The IMF Needs More Than a New Boss
By Charles W. Calomiris, a professor at Columbia Business School and a member of the International Financial Institutions Advisory Commission.
Appointing a successor to Michel Camdessus as managing director of the International Monetary Fund promises to be a global opera bouffe with as many twists and turns as a Gilbert and Sullivan plot.
Until recently it appeared that the European favorite, Caio Koch-Weser of Germany, would win. But on Monday President Clinton announced -- to the embarrassment of his European friends -- that Mr. Koch-Weser was unacceptable. (He is therefore not expected to win an IMF straw vote Thursday.) The administration then reassured Europe that it would follow tradition and support another European. That may have come as a disappointment to America's Stanley Fischer, acting director of the IMF and a favorite among developing countries.
What does he stand for?
The specific controversy over a new managing director has blossomed into a larger debate over the IMF as a whole. Members are concerned not just with a half-century reign of European directors, but also with the insider methods that put them in office. Changing the way the IMF anoints its leadership will call for deep reforms of the entire organization.
Surely it's anachronistic to limit the leadership of the IMF to Western Europe. Shouldn't citizens of the world's second-largest economy -- that of Japan, which nominated Eisuke Sakakibara for the post -- be eligible to lead the organization? And as economist Jeffrey Sachs has argued, successful reformers in developing or transition economies might be the most promising candidates, given that they have engineered reforms on which stable emerging financial markets depend, and which the IMF should encourage.
In addition to ending this Eurocentric gentleman's agreement, some are calling for a new process for selecting the IMF's leader. The quota system -- which governs the voting percentages of IMF members -- gives developed countries effective control over IMF policies, including the selection of managing director. The U.S. alone controls 17.3% of the votes.
The IMF describes itself as a cooperative providing global public goods (financial stability, free trade and capital mobility). That rhetoric would be consistent with a more democratic means of voting for its leader -- perhaps a "one country, one vote" rule. In practice, however, the IMF is more a slush fund run for, and financed by, finance ministers from the Group of Seven industrialized countries. It's inconceivable that those paying the IMF's bills would relinquish control over its leadership.
Hence the current dilemma. The American and European finance ministers in large part pay for, and thus rule, the IMF. They wish to be bound by a gentleman's agreement that, if violated, has repercussions for other aspects of "cooperation." This might include, for example, the understanding that the U.S. controls the presidency of the World Bank.
Realistically, what can be done? With respect to the immediate problem of selecting a managing director, there is little point in debating voting rules, because there is no way around the current allocation of votes and the current list of nominees.
The best to be hoped for is a meaningful and open process of nominee selection. Candidates should be required to state clearly their visions of how to transform the IMF from a failed political slush fund into a bona fide economic mechanism. To create greater openness and accountability, those statements of intent should be made public, as should the votes of member countries for each candidate.
In the longer run, however, more fundamental reforms are needed. The right answer to the question How should we select someone with as much power as the managing director of the IMF? is that we shouldn't. The world's democracies never should have created a fund, or a managing-director position, with such vast discretionary authority in the first place.
The IMF channels vast sums of money around the globe, selectively setting and enforcing borrowing conditions as the political winds of the G-7 dictate. Its deeply flawed accounting rules and governance structure serve to obfuscate its activities and protect its management from accountability.
Most troubling of all, the IMF has become a mechanism for subverting the democratic processes of creditor and debtor nations. With respect to creditor nations, it is a means of circumventing parliamentary authority over foreign aid. In debtor nations, the IMF protects powerful oligarchs and international banks from the consequences of their own bad economic decisions. Average citizens end up paying high taxes in support of costly and counterproductive bailouts of domestic cronies and foreign bankers.
The real answer to the current dilemma of selecting a leader, then, is to reform the IMF's charter. An IMF that focuses on crisis management -- with rapid, effective liquidity assistance at a penalty rate rather than subsidized long-term conditional loans -- would be more effective, less corrupt and self-financing. It would also finally live up to its own global-public-goods rhetoric. With that transformation would come an end to the flow of slush funds from the G-7 countries, which is the main constraint blocking the democratization of IMF voting rules.
An open debate among the nominees for managing director could be a first step toward recognizing the IMF's inadequacies and rebuilding its credibility. By happy coincidence, the International Financial Institutions Advisory Commission, established by Congress last year to propose reforms to the global financial architecture, next week will release its detailed proposals for reforming the IMF, as well as the World Bank and five other multilateral organizations.
The commission's hearings have underscored the need for an effective IMF. Its report could serve as a springboard for the much-needed debate among the candidates vying for IMF leadership about its appropriate mission and governance structure.