IMF scandal: Meet the man who takes over the Fund

With IMF managing director Dominique Strauss-Kahn under arrest in New York on sexual assault charges, the Fund announced that the French politician’s deputy, American John Lipsky, would take over day-to-day operations. He is scheduled to brief the IMF board on developments this afternoon. Strauss-Kahn was widely expected to depart this summer to run for the French presidency, but the arrest has robbed the Fund of an orderly process for selecting a new director. 

Lipsky’s tenure at the top may last only as long as it takes for a consensus candidate to emerge. Indeed last week, he had announced his intention to step down in August, when his term as principal deputy is scheduled to end. That exit will likely be postponed. Lipsky steps in with a wealth of experience–and a profile very different from that of the charismatic and free-wheeling Strauss-Kahn.

Lipsky was a banker for most of his career, and he still looks the part. He’s tall and lean, sports a mustache that curls slightly, and favors pinstripes. For years, he worked at Salomon Brothers and J.P. Morgan, although he also served a stint as a junior official at the Fund in the 1980s.  He’s a PhD. economist and talks like one.  Within the first few moments of an interview he granted me earlier this year, he distinguished between Pareto superiority and Pareto optimality.

Since 2006, Lipsky has been the second-ranking official at the Fund, a position which has placed him at the epicenter of the financial crisis and its aftermath. Lipsky arrived at the Fund shortly before Strauss-Kahn was selected as managing director (the top IMF post has always gone to a European), and their styles could scarcely be more different. Strauss-Kahn is a politician who speaks off-the-cuff and in layman’s terms. For all his personal travils, which predate this latest charge, he has been widely seen as one of the most politically savvy directors in the Fund’s history.  Lipsky, by contrast, is an economist and a technocrat whose utterances are almost invariably cautious and precise. No one would characterize him as a politician.

That technocratic style has often been an asset, and may be critical as Lipsky tries to steer the Fund through one of its more difficult moments. In Washington and around the world, Lipsky has often led delicate negotiations between the Fund and those countries seeking its resources, either in the form of loans to address emergency shortfalls or stand-by arrangements to help reassure international markets.  Just this month, he announced a new credit line for Colombia, tamped down rumors that Greece might default on its debt, and warned Tanzania about the dangers of inflation.

In theory, Lipsky’s position as principal deputy could have been filled by any qualified person from any country. According to recent custom, however, the IMF’s number 2 has always been an American. Lipsky’s predecessor was Anne Krueger, an academic economist who has since returned to the academy. Before her came another American academic, Stanley Fischer (oddly, Fischer has since taken up Israeli citizenship and become head of Israel’s central bank).

Lipsky took the IMF job in September 2006, with the backing of senior Bush administration Treasury Department officials. "These people tend to be nominated by the United States government," says former U.S. Treasury Department official Edwin Truman. But the Stanford-educated economist has no real political profile and does not think of himself as a political appointee. Instead, he sees himself as an international civil servant who works only on behalf of the institution:

I’ve felt strongly for a long time about the need for multilateral collaboration and cooperation. That’s why I joined Fund right out of graduate school. If you believe that something is important, you have to decide whether you’re going to make it happen or whether you‘re just going to try to have an opinion. For me, this was easy; I believe in the mission of the Fund and the goals of the Fund.

Lipsky’s doctorate in economics and apolitical profile mirrored the background of his predecessors, but he does add something to the mix: time in the private-sector. Experience in the banking world is valuable, Lipsky told me, in an institution that is still struggling to understand the international capital markets and their effect on financial stability. Indeed, a recent internal examination of the Fund’s performance in the run-up to the financial crisis criticized the staff for having inadequate financial-sector expertise. Lipsky believes the Fund has come a long way on that front since the crisis began. Simon Johnson, a former research director at the Fund,  sees Lipsky as someone who understands financial markets without being "cognitively captured" by Wall Street:

He has a lot of insight into markets and had good intuition and good contacts. Particularly because this crisis turned out to be so financial-sector centered, and because I expect future crises will be, you need somebody who understands this stuff. He had the right mix of skills for that moment.

