10/24/2012 12:19 EDT | Updated 12/24/2012 05:12 EST

Christine's Lagarde's To-Do List


This article first appeared on

By Bessma Momani and Kevin English

At the IMF-World Bank Annual meetings in Tokyo, Japan this month, participants from the private and public financial sector gathered to assess the state of the world economy. With the Great Recession still fresh on everyone's minds and the speed of economic recovery barely making the kind of positive impact that could be felt on Main Street, the mood was sombre and pensive. As the head of the International Monetary Fund, all eyes were on Christine Lagarde to guide and prescribe a global recovery plan. This year Madame Christine Lagarde will be accepting the CIC's annual Globalist of the Year award; an award that is fitting for a woman tasked with ensuring the prosperity and stability of the global economy.

At the core of the Ms. Lagarde's global recovery plan is the need to foster deeper global policy coordination within what is an increasingly multipolar and heterogeneous economic order. Under the leadership of Lagarde, the Fund is needed to synchronize key global economic powers' recovery strategies while warning of and preventing any unintended consequences. These are not easy challenges for Lagarde to navigate, but in her words: "A world that is bound together must be a world that works together -- a world that... 'has not been broken up into fragments by narrow domestic walls'."

Japan and the United States need to act swiftly to craft and implement credible medium-term fiscal consolidation programs. Not a small task when both countries' political systems are being held captive to divergent domestic interests and where political squabbling has lead to repeated internal fragmentation.

Christine Lagarde has not cowed to the pressure of the IMF's largest benefactor, the United States, and continuously advises against the current US approach to dealing with its looming fiscal cliff. She has also been highly critical of the large negative spillover effects which such inaction is having on global growth -- particularly the impacts on low income countries.

Another issue of great concern to Lagarde is -- of course -- the Eurozone. European leaders must move beyond a piecemeal approach to dealing with the euro crisis. This will require moving forcefully ahead with designing a genuine banking union, completing the long-overdue clean-up of the common currency zone's financial system through direct bank recapitalizations, and finding a politically acceptable avenue for troubled countries to apply to the ECB's OMT program.

The political cost of this to European countries' sovereignty is high, but these are costs that Lagarde understands well, having once served as the Finance Minister of France. The alternative to further institutional consolidation is an unravelling of the Eurozone that would certainly trigger another "Lehman moment" in global financial markets.

The challenge is for politicians to make the kinds of sacrifices needed to get the Eurozone on the right track. The Fund must not let dogmatic policy inclinations trump sound -- and from a social stability standpoint, realistic -- structural economic reform and fiscal consolidation programs. Lagarde is highly cognizant of the political challenges European governments face, but her role as the Managing Director is to be the ruthless truth-teller envisioned by the IMF's co-creator John Maynard Keynes.

Luckily Ms. Lagarde appears up to this challenge. She recently said: "Advice is sometimes difficult -- both giving and receiving! Over the past year, we made a number of big judgment calls -- some controversial. The call to recapitalize European banks; the call for a larger European financial firewall; the call for a more balanced approach to fiscal adjustment; and, the call for urgent attention to the fiscal cliff. These were tough calls, but it is our job to make them -- to be an objective, independent arbiter of economic issues, especially during hard times."

The highly public disputes between Lagarde and senior German officials over the need to ease the path of fiscal adjustment in some periphery Eurozone countries (which Fund research now suggests has been subject to significantly larger multipliers than previously believed), is case-in-point to this difficult role that the IMF must play.

While the advanced economies have staggered over the past few years, emerging markets economies, especially those in Asia, have continued to grow. The prosperity of emerging market economies cannot continue to be solely tied, however, to growth in advanced economies. Rebalancing away from heavy reliance on external demand and government-led investment binges is necessary for emerging market economies to sustain their positive growth patterns.

The reforms needed to boost private consumption, however, have potential political costs as well. For countries like China, the fear is that this will also raise political expectations, spur socioeconomic disparities, and ultimately challenge the communist party rule. Domestic re-balancing also is certain to meet staunch backlash from entrenched interests in China's powerful export-oriented industries.

Not to be forgotten is the challenge faced by low income countries which remain highly exposed to negative terms-of-trade shocks -- many of which are spillovers from the recent deterioration in global economic growth. The Fund has signed dozens of concessional lending agreements with LICs over the past four years.

Lagarde has worked to convince the Executive Board to approve precautionary financing packages that would be ready to provide additional support should it become warranted. Under Lagarde's watch, the IMF staff have also added new lexicon to their analyses: "inclusive growth." The Fund now admits that "...research tells us that less inequality is associated with greater macroeconomic stability and more sustainable growth. This has profound policy implications." For those of us who have followed the Fund closely for the past decades, it is hard to overstate the extent of this paradigm shift -- even if the IMF itself will not openly attest to this.

The IMF is also not without its fair share of criticism. A few years ago, policymakers called the IMF irrelevant, without a cat to rescue. Strapped for financial resources and unable to find members who wanted IMF funding and its despised advice, the international financial crisis has given the IMF its "groove back" -- so to speak.

The IMF must still earn its members' legitimacy and trust. Global policy coordination requires it. Lagarde has worked feverishly to return members' faith in the organization. Some of this has come through a series of negotiated governance reforms aimed at increasing the voice and representation of dynamic emerging economies in the Fund's key decision making bodies.

Lagarde has also worked tirelessly towards achieving the long-term goal of transforming the IMF into a genuine global lender-of-last resort. In this pursuit Ms. Lagarde's charisma and "je ne sais quoi" have proven invaluable. As one finance minister noted, his country agreed to contribute to IMF's latest bilateral loan and note purchase agreement because "...Christine asked him to." Lagarde demonstrates how strong leadership has its payoffs.

Leading the IMF at time when the world economy rests precariously between recession and recovery for the second time in four years is indeed a herculean task. For the Fund to prove successful in guiding the global economy away from the abyss, the IMF must be viewed as a trusted advisor and independent interlocutor; an institution capable of providing strong surveillance - particularly regarding economic and policy spillover effects-, and, of "speaking truth to power" when global growth and stability requires it.

The tectonic shift underfoot in the global economy -- from the "West to the Rest" as it is now often called -- will place an even greater premium on economic policy coordination. A sustained global recovery will require the Fund to succeed in recapturing the spirit of shared fate and cooperation that allowed global leaders to prevent a repeat of the Great Depression. These tasks fall on the shoulders of the IMF Managing Director, Christine Lagarde.