Financial Times

The Old Order Has Triumphed Yet Again

Christine Lagarde owes Agustin Carstens a debt for having made this an ostensible contest rather than a choice by acclamation. This may actually strengthen her legitimacy if she can turn the narrative around to having won the top job at the IMF in a fair and open contest. Still, for emerging markets, the selection process that culminates in Lagarde’s victory leaves a bad aftertaste.

Although emerging markets lost this round, Ms Lagarde’s victory may well turn out to be a good outcome for them in the long run. She brings to the position an excellent set of strategic and political skills that could make her an effective advocate for emerging markets at the IMF. Ms Lagarde can twist the arms of European countries that have blocked progress on governance issues by arguing that such reforms would be for the greater good of the IMF.

As a well-respected insider in European economic and political circles, Ms Lagarde has the clout and credibility to corral Europe into supporting further reforms at the IMF. Indeed, Mr Carstens may have been less likely to deliver on governance reforms (such as voting rights and representation on the executive board), despite his heart being in the right place, as he would have found it more difficult to overcome European resistance.

The immediate priority for Ms. Lagarde, as Mohamed El-Erian notes, is to reset the IMF’s engagement with the debt crisis in Greece in a manner that avoids a blow-up but doesn’t smack of favoritism. Having been embroiled in dealing with the European debt crisis already, it remains an open question whether she can shed that baggage when she comes into the IMF job and can take a fresh and more objective perspective.

Ms. Lagarde’s longer-term challenge is to rebuild the emerging markets’ trust in the IMF and make them feel they have a strong stake in the institution. Two factors have heightened the emerging markets’ perception that the IMF subjects them to a different set of rules than it does the advanced economies. One is the selection process for the next managing director. The second is the treatment of European countries in crisis, with the sense among emerging markets that they would not have been given as much rope as Greece seems to be getting if they did not meet policy commitments and targets.

Ms. Lagarde will have to work hard to convince emerging markets that she will not let the IMF once again be dominated by European and American views and interests. Otherwise, her legitimacy and that of the institution could be sullied.

How can she do this? First, Ms. Lagarde needs to ensure that the shifts in voting shares and executive board representation in favor of emerging markets that were agreed during her predecessor’s regime are carried through fully and quickly. Second, she needs to push for more aggressive reforms that bring representation at the institution more in line with existing economic realities on the ground.

Ms. Lagarde takes over an institution that has become central to the global financial system. The way she manages the political, technical and strategic aspects of the job will help determine the IMF’s future legitimacy and effectiveness.