On Friday, Feb. 19, the Executive Board of the International Monetary Fund (IMF) elected Christine Lagarde to serve a second five-year term as managing director. On the surface, this decision seems troubling. A former finance minister of France, Lagarde is the eleventh consecutive European to head the IMF, dating back to the origins of the institution in 1946. While many countries in Asia, Latin America and Africa have undergone unsteady but rapid economic growth and political transformation, they have drawn on the IMF for financial assistance and policy advice but have also become creditors and contributors to it. Nonetheless, their officials are still relegated to the second or third tier of the IMF’s management ranks. Why perpetuate the 70-year European monopoly?
To understand the current situation, first consider the history: How and why did Europe get a lock on picking the head of the IMF? When the IMF and the World Bank were being established in 1946, the U.S. government decided that it was critically important for the head of the World Bank to be an American banker. The World Bank was larger than the IMF and was expected to be more important in the reconstruction of economies devastated by World War II. To raise money, it would have to issue bonds in the New York capital market, and it would be easier to sell those bonds if the World Bank were headed by a familiar and respected individual. The smaller IMF could be headed by someone from elsewhere in the world. The first choice of many participants was a Canadian, but after Canadian officials turned down offers in 1946 and again in 1951, the job of IMF managing director went first to a Belgian and then to a Swede.
Once the Europeans got a taste for running the IMF, they managed to stick together well enough to elect all of the people who have had the job up to today. Only once did they fail to put up a consensus candidate (in 1986), and even then the IMF membership picked one of the two European candidates (Michel Camdessus, from France, over Onno Ruding, from the Netherlands). Only once did the membership reject the Europeans’ first choice (Germany’s Caio Koch-Weser in 2000).
Why does this matter? Most (though not all) managing directors have done an excellent job, particularly from the 1960s through 2000. By the millennium, however, the process had degenerated into something close to political patronage. The German government made it quite clear that it felt entitled to name the next managing director. When Koch-Weser was rejected, Germany just sent up another candidate (Horst Köhler) and effectively dared the rest of the membership to turn him down. After that episode, the IMF Executive Board formally adopted a new, more transparent, process that was supposed to promote meritocracy. Although subsequent vacancies have attracted candidates from other regions, Europe has maintained its solidarity and its sense of privilege, and the IMF Executive Board has chosen three more Europeans to lead the IMF.
The European monopoly severely damages both the credibility and the effectiveness of the IMF. The effect on credibility is obvious. A multilateral institution cannot credibly offer policy advice to its members unless the membership is fairly represented in its management. The damage to effectiveness, though, goes beyond the loss of credibility, because the selection process creates the reality — not just the perception — that the managing director could be beholden to the countries that supported his or her candidacy. This problem was evident during the East Asian financial crises in 1997-98, when major countries blatantly inserted themselves into the process of determining policy conditions on IMF lending. And it has been particularly problematic since 2009, when the IMF’s lending has been primarily to European countries. Europe’s interests are not identical to those in the rest of the world, and the region has played an outsized role in deciding the terms on which the IMF can lend.
The case for a new beginning is thus quite clear, but the question of timing remains. Why was 2016 not the right time to make the leap?
First, continuity matters. Running the IMF takes time to learn, and almost every managing director has become more effective over time. The four managing directors who have served at least part of a second term — Per Jacobsson (1956-63), Pierre-Paul Schweitzer (1963-73), Jacques de Larosière (1978-87) and Michel Camdessus (1987-2000) have been among the most effective.
Second, Lagarde has been a strong leader. She has recognized the dangers of austerity, and she has stood up to the European bosses at critical junctures. Two incidents stand out. First, shortly after she arrived in 2011, she made a public and well-reasoned case for recapitalizing European banks at a time when most European officials were still adamantly opposed. Second, in June 2015, she insisted correctly on a deeper restructuring of Greek debt as a condition for continuing IMF participation in lending to Greece, and she followed through on the threat when European institutions balked. While that insistence would have been more effective had it been made earlier, it has restored credibility to the IMF and may yet lead to a better outcome for Greece.
Third, geographic diversity in leadership is only one dimension of the process of rebalancing the IMF for the 21st century. As the first woman to head the IMF, she is both a role model and a strong advocate for diversity in an agency that has lagged in that domain. The task of making the IMF a truly diverse institution — on gender, nationality, and intellectual training — is a work in process that continues to be resisted from within. In a second term, Lagarde will have an opportunity to ensure that recent gains become irreversible.
Before Lagarde arrived in 2011, three consecutive managing directors failed to complete a single term in office, leaving the IMF in a weakened and embarrassed state. It is a relief to the institution and the world economy that she is prepared to stay for a second term. The transition to a non-European director is imperative, but it can wait another five years.
