Lagarde’s To-Do List
What should Christine Lagarde do on Day 1 as managing director of the IMF? Five experts weigh in.
- Desmond Lachman: Cut Greece loose
- Paul Blustein: Take an oath of objectivity
- James Raymond Vreeland: Let regional organizations do the hard work
- Padma Desai: Sharpen the Fund’s economic analysis
- Raymond C. Offenheiser: Give the developing world a voice
Cut Greece loose
It is too late to advise Christine Lagarde to reconsider taking on the job of IMF managing director at what is likely to prove to be the most challenging period in that organization’s 65-year history. There’s still time, however, for her to avoid taking ownership of the terrible mess her predecessor, Dominique Strauss-Kahn, created for the fund with his ill-considered bailout operations for Greece, Ireland, and Portugal. Indeed, it would appear that Lagarde’s interests and those of the global economy would both be served best if she were to take a fresh look at the IMF’s failed policy approach to the eurozone sovereign debt crisis.
Not to put a fine point on it, but the IMF-EU’s "no default and no exit from the euro" approach for the European periphery is not working. The IMF and the European Union have designed a straitjacket of brutal austerity fiscal measures that are producing deep recessions in those countries, which in turn are undermining their tax bases and sapping their political will to stay the adjustment course.
The current program makes no sense. Although it is patently clear that the austerity medicine is not working in Greece, the IMF and EU are about to double the dose with their latest Greek bailout package. The fund is already applying the same failed recipe to Ireland and Portugal.
The policy options Lagarde faces on assuming office could hardly be less appealing. Continuing the IMF’s failed policy prescription of sustained austerity without default or devaluation is all too likely to end in tears for everyone involved. It is also all too likely to compound the European sovereign debt crisis and blacken the IMF’s reputation across Europe, in much the same way as occurred in Asia in the late 1990s. Yet initiating a course correction in IMF policy is all too likely to trigger a crisis in Europe’s banking system that would make the fund the target of international criticism.
If well-handled, however, the latter approach might at least allow for an orderly restructuring of the European periphery’s debt, and an orderly exit of those countries from their use of the euro currency. Risky as that strategy might be for the IMF, it is the one Lagarde should opt for if the world is to be spared a second Lehman Brothers-style banking crisis, this time in the heart of Europe.
Desmond Lachman is a resident fellow at the American Enterprise Institute.
Take an oath of objectivity
"I, Christine Lagarde, solemnly swear that I will neither seek nor accept any public office — elected or appointed — in France, or in any European agency or institution, for a period of five years after leaving my post as managing director of the IMF."
Issuing an oath of that nature should be the first order of business for Lagarde. She comes to the International Monetary Fund as the chosen candidate of her fellow European policymakers, just like all of her predecessors, under the selection system that has prevailed since the IMF’s establishment. Anachronistic as that system is, it is particularly pernicious in Lagarde’s case because of the clear conflict of interest presented by the crisis in the eurozone. The European politicians who anointed her have enormous stakes in seeing the crisis resolved in ways that benefit them politically, whereas the IMF’s task is to promote a credible approach that will resolve the crisis sustainably. It is all too easy to imagine how these interests will diverge as the crisis develops; arguably, they already did when Dominique Strauss-Kahn was heading the IMF while simultaneously planning to run for president of France.
The question of whether Greece’s debts should be restructured is just one case in point. Europe’s power brokers quailed at the prospect that the losses inflicted on their banks would require them to pour more taxpayer money into their financial systems, and they desperately scrambled for solutions that would defer the pain, however inevitable it may be. Is that the best in the long term for Greece, for Europe, for the world? I don’t think so, but regardless of the pros and cons of that particular argument, the point is that the IMF needs to show that its policies are as free from short-term political considerations as possible. Its most important asset is not its money but its credibility, and if it is perceived by financial markets as little more than Europe’s tool, its effectiveness in restoring confidence will be severely curtailed.
Lagarde should do everything in her power to eliminate doubts about where her loyalties lie. When Europe united behind her candidacy, I argued that her selection would be a travesty. I haven’t changed my mind, but at the very least she should forswear the ambition to hold any office for which she would depend on the support of European leaders or voters. She may be morally obliged to take steps that will make her as unpopular in Europe as previous IMF chiefs have been in places like Brazil and South Korea. She must show that she is prepared to do so if necessary.
Paul Blustein is a nonresident fellow with the Brookings Institution and a senior visiting fellow with the Centre for International Governance Innovation.
Let regional organizations do the hard work
Christine Lagarde has a lot on her plate, with Greece as the most pressing point on the agenda. But she should not overlook the issues of political representation that surrounded her own election bid.
Many IMF member states are openly calling for a non-European to lead the fund for the first time in its history. This follows a recent reform to IMF governance in which some vote shares finally shifted from Western Europe to emerging-market countries like China, India, and Brazil. The reform was necessary, as power on the executive board no longer reflected global economic realities.
At the same time, however, Western governments have to think about domestic politics. Consider the United States: If it gives up too much power, isolationist forces in Congress have a good excuse to say "no" the next time the president asks for an increase in IMF contributions. With that in mind, small Western European countries gave up the most votes in the last round of reforms. But these countries, too, have domestic politics to consider. The Swiss, for example, would never have joined the IMF without a seat on the executive board. If they fail to retain their seat, they may be less inclined to support the institution.
Power at the IMF is on a tightrope. It used to make sense for the United States to provide the lion’s share of resources and receive commensurate political control. As emerging markets continue to grow, however, they will demand more voting power. Eventually, we will reach an impasse where Western governments will not have the domestic political capital to assent to the changes demanded by the developing world.
