Quota reform impasse likely as IMF faces legitimacy crisis

As the IMF is set to publish its 15th General Review of Quotas by the October World Bank and IMF Annual Meetings, the US has suggested that it will block reforms of quotas in favour of extending the portion of ‘New Arrangements to Borrow’ (NAB), which are designed as a backstop to the Fund’s quota-based financing mechanism (see BWP Observer Spring 2019, see Update 79).

IMF quotas are defined as “the building blocks of the IMF’s financial and governance structure” where a “member country’s quota broadly reflects its relative position in the world economy” and determines its voting share on the IMF executive board. The current formula used to guide the distribution of quotas is calculated in accordance to GDP (50 per cent), economic openness (30 per cent), economic variability (15 per cent) and international reserves (5 per cent).

Quota reviews are supposed to take place every five years. While member states had originally committed to completing the 15^th review in January 2014, the US used its veto to delay the approval of the 2010 14^th review until 2016 (see Observer Winter 2016, Autumn 2015). Moreover, the delayed 2010 reforms resulted in many low-and middle-income countries losing substantial shares of their voting power – such as Nigeria by 41 per cent, Venezuela by 41 per cent, Libya by 39 per cent and Sri Lanka by 34 per cent (see BWP Observer Winter 2016).

This review corresponds with a crisis of multilateralism engulfing international institutions, which could intensify should the IMF uphold the ‘gentleman’s agreement’ to appoint another European its new managing director (see BWP Observer Summer 2019).

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Will Mexico back Carstens as the next IMF managing director?

In an interview with Bloomberg published on July 29, Andres Manuel Lopez Obrador (ALMO), Mexico’s President, noted that he would support former central bank governor who now heads the Bank for International Settlements, Agustin Carstens, should Carstens be nominated as a candidate.

ALMO noted that despite their “political differences”, he would hypothetically support Carstens, stating that: “I would like to. I would always support a Mexican, if they’re a specialist in the material…” Earlier this month, Carstens declined to comment as to whether he would be eager to run for the position of IMF managing director.

The discussion around Carstens potential candidacy will conjure up memories of the 2011 leadership race for the IMF managing director. Carstens was shortlisted alongside Christine Lagarde for the position, following the resignation of former head of the IMF Dominique Strauss-Kahn, who was arrested in the US on charges of an alleged sexual assault.

Carstens, however, subsequently failed to galvanise support among emerging economies, who are structurally underrepresented in the current IMF governance configurations. Interestingly, as part of his bid, Carstens noted that should the IMF follow through with the ‘gentleman’s agreement’ and select a European candidate for the post, it may produce a conflict of interest, as Europe struggled with a post-crash debt crisis. He noted: “We could have a situation where borrowers dominate the institution,” stressing that the European region needed a fresh perspective in order to solve the problem.

In the news

• Osborne misses IMF leadership shortlist, ICAEW economia.
• Europe Needs a Different Approach to IMF Leadership, Bloomberg.
• AMLO apoyaría a Agustín Carstens en caso de que aspire a dirigir el FMI, Grupo Formula.
• The tricky business of electing a new IMF managing director, Central Banking.
• EU candidates for IMF job narrowed down to three, Financial Times.
• The next head of the IMF should come from Asia. But will they?, East Asia Forum.
• Next IMF chief must be ‘ready to go to war’ – trade and currency, strategist says, CNBC.
• Next IMF chief must stand up to Trumpian protectionism, but need not be European, South China Morning Post.
• Look beyond Europe for the IMF’s new leader, East Asia Forum.
• IMF launches selection process for Lagarde successor, Financial Times.
• World Bank’s Georgieva added to EU list of candidates to lead IMF, Reuters.
• Europe lists 5 candidates to succeed Lagarde at IMF, Apex News.
• Raghuram Rajan can be a strong contender to head IMF if it’s looking beyond Europeans, the Print.
• Europe is at odds over who will replace Christine Lagarde at the IMF, CNBC.
• Commentary: The rare, huge reform opportunity before the IMF, CNA.
• Is Asia Serious About Running the IMF?, AsiaGlobal online.
• UK Parliament panel seeks backing for an Indian IMF chief, Economic Times.

Here we go again: Surprise IMF leadership change litmus test for its legitimacy

On 16 July, Christine Lagarde announced she had submitted her resignation from the IMF as managing director, effective 12 September, in light of her nomination for the presidency of the European Central Bank. In the interim, IMF first deputy managing director, David Lipton, was appointed acting managing director by the executive board. The board intends to complete the selection process by 4 October.

Handy yardstick for health of neocolonial and neoliberal system

The surprise announcement kicked off the customary speculation of potential candidates to fill the IMF leadership position and the time-honoured tradition by civil society and others of calling for the abolition of the historic ‘gentleman’s agreement’ on World Bank and IMF leadership.

The unofficial agreement, in place since the founding of the institutions 75 years ago, has ensured that the IMF has always been led by a European, and the World Bank by a US citizen (see Inside the Institutions, What is the ‘gentleman’s agreement?‘). Civil society organisations around the world have for decades pointed out that the Fund and Bank continue to undermine their legitimacy by adhering to this arrangement. They have demanded an end to the European stranglehold on the top IMF post and for it to live up to its commitment to “adopt an open, merit-based and transparent process for the selection of IMF management” (see Update 76).

The selection of yet another European managing director immediately after this year’s appointment of US-nominee David Malpass as World Bank president (see Observer Spring 2019) would unambiguously demonstrate that the leadership succession processes at the Bretton Woods Institutions remain undemocratic, opaque and illegitimate. The expected quashing of the 15^th IMF quota review – which was an opportunity to more fairly distribute voting powers at the IMF executive board (see Observer Summer 2019) – further exacerbates the Fund’s crisis of legitimacy, at a time when the adequacy of the current multilateral system is increasingly being questioned. In the words of Ambrose Evans-Pritchard of UK newspaper the Daily Telegraph, “If the Europeans persist in treating the International Monetary Fund as a hereditary fiefdom, they will destroy the institution. Global credibility will wither away.”

A fragmented Europe selects three IMF managing director candidates

On Friday 26 July, Europeans identified five candidates for the position of IMF managing director ahead of the nomination deadline on 6 September. The initial list of contenders was whittled down to just three on Monday 29.

Traditionally, leadership selection at the World Bank and IMF is subject to a historic ‘gentleman’s agreement’, which has ensured that the IMF managing director has always been a European and the World Bank president a US national. IMF managing directors have disproportionately been French nationals. Of the 11 managing directors, five have been French, followed by two from Sweden, and one each from Belgium, the Netherlands, Spain and Germany. This time round, French Finance Minister Bruno Le Maire is coordinating the European selection promise.

A fragmented Europe fails to reach consensus

Customarily, Europeans select one candidate and the process of deliberation towards consensus building around that candidate is largely done behind closed doors. This time however, as Europe faces the possibility of growing fragmentation, European governments have struggled to select someone that could win enough support, with reports that the French have sought to widen the pool of candidates, not by looking outside of Europe, but by scrapping the age limit for the job.