July 17 - Issue 21 - IMF Head Resigns; IMF Opens Selection Process to All Member States

New York, 17 July 2007 - Following Rodrigo de Rato's unexpected resignation as Managing Director of the International Monetary Fund (IMF) last month, Member States and civil society groups immediately began calling for the IMF to reform the selection process for Managing Director. A long-standing, informal agreement between the United States and Europe gives European countries the prerogative to select the Managing Director of the IMF and the US administration the choice of President of the World Bank.

Despite an early agreement by European Union countries to insist on the tradition one more time and to support Dominique Strauss-Kahn of France for the position, the IMF's Executive Directors announced on July 12 that they would consider candidates "without geographical preferences." The Directors also established a candidate profile for the Managing Director for the first time in the IMF's history and invited nominations from any Member State. This official opening of the selection process could allow for a non-European to lead the IMF for the first time, depending partly on whether additional viable candidates emerge. The Executive Board will accept nominations until August 31, 2007.

Below are details on the official selection procedure for the Managing Director of the IMF, calls for reform of the existing process, rumored candidates, the deliberations within the EU last week, and the Board's announcement on July 12 regarding the next steps in the process.

Selection Procedures for IMF Head

Like the World Bank, the IMF's organizational hierarchy begins with the 185 Member States, which mostly overlap with the member countries of the World Bank. Each Member State is represented by a governor, often the finance minister of the country, and the 185-member Board of Governors meets once a year. It is through the Board of Governors that Member countries can hold the Fund accountable.

For the day-to-day management of the Fund, the Board of Governors appoints a 24-person Executive Board. The Executive Board is made up of eight Executive Directors selected by single countries, the five largest shareholders of the Fund (the US, Japan, Germany, France and the UK) and China, Russia, and Saudi Arabia; as well as 16 Executive Directors elected for two-year terms by groups of countries ("constituencies").

It is the responsibility of the IMF's Executive Board to select the Managing Director. The IMF uses a weighted voting system that gives economically larger member states more votes. The countries with a larger economic size have a larger "quota" in the IMF and are considered larger shareholders. This affects decision-making among member states; an 85% majority is required to adopt a decision. However, most of the decisions taken at the level of the Executive Board are made by consensus. When possible, this includes the decision to appoint the Managing Director (MD).

The MD has a five-year, renewable term and holds a similar role as the World Bank president. The MD serves as the chair and the chief of the IMF staff, reports to the Executive Board, and is assisted by a First Deputy Managing Director and two other Deputy Managing Directors.

Calls to Reform Selection Tradition

The Managing Directors of the IMF have been nationals of six Western European countries: Germany, Belgium, Sweden (two), France (three), the Netherlands, and Spain. All nine MDs have been men.

The IMF faces ongoing criticism for its decision-making practices as larger developing states such as Brazil, India and China argue that they and smaller developing countries hold disproportionately less influence than developed Member States. (For example, all of Africa has a total of only 4.4% of the voting shares, while the United States holds almost 17% of the voting power.) Opening the selection process of the Managing Director to non-Europeans is among the changes demanded.

Many calls for reform have come from within the IMF itself and its Member States.

Timeline of Internal Reform Efforts

  • 2000 -Michel Camdessus of France resigns as IMF Managing Director and suggests that Europe and the US to reconsider their control of the IMF and World Bank. In the process of identifying Camdessus' successor, the Japanese government, the second-largest contributor to the IMF after the U.S., puts forward a candidate who is also supported the Association of Southeast Asian Nations (ASEAN).
  • 2001 - A joint working group of IMF and World Bank Executive Directors is established to assess the weighted voting system and other governance issues.
    • The working group provides detailed recommendations for a revised MD selection process. It recommends that upon a vacancy, the Executive Directors decide on required candidate qualifications and set up a geographically balanced advisory group of experts, which reviews candidates and provides their assessments to the Board. The Executive Directors agree on a shortlist, establish a deadline for candidacies, and finalize modalities for publicizing the shortlist. The last step is the formal selection of the MD from the short list of candidates.
    • The Executive Boards of both institutions endorse the joint report in 2001, but neither formally adopts or acts on the specific recommendations.
  • 2004 - Managing Director Horst Köhler of Germany resigns. The Joint Working Group guidelines are raised again during controversy over who will succeed him and how the person will be selected. The IMF Board of Directors, which had said it would use the recommendations for guidance in the future, does not establish the recommended committee to review candidates.
    • March 19 - The "G-11", a group of the IMF's 24 Executive Directors representing a total of 126 countries call for selection reform in line with the recommendations of the joint working group. They state:

§ "The process of identifying and selecting the candidate must be open and transparent, with the goal of attracting the best person for the job, regardless of nationality. A plurality of candidates representing the diversity of members across regions would be in the best interest of the Fund.

