Dominique Strauss-Kahn last night sought to restore battered confidence in the institutions of global finance with a bold pledge to reform the IMF when he takes the helm next month. In an exclusive interview with Emerging Markets, the incoming managing director reiterated his vow to tackle head-on the profound issues of relevance and legitimacy facing the Washington-based multilateral. “I will repeat what I have said throughout my campaign,” he said. “I am the candidate for reform.”
The former French finance minister said he strongly endorsed various proposals this weekend by the IMF’s governing body to boost the Fund’s surveillance role, grant greater voice to developing countries and overhaul the institution’s funding model. “When I listened to what they are saying at the IMFC, it’s clear that they are really asking for reform,” he acknowledged. “I have no problem with what has been said [in these discussions].”
Asked to comment on the widespread crisis of confidence plaguing the Fund – a dramatic turnaround from a year ago – Strauss-Kahn agreed the early departure of Rodrigo de Rato had increased uncertainty surrounding the institution’s future: “That’s normal,” he said. “That’s why we need reform.”
Although Strauss-Kahn declined to discuss the substance of his reform plans at this stage, he pledged to revitalize the institution’s role as global financial watchdog – a key IMFC recommendation. His comments come as de Rato’s era as managing director winds to a lacklustre close – with the world’s financial elite calling for a radical rethink of the Fund’s role.
Former IMF managing director Michel Camdessus told Emerging Markets before the Washington meetings that the Fund had failed to learn the lessons of the past – and, in particular, that this year’s financial crisis would not have happened if Institution’s members had implemented reforms agreed a decade ago.
The former French Fund chief, who has been closely advising Strauss-Kahn, said that the incoming managing director will have to work hard to reach consensus on key reforms. “Only then will the world be reassured that it no longer has Damocles’ sword above its head,” Camdessus said.
His message was echoed yesterday by leading policy-makers, including ECB executive board member Jurgen Stark. “Ten years ago, after the Asia crisis, the IMF gave these countries a lot of good advice about avoiding currency and maturity mismatches in their banking systems. I just ask the question: how could something very similar happen today in a more developed economy?”
Stark said that the IMF would need to redefine its role by extending its focus beyond emerging markets. “This is not so difficult in principle – it takes the Fund back to the reasons it was originally created, to contribute to global financial stability, using instruments like surveillance,” he told Emerging Markets.
Developing economies too are weighing more heavily into the debate. Brazilian finance minister Guido Mantega said yesterday that Strauss-Kahn had agreed to support an adjustment that would take Brazil’s IMF voting quota up to 2%, from just under 1.4% at present, to be finalized if possible at the IMF spring meetings in 2008.
But the European single-member constituencies remain reluctant to sacrifice their own voting power, and Mantega said that Brazil is taking a two-track approach to gaining a greater voice in the global financial architecture. The government is aiming for Brazil, along with China, India and South Africa, to be included in an expanded G7 finance ministers’ grouping.
Mantega is scheduled to meet US Treasury secretary Henry Paulson to discuss the matter on Monday morning. Large emerging market economies such as Brazil “today contribute to a better equilibrium in developed countries,” Mantega said. Until now, “We have had a marginal participation [in G7 meetings] included for coffee but not dinner,” Mantega said. “We should be invited to the full-course dinner.”