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Will Strauss-Kahn Lead the IMF Out of Crisis?

A surprising newcomer in Washington

It has been a long time since IMF and World Bank Annual Meetings were as exciting as in this “age of turbulence” (Alan Greenspan). With a global financial crisis in full swing, two new men at the helm and new reform ideas under debate, both institutions would have had every opportunity to put their indispensability for management of the world economy to the test. However, this would require fundamental changes but there is scarcely any indication of that, writes Rainer Falk.


The International Monetary Fund (IMF) should no longer act as “gendarme” of the world economy. It has to reform itself in order to restore its relevance and legitimacy. The image of the World Bank as the “good mother” and the IMF as the “big stick” also has to be corrected. Wherever the new IMF Managing Director, Dominique Strauss-Kahn, who was elected last month and will take office on 1 November, currently speaks, the message is quite clear: here comes someone who wants to change the Fund.

* Time for reform?

The moment could not have been chosen better. Gone are the years when such meetings served above all as an opportunity for finance ministers and central bank presidents to congratulate each other on high growth rates, regardless of how much they may have contributed. This summer’s credit crunch will occupy the financial policy makers and institutions much longer than originally expected. The consequences for the real economy will be enormous even if the exact extent cannot yet be predicted. What is clear, however, is that the pinnacle of high growth is past and a period of downswing has started that could end in a recession. Therefore, in its autumn World Economic Outlook (see references) the IMF has now started to correct its growth projections for the world economy downward, from 5.2% (2007) to 4.8% (2008), whereby a “soft landing” for the US economy is still assumed.

Drastic reforms would also be needed at the IMF since the Fund itself is in a deep crisis since the big emerging economies have largely been lost as clients (and therefore the income from interest and loan charges), the dissatisfaction with the Fund’s undemocratic decision-making processes is constantly growing and its mandate – especially in the poorer developing countries – is more and more harshly criticised.

The self-proclaimed “free market socialist” and “reform director” Strauss-Kahn finds ample room for changes in all these areas. However, the pressure and expectations that he has generated with his energetic stance will not be easy to fulfil. That is not even because of the defect that he can scarcely slough off of being the candidate of the North, elected on the basis of an archaic horse trading between the US and Europe. In the end, even important countries of the South like Brazil, South Africa and Chile voted for Strauss-Kahn. However the Europeans reinforced their grip at the IMF even more by imposing the Italian finance minister Tommasso Padoa-Schioppa as chair of the strategic International Monetary and Financial Committee (IMFC). Thus some are already talking about the “European Monetary Fund” and others talk about the “Turkish Monetary Fund” (since Turkey is the last major IMF client).

So what is to be done?

* Financial market regulation?

When Strauss-Kahn talks about international financial markets, then he likes to talk about financial stability as a “public good” that the IMF must provide and the regulatory requirements derived from it. However, coming to Washington he will find an already established consensus that is foremost concerned with protecting the ‘benefits’ of the past years’ financial innovations (whatever they may be), merely fine tuning existing regulatory instruments and reducing the concept of control and regulation solely to increasing transparency. One typical example is the recent Global Financial Stability Report of the IMF released just before the Annual Meeting (see notes). The report concedes that adjustment to the latest financial crisis could take longer and the risks for financial stability could grow ominously. However, it warns governments not rush to “regulate all and everything”.

* More weight for the South?

The current discussions about quota review and voting rights reform are equally unspectacular. Since almost no country is willing to accept a reduction in its voting shares, a reapportionment in favour of the developing countries could only be reached by a quota increase. But even the most ambitious scenario for a quota increase currently discussed would only reduce the industrialised countries voting shares from 60.6% to 58.3%. A quota increase of 12.5%, as currently proposed by the G-20 troika (Brazil, South Africa, Australia) would offer leeway to shift the voting proportion by 2-3% in favour of the developing countries—too little to remove the legitimacy deficit in the long term.

Possibly therefore, Strauss-Kahn introduced the proposal for a double majority in addition to quota reform, both in a Wall Street Journal article (>>> My Vision for the IMF) and in his inaugural presentation to the IMF board. According to this proposal important decisions have to be ratified by majorities of both creditors and debtor countries. The proposal, long favoured by NGOs (>>> Shifting the debate: A double majority for the IMF) and even practiced by some international organisations (e.g. the Montreal Protocol and Global Environmental Facility—GEF), would have potential to create a genuine North-South balance in the Fund. The only catch for this is that it could only be introduced with the consent of the USA and Europeans, who currently dominate the fund. And they have just made it clear that they are not ready to forsake their established privileges.

* Retreat from the LICs?

The controversial question remains, what is the future mandat of the IMF in low-income countries (LICs), after being less and less welcome in emerging economies? In the past years, there has been a growing chorus of those whose opinion is that the Fund should generally withdraw from the poorest countries because it simply lacks the expertise to combat poverty. Support for this position was articulated last April even by a study of the IMF Independent Evaluation Office. Among other things it was found that the additional development assistance that flowed to Sub-Saharan Africa since the beginning of the decade was not used to combat poverty on account of the IMF’s macroeconomic and budgetary stipulations. Instead it was diverted primarily to service internal debt or to expand international currency reserves.

Therefore NGOs now demand in a letter [33 KB] to the incoming Managing Director, that the IMF must change its policy so that the increase in spending for education, health and combating AIDS is no longer prevented. Strauss-Kahn made it quite clear that the conditions for IMF loans should be further reduced and that one must ask what is really indispensable here. The “Frenchman” (Strauss-Kahn), however, is insisting to maintain IMF’s engagement in the poorer countries.

Even here the new IMF boss does not start from scratch. The review of the IMF’s role in low-income countries has already been introduced by de Rato as a main item in the Fund’s “Medium-term Strategy”, which aims to better integrate these countries into the world economy in future. In this context, the IMF and World Bank have long been working to prepare a joint strategy. This strategy is to have been cast in a Joint Action Plan of the Bank and the Fund at the coming Annual Meeting.

It remains to be seen whether Dominique Strauss-Kahn at least occasionally will ally himself with the civil society reform efforts against the Fund. His reform rhetoric raises high expectations. Whether under his leadership the IMF will become an institution that gives more policy space to the South, i.e. less external intervention; and that understands development in terms greater than mere macroeconomic stability, such as employment, sustainability, and an end to poverty, is quite another matter indeed.

* IMF, World Economic Outlook: Globalization and Inequality, Washington DC, October 2007 (available at www.imf.org)
* IMF, Global Financial Stability Report. Financial Market Turbulence: Causes, Consequences, and Policies, Washington DC, September 2007 (available at www.imf.org)

Rainer Falk is editor-in-chief of World Economy & Development (www.wdev.eu) in Luxembourg.

Posted: 17 Oct 2007

Recommended citation: Falk, Rainer (2007) ‘Will Strauss-Kahn Lead the IMF Out of Crisis? A surprising newcomer in Washington’, World Economy & Development In Brief, Luxembourg, 17 Oct (www.wdev.eu)

* Find more on the subject: >>> Global Finance

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