§ All members of the Executive Board should be consulted in the process of considering candidates that lead to the selection of the Managing Director and informed in a timely manner regarding candidates, including their credentials and knowledge of the institution."

o This is "an unprecedented challenge coming from within the IMF's own Board of Directors," says the civil society network "50 Years is Enough." It is the first time "a significant group of Board members has issued a public statement calling on the Board as a whole - and the most powerful members on the Board as individual actors - to change their behavior."

o Arab Member States nominate three candidates to succeed Köhler (Stanley Fischer of the U.S.; Andrew Crockett of the U.K.; and Mohamed El-Erian, a citizen of both France and Egypt). However, Rodrigo de Rato of Spain is supported by the U.K. and the U.S., and a straw vote by the Executive Board results in a majority in his favor.

  • 2005
    • September - The IMF's Medium-Term Strategy, a plan for the future direction of the Fund in the context of economic globalization, calls for an open and merit-based process for selecting the next MD. Horst Köhler, now Germany's president, personally supports this finding, as does his successor de Rato.
    • October - A group of 20 emerging and developed economies (G-20) proposes reforms to the Bretton Woods institutions including the selection of senior management based on merit and broadly representing all Member countries.
  • 2006

o April - The MD's report on a two-year plan for implementing the Medium-Term Strategy says, "The Fund must also address other aspects of governance, including transparent selection of management and better definition of the role of the Board."

o September 14 - The Executive Board commits to assessing the selection procedures for the managing director: "There is considerable agreement on the importance of ensuring that procedures for the selection of the Managing Director are open and transparent. The Executive Board will consider whether further steps, beyond those discussed by the Boards of the Bank and the Fund in 2001 and the steps followed for the selection of the Managing Director in 2004, are needed to ensure a fully transparent process for the selection of the Managing Director, as part of the two-year program of governance reforms."

o September 18 - The IMF's Board of Governors votes to adopt the Resolution on Quota and Voice Reform in the IMF which raises slightly the voting shares of China, Mexico, South Korea, and Turkey. This is considered one of the biggest reforms ever for the IMF. (But the increases do not counterbalance the US' voting share. At 16.79 % the US has an effective veto power over any decisions taken by a vote requiring an 85% majority.)

    • October - The G-20 reiterates its position on the need for merit-based and broad selection processes for senior management.
    • December - An IMF Working Paper on "Rethinking the Governance of the IMF" stated that "including more transparent selection procedures for the position of Managing Director of the IMF ... should have been done some time ago because there really is no debate about it, at least ever since the discussion on the [joint draft report]. In this regard, specific procedures for ensuring this transparency should be developed soon, and there is no need to wait for the two-year program of actions on governance reform."

EU Resistance to Reform

When World Bank President Paul Wolfowitz resigned in May 2007, widespread calls to end the US selection monopoly led many Member States and observers to speculate that the process to replace him would be open and competitive. But the US re-asserted its claim to the selection of the next World Bank President, and the EU supported the Bush Administration in appointing Robert Zoellick, presumably in tacit exchange for its continuing privilege in nominating the IMF head. Indeed, the day after de Rato's announcement, the European Union reiterated its prerogative to nominate his replacement. U.S. Treasury Secretary Hank Paulson reportedly affirmed this prerogative. He said that the U.S. would support any European candidate of "real stature."

When addressing the selection tradition, European leaders argue that opening the process should come with an end to the US control of the World Bank presidency. French Finance Minister Christine Lagarde recently said, "If this tradition is questioned, it should be for the two institutions at the same time." Germany's Peer Steinbrueck agreed, "After the US could propose the successor for Wolfowitz at the World Bank, I think the current tradition should continue."

