What Does The IMF Do, Who Should Drive It?

Since the International Monetary Fund's head resigned, a sharp divide has emerged about who should be the next managing director. One camp is arguing for someone from an emerging country. Others say Europeans should keep hold, at least until Europe's financial woes wane. Host Michel Martin speaks with Wall Street Journal reporter Sudeep Reddy, who has been closely following the situation at the IMF.

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MICHEL MARTIN, host: I'm Michel Martin, and this is TELL ME MORE from NPR News.

Later in the program, we open up the pages of The Washington Post Magazine, which we do just about every week, and take a look at the artist behind the syndicated cartoon Cul-de-Sac, which you can find in 150 newspapers around the country. And we'll find out why cartoonists around the country think he's so great and why they're rallying to his side for a very special project. That conversation is later.

But first, we go back to that story that has earned headlines around the world. The arrest of the managing director of the International Monetary Fund, the IMF - his name is Dominique Strauss-Kahn - on charges that he sexually assaulted a housekeeper who had arrived to clean his hotel room in New York.

In the wake of that arrest, Strauss-Kahn resigned his post. So, now the question is, who should replace him? Although 187 nations are represented on the board of the IMF, a European has always been tapped to run it, while an American has been tapped to run the World Bank. But now the leaders of some of the emerging economic powers are challenging that and they're saying it's time to open up the leadership fight to representatives from other parts of the world.

We've called on Sudeep Reddy to tell us more. Sudeep covers economics for The Wall Street Journal and he's been covering the IMF these past few months. Welcome back. Thanks for joining us once again.

SUDEEP REDDY: Good to be here, Michel.

MARTIN: I think we should start by your telling us what exactly the IMF is, what does it do.

REDDY: You can really think of the IMF as a cross between the United Nations, which has 187 nations on it and a global financial regulator. And if you put them together, it's an intergovernmental organization. It's effectively owned by all 187 nations. But based on their share in the global economy, each nation can exert a different amount of power over it. So the U.S. has the largest shareholder stake in the IMF, almost 17 percent. And that gives it the ability to veto most rule changes at the IMF.

And as a bloc, the European countries have a little more than a third of the share of the IMF. And so, they have, when they come together, a big stake in this.

MARTIN: What do they do? What does the IMF actually do? Why is it so important?

REDDY: The IMF was actually created out of the devastation of World War II. When the Allied powers came together in Bretton Woods, New Hampshire, they came up with this organization that was really designed to stabilize the world economy around exchange rates. It was a much more difficult system back then of managing exchange rates.

And so, the IMF was, in some ways, responsible for making sure that countries stuck to a specific policy of exchange rates and also monitored their economies. And so, a lot of what the IMF does today is it sends people to all 187 countries to monitor their macroeconomic situation. To really track what's going on in their economies, and it does make recommendations that are designed to provide some cohesion to economic policies around the world, whether it's the flow of capital or the management of exchange rates or financial regulation.

MARTIN: Now, technically the 24-member board selects the managing director of the IMF. It's not written in stone that a managing director be a European, but it always has been a European. Why is that?

REDDY: There were two institutions that came out of the post-World War II environment. One was the World Bank, which was initially set up to really rebuild Europe out of the devastation from World War II. And the U.S., because of the financial situation of the U.S., took the number one spot at the World Bank. And the Treasury secretary at the time realized that it couldn't also take the number one spot at the IMF.

And so, the Europeans got the number one spot at the IMF and it's been this agreement ever since because of the way the voting shares are instituted, together the U.S. and Europe have a majority stake and they've been able to watch each other's back over the years making sure one has the leadership spot in each institution.

MARTIN: So, it's a gentlemen's agreement, so-called.

REDDY: It is exactly a gentlemen's agreement.

MARTIN: It's coming under some heavy fire right now. In fact, there was a piece in The Washington Post, opinion page over the weekend by Moises Naim, a former executive director of the World Bank. He's now at the Carnegie Endowment for International Peace. And he says it's time to overthrow the IMF's colonial masters. It's a very tough piece saying this is just outmoded and outdated; some of the fastest-growing economies need to have more say over this. How is that argument being received?

