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Countries in the developing cast an increasingly wary eye on IMF loans (AP Images/Ed Wray).
Russia turned heads in late August by nominating Josef Tosovky, the Czech Republic’s former central bank president, to head the International Monetary Fund (IMF). The bid seemed a direct challenge (FT) to Western European influence within the institution. EU ministers had already approved (IHT) Dominique Strauss-Kahn, France’s former finance minister, to fill the post, though IMF officials stressed they did not object to Tosovky’s nomination and would strive to maintain an open and transparent selection process. Even so, strong U.S. support may all but guarantee Strauss-Kahn victory (Forbes), following IMF board meetings with the candidates in Washington in early September.
Regardless what comes of the selection process, Russia’s challenge highlights pressing questions for the next IMF leader, including how to preserve the relevance of an organization set up more than sixty years ago to promote monetary cooperation and foster economic growth. First, there is the matter of legitimacy. In an agreement dating to the 1940s, Europe holds sole responsibility for appointing the IMF’s leader (the United States, in exchange, selects the World Bank president). Many experts, particularly in developing countries, now blame this system for the IMF’s woes. Former Russian Prime Minister Yegor Gaidar, in a recent Financial Times op-ed, calls Western Europe’s IMF hegemony “a relic of the colonial empires of Europe” and says Russia was right for bringing attention to this power imbalance. A recent Council Special Report by CFR Senior Fellow Peter B. Kenan also acknowledges problems in the fund’s European-dominated selection process. The effect is particularly damaging, the Financial Times argues in an editorial, given that growing global currency reserves now dwarf the resources of the fund. Increasingly, it says, the IMF’s “only assets are political legitimacy and intellectual authority.”
Experts say any reform would need to focus on IMF voting rights, which grant more institutional leverage to the United States and Western Europe through a controversial quota system. A 2006 paper by Harvard’s Richard N. Cooper and Edwin M. Truman of the Peterson Institute for International Economics suggests the fund could develop a fairer system for determining voting power. In particular, the paper suggests the fund should abandon one economic “openness” rating, used in determining its quotas, which the authors deem arbitrary.
Yet even if strides are made toward making the IMF’s organizational structure more egalitarian, some critics say the fund may still fade as global currencies become more stable, mitigating the need to keep an international piggy bank for bailouts. Others criticize the policy of bailouts altogether, arguing they have exacerbated past currency crises. Robert J. Barro, another Harvard economist, says the fund should scrap bailouts and focus on giving targeted, short-term loans (PDF) to reliable economies. In the Council Special Report, Kenan advises that even though the last several years have seen no major currency crises, it would be imprudent to expect that none are to come. As a particular source of concern, he cites fiscal imbalances between developed industrialized economies and those in East Asian and leading oil states. In a recent interview with CFR.org, U.S. Treasury Secretary Henry Paulson echoed these worries, calling China’s currency “severely unbalanced.”
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