Other comments affirming EU control:

  • "We hope that the EU will identify a suitable successor candidate in due time so as to ensure the important reform process that has been started at the IMF will be taken to a good port and at a good time." - Spokesperson for the European Commissioner for Economic and Monetary Affairs, June 29

· "We're going to work with Europe to keep it European." - Spanish Deputy Prime Minister

  • "It's our turn." - Jean-Claude Juncker, president of the Eurogroup (and Prime Minister of Luxembourg), July 10.He suggested that the EU should retain the selection privilege especially because the US was just permitted to select the president of the World Bank.
  • "I would be rather surprised if, so soon after the United States put one of their own at the World Bank, all of a sudden the whole arrangement were called into question." -European finance ministry official.
  • "The next head of the IMF should come from Europe." - EU Commission, July 9

Candidates to Replace De Rato

Within days of de Rato's announcement, rumors of several possible replacements emerged. An Italian has never held the post, and Italy currently has no officials in top international positions, thus seeming to be a viable country to put forward a candidate. Five individuals were discussed in the media:

  • Mr. Mario Draghi
    • Governor of the Bank of Italy; Former Goldman Sachs Group executive
    • Said last week, "I am not interested in the IMF"
  • Mr. Tommaso Padoa-Schioppa
    • Economy and Finance Minister of Italy; Former executive board member at the European Central Bank
    • Said recently that the only IMF role he seeks is chairman of the International Monetary and Finance Committee, which sets policy for the IMF. The post had been held by Gordon Brown, who recently stepped down to become Prime Minster of the UK. EU ministers have backed his candidacy to succeed Brown.
  • Mr. Mario Monti
    • Former European Union Competitions Commissioner
    • Said he is not available
  • Mr. Lorenzo Bini Smaghi (Italy)
    • European Central Bank executive board member
  • Mr. Vittorio Grilli (Italy)
    • Economy Ministry Director General

Other Europeans candidates included:

  • Mr. Mervyn King (UK)
    • Governor of the Bank of England
  • Mr. Andrew Crockett (UK)
    • Former general manager of the Bank for International Settlements
  • Mr. Gerrit Zalm (Netherlands)
    • Dutch Finance Minister
    • Said he is not available
  • Mr. Leszek Balcerowicz (Poland)
    • Former central bank governor; Known as the architect of the liberalization of Poland's economy
    • Poland said it would support him, but on July 9 nominated Marek Belka (below)
  • Mr. Marek Belka (Poland)
    • Executive Secretary of the United Nations Economic Commission for Europe; Former prime minister of Poland; Former economist at World Bank and JPMorgan Chase; Former finance minister of Poland
  • Mr. Jean Lemierre (France)
    • Head of the European Bank for Reconstruction and Development
    • Considered a top candidate since he was passed over in favor of Rodrigo de Rato last time around.

Possible non-European candidates included:

  • Mr. Trevor Manuel, South African Finance Minister
  • Mr. Armenio Fraga, Former Governor of the Central Bank of Brazil
  • Mr. Mohamed El-Erian, Head of Harvard Investment Management
  • Mr. Stanley Fisher, Governor of the Bank of Israel, US citizen

Another candidate emerged with the backing of French president Nicolas Sarkozy - Dominique Strauss-Kahn, former French Finance Minister and advocate of social democratic economics. Some observers saw Sarkozy's support for Strauss-Kahn as a political tactic to remove a popular and effective figure from the French Socialist Party, Sarkozy's domestic opposition. Sarkozy quietly proposed the nomination to the leaders of the US, UK, Italy and Spain before the meeting of EU finance leaders in Brussels on July 9-10.

A potential obstacle for a French candidate was that France already holds three key international economic posts (at the World Trade Organization, European Central Bank and the European Bank for Reconstruction and Development). Further, three of the IMF's nine MDs have been French, running the institution for 31 of its 61 years.

EU Deliberation: July 9-10

The Council of European Union finance ministers (ECOFIN) comprises the economic and finance ministers of the 27 EU countries. On the evening of July 9 before ECOFIN's meeting in Brussels, a smaller grouping comprised of the finance ministers of the 13 countries that use the Euro - the "Eurogroup" - met and reportedly discussed Strauss-Kahn's candidacy informally. Sarkozy attended the meeting and personally advocated for Strauss-Kahn.

The IMF presidency was then formally on the agenda of the July 10 meeting of the entire ECOFIN. The ministers were expected only to decide on whether to control the selection process or open it up, as the U.K., Netherlands, and Sweden had recommended. The final decision on a candidate reportedly was to be negotiated at the following ECOFIN meeting (September 14, 2007).

However, after the July 10 meeting, the EU announced that it had both decided on the procedural question and agreed on a candidate. Regarding the procedure, it agreed to support an open, competitive selection procedure following the next appointment - that is, at the end of de Rato's replacement's term. The EU also announced its support for Strauss-Kahn to replace Rodrigo de Rato.

