And the winner is ....

With the sudden resignation of Dominique Strauss-Kahn, the position of Managing Director of the IMF is up for grab.  Europe is insisting that tradition should be respected and that the new MD should be a European.  Emerging markets, buoyed by their relatively stronger economies, argue that the time has come for a change and that the job should be awarded to one of their nationals.   The US position, as stated by Secretary Geithner, is that the nomination process should be open and quick.  And the winner is…

Since its creation in 1946, the IMF has always been led by a European and since 1963, a Frenchman has led the institution 74% of the time.  The European exclusivity stemmed from an informal arrangement between the original great economic powers.  The French preeminence came from its greater political weight within the European Community, at least through the mid 1990s.

Today, Europe seems to advance the candidacy of French Finance Minister Christine Lagarde.  She is the best European candidate, has been an excellent FM, has an international work background and would be an excellent MD.  But should Europe lead the IMF now?

Those in favor argue as follows: first, Europe remains the second largest economic bloc in the world and as such deserves to maintain its influence over key international organizations such as the IMF; second, since the current flash points are Greece, Ireland and Portugal, an European MD would be best equipped to deal with the crucial cultural and political dimensions of any workable solution.

The other side argues that emerging markets are far more important to the world economy than they were in the 1940s and even 1980s, that they hold massive international foreign exchange reserves and therefore that their time has come to step up on the world scene. 

They also argue (more discretely) that Europe has managed its public finances very poorly so that it is hardly in a position to lead by example and be recognized, albeit indirectly, as the guardian of financial orthodoxy.  No doubt, many Asians remember the (in)famous photo of MD Camdessus standing over a sitting President Suharto signing a financial aid agreement with the IMF.

As the largest contributor of capital to the IMF, the US will likely play the role of referee.  So far, it gives the impression that while it would endorse Mme Lagarde, it is waiting to see if the emerging economies can rally quickly behind a strong candidate.  In the tug of war for the brass ring, Europe seems to have won the first round, and emerging markets are yet to put their demand into action.

As much as I respect FM Lagarde, I believe that it may be time for the right non-European candidate.  Why?

1-      There is no doubt that the most immediate sovereign debt problems have arisen in Europe and that the list of European countries in need of assistance may grow.  Individual merits aside, a European MD will likely be second-guessed and suspected of bias; less so a non-European MD;

2-      The need for cultural understanding and links to the European political power structure may be overstated given that both the European Central Bank and the European Commission would be parties to any and all individual rescues and would provided such “local link”;

3-      Non European countries may also need assistance, in which case the argument by some for having a European at the helm of the IMF disappears;

4-      Finally, a candidate MD with a successful track record of handling a deep sovereign debt crisis would enjoy greater expertise and authority than one without.  In that regard, France didn’t go through such a crisis so that Mme Lagarde didn’t either.

I can think of a few candidates who would meet the above criteria.  In the 1980s, Chile went through a wrenching debt crisis.  It dealt with it on its own, with innovating strategies and sound budgetary policies, without the benefit of multilateral help or the provision of fresh international loans.  It emerged as the healthiest Latin American country, to this day.  While Greece and others would be well advised to study the Chilean restructuring model, it is highly unlikely that any of the architects of the Chilean “miracle” would be nominated given their association with the then military regime.

On the other hand, Mr. Guillermo Ortiz, who as FM (1994-1998) orchestrated the recovery of Mexico from the 1994 debt crisis, would be an ideal candidate.  As FM he was both decisive, cool and very effective.  While the crisis couldn’t have been overcome without substantial help from the US, Mr. Ortiz was very effective in negotiating and coordinating the steps that led to eventual success.  Subsequently, as President of the Central Bank of Mexico (1998-2010), he consolidated the gains, stabilized the peso and contributed greatly to Mexico receiving an investment grade rating for its external debt.  As a Mexican, he comes from an economy big enough to give him credibility in the eyes of G7 countries; he also brings along the ability to work well with the US.

In the end, I feel that the decision will boil down to how fast the biggest emerging countries can line up behind a candidate of the stature of Mr. Ortiz.  If they do, he can and should be elected as the new managing director of the IMF.  If they can’t, Mme Lagarde will likely go through.  Either way, the world will be well served.