Lagarde's negligence a 'footnote,' but the IMF still needs reform

Devex
By Sophie Edwards

International Monetary Fund Managing Director Christine Lagarde. Photo by: IMF / CC BY-NC-ND

Christine Lagarde’s conviction for financial negligence may not have cost her her job as head of the International Monetary Fund, but it could bolster calls for leadership reform at the institution, experts said.

On Monday, a special French tribunal ruled Lagarde was guilty of “negligence with public money” for approving a 400 million euro ($418 million) payout of public funds to a French tycoon in 2008 when she was finance minister for France. The tribunal opted not to impose a punishment; Lagarde could have faced a 15,000 euro fine and up to a year in jail.

The IMF’s 24-member executive board, which speaks for its 189 member countries, responded by issuing a statement the same day saying it had “full confidence” in Lagarde’s ability to continue in her role as head of the multilateral.

Devex spoke to three experts who called Lagarde an effective leader of the IMF and said they doubted her court conviction would have a lasting impact. However, they said the scandal emphasized ongoing issues within the institution, which the governors will need to address if the IMF is to stay relevant and credible in a shifting economic climate.

Britain’s departure from the European Union, Italy’s future in the eurozone, and uncertainties around global trade triggered by Donald Trump’s election, will make the role of the IMF more challenging, they said.

This is the third time in a decade an IMF chief has been embroiled in scandal. Lagarde’s predecessor Dominique Strauss-Kahn stepped down in 2011 after being accused of sexual assault, and another former IMF boss, Rodrigo Rato, is currently standing trial for the alleged misuse of funds while head of Spanish bank Bankia. In 2007, Paul Wolfowitz, then head of the IMF’s sister organization, the World Bank, was also forced to resign.

Unlike Strauss-Kahn, there was little in Lagarde’s background to “question her honesty and integrity,” and this was a big factor in the executive board’s decision to support her both before and after her conviction, according to James Boughton, former historian of the IMF and senior fellow at the Center for International Governance Innovation.

While Boughton doubts the scandal will leave “lasting scars,” he said Lagarde’s conviction could call into further question the existing governance arrangement that has seen a European lead the IMF and an American lead the World Bank since the Bretton Woods institutions were forged more than 70 years ago.

“When Lagarde finishes her term, the IMF is going to have to cast its net a lot wider to find its next managing director. While in my view she deserved a second term, she has to be the last European in the role, otherwise [the IMF is] going to lose all credibility,” Broughton said.

The fund’s next leader should be drawn from a country in Asia, Latin America or Africa so emerging market interests can be better represented in the IMF’s management ranks, he added.

Despite the black mark of this conviction, Lagarde's tenure has been a high-water mark for IMF leadership, according to Scott Morris, senior fellow at the Center for Global Development. The institution is experiencing a “renaissance” thanks to Lagarde, Morris said, and the fact that the board was so quick to support her despite the conviction emphasizes how highly they value her leadership, he added.

Lagarde’s leadership role is more important now than ever, Morris said. As the world moves into “a period of conflict and competition among countries,” the IMF chief is one of “few leaders of stature” who can provide the international leadership needed to “hold together the spirit of cooperation,” he said.

Lagarde has brought “sophisticated” and “nuanced” policy making to the IMF, according to Douglas Rediker, former member of the IMF’s executive board and a senior fellow at the Brookings Institution, who said he had fully expected the board to support her.

“Lagarde and her team have done an extraordinary job of not only putting the more questionable parts of the Dominique Strauss-Kahn era behind them, they've really managed to evolve the IMF into a much more nuanced institution,” he said.

Women’s rights have been given a central role in IMF economic policy under Lagarde, Rediker said, which he said shows a “very sophisticated” understanding of the IMF’s tools and how to use them.

According to Rediker, the conviction is a “footnote” in a time of “enormous global uncertainty,” which will require the IMF to play a “global stabilizing role.” In order to fulfil that role, Rediker said the institution will need to “rethink” its current strategy to become more “attuned to the political considerations of the advice it gives,” so that its prescriptions are no longer seen as “imposing pain without regard to those who are supposed to be better off.”

The IMF still has a negative reputation among some borrower countries as a lender of last resort, according to Boughton — a reputation he said has been partially repaired under Lagarde’s leadership, though there is still some “stigma” associated with requesting finance from the institution.

Speaking at a news conference in Washington, D.C., on Monday Lagarde said of the verdict: “I’m not satisfied with it, but there’s a point in time when one has to just stop, turn the page, and move on. So I’m very happy to not appeal this decision, and to focus all my attention, all my time, all my efforts, to my mission as head of the IMF.”