As Christine Lagarde leaves her role as Head of the IMF, the time is right for reform of the international organisations, giving emerging economies such as China and India a greater, more proportional say.
Christine Lagarde’s confirmation that she is stepping down as managing director of the International Monetary Fund coincides with the 75th anniversary of the Bretton Woods conference in New Hampshire in 1944, when 44 countries founded the fund and the World Bank as the pillars of a global financial order. That order is now being put to the test by globalisation, a populist backlash and the rise of new economic powers such as China.
Lagarde’s exit is an opportunity to address a contentious issue in the management of the two institutions, the outdated convention that Europe appoints the head of the IMF and the United States appoints the head of the World Bank. Limiting the field to Europeans and Americans does not reflect the rising power of emerging economies and the shifts in market activity expected over the coming decades.
The appointment of a replacement for the former French finance minister, soon to become head of the European Central Bank, is a timely opportunity to introduce an open process based on merit.
The quota-based IMF shareholding system, based on economic influence, has also not kept pace with reality, with the US having more than a 16 per cent share of voting power compared with 6.15 for Japan and 6.09 for China, the world’s second largest economy.
Acting managing director David Lipton rightly says the IMF cannot expect to retain global reach and resources “unless countries gaining in importance … gain appropriately in their say in the fund”.
If the IMF is to remain relevant for the next 75 years in helping maintain a stable and robust international monetary system, Lagarde’s successor needs to drive adaptation to a bewildering range of challenges, from the rise of new economic powers like China and India, to financial technologies that will revolutionise payment systems, to climate change, to the emergence of new financial centres and to the risk of digital currencies.
With the IMF having reinvented itself as a rescue lender to cash-strapped governments after the collapse of the fixed exchange-rate system, governments still turn to it for help. But the World Bank faces not only Trump’s hostility towards multilateralism but competition from other development lenders such as the China-based Asian Infrastructure Investment Bank, private investment and Chinese aid.
French Finance Minister Bruno Le Maire told a conference in Paris to mark the anniversary that unless Bretton Woods was reinvented it risked losing its relevance, and the first part of this century may be defined by China’s New Silk Road project, or the Belt and Road Initiative, which “might become the new world order, and Chinese standards … could become the new global standards”.