Lagarde’s challenges

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Christine Lagarde faces a difficult balancing act between helping to resolve the eurozone crisis, where she has been deeply involved, and addressing potential crises in the developing world, argues Raghuram Rajan.

Raghuram Rajan is a former chief economist at the International Monetary Fund and a professor of finance at the University of Chicago's Booth School of Business.

"Now that the dust has settled over the selection of the International Monetary Fund's managing director, the IMF can return to its core business of managing crises. Christine Lagarde, a competent and well-regarded technocrat, will have her hands full with three important challenges.

The first, and probably easiest, challenge is to restore the IMF's public image. While the criminal case against Dominique Strauss-Kahn on sexual-assault charges now seems highly uncertain, the ensuing press focus on the IMF suggests an uncontrolled international bureaucracy with unlimited expense accounts, dominated by men with little sense of restraint.

Fortunately, the truth is more prosaic. Top IMF staff face strict limits on their allowable business expenses (no $3,000 per night hotel rooms, despite reports in the press), and are generally underpaid relative to private-sector executives with similar skills and experience.

The IMF, like many organisations where workers spend long trips together, has its share of intra-office romances. But the environment is professional, and not hostile to women. A previous incident in which Strauss-Kahn was let off lightly for an improper relationship with a subordinate clearly suggests that the Fund needs brighter lines for acceptable behaviour and tougher punishment for transgressions. But other organisations have dealt with similar issues; the IMF needs to make the necessary changes, and, equally important, get the message out that the DSK incident was an aberration, not the tip of the proverbial iceberg.

The second, and perhaps most difficult, challenge facing Lagarde, is the mess in Europe, where the IMF has become overly entangled in eurozone politics. Typically, the IMF assesses whether a country, after undertaking reasonable belt-tightening measures, can service its debt – and lends only when it is satisfied that it can. The entire objective of IMF lending is to help finance the country while it makes adjustments and regains access to private borrowing. This also means that a country with too much debt should renegotiate it down before getting help from the IMF, thereby avoiding an unsustainable repayment burden.

Perhaps swayed by promises of eurozone financial support (and Europe's desire to prevent default-fuelled financial contagion from spreading to countries like Spain and possibly Italy), the IMF took a rosier view of debt sustainability in countries like Greece than it has in emerging markets. But this has not 'helped' such countries, for the availability of soft credit from the euro zone or the Fund only enables a greater accumulation of debt."

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Published in partnership with Project Syndicate.

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