Sooner than expected, the IMF will have a new managing director. For more than a decade, I have criticized the fund’s governance, symbolized by the way its leader is chosen. By gentlemen’s agreement among the majority shareholders — the G8 — the managing director is to be a European, with Americans in the No. 2 post and at the head of the World Bank.
The Europeans typically picked their nominee behind the scenes, as did the Americans, after only cursory consultation with developing countries. The outcome, however, was often not good for the IMF, the World Bank or the world.
Most notorious was the appointment of Paul Wolfowitz, one of the main architects of the Iraq War, to lead the World Bank. His judgments there were no better than those that got the US involved in that disastrous adventure. Having placed fighting corruption at the top of the bank’s agenda, he left in the middle of his term, accused of favoritism.
Finally, as a new order seemed to emerge in the aftermath of the US-made Great Recession, the G20 agreed (or so it was thought) that the next IMF head would be chosen in an open and transparent manner. The presumption was that the outcome of such a process almost surely would be a managing director from an -emerging-market country. After all, the IMF’s main responsibility is to fight crises, most of which have been in developing countries — more than 100 since the disastrous policies of financial deregulation and liberalization began about 30 years ago. There were many heroes of these battles in the emerging markets.
Crises need to be carefully managed. In 1997, the mismanagement of the East Asia crisis by the IMF and the US Treasury transformed downturns into recessions, and recessions into depressions. The world cannot afford to repeat that performance.
Today, the imminent crisis is in Europe, where the European Central Bank (ECB) seems to be putting its own balance sheet and those of European banks — loaded with debt from Ireland, Greece and Portugal — above the well-being of these countries’ citizens. This debt almost surely needs to be restructured, but, having allowed the banks to leverage themselves beyond any level of prudence and load up on toxic derivatives, the ECB is now warning against any sort of restructuring or write-down.
However, it is a bit late for the ECB to describe debt restructuring as “unthinkable.” The ECB should have done some thinking before it let this state of affairs arise. Indeed, more than thinking, it should have done some regulating to prevent Europe’s banks from becoming so vulnerable.
Now the ECB needs to think about how to help everyone, not just the bankers who bought the bonds. The new thinking should put people first, and banks’ shareholders and bondholders second. Even if the shareholders and bondholders lose everything, with the right restructuring, we can still save the banks and protect taxpayers and workers.
Where the IMF’s next managing director will come down on this issue — and on whether fiscal salvation is to be achieved through austerity, with costs borne by ordinary citizens, even as bankers get only a mild slap on the wrist — is critically important, but hard to predict. Despite the failure of the IMF’s strategy in East Asia, Latin America and elsewhere, it still has adherents, even within the emerging markets.