That development may be inevitable, but it does not mean that we give up on global cooperation. The power asymmetries that allowed the IMF to function in previous decades — in which the most powerful actors assumed responsibility for providing the public good — have diminished on the global level, but they still persist in regions. The IMF should therefore embrace an increasing role for regional financial institutions, recognizing that the political will to provide liquidity in future crises will come from the regional hegemons with the most at stake. For example, the United States led in Mexico’s "Tequila Crisis" in the early 1990s, while Japan led in the East Asian financial crisis of the late 1990s, and Germany leads in the current eurozone crisis.
In this multipolar world, the IMF still has an important role to play: namely, that of the bad guy. Regional financial institutions will want to avoid the political backlash of imposing tough conditionality on their neighbors. To escape this, Asia’s regional version of the IMF (the Chiang Mai Initiative Multilateralization) has explicitly tied its lending to IMF conditionality, and the IMF’s main role in the European debt crisis is to enforce policy conditions.
As U.S. financial power declines, so will the power of the global institutions it set up at the end of World War II. Recognizing the decentralization of power, Lagarde can help the IMF to be more effective by cultivating regional coordination. The locus of global financial power is shifting, and the IMF should adapt.
James Raymond Vreeland is an associate professor of international political economy at Georgetown University. This commentary was adapted from his remarks delivered at the Bank of Korea international conference on May 26 and 27, 2011, in Seoul.
Sharpen the Fund’s economic analysis
Christine Lagarde’s most pressing concern will no doubt be the release of the next tranche of IMF funding to Greece. But she must not delay in developing a decisive agenda for resolving the long-term issues that threaten the IMF — issues that went ignored by her predecessors.
First, there is the matter of internal IMF politics. The fund can no longer postpone giving emerging countries a greater role in decision-making. Sooner, rather than later, Europe should relinquish its privileged position in selecting the managing director. Lagarde should set up a credible expert group to devise a transparent and competitive process by which her successor can be chosen. This time, with Mexico’s Agustín Carstens challenging Lagarde for the job, the contest for the top post was more competitive than usual, to the benefit of all. But the distribution of power within the IMF is still far too heavily tilted toward the West.
On substantive economic issues, I would stress two in particular.
The IMF’s normal function is to provide short-term assistance to member countries in distress. But it has never undertaken true systematic taxonomic analyses of their problems and of the characteristics and objectives these countries have: Is the applicant’s payments difficulty temporary or permanent? Is the underlying difficulty monetary or real? Is the country highly indebted, or is the current deficit free from a debt overhang?
Ideally, the IMF would not only be aware of these differences, but the terms of its assistance would be sensitive to them. This is currently not the case. For example, the late-1990s East Asian crisis was in the context of "good fundamentals," while the Latin American crises reflected "bad fundamentals"; and yet the conditionality applied by the IMF to each situation was very similar. Lagarde should develop ways to ensure a better match between the fund’s proposed programs for specific countries and the actual economic situations there.
Next, Lagarde should endorse and highlight the important work being done by Olivier Blanchard, the IMF’s chief economist, on international capital flows. Many of the world’s pending problems, Blanchard has shown, have to do with excess inflows of money into emerging-market economies spurred by the U.S. Federal Reserve’s quantitative easing program. This is fundamentally different from the capital flow problems that plagued East Asia a decade earlier. The IMF should be at the forefront of dealing with this new international problem, but it has yet to fully reckon with it.
Padma Desai is the Gladys and Roland Harriman professor of comparative economic systems at Columbia University and the author of Financial Crisis, Contagion, and Containment: From Asia to Argentina and From Financial Crisis to Global Recovery.
Give the developing world a voice
For all the talk of the IMF bailing out the eurozone, let’s not forget that there are still many developing countries that depend on its assistance — and that the conditions the fund attaches to its loans sometimes exacerbate poverty and social inequality in these fragile places. Europe now knows all too well why all recipient countries want to have a say in IMF policies and decisions that so greatly affect them. So, in her new role as managing director, Christine Lagarde should make sure that they do.
First, she will decide what to do with the nearly $3 billion the IMF unexpectedly received from the sale of its gold reserves last year. This money must be directed to where it is most needed and where it will have the most impact. That means channeling the excess profits to poor and vulnerable citizens of developing countries — meaning, not to Europe or back into savings.
Needless to say, the vulnerable citizens of developing countries don’t get a say at the IMF board meetings. Rightly so, there is deep concern that European governments are quietly moving to bury the surplus funds in the IMF’s books, so that they can maintain disproportionate power over what is done with it.
This is precisely why Lagarde must accelerate governance reform of the IMF and act to loosen Europe’s stranglehold over the IMF board of directors. While the IMF board agreed last year to give emerging and developing economies more of a voice in the institution, the 2.8 percent gain in quota share was simply not good enough. The continued unwillingness of European governments to reduce their overwhelming presence on the IMF board is a problem, and the disappointing process to replace Dominique Strauss-Kahn as managing director has further damaged the IMF’s credibility. There was talk of openness, but everyone realized that Mexico’s Agustín Carstens was simply a token candidate. The decision to appoint Lagarde was ultimately agreed to in Paris and Washington before the candidates were ever announced.
U.S. President Barack Obama’s administration could have stepped up and welcomed emerging powers taking a leadership role in the IMF, as it has done in encouraging the G-20 process, but it chose instead to stay quiet.
Allowing emerging markets a say that accords with their rising global influence will only benefit the institution. If the United States and the European Union continue to hold on to power through structures that reflect an obsolete economic and political world order, rising powers will inevitably turn away toward institutions where they do have a voice.
Raymond C. Offenheiser is the president of Oxfam America.