Political Economist

TWN Info Service on Finance and Development (Jul07/02)

4 July 2007

CALLS FOR IMF LEADERSHIP REFORMS AFTER DE RATO RESIGNATION

Calls for an end to the archaic leadership selection process at the International Monetary Fund (IMF) have been renewed after the surprise mid-term resignation of its managing director Rodrigo de Rato for “personal reasons” last Thursday. Following de Rato’s announcement that he is to step down in October after the Bank and Fund annual meetings, civil society groups revived their calls to end the 63-year-old “gentlemen’s agreement” at the Bretton Woods institutions which gives European governments the prerogative to select the IMF chief while the United States government appoints the president of the World Bank.

De Rato’s departure at this point in time means that his successor will inherit an institution in crisis and one that is undergoing an ambitious but controversial and deeply divisive programme of policy and operational reform.

Below is a report on the reactions to de Rato’s resignation published in SUNS # 6283 Monday 2 July 2007.

With best wishes
Martin Khor, TWN

Calls for IMF Leadership Reforms after de Rato Resignation

By Celine Tan

Calls for an end to the archaic leadership selection process at the International Monetary Fund (IMF) have been renewed after the surprise mid-term resignation of its managing director Rodrigo de Rato for “personal reasons” last Thursday.

Following de Rato’s announcement that he is to step down in October after the Bank and Fund annual meetings, civil society groups revived their calls to end the 63-year-old “gentlemen’s agreement” at the Bretton Woods institutions which gives European governments the prerogative to select the IMF chief while the United States government appoints the president of the World Bank.

In a press statement, a coalition of UK-based NGOs, including leading charities such as Oxfam, ActionAid and Christian Aid, have called upon the UK government and other European countries to seize the opportunity to implement a transparent and merit-based appointment system at the Fund, a chance that was missed in the recent World Bank leadership changeover.

De Rato’s resignation also placed both the Bretton Woods institutions in leadership transition, as its sister institution, the World Bank, sees Robert Zoellick take over its helm from current embattled president Paul Wolfowitz this weekend.

The Bretton Woods Project (BWP), a Bank and Fund watchdog, said that European countries have been given a second chance at reforming the governance of the international financial institutions following the recent failure to implement such reforms at the Bank.

According to BWP’s policy and advocacy officer, Peter Chowla, European governments had “missed a historic opportunity” with the nominations for Wolfowitz’s successor but “they can atone by ensuring that the next IMF managing director is selected through an open, transparent and inclusive process, where selection is based on merit, not nationality, and where the views of all members have equal weight”.

The statement added that “with three months before de Rato’s departure, there is plenty of time to establish and implement a selection process that might be seen as appropriate to such a senior appointment at the national level”.

This call will no doubt be reiterated by developing-country governments for whom the current governance structure of the Bretton Woods institutions disadvantages through their weighted voting system.

The Financial Times cites a diplomat from the Group of 20 (a grouping comprised of the G7, the EU and 11 emerging economies) as saying that the de Rato resignation “will give fresh momentum to the push for reform of the selection process”.

According to the report, Brazil, South Africa and Australia had led demands for the reform of the World Bank selection process after Wolfowitz’s resignation in May but were rebuffed by the US. The White House nominated Zoellick, former deputy secretary of state and US trade representative, to the post and he was appointed unopposed after just 17 days of nominations.

De Rato himself had called for a reform of the Fund’s leadership selection process. In his report on the institution’s Medium-Term Strategy to the Executive Board in April this year, de Rato said that “a transparent procedure for the selection of the Managing Director should be formally approved”.

He had said that as the management has an important role “in maintaining the integrity, credibility and independence of the institution”, its membership needed “to respond to the calls for a transparent process by adopting and publishing guidelines on the selection of the Managing Director”.

The leadership appointment is one component of a larger basket of governance reforms called for by developing countries and civil society at the IMF, including most notably the weighted voting structure which results in industrialized countries holding 71% of the voting power at the institution (the US wields almost 17% of the votes and has effective veto power), while developing countries have less than a third share.

De Rato is currently overseeing efforts at reforming the voice and representation system at the institution which includes a two-stage process to overhaul the outdated quota system used to determine members’ financial subscriptions to the Fund, access to Fund resources and their voting power within the institution.

However, so far, there has been little agreement on what would constitute the basis of the new formula with many developing countries calling for a formula measured at purchasing power parity (PPP) levels while industrialized countries want to introduce openness, including openness to trade, as a factor.

De Rato’s departure at this point in time means that his successor will inherit an institution in crisis and one that is undergoing an ambitious but controversial and deeply divisive programme of policy and operational reform.

The outgoing IMF chief is also supervising an institutional work programme which includes implementation of the new bilateral surveillance framework approved by the Executive Board two weeks ago but opposed by China, as well as plans to revamp the Fund’s revenue model to secure the institution’s financial future in the wake of declining inflows.

Some observers have already questioned the viability of these reform packages in the wake of de Rato’s announcement, although de Rato had pledged his determination to “make further progress on all aspects of the medium-term strategy in the coming months, especially on quotas and voice but also Fund income, crisis prevention, and on collaboration with the World Bank in low-income countries”.

However, many developing countries have already expressed disappointment in the manner in which some of the reforms have been pushed through by the controlling membership of the institution. Many view the reforms as tokenistic at best and disingenuous at worst.

Chinese officials and analysts have already criticized the recent adoption of the aforementioned surveillance decision as bilateralism cloaked in a veneer of multilateralism with the reforms motivated by US efforts to pressure for faster appreciation of the renminbi (see separate article).

The selection process of the new IMF managing director will thus take place amidst uncertainty about the role of the institution in the current international financial architecture and its significance as a multilateral financial organisation.

The continuance of the present outmoded practice of leadership selection based on a postwar, trans-Atlantic power-sharing arrangement will undoubtedly raise questions about the authenticity of the governance reform process underway at the Fund.

De Rato’s own appointment in 2004 was heavily criticised, with his selection process described by the Bretton Woods Project as a “one-horse race” with “squabbling jockeys”, as European countries bickered over their choice of candidate to put forward to the institution.

At the time, NGOs had condemned the horse-trading that led to De Rato’s selection and the secrecy that surrounded the decision to appoint him over the Egyptian nominee, Mohamed El-Erian, who lost in an apparent “secret straw vote”.

According to the Bretton Woods Project and the Italian-based Campaign to Reform the World Bank (CRBM), “backroom political deals ensured Rato’s election, making a mockery of the vote. Due to the lack of transparency of board proceedings, we can’t even know how much support El-Erian received in the straw vote”.

This time round, NGOs called for a halt to this non-transparent process. Romily Greenhill from ActionAid commented: “We hope that European governments will have the strength to finally end the backroom deal with the US that has perpetuated the outdated carve-up of the leadership at the IMF and World Bank”.

De Rato, a former Spanish finance minister, is the ninth managing director of the IMF and served only two and half years of his tenure. He cited “family circumstances and responsibilities, particularly with regard to the education of my children” for relinquishing his post.