If you're too young to remember Star Trek, the second movie feature had the great actor Ricardo Montalban play the titular character in The Wrath of Khan. I bring this up because the race to be the next IMF managing director to succeed Rodrigo de Rato is increasingly looking like a coronation ceremony for the EU's candidate, Dominique Strauss-Kahn. Now, the IMF's clout is much diminished in recent years as developing countries have stacked up on reserves to prevent the recurrence of another Asian financial crisis. Many--including myself--would argue that they've stacked up far too many reserves. In part, reserve overaccumulation is attributable to fear of resorting to the IMF's remedies, so famously critiqued in Joseph Stiglitz's Globalization and Its Discontents.Thus, the IMF has reduced clout for it cannot really lord it over developing countries like it used to. In effect, the IMF has needed to "structurally adjust" itself like the many countries that took its hard advice. What Strauss-Kahn will likely inherit is a reduced fiefdom as the IMF's loan portfolio has shrunken. However, the Financial Times still sees him as a bad choice as (1) a European continuing the tradition of European-chosen IMF heads when developing countries have ever-increasing economic clout and (2) he is said to be unfamiliar with the IMF's tasks:
It is depressing when its Russian executive director speaks more sense about the future of the International Monetary Fund than does the European Union. Yet Aleksei Mozhin did so when he criticised the EU’s decision to foist Dominique Strauss-Kahn, a former French finance minister, on the IMF. Only those who want the Fund to be irrelevant can applaud the decision. This is the wrong candidate, chosen in the wrong way.
Mr Mozhin was right when he said “the IMF is facing a severe crisis of legitimacy”. He was correct to insist that “we must select the best candidate” if the institution is to remain relevant to developing countries. He was right to note that Mr Strauss-Kahn’s biography does not show that “he has the necessary technical skills to do the job”.
Since the world’s foreign currency reserves will shortly be 20 times the resources of the Fund, the days when it could dictate to important countries are past. Its only assets are political legitimacy and intellectual authority. On these rest the credibility of its surveillance, the cogency of its advice and its effectiveness as an honest broker.
The Fund, then, needs an intellectually credible head. But nobody could argue that Mr Strauss-Kahn is the best-qualified candidate in the world by his experience, intellect or training. His insistence that bridging the gap between rich and poor would be one of his priorities shows this. Macroeconomic stability is the Fund’s job. He seems to be running for president of the World Bank, a job taken, again, by a US candidate.
Yet even if Mr Strauss-Kahn were the ideal candidate, the method of his selection would undermine his presidency.
Emerging countries no longer understand why Europeans should determine who might dictate to them in any crisis, as if their old empires still existed. The IMF is either a global institution with a head chosen by the world, or it is an expression of Europe’s will to cling on to every scrap of its prestige and power. In this latter guise, the Fund will be shorn of all legitimacy.
Worst of all, no genuine European interest is served by forcing on the Fund a man who is neither qualified nor legitimate. Europe’s insistence on the old carve-up of the Fund and the World Bank with the US is as arrogant as it is foolish. The only interests served are those of politicians determined to preserve a time-worn droit de seigneur.
The developing countries should vote against this nomination, on principle. The developed countries may still push it though. But they will have secured a Pyrrhic victory.
Dominique Strauss-Kahn, the leading candidate to run the International Monetary Fund, stands to inherit a job much diminished since record sums were dispatched from Seoul to Sao Paulo a decade ago.After nominations closed today, his only rival was former Czech prime minister Josef Tosovsky, who doesn't even have the support of his own government. Strauss-Kahn, France's finance minister between 1997 and 1999, is backed by the European Union, which has produced every IMF managing director. U.S. Treasury Secretary Henry Paulson last month praised Strauss-Kahn as a ``strong'' contender.
Even with the job's tax-free salary of $461,510, Strauss- Kahn may find that the position has more headaches and less power than at any point in the group's 62-year history. The IMF faces a 31 percent drop in principal and interest payments in the next five years, and the past two managing directors bolted faster than any of their seven predecessors.
