The IMF chose the right leader the wrong way

 

Kristalina Georgieva’s reappointment as managing director of the International Monetary Fund is a welcome development, but it also highlights a major flaw in the IMF’s governance structure.

In a world reeling from debt crises, violent conflict, climate change, and the lingering effects of the Covid-19 pandemic, the fund’s importance is difficult to overstate. But to fulfil its proper role, it must be accountable to all member states, not just the powerful countries that currently wield disproportionate influence.

The reappointment process bears directly on this issue. On its website, the IMF informs readers that the executive board (where all countries are represented) may select a managing director by a majority of votes cast, though it has traditionally done so by consensus.

In fact, a long-standing agreement between the Europeans and the Americans dictates that the former decides who will lead the IMF, while the latter chooses who will lead the World Bank. (The IMF has formally adopted “an open, merit-based, and transparent process” for selecting its managing directors, but this has served merely as a quality check on the Europeans’ pick.)

It should be obvious why this arrangement is a problem. The IMF needs all countries to believe that it is acting in an even-handed manner when it makes tough decisions about whom to help, and on what terms. And though it has formal rules, the most powerful countries regularly push hard for exceptions.

The eurozone crisis underscored this conflict of interest. The IMF’s own subsequent evaluation criticised the “perfunctory manner” in which it followed its policies, and called out its decision to short-circuit the usual process by modifying its 2002 framework to grant European countries exceptional access.

The IMF’s response cannot be divorced from its European-nominated managing directors, both of whom had previously served as France’s economy and finance ministers.

As Harold James recounts in his recently published history of the crisis: “The amount of time and energy that the managing director (Dominique Strauss-Kahn and especially Christine Lagarde) personally spent on these programmes – including attending countless meetings in Brussels and other European capitals – was unprecedented in relation to the attention given to even the largest and most important (IMF) programmes in Latin America or Asia. Lagarde, unlike her predecessors, regularly attended the meetings of the European finance ministers.”

James does note that the IMF was trying to adapt to new circumstances. But from the point of view of countries beyond Europe and the US, the special treatment seemed clear to see. Until the appointment process changes, the managing director will always be open to the charge that he or she is overly responsive to European governments.

And the problems don’t end there. In addition to cutting out other countries that are equally invested in the IMF, the current process also distorts the international character of the institution’s formal governance structure.

The IMF has a carefully crafted executive board of directors who represent all its members (albeit unequally). The board is permanently based in Washington, DC (at considerable cost), so that it can guide and oversee the organisation’s mandate and work. There is no good reason why reappointments and performance evaluations shouldn’t be (genuinely) decided through this existing representative structure.

While every managing director’s performance is subject to luck and other circumstances beyond their control, an objective scorecard could be distilled to three metrics of success. The first is the degree to which a managing director has brokered agreement among all countries –working to keep the powerful engaged while restraining them to ensure that others’ interests are considered. This often means quietly organising coalitions of less powerful states.

Georgieva’s record on this front is strong. At a time when the US has called for the IMF to step back from leading on climate issues, she has persuaded many countries to permit the fund to add climate-related risks and opportunities to its monitoring of their economies.

Similarly, although wealthy countries want heavy-handed lending conditionalities (despite the IMF’s own evidence that these are unlikely to work), Georgieva has instead found new ways to lend. And, finally, in a world of intensifying geopolitical rivalry, she has worked steadfastly to keep China engaged, such as in sovereign-debt restructurings.

Second, a managing director must be effective in persuading member countries to commit resources. Here, too, Georgieva has succeeded. This past December, the IMF board of governors approved a 50% increase in quotas (meaning core funding, not special funds for specific projects).

Georgieva also previously persuaded wealthier countries to commit more resources should the institution ever need them (though donors still maintain special control over these so-called arrangements to borrow).

And during the pandemic, she secured agreement on a historic US$650 billion allocation of special drawing rights (the IMF’s reserve asset) to bolster member states’ balance sheets. (Her tireless efforts to persuade wealthier countries to redirect their allocations to poorer countries, however, have been less successful.)

Lastly, the managing director must demonstrate effective leadership within the organisation itself, where there is a constant need to overcome bureaucratic inertia; attract, develop, and retain excellent and diverse staff; and foster a culture of learning and integrity.

With about 60% of low-income countries at high risk of or in debt distress, the IMF must be able to deploy resources at maximum speed and with the right recommendations and conditionalities. There is much room for improvement on this front.

The IMF should get money out the door much faster, and it should tailor its programmes to a world where geopolitical tensions are trumping the principles of free trade that it favours.

With a strong scorecard overall, Georgieva is a good pick. But that is a happy coincidence. It does not change the fact that the IMF’s reappointment process is woefully out of step with the world of the 2020s. - FMT

 

Ngaire Woods is Dean of the Blavatnik School of Government at the University of Oxford.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.