ECOFIN's chairman, Jean-Claude Juncker, acknowledged afterwards that other countries or regions could present candidates but stressed that Strauss-Kahn was the EU candidate. Reportedly EU members decided to retain the selection monopoly this year because the U.S. had exercised the convention in selecting the new head of the World Bank. Juncker argued that the urgency of the appointment meant that the EU could not follow "an ideal procedure."

British Finance Minister Alistair Darling stressed that there had not been a formal agreement and said that, while Strauss-Kahn would be an appropriate candidate, "the British government wants to see what other candidates there may be put forward from other parts of the IMF." Britain was the first European member of the Group of Seven major industrial powers to break with tradition and advocate a wider contest. "All these processes need to be opened up." But other large EU members reportedly regard the UK as "insufficiently European," compromising the UK's influence over EU decisions.

IMF Opens Process

On July 9, the same day as the Eurogroup's dinner meeting in Brussels, the IMF's Executive Board held an informal meeting on the selection process of the Managing Director. The Board's statement affirmed the IMF's official policy that "any Executive Director may submit a nomination, regardless of nationality" and indicated that it would meet again to develop an open and transparent selection process, "consistent with the Fund's Medium-Term Strategy."

IMF Board indeed met again on July12, reportedly prompted by developing nations. After the meeting the Board announced that it had established a "candidate profile and a selection procedure for the next Managing Director." Further, in contrast to the EU's decision to support an open process next time, the IMF's Executive Board decided to invite non-European candidates immediately.

Candidate Profile: The Board agreed that the successful candidate will have:

§ A distinguished record in economic policymaking at senior levels;

§ An outstanding professional background;

§ Demonstrated managerial and diplomatic skills needed to lead a global institution;

§ Nationality from any of the IMF's 185 members;

§ The ability to provide strategic vision for the work of a high quality, diverse, and dedicated staff;

§ A firm commitment to advancing the IMF's goals by building consensus on key policy and institutional issues, including through close collaboration with the Executive Board;

§ Proven understanding of the IMF and the policy challenges facing its diverse global membership; and

§ Effective communication skills.

Selection Procedures:

§ Any Executive Director can nominate an individual for the position of MD

§ An Executive Director may nominate nationals of any Member States

§ The nominations will be kept confidential until the nominee confirms willingness to be considered

§ Nominations will be accepted beginning immediately and until August 31, 2007

§ The Executive Board will consider nominees after the closing date for nominations

§ Nominees will be considered "on the basis of the above candidate profile, without geographical preferences."

§ The first step is for the Executive Board to meet with the candidate(s) in Washington, D.C.

§ Then the Executive Board will meet to discuss the strengths of the candidate(s) and make a selection.

§ The Executive Board will try to select the MD by consensus, but if that is not possible, it may decide by a majority of votes cast.

These procedures are the result of a compromise between developing countries, who reportedly wanted to set up a search committee to solicit additional candidates, France and its EU allies who resisted this, and other EU members reportedly including the UK, Netherlands, and Norway, who supported a relatively long nomination period (until August 31), a commitment to assess candidates using agreed criteria, and new language affirming that the position is open to all nationalities.

Members in Support of Reform

After the July 10 meeting of ECOFIN, the following Member States made comments indicating their support for a broader process.

  • The Netherlands' Finance Minister said, "It's still an open race."
  • South Africa's Finance Minister said he supports appointing the head of the IMF and other international financial institutions based on an open and transparent selection process that doesn't restrict candidates based on nationality. "The EU would be wrong to argue that ‘the U.S. did, why can't Europe do it.'"
  • Australia and Brazil reportedly share South Africa's position and made similar comments, including with regard to the convention's impact on IMF legitimacy.
  • China's Foreign Ministry spokesperson said on July 12, "We hold that the concerns and requests of the developing countries on international economic and financial affairs should be taken into full consideration in the discussion over the candidates for IMF post."
  • The UK's new Prime Minister said on July 9, "The UK will support an open, transparent and meritocratic process for selecting the next managing director." Chancellor of the Exchequer Alistair Darling said after the meeting on July 10, "We don't feel bound by that discussion". "The British government would want to see what others in the IMF would have to say."
  • Italy's Finance Minister reportedly shares the UK's view. "The world has changed.... [W]e have to find the best possible Managing Director. The passport shouldn't be the determining thing."
  • Canada commented that an open process would be "helpful." "We think that there are lots of very good candidates out there for the job," said the Bank of Canada's governor.
  • Nordic states have avoided supporting to Strauss-Kahn. The Norwegian Finance Ministry said that it would consider the best candidate qualified for the position of IMF managing director, not by nationality. Norway shares its vote with the Nordic and Baltic countries and said it would use its influence for what they considered to be the best candidate.