``There has been a dramatic reduction in the clout of the fund and so it has become a less attractive position,'' said Fred Bergsten, director of the Peterson Institute in Washington and a former assistant secretary of the U.S. Treasury. ``Recent incumbents seem to be jumping ship when they see another opportunity.''
The Washington-based IMF was at the center of some of the biggest financial decisions of the past three decades, helping broker solutions to the Latin American debt crisis in the 1980s, and rescues for Mexico, Russia, Brazil and Asia in the 1990s after their currencies collapsed.
The IMF chief used to be treated like a statesman, crossing the globe to assert the fund's authority over borrowers.
In 1997 and 1998, the fund extended credit lines of more than $80 billion to Indonesia, Thailand and South Korea to help them avoid default after the decline in their currencies pushed up the cost of foreign-debt payments.
At a 1998 ceremony in Jakarta, then IMF managing director Michel Camdessus stood over Indonesian President Suharto while the former general was forced to lean down, and sign terms for emergency loans. Suharto's three-decade rule ended later that year.
Nowadays, the fund wields less influence and three-quarters of its standard loan portfolio is tied to one country -- Turkey.
``The head of the IMF is in danger of becoming more like the queen or the queen mother rather than a prime minister,'' said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London. ``Which of the big countries in the developing world needs the IMF or really cares what they think?''
Strauss-Kahn, speaking in a telephone interview from La Paz, Bolivia, said that the goal of the fund should continue to be the preservation of financial stability.
``The biggest priority is to redefine the priorities of the fund,'' he said. ``The goal should remain the same: To ensure financial stability. Once, this was mostly a question of current- account balances. Now it is a much broader question involving investment flows, and hedge funds, and the spillovers they create.''
The IMF's lending capacity is $161 billion, which pales in comparison with currency reserves in developing countries that have grown this year to $3.9 trillion, up from $910 billion in 1997, according to IMF figures. The fund's loans outstanding this year total $17.7 billion, the least since 1980.
``Heads of state no longer tremble at the approach of the IMF because they no longer need its money,'' said Adam Lerrick, an economics professor at Carnegie Mellon University in Pittsburgh. ``Leading the IMF will become a much more technical and less glamorous job.''
Strauss-Kahn, 58, was a candidate for the French Socialist Party's presidential nomination. He lost to Segolene Royal, who was defeated in May's general election by Nicolas Sarkozy. Sarkozy nominated Strauss-Kahn three months later.
Aside from France, only Russia has put forward a name, proposing the 56-year-old Tosovsky.
In April, the fund predicted a shortfall of around $224 million in 2008. To fill the gap, the fund may need to sell a portion of its gold holdings, which may meet resistance from gold producers such as the U.S. and South Africa.
``Whoever comes in as the new managing director will inherit a difficult work program,'' said Mohamed El-Erian, chief executive officer of Harvard Management Company Inc. in Boston and a former deputy director of the fund.
The U.S. tried to make the fund an impartial adjudicator of members' foreign exchange policies, hoping to pressure China not to suppress the value of its currency. That ambition foundered after the Treasury rejected IMF assertions that the dollar was overvalued. On Aug. 2, an aide to Paulson told Congress that it's impossible to measure a currency's fair value.
The new managing director also risks alienating countries as he tries to broker a deal over voting power. The incumbent, Rodrigo de Rato of Spain, started a process to give more sway to emerging economies, such as China and India. That will mean European nations have to give up some power.
Strauss-Kahn ``will probably be the last European to become IMF head in the foreseeable future,'' Luxembourg Finance Minister Jean-Claude Juncker, told the Financial Times Deutschland on Aug. 28.
``It is unlikely that any reform is going to make many countries ecstatic, but it will almost certainly leave many unsatisfied,'' Bergsten said.
The IMF's shrinking profile was illustrated this month as corporate borrowing costs soared. As central banks in Europe, the U.S. and Japan injected extra cash into the banking system to prevent credit from drying up, de Rato was silent. The fund's only contribution was a statement from Masood Ahmed, the head of external relations.
