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European Should Head IMF

Prof. Peter Morici - 5/20/2011

The debate over whether a European or Asian should lead the International Monetary Fund involves more than symbolism. An Asian leader could be bad for free markets and the progress of the global economy.

After World War II, the World Bank was established to provide long-term financial and technical assistance to developing countries, and the IMF was created to manage a system of fixed exchange rates. Essentially, the dollar was pegged to gold and other currencies to the dollar. The Americans got the head of the World Bank and the Europeans the IMF.

With the demise of the fixed exchange rate system in the 1970s, the IMF mission evolved to providing short term loans to countries with sovereign debt issues—that is why it is currently involved in Greece’s debt problems—and advocating transparent, market determined exchange rates.

Too many Asian governments on too many occasions have flaunted the system of market determined exchange rates, and violated World Trade Organization rules against manipulating exchange rates to accomplish competitive advantages and trade surpluses—the WTO defers policing such abuses to the IMF. Notably abusers have included China, India and Japan, who constitute the lion share of Asian GDP.

Were the Asians permitted to capture the IMF bureaucracy, its role could easily morph into sustaining exchange rate relationships that greatly disadvantage U.S. and European growth. Slow growth caused by the global trade imbalances, created by undervalued Asian currencies, make worse sovereign debt problems in Europe and U.S. federal and state budget challenges.

Asian growth has been remarkable but it has come in some measure from Asian governments breaking the rules—now we should not put them in charge of enforcing those rules.