Choosing the IMF’s next leader

By Joseph E Stiglitz
June 5, 2011 | Free Malaysia Today

NEW YORK: Sooner than expected, the International Monetary Fund will have a new managing director. For more than a decade, I have criticized the Fund’s governance, symbolized by the way its leader is chosen.

By gentlemen’s agreement among the majority shareholders – the G-8 – the managing director is to be a European, with Americans in the number two post and at the head of the World Bank.

The Europeans typically picked their nominee behind the scenes, as did the Americans, after only cursory consultation with developing countries. The outcome, however, was often not good for the IMF, the World Bank, or the world.

Most notorious was the appointment of Paul Wolfowitz, one of the main architects of the Iraq War, to lead the World Bank. His judgments there were no better than those that got the United States involved in that disastrous adventure. Having placed fighting corruption at the top of the Bank’s agenda, he left in the middle of his term, accused of favoritism.

Finally, as a new order seemed to emerge in the aftermath of the US-made Great Recession, the G-20 agreed (or so it was thought) that the next IMF head would be chosen in an open and transparent manner.

The presumption was that the outcome of such a process almost surely would be a managing director from an emerging-market country. After all, the IMF’s main responsibility is to fight crises, most of which have been in developing countries – more than a hundred since the disastrous policies of financial deregulation and liberalization began some 30 years ago. There were many heroes of these battles in the emerging markets.

Crises need to be carefully managed. In 1997, the mismanagement of the East Asia crisis by the IMF and the US Treasury transformed downturns into recessions, and recessions into depressions. The world cannot afford to repeat that performance.

New thinking needed

Today, the imminent crisis is in Europe, where the European Central Bank seems to be putting its own balance sheet and those of European banks – loaded with debt from Ireland, Greece, and Portugal – above the well-being of these countries’ citizens.

This debt almost surely needs to be restructured, but, having allowed the banks to leverage themselves beyond any level of prudence and load up on toxic derivatives, the ECB is now warning against any sort of restructuring or write-down.

But it is a bit late for the ECB to describe debt restructuring as “unthinkable.” The ECB should have done some thinking before it let this state of affairs arise. Indeed, more than thinking, it should have done some regulating to prevent Europe’s banks from becoming so vulnerable.

Now the ECB needs to think about how to help everyone, not just the bankers who bought the bonds.

The new thinking should put people first, and banks’ shareholders and bondholders second. Even if the shareholders and bondholders lose everything, with the right restructuring, we can still save the banks and protect taxpayers and workers.

Where the IMF’s next managing director will come down on this issue – and on whether fiscal salvation is to be achieved through austerity, with costs borne by ordinary citizens, even as bankers get only a mild slap on the wrist – is critically important, but hard to predict.

Despite the failure of the IMF’s strategy in East Asia, Latin America, and elsewhere, it still has adherents, even within the emerging markets.

The leadership contest has turned out differently from what many had expected. Some of the most qualified candidates (in both developed and developing countries) have not received the support of their own governments that the political process seems to require.

Other qualified people from emerging markets have been reluctant to put their hats into the ring – it is a brutal job, with a travel schedule that requires physical stamina to match wisdom and experience.

Much as I would like to see someone from the emerging markets and the developing world head the IMF, the first priority is to choose a leader with the requisite skills, commitments, and understandings in an open and transparent process, someone who will continue along the reform path on which the Fund has embarked.

Moving in the right direction

Realpolitik might mean that there will be senior people from both China and the US in the top management team, but the presumption that the number two position should be filled by an American also has to go.

Whatever the outcome, the IMF, the World Bank, and the international community need to reaffirm their commitment to an open and transparent process – and ask how that process can be improved.

For example, rather than nominations from governments, which often are reluctant to support excellent candidates from opposition parties, an international nominating committee could put forward names.

Similarly, changes in voting procedures (public voting by countries, rather than through constituencies, or a requirement that candidates win the support of a majority of developing and emerging countries) could persuade more emerging-market officials to put their names forward.

What we are seeing now – open campaigning, as opposed to selection behind closed doors – seems to be a move in the right direction. But one hopes that campaign promises won’t tie the new leader’s hands, as so often happens in electoral politics.

Simplistic ideologies got the world into the mess in which it now finds itself, and simplistic prescriptions (even of the “tough-love austerity” form) will only compound the problems.

