is that the IMF is at the center of a global debate on reforms and that inside the institution these were led by Strauss Kahn. It seems the French Government leads the way for some IMF reforms and for some changes in the international financial architecture. In that context, the French Finance Minister has a very important role. Lagarde is directly related to the concept of the Stiglitz Commission as the Commission on the measurement of economic performance and social progress is known, on French government's initiative. This is different from the Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System where they also had some bearing. France also owns the largest absolute public debt and could face a similar problem as that which has already emerged elsewhere when European interest rates rise.

Several candidates have emerged to replace DSK. One in particular has been pushed. Dr Carstens, Governor of the Bank of Mexico, ex finance minister of Mexico and former number three person at the Fund. Dr Carstens is far removed from the discussion on reforms at the Fund or in the international financial architecture. Instead he is recognized for having taken Mexico into a negative 6.5% GDP growth in 2009, the largest in Latin America and one of the largest in the world. He is also known for having rejected several Nobel prize winners advise on countercyclical policies, among them Stiglitz. Carstens is a true believer in prociclycal policies.

When the IMF started the debate on capital controls in order to prevent the propagation of the financial crisis if capital flow reversals occurred, the position he defended was to keep the markets perfectly opened but have access to the flexible credit line of the IMF so that a run in the currency will not erode the international reserves base. Carstens is the candidate of Mexico and could be the candidate for North America. He is not very likely to be a candidate for the other large Latin American emerging economies as Mexico is perceived as being North America and always taking sides with the US. End April, President Calderon in a visit to Lima said the Arch of the Pacific agreement that includes Mexico, Colombia, Peru and Chile, was created in order to counterbalance Brazil’s weight in the region.

Can the IMF become a democratic institution and reflect the changed world power structure? Will the election of the new Executive director allow for someone who can lead reforms inside the institution that may among other things veer away from University of Chicago thinking on economic policy recommendations? Will the new IMF executive director be able to lead reforms in the international reserves system? Is it reasonable that this new executive director represent a highly indebted rich country instead of a solid growth economy? Can the IMF stop being a North South institution and return to its multilateral sense? It is time for a change.

Mexico City, May 29, 2011

- Oscar Ugarteche, Senior researcher at the Instituto de Investigaciones Económicas UNAM and Professor of International Finance at the Faculty of Economics UNAM

https://www.alainet.org/es/node/150021