Daily Archives: April 16, 2012

It is not whether you win but how you play the game. This old sports refrain can be felt after Monday’s announcement on the selection of Jim Yong Kim, the US nominee, as the next president of the World Bank. Yet it will only prove meaningful if Dr Kim now leads all sides to complete the reform of the Bank’s feudal appointment process – a long overdue step that has repeatedly eluded the international community both here and at the International Monetary Fund.

There is no doubt that this contest for the presidency of the World Bank was indeed different and ”better played.” For the first, three qualified and talented individuals were nominated and interviewed by the Bank’s Executive Board. Their expertise and experience were widely discussed in the media. All three took pen to paper to describe their qualifications and their vision for the institution. And two of them – Jose Antonio Ocampo and Ngozi Okonjo-Iweala – even participated in an open question and answer forum.

Stunningly, it took almost 70 years for these basic steps to occur. While they speak to better governance, they only materialized because of the courage and perseverance of a few brave individuals, most importantly Mr Ocampo and Ms Okonjo-Iweala.

Yet all is not good. Once again, overt political considerations trumped the more legitimate dominance of experience and expertise. And, once again, the deliberations of the Executive Board proved excessively mysterious and overly secretive.

Now that the selection is behind them, the major parties are expressing satisfaction, albeit less than complete. American officials are comforted that they retained their nationality-based entitlement to the presidency of the World Bank, just like their European peers did at the IMF last year. Yet even they are aware of the cost to their credibility and that of the Bank. The emerging countries that backed the two non-American candidates have welcomed the more competitive process, though their enthusiasm is restrained by the blatant persistence of nationality as the overriding selection criterion. And World Bank insiders, led by the Executive Directors are rallying behind the new President, noting that the institution is much more important than any particular individual.

It is important to remember that some similar feelings were in play on previous occasions, most recently after last year’s nationality-based appointment of Ms. Lagarde as head of the IMF. Moreover, in one of the previous rounds at the Fund, a senior European official had even acknowledged that the time had come to end the nationality-based entitlements to the leadership of these multilateral institutions.

Yet, every time push came to shove, attempts to crystalize this into proper reform repeatedly failed. And this will happen again if Dr Kim does not immediately spearhead certain changes when he assumes his new responsibilities on July 2.

During his first 100 days in the office, the new president has a golden opportunity to earn the respect of the world by ensuring that the next selection of the World Bank is indeed open, transparent and merit-based. To this end, he should take proposals to the Board that would hard wire much of the ad hoc approach that characterised the partial competitive elements of his selection, and reinforce them by a comprehensive due diligence process.

The IMF would find it very hard not to follow Dr Kim’s lead. Thus both organizations would be able to announce the much-delayed reforms in October at their annual meetings in Japan.

Don’t under-estimate the importance of such a step. With so many people watching around the world, renewed  failure to move forward with reforms at this critical juncture would accelerate the gradual disengagement from the two institutions by a growing number of countries. It would also undermine their standing in the court of public opinion at a time when both need to be viewed as “trusted advisors” and respected promoters of the global public good.

The reform of the appointment process at the IMF and World Bank is not an option. It is an obligation for all those that believe that the credibility and well-functioning of these institutions are central to the wellbeing of the global economy.

La France compte 65 millions de sujets, sans compter les sujets de mécontentement”. From a political standpoint, the famous sentence by 19th century polemicist Henri Rochefort applies perfectly: French voters are angry and politicians are struggling to respond to their anger. But from a market perspective, there are only three serious topics: first, public finances; second, competitiveness; and third, the country’s stance in Europe. The question is whether the next president will have the ability to tackle them without exacerbating the citizens’ anger.

Start with public finances. The numbers are bad though not exceedingly alarming, but the record of the past decades is weak: the country has repeatedly refrained from seriously attempting to reduce public debt; it combines a Nordic appetite for public spending with a Southern European willingness to pay for it;  and fiscal credibility is low.

Plans to change this state of affairs have not been seriously discussed during the campaign, but François Hollande and Nicolas Sarkozy have both pledged to reduce the deficit to zero by the end of their term. Whoever gets elected will thus be able to claim that he has been given a mandate to break with sloppiness. He may be able to change course if he sets the compass right from the outset, especially by devising a fiscal rule and by creating an independent monitoring body.

Competitiveness is more difficult. Over the last 10 years the current account balance has worsened  year after year, the share of manufacturing in output has shrank, the number of exporting firms has diminished and the share of exports in GDP has stagnated. France has a number of world-class companies but its medium-sized companies are too few an, the insufficiently profitable. They too often compete on prices rather than quality.  The disease is thus severe.

The campaign here has been less helpful. True, the two main candidates have acknowledged the problem and both have said priority will be given to supply-side measures. But there has been no comprehensive policy conversation about these and the candidates have pandered to the anti-profits, anti-offshoring, anti-globalisation mood of the electorate. So the next president will not have a clear mandate for politically and socially sensitive reforms.

As to Europe, it is increasingly evident that the bare-bones Economic and Monetary Union of the Maastricht treaty is a casualty of this crisis. A stable euro requires significantly more policy integration. There are discussions about what exactly is needed – a banking union, eurozone bonds or a fully-fledged fiscal union with transfer mechanisms – but all require giving additional powers and political legitimacy to Brussels.

As the country that first proposed the euro and because its economy heavily depends on European prosperity, France should be the champion of these reforms. It is also pivotal as Germany cannot move if it perceives France as double-minded. But both left and right include a strong and vocal eurosceptic wing. For this reason candidates have refrained from spelling out a genuine European programme. The next president, however, will have little time to let his true priorities known and hold serious discussions with Berlin and other partners before the German election campaign starts, de facto suspending negotiations.

In the end the next president will be short of the mandate he should gain in the campaign: the election will have delivered barely enough on public finances, little on competitiveness and almost nothing on Europe. For sure, the French system is centralised enough to give the president the means to push through the agenda he believes in. But this, perhaps, is also the reason why Rochefort is still right, a century and a half later his famous editorial.

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