TIME FOR THE IMF TO FOLLOW THE VATICAN / THE FINANCIAL TIMES COMMENT & ANALYSIS

Time for the IMF to follow the Vatican

Mohamed El-Erian

March 14, 2013

Few would have predicted the Vatican would beat the International Monetary Fund in electing a non-European as its leader. The considerations that reportedly led to the selection of Argentina’s Jorge Mario Bergoglio – now known as Pope Francis – will resonate well with those who feel the IMF has been increasingly short-sighted in holding on to an outdated nationality-based approach for selecting its managing director.

 

 

The ascendancy of Pope Francis is widely seen as an explicit recognition that Europe no longer dominates the Catholic church, and as consistent with a shift in dynamism and numbers in favour of the developing world. It is also an attempt to bring the perspective of a relative outsider to a church whose insularity is believed by many to have undermined its credibility. Finally, it is expected to facilitate renewal at a time when many are looking for inspiration and enlightenment.

 

 

The essence of these arguments is similar to those made to encourage the IMF to move decisively from its nationality-based approach – which has ensured only Europeans have led it since its creation in 1944 – to one that is genuinely open, transparent and merit-based.


Europe no longer dominates the global economy. If anything, it has become the biggest source of systemic risk in recent years. Meanwhile, developing countries have significantly outperformed, both economically and financially, with some gaining systemic influence greater than that of several European economies.


The continent is seen by many as having co-opted the IMF to support an insufficiently objective approach to solving Europe’s own problems. Moreover, the fund has appeared shy in conveying important lessons learnt in previous developing economy debt crises. Indeed, officials from Africa, Asia and Latin America complain about its outmoded adherence to a one-way flow of best practices.


In the past, western governments showed little restraint in using the IMF as a vehicle for giving advice to (and imposing conditionality on) emerging economies. But now they themselves face persistent problems, the IMF appears hesitant to engage the whole membership in formulating advice, let alone to act as a conduit for suggestions from developing to advanced countries.


Then there is the relative void at the centre of the global system. After the high reached in April 2009 at the London meeting of the Group of 20 leading economies, global policy co-ordination has diminished to a worrying degree – especially when judged against the complexity and fluidity of today’s global economy.

All this has served to undermine the credibility and effectiveness of the IMF – at a time when the interlinked nature of the world’s economies is substantial. Just witness the currency tensions associated with the widening pursuit of unconventional monetary policies.

 

 

The IMF should not wait for the end of the tenure of Christine Lagarde, its managing director, to reform the selection process comprehensively. Indeed, as illustrated in the two previous occasions when governments had to scramble to choose a new managing director after incumbents resigned, a proper revamp cannot be undertaken in the midst of intense political posturing and electioneering.

 

 

 

Using the Vatican’s achievement as a catalyst, Ms Lagarde should calmly start the process now, especially as she is not even midway through the first of her potential multiple terms. Already, she has shown her willingness to do the right thing even when this risked upsetting western officials (warning about the fragility of European banks, for example, and telling US Congress that its dysfunctional behaviour was threatening the global economy).


With the help of outside experts, she could spearhead a lasting revamp that decisively places merit above nationality. This would also allow for changes to rules that preclude highly qualified candidates from making it to the final rounds (such as the arbitrary age limit that in 2011 derailed the Israeli central bank governor Stanley Fischer, a respected monetary official who has excelled at both the national and multilateral levels).

Even better, such changes would come at a time when political squabbles in America’s Congress risk derailing implementation of the marginal adjustment to the IMF’s voting and representation agreed in 2010.

 

 

 

We should not underestimate the role such a move could play in enhancing the integrity and effectiveness of the IMF.



The writer is the chief executive and co-chief investment officer of Pimco