international analysis and commentary

Choosing an IMF leader: who holds the power?


In the past, the balance of power went something like this: the Europeans ran the International Monetary Fund and the Americans headed up the World Bank. Now, with new emerging economic powers, Europe itself needing debt bailouts and the US focused on Asia, choosing a new IMF chief may not be so simple.

The IMF, which debuted after World War II to prevent world financial crises, has had 10 managing directors – all of whom were Europeans. The 10th, Dominique Strauss-Khan, who resigned on May 18th after being arrested in a sex scandal in New York, had been working to make the IMF less Western-focused by transitioning leadership in favor of rising powers like China and India.

A 2008 reform, which went into effect this year, strengthened the representation of 54 lower-income member countries – many emerging market powers – by increasing their individual quotas. The quotas, which the IMF assigns to member countries according to their global economic standing, determine several things: each country’s financial responsibility to the fund, its borrowing potential and – most importantly – its voting power. In other words, the richer the country, the greater its influence on IMF decisions – like who will be the next managing director of the fund.

According to the IMF, the 2008 reform increased the voting power of low-income countries by almost tripling their basic votes. However, Europe still weighs in heavily, holding approximately one third of votes, while the US holds more than 16%.

In November 2010, the IMF announced another major reform in quotas and governance aimed at giving emerging economies even more control. The plan calls for a 6% quota shift to emerging markets and developing countries. Brazil and India would move to the top 10 IMF shareholder list and China, now the 6th largest shareholder, would become the 3rd largest. Under the plan, the 10 largest members of the fund would be: the US, Japan, China, Germany, France, the UK, Italy, Brazil, Russia and India – in this order. Saudi Arabia and Canada would move down and voting power would shift by more than 5%, when combined with the 2008 reform, to developing countries.

Strauss-Khan, after the executive board’s decision on the reform, said, “This historic agreement is the most fundamental governance overhaul in the Fund’s 65-year history and the biggest ever shift of influence in favor of emerging market and developing countries to recognize their growing role in the global economy.”

But the 2010 reform is not set to be implemented until the fall of 2012 and voting power is a crucial issue now as the IMF’s executive board prepares to take nominations for Strauss-Kahn’s successor. The board, comprised of 24 members who represent the IMF’s member countries, is responsible for determining a selection of candidates based on the nominations received. The selection is then presented to the member countries who vote for the new managing director. Under today’s rules, Europeans still hold a large share of votes and have already agreed that they want a European leader – with French Finance Minister Christine Lagarde as their prime nominee.

The emerging nations, on the other hand, have so far failed to unite behind a candidate, with several names surfacing from a variety of countries. Plus, it will be difficult to find an accord as India is not likely to support a Chinese nominee, and vice versa. In fact, just after Strauss-Khan’s resignation, Chinese names like Zhu Min – former Deputy Governor of the People’s Bank of China and advisor to Strauss-Kahn – began to surface in the press. Chinese Foreign Ministry spokesperson Jiang Yu made her point clear by saying, “In principle, we believe that newly emerging markets and developing countries should be represented in the top leadership.”

Ideally, the Asian factor should weigh heavily in the vote, but in reality it will be the Americans who ultimately decide. Europeans will vote for a European, the emerging countries will vote for one of their own and it will be left to the Americans and their 16% of the vote to tip the balance of power. Now the question is whether the US will side with its traditional Western friends, or look even further East into the future.