Finally, Dominique Strauss-Kahn has decided to resign as chief of the International Monetary Fund. The move is to prevent further damage to the institution, which is now playing a critical role in bailing out the peripheral euro-zone countries of Europe. Strauss-Kahn said in his letter of resignation that he wanted to focus his energy on defending himself against criminal charges that he sexually assaulted a hotel maid in New York. Strauss-Kahn, who has ambitions to be a French presidential candidate, is currently being held at Rikers Island Prison in the U.S. and is attempting to get bail.
Speculation is now intense over who will succeed Strauss-Kahn at the fund. Traditionally, the chief of the IMF comes from the organization’s European quota of staff. At the same time, the head of the World Bank comes from the U.S. These traditions are remnants from the creation of the twin institutions, which came into being after the Bretton Woods agreement following the Second World War. While the World Bank focuses on development loans, the IMF guards the stability of the international monetary system and macroeconomic issues.
But with the changing global landscape in favor of the emerging and developing economies, the U.S. and Europe might no longer have the final say on who leads these institutions. Over the next few decades the economies of Brazil, Russia, India, China and South Africa (the BRICS countries) will play a greater role in the global economy, along with other emerging economies. Whereas growth in the world’s developed economies is stagnant, the average growth rate in the emerging market economies remains steady at around 6 percent per annum. These countries are fast catching up with the developed economies in terms of standards of living.
Along with stronger economic growth in the developing countries comes greater bargaining power. Now the BRICS countries want a bigger say in financial affairs and international cooperation. Naturally, the Europeans are guarding their privilege to pick the IMF chief, and are playing their cards close to their chest. It was reported that Sweden is backing French Finance Minister Christine Lagarde to succeed Strauss-Kahn. But Russia and South Africa have called for an emerging-market candidate, while some Asian policymakers have suggested someone from this region.
The biggest issue facing the international monetary system now is how long the U.S. dollar can continue to serve as the world’s reserve currency of choice. The U.S. is faced with massive indebtedness. The second round of “quantitative easing” (QE2) has significantly eroded global confidence in the greenback. Inflation worldwide has been on a significant rise following the U.S.’s move to reflate its economy via its money printing policy. As a result the U.S. dollar has been on the decline, while commodity products, such as gold and oil, have seen a sharp increase in price.
The World Bank recently issued a report suggesting that over the next 10 years, as the economies of the BRICS countries become larger, these nations will play a more important role in shaping the international monetary system. The currencies issued by these BRICS countries, particularly the Chinese yuan, could function as reserve currencies. Increasingly, these countries, which will dominate the global economy in the coming decades, could trade among themselves with their own currencies without having to rely on the U.S. dollar as the accepted international medium of transactions.
Given this trend, it is perhaps rational that the next IMF chief should come from one of the emerging-market countries. So far critics have charged that the IMF has been trying to protect the status quo ― the interest of the global banks and also the international monetary system revolving around the U.S. dollar. The global banks have been involved in creating financial bubbles and the U.S. dollar is suffering from the Federal Reserve’s zealous printing program. Having a European head at the IMF will continue this status quo, which is no longer sustainable. It is time that the torch at the IMF was passed on to a representative of the developing world, who will be responsible for creating a new global financial architecture.
(The Nation (Thailand), May 20)
