Out With Strauss-Kahn, In With Who?

Strauss-Kahn in his heydays

So now Strauss-Kahn has resigned from the IMF a few months before his scheduled departure and as of this morning granted bail.

The resignation has accelerated the race for the IMF top position with Europe scrambling to hold on to this high-profile position. The Bretton Woods institions (IMF and World Bank) are notoriously very Euro-centric and it is a well known agreement (albeit unspoken) that the IMF boss is European and the World Bank boss is American - a concession by the Europeans since both headquarters are in the USA.

Traditionally, the selection of a new Managing Director is decided by IMF's executive board which is made up of 24 representatives of IMF's 187 member countries. The US, China, Japan and the UK have their own seats on the board as they are regarded as the big economies. The other countries are grouped in constituencies. Votes cast are weighted by the country's subscription to the IMF, known as its quota, which is related to the nation's share of the world economy. Clearly, unless small economies in the same constituency unite and push one representative, the position would always be occupied by the largest economy.  China and other emerging economies are underrepresented considering the new economic power blocks recently created. China's share of the global economy (PPP-GDP) is 13.6% but its IMF vote share is only 3.82%. Yet countries like the UK and France account for 2.9% of PPP GDP, but each has 2.9% of the vote.

The European Union (EU) share of the vote is about a third so if they unify behind a single candidate that would give them a greater advantage to hold on to this position. However, the EU has been known in the past not to back the same candidate. This may change considering the ranging factors beginning with the economic troubles within the Euro-zone and the louder voices of countries like China, Brazil and South Africa regarding this top position. The Wall Street on Wednesday reported that the European officials are uniting to back French Minister Christine Lagarde for this top post. The sovereign-debt problems and other European financial challenges are likely to remain at the top of IMF's agenda for the next few years and this is being seen as enough ammunition to argue that Europe should hold on to the top job for the immediate future.

China, recognizing its IMF member position as the third most powerful member urged "fairness, transparency and merit" in the selection process. Brazil and South Africa are adding their voices urging that the next MD not be chosen on the basis of nationality. The Germans acknowledge that developing countries can make a case for the top posts at the Bretton Woods institutions but argue that under the current situation surrounding the Euro it is best placed for a European candidate.

In the meantime, other potential candidates for the position besides Christine Lagarde include Gordon Brown who has been quietly lobbying for the position; Trevor Manuel, a former South African finance minister whose name has come up in other years as a possible candidate; former Turkish finance minister Kemal Dervis; Israeli central bank chief and form IMF first deputy MD Stanley Fisher; and former German Bundesbank chief Axel Weber who earlier this year bowed out of the race to succeed Jean-Claude Trichet as president of the European Central Bank.

I wonder what kind of power shake up there would be if all the developing countries including the emerging economies decided to field their own candidate who was non-European. When Africa and South America were going through their financial difficulties, the IMF executive positions were held by Europeans (and Americans) who made fiscal decisions for regions/continents they hardly knew. Now that the Euro-zone is in trouble Europe feels it is best suited for the position because of the decisions that need to be made and negotiated. Is this euro-centric arrogance or what?

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