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TWN Info Service on Finance and Development (Jul07/05)

16 July 2007


MISSED CHANCE TO REFORM SELECTION OF IMF CHIEF

Just 12 days after International Monetary Fund Managing Director Rodrigo de Rato made a surprise announcement that he would resign in October, European countries have put forward a leading member of the French socialist party and former finance minister Dominique Strauss-Kahn to replace him.

With the United States now indicating support for Europe’s choice, Strauss-Kahn is almost certain to get the job. Executive Directors from the US and Europe wield about 53% of the voting weight on the Board. It is the second lost opportunity in as many months for reform of the anachronistic governance of the international financial institutions.

However, with senior officials from some developing countries (and at least one developed country) voicing unhappiness with the undemocratic process, there might still be a bumpy road to Strauss-Kahn’s formal appointment.

The following is a report by Peter Chowla from the London-based World Bank and IMF watchdog, the Bretton Woods Project, on the selection process. It was published in SUNS #6292 Friday 13 July 2007.

With best wishes
Martin Khor
TWN

Missed Chance to Reform Selection of IMF Chief

By Peter Chowla

Just 12 days after International Monetary Fund Managing Director Rodrigo de Rato made a surprise announcement that he would resign in October, European countries have put forward a leading member of the French socialist party and former finance minister Dominique Strauss-Kahn to replace him.

With the United States now indicating support for Europe’s choice, Strauss-Kahn is almost certain to get the job. Executive directors from the US and Europe wield about 53% of the voting weight on the board.

It is the second lost opportunity in as many months for reform of the anachronistic governance of the international financial institutions.

However, with senior officials from some developing countries (and at least one developed country) voicing unhappiness with the undemocratic process, there might still be a bumpy road to Strauss-Kahn’s formal appointment.

De Rato cited only personal reasons for his departure, but said that he remained committed to pursuing reform at the IMF under the Medium-Term Strategy, a document that the managing director had a strong hand in shaping. His departure, announced months in advance, opened up the possibility that an open, transparent and merit-based process for selecting the next managing director could be put into place.

Apparently, the heads of state and finance ministers in Europe had other plans. Under the terms of a 60-year-old gentleman’s agreement, the United States appoints the president of the World Bank while Europeans head the IMF. That the US pushed ahead with nominating Robert Zoellick for the World Bank presidency last month made Europeans even more reluctant to give up their own spoils.

In the week leading up to a breakfast meeting of European finance ministers on 10 July, a plethora of European candidates were put forward. However, Strauss-Kahn, also known as DSK, received the endorsement from the majority of European Union member states, after a vigorous campaign by French President Nicolas Sarkozy. The French president’s efforts effectively place France centre-stage in global politics while also bolstering his claim to be uniting the left and right in France. He has also conveniently removed a potential rival to his re-election.

US Treasury Secretary Hank Paulson had already confirmed that the appointment was a European prerogative and that the US would support any European candidate of “real stature”.

The German Finance Minister, Peer Steinbrueck, from a centre-left party but working under centre-right Prime Minister Angela Merkel, also brushed aside calls for an open and transparent process and openly supported Strauss-Kahn when Sarkozy first announced his intention to nominate him.

With European and US backing, Strauss-Kahn is virtually guaranteed the job.

Not so fast

The road to Strauss-Kahn’s formal selection may yet be bumpy.

The day before the European finance ministers met, the UK’s new chancellor Alistair Darling publicly declared: “The Managing Director job needs to be filled following an open process. I don’t think Europe can simply say, That position is ours and we are not prepared to discuss it with anyone else’”.

After the meeting, the UK Treasury dissented from the robust statement of support for Strauss-Kahn issued by the European Union presidency, saying that “we don’t feel bound by that discussion”.

Developing countries and NGOs were the first to demand that the selection process be opened. The spokesperson for South Africa’s Finance Minister Trevor Manuel commented just a day after de Rato’s announcement: “We believe that the process must be open and transparent and that the selection of the candidate to replace Mr De Rato must be based on merit and not the continent the person comes from, or the country.”

On the Monday before the European decision, the IMF’s Executive Board met to discuss the replacement process. By the IMF’s Articles of Agreement, the Board is the body that is given the power to appoint the Managing Director.

The Board’s agenda is heavily influenced by the dean of the board, the longest serving board member, who currently is Iranian Abbas Mirakhor, and the deputy dean, Shakour Shaalan from Egypt.

Developing country board members seem ready to challenge the tradition of European domination in any way they can, with Shaalan saying “I am going to blast the Europeans, not because of Mr. Strauss-Kahn, but because of the procedure being followed.”

The Board had previously broadly endorsed the guidelines set down in a 2001 report by a joint Bank-Fund committee looking into the selection processes. It called for an open, merit-based process driven not by national nomination but by an external advisory group of eminent persons.

The IMF’s Medium-Term Strategy has also called for more transparency in the selection process. The board issued a statement on 9 July confirming that the board plans to make a decision in “an open and transparent manner” and agreeing that “any executive director may submit a nomination, regardless of nationality, for the position”.

Fait accompli

Even if there are machinations on the board to ensure an open process, the outcome is already defined. At the time of de Rato’s selection in 2004, there were officially three candidates, including one non-European, but the outcome was known far in advance. With Paulson’s statement about deferring to Europe, there is little possibility for Strauss-Kahn not to be accepted. Executive directors from the US and Europe wield about 53% of the voting weight on the board.

Developing country officials inside the IMF have indicated that they are again interested in putting forward a candidate, but no names have been announced. Trevor Manuel has been cited by the media as a possible candidate, as has Arminio Fraga, former Brazilian central bank governor; Mohammed El-Erian, the failed 2004 candidate and head of Harvard Investment Management; and Stanley Fisher, governor of the Bank of Israel.

But even if all developing country Executive Directors voted together and attracted the unlikely support of Japan, Canada, Australia and Russia, they would still be unable to dethrone a united Europe with American backing.

The announcement of Strauss-Khan’s nomination also indicated that after his term ends, the post should be open to others. Europe seems to want open appointment processes at both the World Bank and the IMF, but is unwilling to take the first steps. After acquiescing to the US imposition of Robert Zoellick on the Bank, Europeans seem devoted to trying to make two wrongs equal a right.

* Peter Chowla, who contributed this article, is a policy and advocacy officer with the Bretton Woods Project, an NGO monitoring the World Bank and IMF in London. The article was first published on www.brettonwoodsproject.org 

 


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