[Michael Spence] The IMF leadership and global governance

MILAN ― The departure of Dominique Strauss-Kahn as head of the International Monetary Fund has presented the G20 group of advanced and emerging economies with an opportunity and a challenge as they vie to select a new leader.

It is a critical moment of transition because the emerging economies that have been in the shadows during most of the IMF’s existence will be dominant in the not-too-distant future. Thus, the openness of the selection process for a new IMF leader will be key not only to the future legitimacy of that institution but to the very notion of cooperative global economic management.

The IMF has always had tremendous analytic depth. It has gained strength under the gifted leadership of Strauss-Kahn as a better capitalized, motivated and high-performance institution. In the post-crisis period its functions have expanded to include greater “surveillance” of the economic health of systemically important countries. Crucially, it has evolved into an expert secretariat serving the G20 as the latter strives to coordinate policy in pursuit of stability, growth and sustainability in a world where national interests still reign.

There are a number of candidates from advanced and emerging countries with excellent qualifications and experience in both the technical and political/leadership dimensions of the post. Emerging-economy macro-management has not only improved over time; it is flat out excellent. Superior positioning prior to the recent financial crisis, the effective mid-crisis response, and post-crisis control of fiscal deficits and sovereign debt, not to mention restoring growth, support this view. The resilience of the emerging economies in the wake of the global financial meltdown of 2008-2009 is the envy of the advanced countries.

A top-flight leader can come from this pool if international negotiations do not produce compromises that trade away merit, as has happened in the past in other contexts. This should be avoided.

But there is much more at stake than ending up with one of the several superbly capable candidates. The process itself is critically important. The advanced countries need the emerging economies as partners in managing the global economy now, not just in a few years’ time when roles will be reversed. Good governance now will carry over by example.

Preempting an open process of considering all highly qualified candidates will send the wrong ― and indeed destructive ― signal to a group of large, high-growth developing countries whose systemic importance is high and rising.

Specifically, Europe should not assert their traditional prerogative “one more time,” because the sovereign debt issue is a significant risk factor for the EU and the global economy. Nor should the field be restricted to emerging-economy candidates simply because “they are now systemically important” or because “perhaps belatedly, it is their turn.” Neither of these paths sends the right message. Both fail to advance building the capacity to cooperatively manage global economic balance, growth and equity.

The G20 countries, where most of the voting shares in the IMF reside, thus have a delicate problem. Though rightly projecting their rising clout, the message they should send is that meritocracy matters more than country of origin or who won the “entitlement” debate in this round. If the latter becomes the issue, no one would win with respect to the larger agenda of building cooperative global governance.

The new managing director of the IMF would then begin with both the reality and the perception of uneven support and enthusiasm among the shareholders. That would only weaken the new leader and the institution.

The problem here is the framing. The principal signal needs to be the quality of the process, not the outcome. In substance, the process has to assess candidates objectively against a number of criteria on the technical and political side. Under present circumstances, one criterion will legitimately be a knowledge of and an ability to operate in the European context. But it is only one. Dealing firmly but realistically with similar fiscal and sovereign debt issues on the other side of the Atlantic, is one. Rebalancing and restoring global demand with implications for growth and sustainability, effective financial regulation, and the coordination of monetary and exchange rate policies around a new set of principles as yet to be developed, are a few others. It would be wrong to attach all the weight to any one of these.

Officials in a number of countries have suggested that it is worth taking the time to get this done properly and interactively, rather than meeting an arbitrary deadline. This is surely right. The IMF has the technical depth and leadership strength to carry on, even without a new managing director in place ― in significant part due to the legacy of Strauss-Kahn.

It will not be easy to make the quality of the process the message, regardless of the outcome in terms of nationality. But it is worth the effort. If successful, it will send a powerful message that at least in some areas, the management of global integration and interdependence is not trumped by national, regional, or stage of development interests.

What is needed is time, and a process involving all the shareholders of the IMF, large and small, leading to a reasonably objectively based consensus on the next leader. Not all of that process can or should be conducted in public. Transparency has its limits. But at the end, the outcome should be strongly endorsed by advanced and emerging economies. That will be the signal that the process has worked. It will also be the crucial solid foundation of initial support for the new IMF leadership.

By Michael Spence

Michael Spence received the Nobel Prize in Economic Sciences in 2001 and is the author of “The Next Convergence: The Future of Economic Growth in a Multispeed World,” Farrar, Straus and Giroux, May 2011. He is an advisor to the 21st Century Council. ― Ed.

(Tribune Media Services)