One of the leading candidates to be the IMF’s next managing director has turned out to be a Frenchwoman, Christine Lagarde, who, as France’s finance minister, helped lead her country through the Great Recession. She has been an outspoken advocate of financial-sector reforms, and has won the respect of all of those with whom she has worked.

Politics is not always kind to good candidates. The world should be thankful that there is at least one. Where she was born should not be an impediment to her prospects.

* Joseph E Stiglitz is University Professor at Columbia University, a Nobel laureate in Economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy.

  1. #1 by yhsiew on Sunday, 5 June 2011 - 8:51 pm

    The IMF leader should be selected on a rotational basis i.e. European – Asian – Latin American – European – Asian……..

  2. #2 by TheWrathOfGrapes on Sunday, 5 June 2011 - 9:03 pm

    Can’t vouch for the veracity of the report below, but it makes for good conspiracy reading……

    * * *

    Russia Says IMF Chief Jailed For Discovering All US Gold Is Gone

    By: Sorcha Faal, and as reported to her Western Subscribers

    May 31, 2011

    A new report prepared for Prime Minister Putin by the Federal Security Service (FSB) says that former International Monetary Fund (IMF) Chief Dominique Strauss-Kahn [photo with Putin L-1] was charged and jailed in the US for sex crimes on May 14th after his discovery that all of the gold held in the United States Bullion Depository located at Fort Knox [photo L-2] was missing and/or unaccounted for.

    According to this FSB secret report, Strauss-Kahn had become increasingly concerned earlier this month after the United States began stalling its pledged delivery to the IMF of 191.3 tons of gold agreed to under the Second Amendment of the Articles of Agreement signed by the Executive Board in April 1978 that were to be sold to fund what are called Special Drawing Rights (SDRs) as an alternative to what are called reserve currencies.

    This FSB report further states that upon Strauss-Kahn raising his concerns with American government officials close to President Obama he was contacted by rogue elements within the Central Intelligence Agency (CIA) who provided him firm evidence that all of the gold reported to be held by the US was gone.

    Upon Strauss-Kahn receiving the CIA evidence, this report continues, he made immediate arrangements to leave the US for Paris, but when contacted by agents working for France’s General Directorate for External Security (DGSE) that American authorities were seeking his capture he fled to New York City JFK airport following these agents directive not to take his cell-phone because US police could track his exact location.

    Once Strauss-Kahn was safely boarded on an Air France flight to Paris, however, this FSB report says he made a fatal mistake by calling the hotel from a phone on the plane and asking them to forwarded the cell-phone he had been told to leave behind to his French residence, after which US agents were able to track and apprehend him.

    Within the past fortnight, this report continues, Strauss-Kahn reached out to his close friend and top Egyptian banker Mahmoud Abdel Salam Omar to retrieve from the US the evidence given to him by the CIA. Omar, however, and exactly like Strauss-Kahn before him, was charged yesterday by the US with a sex crime against a luxury hotel maid, a charge the FSB labels as beyond belief due to Omar being 74-years-old and a devout Muslim.

    In an astounding move puzzling many in Moscow, Putin after reading this secret FSB report today ordered posted to the Kremlin’s official website a defense of Strauss-Khan becoming the first world leader to state that the former IMF chief was a victim of a US conspiracy. Putin further stated, that it’s hard for me to evaluate the hidden political motives but I cannot believe that it looks the way it was initially introduced. It doesn’t sit right in my head.

    Interesting to note about all of these events is that one of the United States top Congressman, and 2012 Presidential candidate, Ron Paul [photo L-4] has long stated his belief that the US government has lied about its gold reserves held at Fort Knox. So concerned had Congressman Paul become about the US government and the Federal Reserve hiding the truth about American gold reserves he put forward a bill in late 2010 to force an audit of them, but which was subsequently defeated by Obama regime forces.

    When directly asked by reporters if he believed there was no gold in Fort Knox or the Federal Reserve, Congressman Paul gave the incredible reply, I think it is a possibility.

    Also interesting to note is that barely 3 days after the arrest of Strauss-Kahn, Congressman Paul made a new call for the US to sell its gold reserves by stating, “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.â€

    Bizarre reports emanating from the US for years, however, suggest there is no gold to sell, and as we can read as posted in 2009 on the ViewZone.Com news site:

    October of 2009 the Chinese received a shipment of gold bars. Gold is regularly exchanges between countries to pay debts and to settle the so-called balance of trade. Most gold is exchanged and stored in vaults under the supervision of a special organization based in London, the London Bullion Market Association (or LBMA). When the shipment was received, the Chinese government asked that special tests be performed to guarantee the purity and weight of the gold bars. In this test, four small holed are drilled into the gold bars and the metal is then analyzed.

