Yesterday, the IMF, which was originally mandated to prevent another global Great Depression, announced that the process to appoint its Managing Director for the 2016-21 term had commenced.
In the midst of a U.S. presidential primary season focussed on asserting the proper U.S. role in the world and preventing a recurrence of the economic crash of 2008-10, and with the U.S. Congress having just authorized funds to double the U.S. equity contribution to the IMF, one might expect that an American should be given a fair chance to get this key job.
But, as things stand, no Americans need apply.
There are two reasons.
First, under a long-standing "informal arrangement" with Europe, re-endorsed by the Secretary of State when the incumbent Managing Director, Madame Lagarde was appointed in 2011, this job is always reserved for a European, regardless of merit. In return, the president of the World Bank is always an American. As a result, every IMF Managing Director in its 70-plus year history has been a European.
Second, this is no open competition. Like a closed country club, candidates have to be nominated first to be considered. Jack Lew, the Treasury Secretary, has the authority to nominate and vote on this matter on behalf of the US. But if he chooses to follow the precedent of the informal US-Europe arrangement, he will not nominate an American. And if someone else nominates an American, Mr. Lew will not vote for that American.
There are two reasons why this is a bad deal for America.
First, the World Bank is declining towards irrelevance as developing countries increasingly rely on private finance. Indeed, this has gone so far that Professor Woods of Oxford University says the World Bank needs to be "saved." Meanwhile, the IMF rises inexorably, boosted by serial global crises, including that reflected in the crash in global stock and commodities markets this year.
So the "informal arrangement" means that the US gets the lesser job and the Europeans get the greater job.
Second, the IMF says that the selection process is "merit-based". But the process of country club-style nominations means that most global talent is excluded from any consideration. If a candidate lacks a political "friend" among the 24 global politicians empowered to nominate, their excellent resume is not even considered. This is no "merit-based system"; it is an "are you one of us system."
Not surprisingly, all this has produced bad results. The three European incumbents prior to Madame Lagarde have all been the subjects to legal proceedings and/or scandal. And the IMF, tasked to prevent Global Depression, has evidently failed to do so, as the Lehman's, Euro, and ongoing crashes illustrate.
So this is not all a matter of murky machinations in some arcane international bureaucracy; IMF failures are directly reflected in both the US economic crisis from 2008-2010 and in the ongoing global market mayhem in 2016. The most ordinary of Americans have paid dearly, including in soaring unemployment and crashing home values after 2007, for these IMF failures.
And, as pointed out in these pages yesterday, the performance of the incumbent in the job continues these shortcomings.
With the global economy under renewed threat now, the US and the World urgently needs the IMF to do its job better than this.
This establishes a compelling American interest to terminate the "informal agreement" with the Europeans at the IMF with immediate effect.
That is because following heavy borrowing in 2010, the Euro Area became the IMF's largest debtor, by far.
So when the U.S. re-endorsed the "informal agreement" with Europe in 2011, a political representative of the IMF's biggest debtor was put in charge of it.
That was then, and is still now, an obvious recipe for conflict of interest.
Such a situation would not be tolerated by the Federal Reserve or any other US financial regulator in any U.S. credit institution.
It is exactly the sort of problem that all our financial regulatory reforms from 2010 onwards have been designed to prevent.
And the IMF itself condemns such arrangements anywhere in the world that it finds them.
Rightly so.
But this elementary prudential common sense has not been applied to the IMF itself, despite it being the cornerstone global credit institution.
This accounts for many of the shortcomings in its global work in recent years.
But, as the largest debtor to the IMF, the Europeans are now extremely anxious to keep control over it. So within hours of the appointment process being announced, many of them--France, Germany, the UK, the Netherlands, and others--quickly announced that they would nominate a European politician to hold the post again. They have all renominated the incumbent, Madame Lagarde.
And their plan is to sew this all up as quickly as possible. Nominations close as early as February 10, with the successful candidate to be announced in early March. If they succeed, Madame Lagarde's reappointment will ensure that a European politician will retain control of the IMF reins on behalf of the European debtors for at least another half-decade.
It is up to Mr. Lew, on our behalf, to address this challenge to US economic stability over the next five years now.
Accordingly, in defense of common sense best financial practice, he should terminate the informal agreement with Europe with immediate effect.
In particular, he can nominate and vote for one of many excellent American candidates. As the US is the largest single IMF shareholder, and we hold a blocking vote there, Mr. Lew's assent to any candidate, including the incumbent, is required.
So, for example, he could nominate someone of the high calibre of Christina Romer, former Chair of the Council of Economic Advisors.
But he can do even better.
If there is a global citizen whose technical credentials outshine even the best American, Mr. Lew should nominate and vote for that person. Because what America needs for its economic security in the next five years is not an American in that job, but the best person in that job.
But so long as Europe is the IMF's largest debtor, that job cannot be held by a European, least of all by a European politician, because of the evident conflict of interest.
So once voting on the nominee for IMF Managing Director begins in February, Mr. Lew's bottom line on behalf of the United States should be as follows: no Europeans, and amongst the others, only the most highly professionally qualified, of whatever other nationality, including American.
If Mr. Lew will not commit to do this now, the US Presidential candidates, on both sides, should demand to know why this is not to be part of America's economic plan over the next five years to avoid another economic crisis.
References
Clinton: US welcomes women to lead the IMF. Associated Press 2011.https://www.highbeam.com/doc/1A1-5976098370994d369d7465fa173f232e.html
How to save the World Bank. Ngaire Woods.https://www.project-syndicate.org/commentary/saving-the-world-bank-by-ngaire-woods-2016-01
The IMF needs less Lagarde. Peter Doylehttp://www.huffingtonpost.com/peter-doyle/the-imf-needs-less-lagard_b_9037736.html?utm_hp_ref=business&ir=Business