Even the EU candidate, Mr. Strauss-Kahn, said in a statement on July 17, "I share the opinion of those who have said that the next head of the IMF should be chosen on the basis of his proper merits and not only on the basis of his nationality."

Civil society experts advocating for a more inclusive selection process include Oxfam International, the Bretton Woods Project, an initiative by a group of British non-governmental organizations, and the New Rules for Global Finance Coalition.

New Rules for Global Finance is urging the U.S. government not to come out publicly in support of France's candidate and instead "let the process unfold in a fair and inclusive way," especially as there are other viable candidates, including Kemal Dervis of the United Nations Development Programme, who is understood to be acceptable to the US.

Need for Additional CandidatesThe adoption of a formal selection process and candidate qualifications are precedent-setting for the IMF. To set a further precedent of having a non-European MD, however, it is incumbent on the Executive Directors to nominate a range of candidates, including from outside Europe. This failed to take place during the nomination period for a new President of the World Bank last month, resulting in the Bank Board's unanimous selection of the sole candidate, selected by the U.S. administration.

If the EU unites behind Strauss-Kahn and they are joined by the US, they will control 53% of the votes on the Board and ensure his selection. According to one analyst, having multiple European nominations might be the only way to break the European lock on the position. Additional European candidates could split the EU's votes, which could allow an alternative candidate from a developing country to gain majority support.

Another necessary element would be US agreement to give up control of the World Bank, in exchange for the EU letting go of its IMF prerogative.

It is significant that the Executive Directors may nominate nationals of any IMF member country, not only his/her own; a dissenting EU member, for example, potentially could be the one to put forward a developing country candidate.

Next Steps

Member States have approximately seven weeks to submit candidates for consideration as MD. Interviews with candidates will begin in September 2007, followed by the Board's discussion. Current MD Rodrigo de Rato's resignation will be effective by the World Bank-IMF annual meeting on October 21, 2007.

NGOs have reported the following individuals as rumoured alternatives to Strauss-Kahn. Many of these names were also among those rumoured before the EU selected Strauss-Kahn (see "Candidates to Replace de Rato" above).

  • Mr. Liu Mingkang: Chair of China's Banking Regulatory Commission
  • Mr. Trevor Manuel: South African finance minister
  • Mr. Montek Ahluwalia: Minister Planning Commission of India, former director of IMF's Independent Evaluation Office
  • Mr. Pedro Malan: Chairman of Unibanco, former Brazilian finance minister, recently chaired expert committee on World Bank-IMF collaboration
  • Mr. Stanley Fischer: Governor of Central Bank of Israel (US citizen)
  • Mr. Mohamed El-Erian (French and Egyptian): head Harvard Investment Management, lost to de Rato in 2004; has ruled himself out as a possible candidate
  • Mr. Gerry Helleiner (Canadian): Former head of research for Group of 24, researcher with UNCTAD, World Bank, and IMF
  • Mr. Peter Costello: Australian finance minister
  • Mr. Kemal Dervis: UN Development Programme Administrator, former Turkish finance minister

(Biographical links provided by Peter Chowla of the Bretton Woods Project.)

Armenio Fraga of Brazil, the former head of Brazil's Central Bank, has also been mentioned.

In the meantime, Strauss-Kahn plans to visit "the big capitals in the North and the South" to ask for their support based on his merits.

Resources

IMF Website on reforms of the MD selection process

IMF Executive Directors' Press Release with MD Selection Details - July 12, 2007

"The Process for Selecting and Appointing the Managing Director and First Deputy Managing Director of the IMF," Background Paper by the Independent Evaluation Office of the IMF - July 11, 2007

IMF Executive Directors' Statement on "Open, Transparent" Procedure - July 9, 2007

Rodrigo De Rato's statement of resignation as IMF Managing Director - June 28, 2007

G-20 Communique on BWI reform - November 2006

IMF Resolution on Raising Quotas - September 18, 2006

IMF Commitment to Assess MD Selection - September 14, 2006

Statement by "G-11" Executive Directors - 2005

G-20 Statement on BWI Reform - October 2005

Draft Joint Report by the World Bank and IMF Joint Working Group to Review the Process for Selection of the Bank President and Fund Managing Director - April 25, 2001