DSK scandal at the IMF: How to choose the organization's next leader.

Commentaries on economics and technology.
June 3 2011 11:14 AM

How To Choose the IMF's Next Leader

It's time to abandon the corrupt practices and secretive agreements that have steered the organization so wrong.

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France's Finance Minister Christine Lagarde. Click image to expand.
Christine Lagarde

Sooner than expected, the International Monetary Fund 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 G-8—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 United States 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.

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Finally, as a new order seemed to emerge in the aftermath of the U.S.-made Great Recession, the G-20 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 some 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 U.S. 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 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.

But 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.

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