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Three Challenges for New IMF Director

Author: Steven Dunaway
June 29, 2011

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Christine Lagarde's appointment to replace Dominique Strauss-Kahn as managing director of the International Monetary Fund comes as no real surprise. But the aggressive manner in which European authorities pushed through Lagarde's appointment to retain control over the position creates at least three major challenges Lagarde must quickly address.

One, Lagarde has to establish her independence. She has to demonstrate that the IMF will not automatically rubberstamp European decisions and be a convenient piggy bank to help Europe finance the debt crisis in some euro-area countries. The pressure European officials applied to secure the managing director's position for Lagarde and the important role she played as the French finance minister in dealing with the crisis raises suspicions that the Europeans' primary interest in backing her is to ensure access to IMF resources. Thus far, the IMF has provided roughly one-third of the 270 billion euros pledged for the rescue packages for Greece, Ireland, and Portugal. Euro-area countries will be looking for the IMF to provide a similar share of any new rescue package for Greece and for any assistance that may be needed for Spain. Lagarde has to dispel these suspicions.

Moreover, Lagarde needs to show she can stand up to European leaders and tell them hard truths about the economic situation in the crisis countries and that she is willing to call for policy changes (like debt restructuring or currency devaluation) that they may not want. She also has to make clear that the IMF will stop lending if its loan conditions are not being consistently met. Greece is likely to test the IMF's resolve if it continues to miss its fiscal targets and underperform in implementing economic reforms.

Two, like her three immediate predecessors, Lagarde has emphasized the need to enhance the legitimacy of the IMF by giving emerging-market countries increased voting shares and greater representation on the executive board commensurate with their growing importance in the world economy. Over the past decade, only limited progress has been made in this regard, largely because of the reluctance of the smaller European countries that are over represented in the IMF. In acquiescing to Lagarde's appointment, emerging-market countries are likely to be expecting a resolution to this issue. She will have to come up relatively quickly with a plan that can win support by enough of the IMF's major members to be implemented by the executive board. Otherwise, she runs the risk of growing dissatisfaction and disillusionment among the IMF's important emerging-market members. 

Three, Lagarde will have to demonstrate she can effectively manage the work of the IMF. She has limited formal training in economics, especially compared to her recent predecessors. The decision not to consider the candidacy of Stanley Fischer because the IMF's executive board was unwilling to waive an age limit--a move it has taken in the past--underscores concerns. It leaves the impression that it would have been difficult to justify Lagarde's selection over such a distinguished and experienced economist and policymaker as Fischer, a former IMF first deputy managing director and Israeli citizen.

There are questions as to whether Lagarde will be able to sort through the arguments on both sides of critical economic issues and decide what are the most appropriate policy recommendations that the IMF should be advocating. Moreover, once decisions are made, Lagarde's lack of detailed economic knowledge and understanding could make it difficult for her to sell reluctant country leaders on the need for economic policy changes.

It has been suggested that Lagarde's successful tenure as French finance minister illustrates her ability to handle the job of IMF managing director. But questions persist because the IMF handles a far wider range of issues than most finance ministries.

An effective IMF chief is crucial at a time when the fund is grappling with a set of critical and complex issues. The fund has a central role to play in distilling the lessons from the recent world economic and financial crisis and helping to formulate more effective regulation and supervision to make financial markets worldwide more secure. The IMF also stands at the center of efforts to reform the international financial system to enhance stability in the world economy. In addition, with little progress made in correcting the global economic imbalance that fostered the crisis, the IMF still needs to step up efforts to persuade the major countries to take necessary policy action to correct these imbalances and put the world economy on a more rapid and sustainable growth path.

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