    Officials were shocked to learn that the bars were fake. They contained cores of tungsten with only a outer coating of real gold. [photo L-3] What’s more, these gold bars, containing serial numbers for tracking, originated in the US and had been stored in Fort Knox for years. There were reportedly between 5,600 to 5,700 bars, weighing 400 oz. each, in the shipment!â€

    To the final fate of Strauss-Kahn it is not in our knowing, but new reports coming from the United States show his determination not to go down without a fight as he has hired what is described as a crack team of former CIA spies, private investigators and media advisers to defend him.

    To the practical effects on the global economy should it be proved that the US, indeed, has been lying about its gold reserves, Russia’s Central Bank yesterday ordered the interest rate raised from 0.25 to 3.5 percent and Putin ordered the export ban on wheat and grain crops lifted by July 1st in a move designed to fill the Motherlands coffers with money that normally would have flowed to the US.

    The American peoples ability to know the truth of these things, and as always, has been shouted out by their propaganda media organs leaving them in danger of not being prepared for the horrific economic collapse of their nation now believed will much sooner than later.

  3. #3 by tak tahan on Sunday, 5 June 2011 - 9:36 pm

    Can our CAT’s member be any helpful in this case?

  4. #4 by limkamput on Sunday, 5 June 2011 - 10:21 pm

    Joseph Stiglitz has an axe to grind against IMF and World Bank, I think everyone knows that. The problem with these Bretton Woods institutions is not just with the leadership. These institutions are dinosaurs and playground for a group of international civil servants to jolly around with money contributed by countries rich and poor.

  5. #5 by Jeffrey on Monday, 6 June 2011 - 2:57 am

    Hah hah TheWrathOfGrapes, thanks for the report. I am amazed at men’s ingenuity & imagination when it comes to spinning conspiracy stories. I’d believe it if Putin himself says it. Sorcha Faal? They couldn’t trace a guy like this in Russian academia who spun that story. Of course anything is possible: there are surely who want to “fix” DSK, but not in the US in this way and for the ‘Gold’ reason. If US has reputedly at least 5046 tons of gold bullion in Fort Knox & 7,700 tons in Federal Reserve Bank of New York’s underground vault in Manhattan its hard to believe it has so dwindled that it has to stall pledged delivery to the IMF of 191.3 tons of gold! Not enough Gold to back Green back? That also the world knows how much less (maybe US $400B in stockpiled gold against its foreign debt in trillions that the US keeps printing. If DSK were threat to US security interest it’s easier to use CIA could use black operatives like Jason Bourne of “Bourne Identity” to terminate him with extreme prejudice outside US soil!

  6. #6 by Jeffrey on Monday, 6 June 2011 - 3:11 am

    The guy is definately randy. It may be wondered how a seasoned seducer & propositioner would have experience to draw the line between an assertive or even aggressive sexual proposition fropm that of a sexual assault without the girl’s consent? Surely he ought to have a wad of cash with him in the room. Then again not every woman – even a chamber maid- need necessarily want to be a prostitute for money, and even if she did, this guy might have wanted something rough or perhaps deemed by her unnatural eg anal sex. Culturewise US (women Lib) is different from France: in US even if a woman says “yes” I suppose she has prreogative to say “no” in the middle of it all and withdraw consent when the man is too far gone to know the importance of when to stop! All these of course speculation but France Inter radio has reported that based on CCTV footage from the hotel’s corridors the girl hurried out of his room 2806 in a panic and also DSK doing the same subsequently.

  7. #7 by Jeffrey on Monday, 6 June 2011 - 3:13 am

    Oops “… seasoned seducer & propositioner would NOT have experience to…

  8. #8 by TheWrathOfGrapes on Monday, 6 June 2011 - 8:15 am

    Jeffrey :
    Not enough Gold to back Green back? That also the world knows how much less (maybe US $400B in stockpiled gold against its foreign debt in trillions that the US keeps printing.

    Precisely. That was why Richard Nixon ended direct convertibility of dollar to gold in 1971, due to heavy debt burden and persistent balance of payment deficits due in part from the Vietnam War.

  9. #9 by TheWrathOfGrapes on Monday, 6 June 2011 - 8:32 am

    Let’s see how long it will take before Matthias Chang and/or Mahathir discover this “scoop” and use it to bash the US.

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