Strauss-Kahn arrest bolsters push for IMF changes

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, 62, was charged with attempted rape in New
York, and his lawyer said he would plead not guilty. 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 rising 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.

‘Frantic’ Agitation

“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. Strauss-Kahn appeared in
Manhattan criminal court today to face charges that he tried to rape a New York
hotel maid.

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.

‘Extraordinary’ Candidate

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.

Germany prefers having a European as head of the IMF if
Strauss-Kahn quits, Chancellor Angela Merkel said today. There are “good
reasons” for Europe to keep the post amid the euro area’s debt crisis, even as
the role of developing nations grows, Merkel told reporters in Berlin.

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 Ltd. in Hong Kong.


Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), is escorted by police in New York.
Peter Foley/Bloomberg