Mexican has a long shot at IMF

While China and other rising economic powers insist they want more of a say in running the world economy, so far they have failed to throw their support behind the developing world’s only candidate to lead the International Monetary Fund.

Mexican central bank Governor Agustin Carstens has the backing only of several Latin American nations in his long-shot bid to gain the IMF post, while France’s Christine Lagarde has garnered support from most European countries and a handful of Middle Eastern nations. With Europe controlling a third of the votes on the IMF board, Mr. Carstens would need the backing of most of the developing world as well as the U.S. — which has remained neutral in the race — to succeed.

The struggle facing Mr. Carstens might seem perplexing, given the ambitions of many developing countries that argue they are now leading world growth as the U.S. lags behind, thus they should play a more important role at the IMF. The Mexican finance chief is widely hailed as a brilliant University of Chicago economist with broad experience in global finance at the IMF, Mexico and elsewhere — making him as well-qualified or more so than Ms. Lagarde, a high-powered lawyer who serves as France’s finance minister.

Mr. Carstens said he stepped forward because no other developing world candidate emerged to challenge the European candidate. Israeli central bank chief Stanley Fisher, who raised his candidacy at the last minute, was disqualified by the IMF on Monday.

Most notably, China, India, Brazil and Russia — the largest emerging countries and among the most vocal critics of the IMF’s exclusive selection of European chiefs in the past — did not offer or endorse a candidate. Officials from these countries acknowledge privately that, while often spouting similar rhetoric, they often diverge on economic issues in practice and have not been able to agree on a candidate.

“If we never present candidates, we will never get where we want to be,” Mr. Carstens told the Peterson Institute for International Economics this week. “Right now, emerging economies are the stronghold of the world economy,” he said, and that is a testament to the IMF’s success at rescuing and counseling many of those countries in the past, including Mexico, Brazil and South Korea. “They need to be heard.”

’A capable candidate’

In the past week, Mr. Carstens, a hefty former baseball player and Chicago Cubs fan, made his case to Treasury Secretary Timothy F. Geithner, as well as authorities in New Delhi and Beijing. While no one volunteered their support, Mr. Geithner pronounced him to be a “capable candidate” in language similar to that he used to describe Ms. Lagarde.

With Europe in the midst of a financial crisis and the IMF as well as Ms. Lagarde deeply involved in fast-moving developments there, Mr. Carstens acknowledges she has an inside advantage and he faces steep odds. But Edwin M. Truman of the Peterson Institute said the silence from most nations outside Europe may bode well for his candidacy because it shows that the European candidate isn’t being endorsed automatically, as occurred in the past.

Under an unwritten agreement with the U.S., since the inception of the IMF after World War II it has been run by a European while the World Bank has been headed by an American. For a half-century, other nations have acquiesced to this informal arrangement.

The United States this time has said the new IMF chief should be chosen on the basis of merit. But if the IMF for the first time selects an emerging-market candidate, that means the U.S. will be the next to lose its perk of automatically naming the World Bank chief. The current World Bank president, Robert B. Zoellick, argues that the loss of such a privilege would undermine support for the international financial institutions in Congress.

Conservative Republicans have made no secret of their opposition to U.S. involvement in the European crisis through the IMF, to which the U.S. has contributed $100 billion in backup funding. Moreover, funding for such international organizations has never won much popular support.

Some analysts say Mr. Geithner would be reluctant to provoke opposition in Congress by breaking with tradition at this delicate juncture, when both funding for the organizations is at stake and the IMF is dealing with arguably its biggest-ever financial crisis, centered in Europe.

But Mr. Truman said the U.S. may be holding back to see who gets most of the rest of the world’s support and it may ultimately endorse the candidate with the most votes on the IMF board. Whichever way it goes, the U.S. is likely to be the kingmaker in the selection process, which is scheduled to culminate at the end of the month.

Mr. Carstens argues that he is the best candidate for preserving the IMF’s independence at a time when the international financial firefighter is providing loan programs of unprecedented size and risk in Europe, in a campaign that some analysts say shows its bias toward the Continent. The rescue programs for Greece, Portugal and Ireland, arranged jointly by the IMF and the European Union, have been the largest and most generous ever, and have plunged the IMF deep into a thicket of intra-European politics and finance.

“There could be a conflict of interest” if the fund’s directorship remains in European hands, Mr. Carstens pointed out. “The main borrower will be Europe and we will have a situation where the borrowers dominate the creditor institution.”

IMF independence

Another potential conflict involves the unsavory possibility that Greece or other European nations may need to restructure their debts rather than strive to repay them through economic austerity programs imposed by the IMF and EU. The IMF has allowed for such debt restructurings in past rescues of nations in Asia and Latin America when the debt load is just too great for citizens to bear.

But many European leaders, with an eye toward protecting major banks on the Continent that have invested in Greek debt, have strongly opposed allowing Greece to default. Ms. Lagarde has been among the most adamant that a default should not occur in Europe, even if that means subjecting Athens to years of recession and painful budget cuts.

Mr. Carstens told the Wall Street Journal that debt restructuring should be a “very, very last resort” when all other measures fail, and that it should be done in “the most market-based friendly way possible.” He stressed it is imperative that the IMF maintain its independence in addressing such difficult situations.

Former IMF chief economist Kenneth Rogoff agrees and argues that IMF independence from Europe is more important now than ever. Unlike individual European nations, he said, the IMF must stand for the larger good for Greece and the world economy. That means persuading the leaders of Europe to allow Greece to renegotiate its debts, a move widely regarded as default in financial markets.

A European IMF chief would be tempted to put off the problem by providing another huge dose of loans that the country ultimately cannot repay. But Mr. Rogoff said the IMF needs to rewrite the bailout programs not only for Greece but also for Portugal and Ireland, giving those struggling nations some relief from their overwhelming debts in exchange for accepting tough budget cuts and other unpopular economic reform measures.