The arrest and resignation of Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), has captured headlines for days. One of the consequences of this sudden turn of events has been the clear surfacing of several candidates from developing nations, as well as strong claims from some emerging economy policymakers that Europe should cede its traditional right to the position. An English bookmaker made Turkey?s Kemal Dervis the favourite in early betting, with India?s Montek Ahluwalia not far behind in the odds.
Unfortunately, Europe is not ready to oblige. While several European candidates were mentioned (or mentioned themselves) and had shorter odds, French finance minister Christine Lagarde became the candidate behind which European support seemed to coalesce quickly. The US had made it clear that they would like Strauss-Kahn?s replacement to be made as soon as possible, which also works in favour of not rocking the boat and appointing a European.
Interestingly, the Europeans have been arguing that since the European sovereign debt crisis and the challenges to the Eurozone loom large, it is very important to have a European at the helm of the IMF. Indeed, Strauss-Kahn seems to have played a skilful and positive role in the European Union?s handling of the Greek crisis as it unfolded last year. He, too, had served as French finance minister, and is an experienced politician and negotiator. The European view is ironic on two counts, however. First, Europeans have never said that it needed someone from a developing country to deal with developing country problems that required IMF support in the past. Then it was fine to have a European leading the way. Second, Germany?s Chancellor Angela Merkel has been one of those stating that Europe?s sovereign debt problems need a
European as head of the IMF, while she has been singularly weak in showing leadership to address Greece?s problems, in particular. Nor has she pushed for Germany to take a lead in supporting the European recovery by increasing domestic demand.
So, the Strauss-Kahn crisis will presumably lead to another French citizen becoming the IMF?s managing director. If Christine Lagarde serves a five-year term, this will actually push back the date at which someone from a developing country can take the position. Unfortunately, Montek Ahluwalia, already past 65, will definitely have crossed the maximum age threshold by then. Luckily for India, he is young by its leadership standards, and can long continue to play a positive role in domestic policymaking for his own country.
Interestingly, there has been no Chinese name in the media speculation and odds-making as to who will take over from Strauss-Kahn. This is not surprising when one realises that China already has a key senior person in place?Zhu Min, serving as special advisor to the managing director. Zhu just passed his first anniversary in that position, and is ideally placed to be the first person from an emerging economy to head the IMF in five years. It is hard to imagine the Chinese not getting the position in 2016, if they want it.
So, the events of the last two weeks echo the broader patterns that have been emerging in real economic events and in the rise of the G20?the slow decline of Europe (it is so easy to read all kinds of symbolism into Strauss-Kahn?s alleged actions in the New York hotel room), the emergence of the emerging economies, and the future dominance of China, with only the US matching it as a global power. The European debt crisis is a temporary annoyance, from this longer perspective, and will get worked out with some squabbling and inefficiency, but will not derail the euro or the European Union. In fact, having a European head of the IMF probably does not matter that much. The IMF?s new role in relation to the G20 may be much more significant in the medium run.
The last G20 meeting began to lay out a road map for global rebalancing. The IMF?s job there is to develop multiple indicators to serve as guides against which to measure policies and outcomes. This is a technical task which also does not rely that much on who leads the IMF. That organisation has a wealth of intellectual capital that can be put to the task at hand, and economists will shape the framework within which the politicians ultimately do their deals. As I have noted before, China plans to change its pattern of growth, and as it does so, some of the global imbalances problem will fade. But China will march according to its own beat. The G20 and IMF will both play a role in the new world of global economic policy coordination, but the economic power of individual nations will matter, as it has always done.
The author is professor of economics, University of California, Santa Cruz