Recruiting the right MD for the IMF

By Ajay Shah, on May 27th, 2011

The recruitment of the IMF MD has turned into quite a controversy. For an interesting set of views, see this page on the website of The Economist. In a remarkable development, the EDs of India, China, Russia, Brazil and South Africa came out with a clear
joint statement on the silliness that is afoot.

There are four perspectives on this question which are worth noting:

  1. There is an obvious gap between the power structure at the IMF, which reflects the way the structure of the world economy after the Second World War, as compared with the present reality. As an example, at present, the Netherlands has 2.08% while India has 2.35%. But the Indian GDP is now $1.6 trillion while Netherlands is at half that.
  2. The world would benefit from a competent and capable IMF. The best man (or woman) for the job will not be obtained by having any restrictions on nationality. As an example, in today’s world, a name that leaps out to me is Stan Fischer. But he’s not European, and hence was never even considered for the top job in the last decade. (As with Montek, he is now over age 65 and is hence not eligible for the job today). Given that a large fraction of the top economists of the world are not European, this rule yields a less capable IMF.
  3. I feel that a quota system where the IMF MD must now be from an emerging market is as bad as a quota system where the IMF MD is only recruited from a European country. The key is to get away from all these quota systems, to only recruit the best person for the job. The emphasis should be on technical capability. The person recruited should be a technical expert and not a politican. As an example, see how in the UK, they recruited an American into their Monetary Policy Committee.
  4. In the standard narrative, one hears the idea that in this crisis in Europe, the Europeans are gaining from their
    control of the IMF. I feel this is absolutely wrong. In the Asian crisis, it was good for Asia that the IMF was not conflicted
    by considerations of domestic Asian politics. Similarly, the IMF program in India in 1981 and 1991 was uncontaminated by domestic Indian political considerations. This helped produce a technically sound program, which helped jumpstart India’s growth. It is not accidental that we see structural breaks in India’s GDP growth around these two dates.

What Europe needs most is a tough IMF, which will be a stern taskmaster, which will force difficult political choices so as to heal the economy. Economic policy in Europe today needs to be cruel to be kind. Instead, by placing a string of career politicians from France into the IMF MD’s job, the valuable role which the IMF could have played in solving the European Crisis is being negated. This damages Europe. The wise thing for Europe today is to say: Give us a tough and competent taskmaster, and let him be
anything in the world but let him not be a European politican. The biggest loser from the present arrangement is Europe.



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Brazil, Russia, India and China: Forces to Be Reckoned With

By Cheryl Grey, on August 19th, 2008

In a 2001 research paper entitled “Dreaming with BRICs: the Path to 2050,” investment bank Goldman Sachs introduced the notion that Brazil, Russia, India and China could surge to become four of the largest economies in the world. Since then, they’ve been racking up growth figures that make it seem intensely possible.

There’s no political or economic union between these four nations; they’re simply four of the largest of the world’s emerging markets. Brazil and Russia are major commodity exporters; the former specializing in soybeans, coffee and iron ore and the latter in energy products. China and India, on the other hand, boast tons of cheap labor and claim increasing shares of manufacturing and services outsourcing. However, there is a symbiosis between the four of them, with industrial China and India demanding commodity building blocks from Brazil and Russia, raising their individual gross domestic product (GDP) levels through mutual trade.

The BRIC

Brazil is the slowest growing of the four BRICs with a GDP rate of merely 5.4% in 2007 and 25 consecutive quarters of growth. In the past four years the Brazilian real appreciated 83% against the U.S. dollar, the best performance of all the world’s most actively traded currencies, and per capita GDP has risen to $9,700.

Russian GDP growth in 2007 reached 8.1% after nine years of expansion. Partly due to the largest number of higher-education graduates in Europe and partly due to a flat income tax of 13%, per capita GDP is a respectable $14,700. The federal budget has been in surplus since 2001; it has paid down Soviet-era international debt by 31% and amassed the third largest foreign currency reserves in the world (behind China and Japan).

India grew at a 9.2% clip in 2007 but has the farthest to go of the BRICs, with per capita GDP at $2,700 and over 27% of their massive population below the poverty line. Agriculture remains a major part of the economy and 60% of employment.

China, the largest and still growing the fastest, is slowing its 2007 11.4% GDP growth down to something nearer 10.0% for 2008 as the global economy and demand for manufactured products slows. (Keep in mind they’ve been racing at that pace for the past 30 years.) To prevent becoming simply a cheap labor center, China is now pushing the education of scientists and engineers, hoping to attract R&D funds as well. Per capita GDP has risen steadily and has reached $5,300, although 10% of the population remains below poverty.

The 2001 Goldman Sachs report predicted the BRICs would produce 10% of the world’s goods by 2010. In August 2008 they’re already producing 15%.

In recent years, these nations have grown so fast that their rising demand pushed commodity prices through the roof, with skyrocketing crude oil, iron ore, coal and copper prices directly attributable to China alone. Their demand for technology is equally high. In 2005 the BRICs spent US$65 billion for IT products; by 2009, that’s forecast to reach $110 billion or 8% of the global market—the same as Japan. For companies looking for export markets to develop, those are mouthwatering numbers.

Problems at Hand

Each of the BRICs has problems in their economic machinery. Brazil, for example, still maintains import tariffs to protect domestic producers. Their inflation remains high at 6.3% per year, and the central bank has raised interest rates to a jaw-dropping 13.0% in their attempt to cool domestic demand. Russia has one of the worst organized crime problems in the world, and the industrial sector still hasn’t recovered from decades of Soviet neglect, while India has basic infrastructure problems such as poor roads and unreliable power supplies. China’s problems include lax environmental regulations leading to 20 of the 30 most heavily polluted cities in the world and a serious image problem after global recalls of unsafe products.

Economic futurism is fraught with peril. So many assumptions must be made—questions not only economic but also demographic, governmental, environmental and industrial, among others—that it can be difficult enough selecting an international stock for investment, much less predicting the developmental growth path of four separate nations. Many variables must come together to make the Goldman Sachs BRIC dream a reality, some of which, such as policies supportive of growth, are up to the BRICs themselves, while others, such as natural disasters, are not. Whether or not they achieve the goal set for them, this emerging economic force will play an increasingly strong role on the global stage.



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