Sanjaya Baru: Dominique in Delhi

In India this week, IMF’s Strauss-Kahn will be heard for his views on Europe.

When Dominique Strauss-Kahn called on Prime Minister Manmohan Singh in 2007 to seek India’s support for the post of managing director of the International Monetary Fund (IMF), he would have been pleasantly surprised at the ready endorsement he got. “French leadership at the Fund has been good for India,” he was told, and India’s support was assured.

Mr Strauss-Kahn was the beneficiary of Dr Singh’s happy personal experience with another Frenchman, Michel Camdessus, who ran the IMF in 1991-92 when India was under a Fund programme. Perhaps Mr Strauss-Kahn did not expect such hearty endorsement partly because some thought India would support America’s Stanley Fischer, whose name was doing the rounds, or because India’s finance ministry was trying to secure a quid pro quo in the form of support for Finance Minister P Chidambaram as chairman of the International Monetary and Financial Committee, an influential policy-making body of the Fund, and Italy was seeking that job in return for support to Mr Strauss-Kahn.

 

Italy’s Economic Minister Tomasso Padoa Schioppa got that post, with a little help from some African nations. Europe secured the Fund’s leadership with both hands. Now that Europe weighs so heavily on the Fund’s mind, it is time Mr Strauss-Kahn spent some time sharing his thinking with India about what Europe has been up to and where it is headed.

Mr Strauss-Kahn will have his usual words of praise for India’s macroeconomic management and his usual words of advice on fiscal responsibility. Both would be well-intentioned and, indeed, even relevant given that India does need better economic and fiscal management. But a large part of what he says this week in New Delhi should be devoted to the Fund’s reading of Europe and the consequences of the actions of European leaders, he may well be one of them in a few months, for the world economy and for developing economies in particular.

Speaking in New Delhi in February 2008, Mr Strauss-Kahn gave a very lucid and thoughtful account of the global economic situation at the time. He showed remarkable awareness of the gravity of the situation in the trans-Atlantic economies and of the impending financial crisis. Yet, after having drawn attention to all the problems that the United States and Europe were facing, he chose to devote the second half of his speech to advise emerging economies, on perfectly legitimate grounds, that the latter were indeed not delinked from the former.

The closing words of Mr Strauss-Kahn’s 2008 speech were: “The world economy has entered a difficult phase, with the financial crisis spreading to the real economy. This has become a global problem that requires a global solution. Emerging markets need to join industrial countries in the macroeconomic and regulatory policy response. Such a collaborative approach offers the best hope for ensuring the stability of the global economy.”

In the months that followed, it is not the so-called “emerging economies” that were in need of sound advice but the industrial countries. Today, it is not so much the “emerging markets” that “need to join” industrial countries in ensuring sound “macroeconomic and regulatory policy response”, but the other way round. The world has lost confidence in European economic leadership. Can the IMF, an institution led by Europe, help restore global confidence in Europe?

What advice does Mr Strauss-Kahn have for industrial countries today? Till yesterday, the world worried about Iceland and Greece. Today, it worries about all of southern Europe. Hungary has a programme with the Fund. Tomorrow Britain could give the IMF sleepless nights. Macroeconomic leadership has been found wanting in almost every G-7 economy.

The G-20 countries have stood by the Fund and improved its finances. But the IMF cannot be re-empowered by money alone. It has to be re-legitimised by new ideas, and by its willingness to discipline the rich as much as it does the poor.

After Mr Strauss-Kahn speaks at a Ficci function in New Delhi, he will hear an Indian response to his views from two distinguished policy-makers — Montek Singh Ahluwalia and Dr Yaga Venugopal Reddy. Commentators have recommended both their names for Mr Strauss-Kahn’s job, were he to return to a political career in France and were India to seek the job. Those who walk the global gossip corridors even speculate that the United States may offer to support Mr Ahluwalia while China may plump for Dr Y V Reddy (who has admirers in Beijing from his days there advising China’s economic policy-makers).

While both would offer good leadership at the Fund, India should not get tempted to seek this job at this time. It must, however, support an Asian head at the Fund. Japan had its moment in 1995 when Toyo Gyohten of the Bank of Japan sought the job. Today, Japan cannot hope to inspire global confidence. The world also needs a stronger IMF that can command the respect of the United States, Europe, Japan and China.

A good Asian candidate for India to back would be Singapore’s turnaround man, Finance Minister Tharman Shanmugaratnam. An economist trained at the London School of Economics and Cambridge (UK) and Harvard Universities, Mr Shanmugaratnam was head of Singapore’s Monetary Authority. As an Asian and a professional, he would enjoy the confidence of China, Japan and India, and should command the respect of the United States, Europe and the world.

More importantly, at a time when economic policy managers on both sides of the Atlantic have messed up their economies, neither an American nor a European will inspire confidence in global markets, nor indeed would China with its still non-transparent economic policies. A Singaporean like Mr Shanmugaratnam can fit the bill. Any takers?