Arrest could benefit IMF's emerging markets

WASHINGTON — The arrest of International Monetary Fund Managing director Dominique Strauss-Kahn may bolster a drive by Brazil and other emerging markets for a greater voice in the selection of the IMF and World Bank chiefs.

Strauss-Kahn, charged with attempted rape in New York, was ordered held without bail Monday by a New York judge. A potential candidate for the French presidency, Strauss-Kahn, 62, has denied the charges and will plead not guilty, his lawyer Benjamin Brafman has said. Strauss-Kahn didn't enter a plea when he appeared in Manhattan criminal court.

The former French finance minister was chosen in 2007 to a five-year IMF term in keeping with an informal agreement dating to the end of World War II, under which a European heads the Washington-based fund while an American leads the World Bank.

Policy makers such as Brazilian Finance Minister Guido Mantega say the arrangement sacrifices merit to diplomatic deal-making and doesn't recognize the growing economic clout of developing markets, which are set to grow at more than twice the pace of their developed counterparts this year. The arrest will give them added ammunition, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.

"This event is likely to put into play the leadership and governance structure of the IMF in a dramatic and unanticipated manner," said Prasad, a former IMF official. He said it's "untenable " for Strauss-Kahn to keep his job, and that Europeans may be unable to make a strong case to maintain control of the post.

Prasad said potential candidates for the top IMF job include Singapore Finance Minister Tharman Shanmugaratnam, former South African Finance Minister Trevor Manuel and Kemal Dervis, who was Turkey's minister of economic affairs at a time his country got aid from the IMF.

"There's going to be pretty frantic diplomatic agitation" if Strauss-Kahn resigns, said Nicolas Veron, senior fellow at Bruegel, a Brussels-based economics research group. "It's the first time that the competition is so internationally open."

The IMF's No. 2 official, John Lipsky, last week said he would leave when his term expires Aug. 31. Lipsky is acting managing director during Strauss-Kahn's absence from Washington.

Lipsky's position of first deputy managing director has been traditionally held by a U.S. citizen. The two other deputy managing directors now are Japanese and Egyptian. A Chinese citizen was named special adviser to Strauss-Kahn last year.

For Europe, "only a truly extraordinary candidate now has any chance," Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in an interview. He named French Finance Minister Christine Lagarde as one such person, saying she might be "brought into play not as another European candidate but as the first female head of the IMF."

Even so, "the ball is in the court of the emerging markets because they really have to come up with a strong candidate that they can unify behind, and that's going to be very tricky," he said.

Another possible candidate to replace Strauss-Kahn is Zhu Min, 59, a special adviser to the IMF and a former deputy governor at China's central bank, said Shen Jianguang, a former IMF economist now at Mizuho Securities Asia in Hong Kong.

"He has the right background," Shen said. "China and other developing countries are pushing for a larger share and more prominent representation in the IMF."

Emerging markets argue that having a greater say in the 187-member IMF would make them less prone to accumulate foreign currency reserves as insurance against a crisis and turn to the IMF for help instead, said Bessma Momani, a professor in the department of political science at the University of Waterloo in Canada, who specializes in the IMF and its policies.

"The fund had been reviewing its governance structure, particularly with respect to providing greater representation for the developing economies," Philippine central bank Governor Amando Tetangco said in an e-mailed reply to questions. "The recent incident should hopefully not be a significant distraction."

Established in 1945 to help oversee the construction of a new international monetary system, the fund has evolved into a lender of last resort to cash-strapped nations. Recipients of IMF aid include Britain in 1976 to Mexico in 1982.

The global financial panic triggered by the bankruptcy of Lehman Brothers Holdings in September 2008 restored the IMF's relevance as emergency loans soared to a record of $91.7 billion last year.