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Tuesday, May 24, 2011

International Monetary Fund: Selecting a Managing Director

Martin A. Weiss
Specialist in International Trade and Finance

On May 14, 2011, Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund (IMF), was arrested at John F. Kennedy Airport and charged with the attempted rape, criminal sexual assault, and unlawful imprisonment of a maid at the New York City Sofitel hotel. He resigned his leadership position on May 18, 2011.

Mr. Strauss-Kahn’s arrest comes at a challenging time for the IMF, which he had led since 2007. Under his leadership, the IMF reasserted its role as the premier international organization for international economic corporation. In the wake of the financial crisis, Mr. Strauss-Kahn persuaded countries to substantially increase their funding to the IMF, enabling the IMF to sharply increase its financial support to troubled economies and its capacity to monitor global economic risks. The IMF is heavily involved in the current economic crisis in Europe.

The resignation has put the selection of Fund leadership back into the spotlight. Controversy focuses on whether a transatlantic “gentlemen’s agreement” reserving the IMF leadership for a European and the World Bank leadership for a U.S. citizen is adequate for the current global economy. Proposals for a more open, transparent, and merit-based leadership selection process have been made consistently in the past, and at times have been incorporated in communiqu├ęs of various leaders summits, but have yet to change the outcome at either of the institutions.

Although Congress can pass legislation directing the U.S. representatives at the IMF or hold oversight hearings, there is no congressional involvement in the selection of Fund management. U.S. participation in the IMF is authorized by the Bretton Woods Agreement Act of 1945. The Act delegates to the President ultimate authority under U.S. law to direct U.S. policy and instruct the U.S. representatives at the IMF. The President, in turn, has generally delegated authority to the Secretary of the Treasury. The largest shareholder of the IMF, United States has a 16.8% voting share.

The formal requirements for the selection of the IMF Managing Director is that the Executive Directors appoint, by at least a 50% majority, an individual who is neither a member of the Board of Governors or Board of Executive Directors. There are no requirements on how individuals are selected, on what criteria, or by what process they are vetted. Moreover, although the IMF Executive Directors may select its Managing Director by a simple majority vote, they historically aim to reach agreement by consensus. With these factors combined, the convention guaranteeing European leadership at the IMF and American leadership at the World Bank has remained in place.

The European-U.S. arrangement on the leadership positions at the IMF and World Bank has created resentment in many developing and emerging economies. Critics of the current selection process make two general arguments. First, the gentlemen’s agreement on IMF and World Bank leadership is a relic of a post-war transatlantic global economy that no longer exists. Second, the IMF and the World Bank aim to be leaders in promoting transparency and good governance practices, which hardly justify the political horse-trading that have dominated past selections. At the same time, European officials and some commentators argue that given the intense IMF involvement in managing the crisis in the peripheral European economies and securing the future of the European Monetary Union, a European leader is needed to maintain the Fund’s prominence and legitimacy.

Date of Report: May 20, 2011
Number of Pages: 13
Order Number: R41828
Price: $29.95

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