Opinion Asking for a conflict

In a world where markets already pay more attention to what happens in China than in Europe,and where loans from emerging economies are keeping the debt-challenged US economy on life support,the IMF’s outdated governance practices have become an accident waiting to happen. The IMF has long been the last line of defense in emerging-market debt crises,combining big short-term loans with technical assistance that has proven effective far more often than not. Today it is on the front lines of the European debt crisis,with Greece,Ireland and Portugal teetering on the brink. Given Japan’s huge debts and demographic implosion,and China’s runaway boom,it is not hard to imagine a vast IMF program in Asia in the next decade. Even the US is a potential customer if it continues for another 10 or 15 years to neglect its soaring debt burden.

If the fast-growing economies of Asia and Latin America feel disenfranchised from the IMF — there is still a strong undercurrent of hostility over the fund’s handling of the 1997-98 Asian financial crisis — it will be difficult for the IMF to raise money to deal with Europe and potentially Japan and to credibly do its work in emerging markets now and in the future. And because American and European leaders do not want to hear when their monetary,fiscal or regulatory policies are out of whack,the IMF is really the only strong voice that can deliver the message; a non-European is best-equipped to deliver it.

Until a few weeks ago,everyone seemed to agree that it was high time for a change. The presumption was that the IMF board would choose its next managing director from the handful of supremely qualified candidates from emerging markets,thereby strengthening its claim to be a truly global institution. The incumbent,Dominique Strauss-Kahn of France,was on record supporting a transparent,merit-based approach for choosing his successor. Given the prestige he had amassed leading the IMF during the crisis,it was assumed that he would use his influence to shepherd in the new era.

Everything changed in mid-May. Strauss-Kahn was forced to resign after being accused of sexual assault. Suddenly,the IMF became tabloid fodder and the plans for an open and meritocratic selection process were tossed out the window. With the IMF’s legitimacy now under unexpected attack on a second front,gender inequality,European leaders inventively coalesced around the French finance minister,Christine Lagarde.

Just a short while ago,the fact that Lagarde is French would surely have been disqualifying,given that the French have led the IMF for most of the last three decades. Her training as a lawyer,rather than as an economist,might also have been an obstacle. The head of the IMF is like the head of a central bank,and is frequently confronted with difficult judgments on the sizing and timing of debt programs,not to mention on monetary policy and regulation.

Lagarde has provided a strong and clear voice on the need for dramatic financial sector reform. But weighed against Mexico’s candidate,Agustín G. Carstens,she might have come up short prior to the DSK debacle. Carstens,who has a Ph.D from the University of Chicago,has a golden CV for the job. The head of the IMF routinely deals with central bankers as well as finance ministers,and Carstens had held both positions in Mexico. He has also served as a deputy managing director of the IMF and knows the institution inside out.

Carstens has rightly argued that a European is going to be hugely conflicted in managing the IMF’s central challenge: Europe. Soon,it will likely have to help manage government debt defaults in more than one European nation,starting with Greece. European leaders want to kick the can down the road by bribing the Greeks with more loans to prevent them from defaulting. This is where the IMF normally preaches tough love. The IMF board has given itself until June 30 to decide. The circumstances of Strauss-Kahn’s departure have to be taken into consideration,and the fallout on gender issues is not over. There has never been a woman as head of a major multilateral lending institution,and Lagarde is a credible candidate. It seems a done deal,though perhaps there is some way to cap the length of her tenure and improve the selection process next time.

And the MD is not the only position that matters. At the end of August,John P. Lipsky,the first deputy managing director,who was named to the job by the Bush administration,is due to step down. Why not see if one of the top emerging-market candidates can be a replacement? An effective No 2 would also be well-positioned to take over when Lagarde herself steps down.

There is still time to set in place a merit-based selection process that could eventually form the basis for filling the top job. The IMF may be a poorly understood institution,but it does not have to be a poorly governed one.

Kenneth Rogoff is a professor of economics at Harvard,was chief economist at the IMF from 2001 to 2003