REDDY: It is being recognized as a legitimate argument. It's not really leading to much change. This is really all about the legitimacy of the organization. The world, at least in the last decade, has changed tremendously. Advanced economies like the U.S. and most of the European nations are growing much more slowly as they did in the past.

And the developing economies, the emerging markets - Brazil, Russia, India, China, South Africa - they're all growing much more quickly. They're seeing a, really, a new regime in their economies with open markets. And that's changing the world stage. And 20 or 30 years from now, it's going to be a completely different global economic landscape.

And the IMF system does not reflect that right now. It's still geared toward the old colonial powers to the nations that have historically held the power in the global economy.

MARTIN: But they're not - so but you're saying that everybody recognizes that this is an outmoded governance structure, but nobody is willing to change it?

REDDY: Right. Because if you're the U.S., why would you want to give up your power? If you're Europe, why would you want to give up your power? And if you still hold the majority stake in the IMF based on your share of the global economy right now, then did you really want to give up your power?

MARTIN: What lever can be pushed by the emerging countries? Why would they want to give up power? And so what would persuade them to do so?

REDDY: Well, this goes to the entire issue of credibility. The head of the United Nations for the past 30 years has been a non-European. A Peruvian. The current one is Korean, Egyptian, somebody from Ghana. And so, you've had leaders from non-European nations. And that has in some ways enhanced the credibility of the United Nations.

And so, if you don't have - if you don't depart from this current practice with the IMF, you're going to see a divide within the IMF and you're not going to actually see the policies pursued on a shared basis. The emerging countries are going to say, we don't care about your ideas. If this is what you want to push, then we're not going to be a part of it and we'll do our own thing.

MARTIN: On the other hand, though, of course the U.S. and Europe are still the world's largest economies, along with Japan, and they fund these institutions to a great degree. So I think the other side of the argument is it's our money.

REDDY: Absolutely, it's our money and we created these organizations and we still have the overwhelming share in them. And so, we should be in charge. And that's a hard argument to overcome. What needs to happen, though, is developing economies need to come together and find a candidate who they can all stand behind and force Europe and the U.S. to recognize that this has to change at some point.

MARTIN: And have they done so? Because it seems that European countries seem to be coalescing around another French candidate, a French woman economist. And that seems to be the consensus candidate for Great Britain and for France and for Germany. But what about for the emerging countries that are complaining about the governance structure? Have they coalesced around a candidate?

REDDY: They have not because they don't really have any kind of institution to gather around a candidate. The Europeans have the European Union, European Central Bank. They have a number of institutions where they can really convene and decide - this is going to be our person. And in this case, it's the French finance minister, Christine Lagarde, who is generally recognized as a solid leader in France. And so, she is likely to be their number one choice.

And the developing economies have thrown out a bunch of names, but they don't really have somebody they can all stand behind. And they don't have a system to come behind a single person.

MARTIN: And, finally, before we let you go, Sudeep, if you don't mind my asking, you've met Dominique Strauss-Kahn, who's the man who's accused of this very crude, you know, attack on a hotel maid. And I just - if you don't mind my asking, I would like to ask if you were surprised as well by these charges?

REDDY: Well, if this were another case of an affair by Dominique Strauss-Kahn or some kind of inappropriate relationship, I don't think anybody would really be surprised. But this allegation is really one that's equated to a street crime. And so, that's what's so shocking. This is somebody who - most of the discussion about Strauss-Kahn was whether he would be resigning in the next couple of months to run for the French presidency because he was seen as the shoo-in candidate to lead France after Sarkozy.

And so, the fact that you see something like this the day before he's supposed to go meet with the German chancellor is rather shocking. It just doesn't fit with what people would expect of a politician who was seemingly on his way up to do something like this.

MARTIN: Sudeep Reddy covers economics for The Wall Street Journal. He also covers the IMF, the International Monetary Fund. And he's with us from time to time to shed light on these important stories. He was here with us once again in our Washington, D.C. studios. Sudeep, thank you so much for joining us.

REDDY: Thank you, Michel.

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