Would Strauss-Kahn’s Downfall Mean More IMF Democratization?

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Last week, a high-ranking International Monetary Fund official lectured a conference of Latin American central bankers in Rio de Janeiro, Brazil, about not letting their economic booms overheat into financial crises. It’s the sort of warning that any country should of course heed. But the IMF has lost a lot of clout in Latin America over the past decade – not just because its stern fiscal demands were widely blamed for worsening crises like Argentina’s 2001 meltdown, but because as developing nations like Brazil, India and China build more macroeconomic muscle, they believe the Fund’s leadership and philosophies are still too dominated by its U.S. and European founders.

Which is why what happened a couple days later in New York probably matters more right now to those Latin central bankers than what they heard in Rio does. As Bloomberg’s Sandrine Rastello points out in an excellent article today, the May 14 arrest of IMF Managing Director Dominique Strauss-Kahn, for the alleged attempted rape of a Manhattan hotel maid, may do more than ruin a man touted as a future President of France. It’s likely to fuel calls from Latin America and the rest of the developing world to drop the tradition whereby a European runs the IMF while an American runs its partner agency, the World Bank. As Eswar Prasad, a Brookings Institution senior fellow and former IMF official tells Rastello, “This event is likely to put into play the leadership and governance structure of the IMF in a dramatic and unanticipated manner.”

Things have been swinging in this direction already. Brazil, especially under former President Luiz Inácio Lula da Silva, spent the past decade pushing open First World club doors for Third World up-and-comers – effectively turning the G-8, for example, into the G-20. As one high-ranking Brazilian diplomat reminds me, Brazil and kindred emerging powers like India are “committed to rendering decision-making processes in international bodies more representative, more democratic, more in tune with today’s realities.” Keeping the IMF and World Bank the economic equivalents of NATO, the diplomat adds, just perpetuates “the asymmetries of the past.”

And as Rastello points out, the IMF, which has grown to 187 members from the 45 it started with after World War II, was in fact democratizing under Strauss-Kahn. Or, as developing-nation leaders term it, the Fund was moving toward a more “merit-based” management approach. Last year, for example, rule changes gave China the third largest percentage of votes.

But Strauss-Kahn’s almost certain departure, and its ignominious circumstances, are just as certain to accelerate the push for a non-European to replace him. If that happens, his successor is more likely to be from Asia than from Latin America; but either way, the hope in emerging-market regions is that one of their own will be more in tune with the kind of “third-way” approach that Brazil took after the Argentine disaster – a hybrid of business-friendly fiscal discipline and poverty-busting social projects – instead of the narrower orthodoxy the IMF is known for.

Meanwhile, Brazil’s new President, Dilma Rousseff, is poised to announce a new program to eradicate extreme poverty at the same time economists are beginning to worry about inflationary pressures emerging again in Latin America’s largest economy, now the world’s seventh-largest. Regardless of who eventually replaces Strauss-Kahn – and where that person hails from – the IMF isn’t likely to stop warning countries about those kinds of risks.