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In scandal, an opportunity for IMF change

Dominique Strauss-Kahn's tenure as managing director of the International Monetary Fund coincided with fundamental shifts in global economic power to emerging markets from the United States and Europe. But whether there truly is a new world order will be revealed by Mr. Strauss-Kahn's suddenly unavoidable exit from the world stage.

The former French finance minister was removed by authorities from the first class cabin of a flight bound for Paris from New York on Saturday afternoon, and was charged in the wee hours Sunday with attempted rape and unlawful confinement of a 32-year-old female maid at a Sofitel hotel in midtown Manhattan.

Mr. Strauss-Kahn is denying the charges and his wife, French journalist Anne Sinclair, said in a statement to Agence France-Presse that she doesn't "for a second" believe the accusations. Still, the allegations against Mr. Strauss-Kahn aren't the type that can be easily set aside as he awaits trial - even if he's innocent. The distraction is too great at this moment in the IMF's history.

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The institution is in the middle of efforts to stabilize Europe's debt crisis, and Mr. Strauss-Kahn was originally scheduled to meet German Chancellor Angela Merkel Sunday and European finance ministers Monday. The fund will send deputy managing director Nemat Shafik to Monday's meeting in his place.

The talk is already turning to who will replace him. This was already a topic of some discussion in certain circles because of the assumption that Mr. Strauss-Kahn was poised to challenge for the French presidency next year as the Socialist party candidate. He had yet to say definitively that he would run, but had stopped short of ruling out the possibility.

If the IMF was a typical institution, the choosing of its next chief executive officer would be a reasonably straightforward matter: the board of directors would examine prospective candidates and choose the man or woman most qualified for the job. However, the IMF isn't a typical institution.

Since its creation after the Second World War, it's been understood that the managing director would be a European. This arrangement was the result of a political understanding between the bigger continental European countries and the United States, which holds a veto over most of what goes on at the IMF by virtue of being the fund's largest shareholder. The quid pro quo for the U.S. was the right to choose the IMF's first deputy managing director, and the president of the World Bank, the fund's sister institution.

Mr. Strauss-Kahn is among those pushing for an end to this arrangement.

During his stewardship, which began in November 2007 after he failed to win the Socialist nomination for the last French presidential election, the IMF approved a realignment that left China as the third-biggest shareholder and weakened the clout of European countries in favour of faster-growing emerging markets.

The next step is to create an open process for selecting the leader of the IMF and the World Bank that favours merit over a candidate's passport. The charges against Mr. Strauss-Kahn strengthen the case for a shakeup because emerging-market countries will be able to say that the old way has led to nothing but embarrassing controversy.

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In 2008, Mr. Strauss-Kahn was reprimanded by the IMF's board for showing a "serious error in judgment" by having a romantic relationship with a female economist at the fund. A year earlier, Paul Wolfowitz was forced to resign as president of the World Bank over allegations that he showed special treatment to his girlfriend, who was a bank employee.

Emerging-market countries are in a position to say the leaders that are being foisted on them at the fund and the World Bank are far from "squeaky clean," said Bessma Momani, a senior fellow at the Centre for International Governance Innovation in Waterloo, Ont. and specialist on the IMF's history and policies. "The IMF is going to need new branding to show it has done something different. It's a great time for the emerging markets to say, 'It's time to give us a chance.'"

Some of the candidates mooted for the IMF job include Kemal Dervis, a former Turkish finance minister who is currently at the Brookings Institution in Washington; Stanley Fischer, the former No. 2 at the fund who is currently the governor of the Bank of Israel; Montek Singh Ahluwalia, the deputy chairman of India's planning commission; Agustin Carstens, the governor of the Bank of Mexico and a former senior IMF official; and former South African finance minister Trevor Manuel.

A credible selection process would follow a proposal by Colin Bradford, a non-resident senior fellow at Brookings. The IMF's board of directors would review a full slate of candidates, rank them and then take a few recommendations to the finance ministers and central bankers who make up the fund's board of governors for a vote. At this stage, geopolitics would inevitably come into play, but, as Mr. Bradford says, it would be "one factor, but not the determining factor."

For much of the past year, the assumption in Washington has been that Europe would yield to an emerging-market candidate as the next managing director. But that feeling changed somewhat during the spring meetings of the IMF and World Bank last month. The buzz was that Europeans wanted to maintain their special link to the IMF given the fund's involvement in the financial rescues of Greece, Ireland and Portugal. The name making the rounds as Mr. Strauss-Kahn's replacement was French Finance Minister Christine Lagarde, a popular figure internationally who would be the first woman to lead the IMF.

"The U.S. wants to keep the (World Bank), so (the European Union) will push for a euro, Lagarde, to run the IMF," economist Nouriel Roubini said on Twitter Sunday. "Lofty goals of merit" and a greater role for emerging markets may end up trumped by "realpolitik," Mr. Roubini said.

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Unless post-crisis "realpolitik" really is different than the way things were done before. The U.S. and Europe were allowed to dictate who ran the global institutions after the war because they had all the clout. That's no longer the case.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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