Wednesday, 25 May 2011

IMF: Is Lagarde Avantgarde?

On 25 May, Christine Lagarde, the French finance minister, formally launched her bid to become the next managing director of the International Monetary Fund. Mrs. Lagarde has strong support from European heavyweights, such as Germany and the UK. A day earlier, Press Release No. 11/195 was posted on the IMF website: Statement by the IMF Executive Directors Representing Brazil, Russia, India, China and South Africa on the Selection Process for Appointing an IMF Managing Director. Its major points:
  • The convention that the selection of the Managing Director is made, in practice, on the basis of nationality undermines the legitimacy of the Fund.
  • The recent financial crisis which erupted in developed countries, underscored the urgency of reforming international financial institutions so as to reflect the growing role of developing countries in the world economy.

Despite Shifting Wealth, the first point carries more weight than the second.
The growing role of developing countries in the world economy is well-documented and undeniable. But it is often exaggerated by the common use of world GDP shares adjusted for purchasing power parities (PPP) rather than based on nominal dollars, Euros or SDRs. PPP adjustment makes sense when comparing living standards or PROSPECTIVE shares in world GDP, as poor countries’ currencies are undervalued but tend to appreciate once countries converge to advanced-country levels. But PPP adjustment makes little sense when comparing economic weights TODAY. Such a comparison requires to relate GDPs through current nominal dollar, Euro or SDR values.
According to latest IMF data, world GDP in 2011 is estimated to total US$ 68.7 trn. (One trillion –trn – ist 1000 billion – bn). Of that product, 64.6% is attributed to advanced countries, 35.4% to the rest, the group of emerging and developing countries. So while the role of developing countries has been growing (especially over the last decade), the group of advanced economies still stand for roughly 2/3 of world GDP. On that account then, a European managing director looks still like a natural choice, as Europe totals a higher share (46.8%) than North America combined (40.7%) within the advance-country group.
The first point made by the BRICS executive directors - that the selection of the Managing Director if made, in practice, on the basis of nationality will undermine the legitimacy of the Fund – carries much more weight. The rise of regional funds that could obscure the IMF role as a global economic enforcer is particularly notable in Southeast Asia, which now holds the bulk of the world’s reserve assets. In that region, the push toward economic integration raises the prospect of an Asian Monetary Fund as Southeast Asian leaders develop a centralised fund known by its acronym as the CMIM, the Chiang Mai Initiative Multilateralisation. Asia could find regional rules more appealing than those of supranational organizations like the IMF  if its leadership remains dominated by developed nations. In Martin Wolf’s words “this would Balkanise management of the global economy, to no one’s true long-term advantage”. 
To sum up: Christine Lagarde as IMF head is more Ancien RĂ©gime than Avangarde.

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