If better understanding the changing world of international finance has been a key challenge for the institution, so too is simply representing the world. Although the Fund was born at the end of World War II, it only became global when the Cold War ended. Russia and the former Soviet bloc countries–who had stayed away from the market-oriented institution–joined in the early 1990s. In all, 187 countries are now Fund members, leaving just a smattering of countries, including North Korea and Cuba, on the outside.

The post-Cold War move toward near-universal membership was a major step for an institution designed to safeguard the world’s economy. Adjusting to shifting patterns in international economic growth has been much more complicated. Leaders in emerging economies including China, Brazil and India have often complained that they don’t have enough influence on the IMF’s executive board or with its senior staff.  Last year, IMF members reached a new agreement on voting shares that will take effect next year. Lipsky told me that the changes will bolster the organization’s legitimacy:

Our ten top shareholders will be the US, Japan, the four large European countries, and the BRICs. That sounds pretty good–it sounds pretty legitimate to me. I can hardly think of a substitution that you could make among that top ten and feel like you had a more legitimate or representative institution.

That legitimacy that Lipsky touted is now under threat from an unexpected quarter. Strauss-Kahn’s alleged crime may throw unwanted light on the usually quiet upper management of the Fund. Those critics who have long charged that the Fund is arrogant and unaccountable will no doubt have new energy (particularly if Strauss-Kahn ends up deploying diplomatic immunity). As discussions begin on a new permanent managing-director, the scandal may embolden those who argue that the time for a non-European managing director has come. Lipsky could find himself squarely in the middle of one of the fund’s most consequential leadership contests.  

Ultimately, Strauss-Kahn’s legal problems will probably have little impact on the immediate substantive work of the fund. But the leadership crisis occurs at a moment when there are myriad critical decisions pending. Strauss-Kahn was scheduled to meet this week with European policymakers to discuss the troubled EU-IMF bailout of Greece. The details of Portugal’s own bailout are still being negotiated. Pakistan is the midst of difficult negotiations with the fund about a stalled loan package. And Egypt’s new government is negotiating its own assistance package.

More broadly, the fund faces  tough questions about its lending practices as pro-democracy uprisings continue across the Arab world.  Those uprisings exploded shortly after my interview with Lipsky, and I asked him later about IMF lending to countries that are not democratic or only superficially so. That point was underlined dramatically during the IMF’s April meetings when Egyptian activist Wael Ghonim essentially accused the international financial institutions of being complicit in propping up the Mubarak regime. A feisty exchange between Strauss-Kahn and Ghonim ensued. Lipsky believes the debate was a sign of vigor and transparency. "Don’t forget that Wael Ghonim was speaking on a panel with Managing Director Strauss-Kahn that was organized together with Al Jazeera TV. To me that means we’re open and we listen to important voices in the world." On the substance of the dispute, Lipsky insists that safeguarding economic stability means dealing with governments as they are:

We have 187 member countries, each with their own political system. The IMF has a mandate – indeed an obligation – to work with each member as long as their government is internationally recognized to promote macroeconomic stability, growth, and employment creation.

Lipsky is convinced that this year’s annual meetings contributed to those goals of macroeconomic stability and he was heartened by "the sense of progress on taking a cooperative multilateral approach towards the various challenges that we face." Lipsky naturally speaks in the language of economics, but at heart he appears to be animated as much by a faith in the possibilities of effective cooperation as by empirics. History is full of instances in which states failed to cooperate effectively, even when it was in their interest to do so. But Lipsky is not daunted by the past. He simply sees no reason why countries–even big, powerful countries with very different economies–cannot come together to reach mutually beneficial agreements:

Isn’t it plausible that if everyone sat around the table and agreed on a coherent basis how everyone would set their policy that the outcomes would be Pareto superior? If you believe that, then the incentive for making it work is clear. It’s in your interest.

As the Strauss-Kahn era abruptly ends, the Fund may find itself fortunate to have someone with Lipsky’s combination of technocratic skill and simple faith in the power of multilateralism.