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EDITORIAL

Lagarde’s Exit, Fresh Beginning For IMF?

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In about two months from now, a new managing director will assume duties at the International Monetary Fund (IMF) as Christine Lagarde announced recently that she would be stepping down as the Fund’s managing director in September.

Lagarde tendered her resignation, which will take effect from September 12. The executive board of the fund accepted her resignation and said that it would begin a selection process promptly.

IMF executive board said her legacy of achievements has made a lasting imprint on the fund. According to them, under her guidance, the fund successfully helped its members navigate a complex and unprecedented set of challenges, including the impact of the global financial crisis and its aftershocks.

It is also instructive to note that Lagarde’s exit coincides with the 75th anniversary of the Bretton Woods conference in New Hampshire in 1944, when 44 countries founded the IMF and the World Bank as the pillars of a global financial order. Analysts have said Lagarde’s exit may be an opportunity to address the contentious issue of outdated convention that Europe appoints the head of the IMF and the United States appoints the head of the World Bank.

IMF and World Bank’s leadership has always been the fiefdom of the Europeans and Americans, a development analysts say does not reflect the rising power of emerging economies and the shifts in market activity expected over the coming decades.

As Largarde waits to be appointed as head of the European Central Bank, her replacement may be a timely opportunity to introduce an open process based on merit. IMF would need to take a second look at its shareholding system. Perhaps, the Fund is considering it seriously. The acting managing director,  David Lipton noted recently that  the Fund cannot expect to retain global reach and resources unless countries gaining in importance gain appropriately in their stay in the fund.

If Lipton’s statement means allowing countries that are emerging in the global economic circle have more stakes in the Fund, then that may challenge the quota-based IMF shareholding system which is based on economic influence, with the US having more than a 16 per cent share of voting power compared with 6.15 for Japan and 6.09 for China, the world’s second largest economy.

For IMF to remain relevant, Lagarde’s successor needs to drive adaptation to a bewildering range of challenges, from the rise of new economic powers like China and India, to financial technologies that will revolutionise payment systems, to climate change, to the emergence of new financial centres and to the risk of digital currencies. If global leaders want the IMF to achieve its mission of ensuring international financial stability, they must also do more to depoliticize the fund.

The IMF needs a managing director of the highest calibre, chosen through an open competition not evidently tainted by national politics. But that would only be the first step. The fund should also replace its politically appointed deputy managing directors with technocratic deputies, also chosen through a competitive process. And this core team should be supported by a Council in the style of the Bank of England’s Monetary Policy Council, comprising world-class economists and policy makers.

With such a decision making body at the top, the IMF, backed by its outstanding staff, could have the credibility to make tough lending decisions during crises. Such a structure would allow the IMF policy recommendations to benefit from sound economic thinking, rather than being swayed by the foreign policy and financial interests of the U.S. and Europe.

The IMF should get rid of the executive board that has, for decades, largely rubber-stamped decisions made in Washington and European capitals. Its members could retain an advisory function, and the fund’s management could periodically answer to them for its decisions – just as central bank governors’ report to national legislatures.

The world economy is entering another perilous phase. This is not the moment for another backroom deal. The IMF needs a fresh beginning. The IMF and World Bank are no longer the only potential financial backer for countries with financial assistance. China has proven to be a major investor which has altered the financial circumstances of some countries, especially on the African continent.

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