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31 May 2011, Gateway House

The IMF: Emerging economies aren’t ready for prime time

With the post for the head of the International Monetary Fund up for grabs, the emerging market countries are yet to unite and provide a suitable candidate who receives formidable support for his or her candidature. China, however, may boldly question the status quo and step ahead.

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The race for a new managing director for the International Monetary Fund opened an opportunity for India and other emerging economies to take a vigorous stand on having a non-European candidate, demand change in the opaque selection process, and present a qualified candidate. But their slow response has all but ensured that Europe will once again get the job.

Why couldn’t their collective economic might, acknowledged and celebrated by the West, be used to forge real change? Why did they fizzle instead of sizzle? And where was India’s leadership?

The process showed once again that India comes up short when it comes to playing the high-stakes global game. Absence of a long-term strategic plan to strengthen India’s position on the world stage becomes painfully apparent with each missed opportunity. The week after May 15, when Dominque Strauss-Khan was charged with sexual assault in New York and resigned as IMF managing director, a few trial balloons were floated about Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, being a good choice. But he was quickly dismissed as he was over the age limit. India’s Finance Minister Pranab Mukherjee, when asked, gave his business-as-usual answer: “We are watching the situation.” A few days later, he offered: “We are trying to consolidate our position where we can take a view” with finance ministers of developing countries.

Sadly, India is not alone in this; the other emerging economies also have the same malaise. There has been whining in various capitals but little effort at a united front to make the valid claim that the centre of economic gravity has shifted to the emerging markets, which must be reflected in the leadership of international institutions. A few noises came in favour of Arminio Farga, a former governor of Brazil’s central bank and Trevor Manuel, a former finance minister of South Africa, from their capitals but they died soon after Latin America failed to line up behind Brazil.  Mexico’s Augustine Carstens filed his nomination but with little support from the region. It was a spectacle of disunity.

What was needed was a solid campaign with a credible candidate proposed jointly by BRICS (Brazil, Russia, India, China and South Africa), an effort that would gone a long way to ensure an honest selection process for at least the next round. Instead, rivalries and dissonance were on display. Brazil didn’t support Mexico while many South Americans were unenthusiastic about lining up behind Brazil.

Finally on May 24, the BRICS issued a statement at the IMF, calling for “a truly transparent, merit-based and competitive (selection) process,” adding that the convention of choosing the managing director on the “basis of nationality undermines the legitimacy of the Fund.” But the South, alas, is still all over the place “with as many candidates as there are countries,” says Jorge Heine, a former Chilean ambassador to India and Fellow at the Centre of International Governance Innovation in Waterloo, Canada. This despite the Asians having a legitimate claim, having lived though the Asian crisis of the nineties and learned to insulate themselves in a variety of ways from the dangers of being exposed to the strictures of the Fund, explains Heine.

But they were unable to make the play, leaving the field to a declining Europe and a barely-recovering United States who quickly jumped in with their candidates. Major and minor European countries lined up with remarkable alacrity behind Christine Lagarde, the French finance minister, as their candidate as soon the opportunity opened. German Chancellor Angela Merkel staked Europe’s claim on the job mere hours after Strauss-Khan was charged.  Merkel claimed there was a “good case” for a European to head the IMF because of the grave financial crisis in the euro zone. What she was ensuring was safety of German banks, which are vastly exposed in crisis-ridden Greece and need soft bailouts.

Lagarde, meanwhile, was off to the races. She lost no time in waging her campaign, starting with high-profile interviews to the US press and feelers to the Obama Administration – American support is a necessary condition – and continuing with a whirlwind tour of the very countries whose ambitions she will quash, if she wins. The suave lawyer-politician will rush through Brazil, some Arab countries and hopes to end up in China and India to make her case.

As Heine wrote in a column in Canada’s Star,: “When the financial difficulties were mostly in the global South, Europeans were appointed to run the IMF presumably because they knew how to manage economic affairs. Now that they have run their own economies into the ground, Europeans are once again supposed to get priority because they know Europe.” By this logic “an Asian should have headed the IMF in 2000 to deal with the aftermath of the Asian crisis rather than a German.”

And then there is China, which plays its own game. It may have signed the BRICS statement, but it clearly has other plans. China is rumoured to have already cut a deal for the number two position for its man, Zhu Min, in exchange for supporting Lagarde. Zhu, former deputy governor of the Chinese central bank, was special advisor to Strauss-Kahn. Zhu still needs US support because the deputy managing director’s position has always been held by an American and current occupant John Lipsky will retire in August.

Whether the Americans will cede the position (unlikely, especially to the Chinese), Beijing by its nimble footwork and advance planning is in a good place. Zhu already enjoys a more-equal-than-others status within the IMF as special advisor and is treated as a deputy managing director for all practical purposes.

China has systematically increased its presence in various international institutions methodically and maneuvered to get key positions. The thousands of Indians working in the same organisations are rarely corralled as a force by Indian strategists. The Chinese executive directors at the Bank and Fund meet their nationals regularly, presumably to keep each other informed. Even the Americans and British do the same. But no, not the India executive directors who see their appointments as a well-deserved rest after “toughing” it out as IAS officers.

Observers have noted the increased profile of well-educated Chinese in the World Bank, the IMF and various United Nations organisations. They are entering at all levels – junior, mid- and senior – and slowly breaking the stronghold of the Americans and Europeans in the international bureaucracy. They boldly question the status quo at board meetings and make deals to wrest space for themselves.

India has generally ignored openings for senior positions at various UN agencies as unworthy of a bid because nothing less than the secretary-general’s position is considered worth the effort. Heading the UN Food and Agricultural Organisation in Rome was a possibility a few years ago but New Delhi failed to offer a candidate even though it had US and European support. Jealousies and rivalries at home have prevented even easy pickings.

So it is once again with the opportunity at the IMF. The failure of India and others to rally together in time is even more glaring and ironic because there is a groundswell of support among opinion makers in the West for a transparent process. Many have argued against “fixing” the job while others have a problem with Lagarde being a lawyer and a politician. Raghuram Rajan, a former chief economist at the World Bank, agreed that “someone whose primary skill is political would be an unwise choice…. Perhaps the biggest risk of all is to have someone heading the Fund whose political ambitions are still alive. Here there is a real danger that decisions made by someone with substantial influence over nearly a trillion dollars of funding will be made with a view to establishing an electable record in his or her home country.”

In addition, more tha
n hundred global campaigners and groups for IMF reforms added their voice through a letter sent to the board, demanding transparency in the selection process. “We cannot afford to let traditional back-room deals install a candidate supported by only the richest countries,” the letter said. Many have cited the G-20 commitment to end the old game. Even The Economist came out against Lagarde and pointed to names from emerging economies as good candidates.

This, if anything, was unusual and heartening. Jorge Heine is also somewhat optimistic: “I see no reason for the South to give up on leading international financial institutions – these are valuable international platforms that have been monopolized for far too long by representatives of the old order. We should put an end to this, but I’m afraid it won’t happen any time soon.” But by not coming together and making a forceful case, India and other emerging economies have only showed they are not ready for the great game.

Seema Sirohi is a Washington-based journalist and analyst.

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