Rework the fundamentals

The International Monetary Fund is not organised on democratic lines. It is more in the nature of a corporation where voting rights devolve along shareholding — in this case the position a country occupies in the global economic pecking order. And it is an extraordinary occurrence for a company to be run by managers appointed by minority shareholders, even if the latter accomplish the rare feat of coming together on the issue. With just above 50% of the IMF vote between them, the US and Europe are in a position to shoot down any candidate for the managing director’s job if the rest of the world were to put one up. The process of a global economic shift towards emerging economies is far too gradual to be able to change this arithmetic in the foreseeable future. Yet it is in the IMF’s interest to heed the developing world when it asks — as Prime Minister Manmohan Singh has — for a more plural and transparent approach to choosing the fund’s boss!

For one, the IMF has to stay relevant. As more of the world climbs out of poverty, their need for emergency loans from the fund diminishes. On the other hand, crises in the advanced economies — as the 2008 financial meltdown shows — are much bigger that what the IMF can handle. Member nations contribute around a percentage point of the world’s output to the fund every year. Second, the argument that a European chief now would be better placed at handling the continent’s debt crisis sounds hollow to Asian and South American countries that have sought loans over the decades from an IMF headed by Europeans. Finally, the structural adjustments that accompanied most IMF lending were predicated on a certain understanding of capitalism that is in doubt today. For a pertinent approach to the crises of the future the IMF can only gain by infusing new blood from economies that are demonstrably doing better by deviating from the regulatory regimes that have been laid low.

The call for transparency is more pressing. The IMF’s executive board cannot operate like a tightly held company

and yet find the acceptance it needs as a multilateral institution. Backroom deals are brokered easily when there is an obvious lender of last resort. That scenario is changing:

the Asian worker has over the previous couple of decades proved to be a bigger lender to the western consumer than

any bank. Asia’s export-led strategy, built on artificially low exchange rates, gives it an inordinately big voice in currency talks. Any impression that it is being denied entry into global institutions can exert a perverse pressure to dig deeper into entrenched positions on exchange and interest rates, to the detriment of world trade.