James Raymond Vreeland on Lagarde’s tasks at the IMFJune 29, 2011 # 4:11 pm # Foreign Policy, International Law, International Organizations # No Comment
Christine Lagarde has a lot on her plate, with Greece as the most pressing point on the agenda. But she should not overlook the issues of political representation that surrounded her own election bid.
Many IMF member states are openly calling for a non-European to lead the fund for the first time in its history. This follows a recent reform to IMF governance in which some vote shares finally shifted from Western Europe to emerging-market countries like China, India, and Brazil. The reform was necessary, as power on the executive board no longer reflected global economic realities.
At the same time, however, Western governments have to think about domestic politics. Consider the United States: If it gives up too much power, isolationist forces in Congress have a good excuse to say “no” the next time the president asks for an increase in IMF contributions. With that in mind, small Western European countries gave up the most votes in the last round of reforms. But these countries, too, have domestic politics to consider. The Swiss, for example, would never have joined the IMF without a seat on the executive board. If they fail to retain their seat, they may be less inclined to support the institution.
Power at the IMF is on a tightrope. It used to make sense for the United States to provide the lion’s share of resources and receive commensurate political control. As emerging markets continue to grow, however, they will demand more voting power. Eventually, we will reach an impasse where Western governments will not have the domestic political capital to assent to the changes demanded by the developing world.
That development may be inevitable, but it does not mean that we give up on global cooperation. The power asymmetries that allowed the IMF to function in previous decades — in which the most powerful actors assumed responsibility for providing the public good — have diminished on the global level, but they still persist in regions. The IMF should therefore embrace an increasing role for regional financial institutions, recognizing that the political will to provide liquidity in future crises will come from the regional hegemons with the most at stake. For example, the United States led in Mexico’s “Tequila Crisis” in the early 1990s, while Japan led in the East Asian financial crisis of the late 1990s, and Germany leads in the current eurozone crisis.
In this multipolar world, the IMF still has an important role to play: namely, that of the bad guy. Regional financial institutions will want to avoid the political backlash of imposing tough conditionality on their neighbors. To escape this, Asia’s regional version of the IMF (the Chiang Mai Initiative Multilateralization) has explicitly tied its lending to IMF conditionality, and the IMF’s main role in the European debt crisis is to enforce policy conditions.
As U.S. financial power declines, so will the power of the global institutions it set up at the end of World War II. Recognizing the decentralization of power, Lagarde can help the IMF to be more effective by cultivating regional coordination. The locus of global financial power is shifting, and the IMF should adapt.