The Lagarde Saga

This post first appeared on the Peterson Institute's Real Time Economic Issues Watch. With the United States throwing its support behind Christine Lagarde for the post of managing director of the International Monetary Fund (IMF), it seems that it is all over, except for the shouting (or rather the whim of the French magistrate investigating her role in the Bernard Tapie affair). This result is unfortunate in one respect. Any decision on the Lagarde appointment should have been deferred until she had been legally acquitted in France. Especially, in the aftermath of the Dominique Strauss-Kahn affair, it was imperative that the new candidate be, like Caesar’s wife, beyond reproach. So, we could still have a situation (admittedly a low probability one) where the world decides to appoint Ms. Lagarde while there is an ongoing investigation against her in her own country. Nothing would have been lost by delaying the appointment by a few weeks.That aside, four substantive points are worth making in relation to the process that has led to Lagarde’s ascent to the nomination.

• The process is rigged. It is rigged in the sense that Europe with its disproportionate share of the vote in the IMF (about 32 percent) gets a staggering advantage in this race. Put starkly, a European candidate needs 19 percent more votes while other non-US candidates need 50 percent. That differential is the measure of how rigged the system is.
• Nevertheless,  the process was contestable. Despite being rigged, perhaps for the first time ever, the non-European candidate had a shot at claiming the prize. In part, this is a reflection of the world recognizing that the system has changed and that Europe does not have a divine right to that job. In part, this was due to the alternative candidacy of Augustin Carstens himself, who clearly showed that his substantive credentials were superb, and, in the view of most who had a chance to assess both candidates, the more qualified person for the job.
• Beware of buying into the Goldman Sachs world view. The process was contestable enough for an emerging market or more specifically a BRIC candidate to win. But the BRICs squandered their chances. What that reveals is that "BRICs" is not a very meaningful category. It is a creation of outsiders (credit to Goldman) but one without any real substance. The commonality of size and potential fast growth is all that justifies creating such a category. And that is far from  enough to overcome history, politics, and other strategic considerations.  China thinks in terms of China, not in terms of the BRIC grouping, and will probably continue to do so for a very long time. That same self-centered approach applies to India, Brazil and the others.
• The system must be unrigged but a European MD will delay that process. Fundamentally, the system must be made fairer by ensuring that no one group of countries gets an unfair advantage in the race to become the MD of the IMF. That means reducing the share of the European vote to something close to that of the United States. The opportunity is there for this to happen.  Europe is a borrower and in the cynical formulation of some in the developing world, IMF stands for "Insolvents Must Fawn." If and when Greece or Spain or Ireland come back to the IMF for finance, the IMF, led by the MD, should use that leverage to say to Europe: "reduce your quota if you want the money." Unfortunately, a European candidate is less likely to use that negotiating influence against Europe. And that, unfortunately, is what might be the real problem with the Lagarde appointment, that the process of making the institution more legitimate, especially in the eyes of the emerging market countries, may have been set back a few more years.