for CNNMay 20, 2011 -- Updated 0909 GMT (1709 HKT)
London (CNN) -- The accusations on the alleged criminal behavior of the former International Monetary Fund (IMF) chief, Dominique Strauss-Kahn (DSK), are causing a great deal of public relations damage to an international institution that was already in serious need of an image overhaul.
As a result of the scandal surrounding DSK, there are already unofficial candidates discreetly nudging to replace him. In my part of the world, for instance, the name of Gordon Brown resonates quite strongly. He was a very capable Chancellor of the Exchequer (finance minister) and later, as prime minister of the UK, he was credited for taking a leadership role in addressing the recent global financial crisis. Of course many would argue that he responded capably to a crisis that he helped create, but that is another story.
The names of other potential candidates to replace DSK have emerged, notably Christine Lagarde, France's current finance minister. What is at issue here is that the only people available to replace DSK are Europeans. Why is this the case? When the three most prominent international financial institutions were created at the Bretton Woods conference, the informal agreement was for the precursor to the World Bank (then known at the International Bank for Reconstruction and Development) to be headed by an American. The IMF, instead, would be headed by a European. Since then, this informal pact has been sustained. So far, 10 European technocrats (including DSK) have served as the IMF chief. Frankly, none of them memorable (except DSK), most of them outright dull.
In the aftermath of World War II it may have made sense to involve Europeans in the formation of new international institutions. Although devastated by the war, Western Europe remained at the heart of the international economy in the postwar era. At the time, the world's monetary stability depended on the re-emergence of European nations. However, the world has changed since the end of the World War II and the postwar arrangements are clearly anachronistic.
The emergence of China, India, and other large emerging markets has diminished the importance of Europe in absolute terms. For instance, if the province of Jiansu (China) were a country, it would have a GDP equivalent to Switzerland. If measured in GDP per capita terms, the Chinese province of Shanghai would have a GDP per capita equivalent to Saudi Arabia. To think that Europe matters a great deal is an illusion.
In light of the new realities, the IMF needs to refresh its outlook and consider that the large countries in the developing world are critical to the global economy. One way to recognize this change would be to appoint an IMF managing director from the developing world. There are many reasons why the IMF should pursue this option. First and foremost, the bulk of the IMF's lending activities are geared to low and lower-middle income developing countries. However, these countries have negligible voting power and no presence on the IMF's executive board. Given that the IMF has such a large impact on developing countries, it is appalling that developing countries have no representation in this institution.
Over the years, as stated in its Articles of Agreement, one of the self-stated core functions of the IMF is to "to give confidence to members by ... providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity." In achieving this mission, the IMF has failed spectacularly in its ability to demonstrate why some macroeconomic policy options (negotiated with countries that have received IMF assistance to repair balance of payment maladjustments) need to be pursued.
Although the IMF has to proscribe very tough macro-economic measures, it has in turn become a pantomime villain in many developing countries. Even appropriate policy responses to repair balance of payments crises are perceived as being imposed from above, from some obscure imperialistic organism. As a result, IMF-inspired policy prescriptions are politically very unpopular in developing countries and they are often derailed. Therefore, the effectiveness of IMF measures is highly constrained.
The IMF would benefit from having a managing director who exhibits greater awareness of the difficulties of managing a fragile economy: in other words the IMF needs to be represented from someone from the developing world. This would not be a touchy-feely symbolic act to appease some malcontents. It would serve very pragmatic goals because there is certainly no lack of outstanding talent from developing countries. Kemal Dervis, Turkey's former finance minister, or Agustin Carstens, Mexico's central bank governor, are highly capable and respected policy makers. If I had a magic wand, I would appoint Raghuram Rajan, a former IMF chief economist and a brilliant professor of finance at the University of Chicago.
Any of these individuals would be able to demonstrate that the IMF is not the enemy of the developing world. This is essential at a time in which the IMF itself is in crisis.
The opinions expressed in this commentary are solely those of Lawrence Sáez.