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DSK Forces Emerging Markets Fracas at IMF

 

A power shift at the International Monetary Fund (IMF) in favor of Emerging Market nations has now set the stage for a fierce international battle over who should succeed Dominique Strauss-Kahn (DSK) as he battles well-publicized allegations of sexual assault in New York. The outcome of this struggle and may threaten the ‘gentlemen’s agreement’ between Western powers of Europe’s claim to the top post at IMF, while the US lays claim to the top post of the World Bank.  It has been an ‘understood’ arrangement since 1944. Christopher Swann of Reuters News Worldwide has written a brilliant synopsis of the fracas, here.

However, in an op-ed piece in the Financial Times of London, the noted Global investment strategist and PIMCO Co-CEO Mohamed El-Erian, argues that this ‘feudal system must be changed; and now is the time to do it. Without a credible and quickly-recovering IMF, Europe will face even more uncertain prospects, progress on structural reforms in advanced economies will recede, and the world will find it more difficult to integrate the rapidly growing emerging economies’ which are leading the World in global economic recovery. He makes a valid point.

This fracas lept unexpectedly into the spotlight with DSK’s arrest in New York on sexual assault charges, which has fueled speculation of his imminent resignation; while the current acting IMF Director, No. 2 man, John Lipsky – deeply steeped in IMF culture and in Wall Street banking – is unlikely to retain the top post beyond his 2012 tenure as the power struggle ensues.

Among Strauss-Kahn’s reforms he has instituted since his selection in 2007 as IMF Managing Director, has been major structural changes in voting & Board representation within the organization that has elevated China to No. 3 in voting power and given countries such as India, Russia and Brazil a greater voice.  Some IMF board officials, according to Reuters, say there is a push by some countries for a speedy resolution to DSK’s role — which would favor another European — while others cautioned against judging too soon, and in the interim work to implement a more transparent, though time-consuming, process. Strauss-Kahn, who was denied bail on Monday, and plans to fight the charges and allegations, which may stretch-out over months.  “No matter how it plays out, it is going to be very difficult for Strauss-Kahn to be an effective leader of the IMF,” said Eswar Prasad, a former IMF official now at the Brookings Institute, a think tank in Washington. In the US, the IMF’s biggest shareholder, officials said Strauss-Kahn was unable to carry on being chief of the global lender from a jail cell, whatever the legal outcome. US Treasury Secretary Timothy Geithner has called for an interim chief to be named, saying Strauss-Kahn “is obviously not in a position to run the IMF.” While Chilean Central Bank President, Jose De Gregorio, weighed in, telling the Financial Times in an interview published on the paper’s website that Strauss-Kahn should leave his post as IMF managing director.

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The IMF, whose shareholders are 187 member countries, has two choices in replacing DSK quickly: (a) Retain its feudalistic approach led by economies who no longer have the economic clout they once did, or (b) implement an open, representative, merit-based selection process based on clear criteria and a transparent process, with greater say by emerging economies which are more relevant in today’s global economy. German Chancellor Angela Merkel said on Monday that while it was not yet time to discuss succession, there was a good case for a European to be in the job. Germany pointed to the debt crisis that has engulfed Ireland, Greece and Portugal in pressing its argument that a European could bring a fuller understanding of one of the world’s most pressing economic problems.  Strauss-Kahn has been deeply involved in talks over European Union and IMF bailouts for debt-strapped countries.  In fact, one of his signature achievements has been reforming the IMF’s voting structure to give emerging market economies more power.  In the past, emerging economies had not been unified enough to put forward a consensus candidate. Some think this time could be different.

As a result of the prospect of tensions between developed and emerging economies in the IMF Board structure, some have recently floated PIMCO’s Mohamed El-Erian, as a possible appeasement. However, El-Erian  this week said he has no desire to head the IMF if its managing director, Dominique Strauss-Khan, resigns over the sex assault allegations.  El-Erian says the  selection process of a new IMF chief has to change now or the fund won’t have the credibility to help Europe overcome its problems. If the fund wants to gain legitimacy among emerging economies, he continued, the IMF needs to be more representative and reflect the current nature & composition of the global economy of nation’s the position has to be open to candidates of all nationalities, more transparent, and a merit-based selection process for the new IMF chief. Stay tuned…

Source: Reuters, FT                                        Video:

 

Author

Elison Elliott
Elison Elliott

Elison Elliott , a native of Belize, is a professional investment advisor for the Global Wealth and Invesment Management division of a major worldwide financial services firm. His experience in the global financial markets span over 18 years in both the public and private sectors. Elison is a graduate, cum laude, of the City College of New York (CUNY), and completed his Masters-level course requirements in the International Finance & Banking (IFB) program at Columbia University (SIPA). Elison lives in the northern suburbs of New York City. He is an avid student of sovereign risk, global economics and market trends, and enjoys writing, aviation, outdoor adventure, International travel, cultural exploration and world affairs.

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Market Trends; International Finance; Global Trade; Economics

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