Even Rodrigo Rato’s rivals emphasize his remarkable mix of leadership qualities, political skills and technical knowledge. Rato’s record has earned him international recognition, and catapulted him to the top of the International Monetary Fund, the world’s foremost financial organization. Following eight years at the helm of Spain’s ministry of economics, Rato was Latin America’s favorite candidate for the IMF post. Meanwhile, his close ties with both the United States and the United Kingdom guaranteed him support from the English-speaking world. However, that support will erode if Rato fails to meet the difficult challenges that lie ahead: He must restore the IMF’s battered image, and straighten out the situation in Argentina.


Although the news was not official until yesterday, May 4th, there was no doubt that the 54-year-old Spaniard would become the next head of the Fund. Rato enjoyed the unanimous support of Latin America, and backing from several European countries, including Austria, Belgium and Luxembourg. He also had support from emerging Asian nations, including China, countries of the Arab world and Russia. This added up to a strong consensus. Moreover, the United States, the key piece in the IMF puzzle, had publicly demonstrated its backing for Rato.


Three weeks ago, John Taylor, secretary of Treasury for International Affairs told Bloomberg News that the views of Latin America “are very important for us. We take it very much into account.” Mauro Guillén, a management professor at the Wharton School, adds, “A key to Rato’s victory is the strong support he has received from the American government, thanks to the close relationships between the U.S. and Spain; especially between George W. Bush and José María Aznar (who led Spain’s government until March 11.)” Guillén says it is even possible that “Aznar personally called Bush to ask for his support.”


A Brilliant Economist

Rodrigo Rato has a law degree, an MBA from Berkeley, and a doctorate in economics from the Complutense University in Madrid.  He began his career within the group of companies owned by the Rato family. Then, he took a 180-degree turn, and decided to join Spain’s conservative party, the Popular Alliance. From that point on, Rato’s political career made constant progress, leading to his appointment as minister of economics in 1996.


In his eight years at that post, Rato became widely recognized around the world. Above all, Rato played a major role overseeing the longest period of economic growth in the history of Spanish democracy. “He has demonstrated that he is capable,” notes Sara González, a professor at the Complutense University of Madrid. “When Rato took over, Spain’s economic situation was not easy, and Rato knew how to fix things up. Moreover, he showed that he can understand and manage conflicting economic interests. Now, however, Rato won’t be dealing with the economy of a nation, but an organization that has incredible power,” González warns.


If anyone can handle the challenges the IMF faces, Rato is that person. “His biggest advantage is that he has no disadvantage,” notes González. “Clearly, Rato personifies everything that a director of the Fund needs to be, and he lacks any major shortcoming.” A born negotiator and defender of free markets, Rato’s oratorical skills in Spain’s Congress of Deputies were so remarkable that his political enemies found them daunting. Now his oratorical skills are going to be especially useful in his new position.


“Rato is a very diplomatic person,” notes Gerald McDermott, a Wharton management professor, adding that one of his outstanding qualities is his political and economic experience. Rato maintains close ties with Latin America, especially with Argentina, where he will wage one of the IMF’s most complex battles. “The Fund has tried many times to make links between microeconomic problems and macroeconomic problems, but it hasn’t managed to achieve that. I believe Rato can do that.”


For years, the IMF has suffering from an image problem. Guillén explains, “Even prestigious economists have been highly critical. The Fund’s problem is that it has gone astray. In the beginning, its role was to prevent states from having an imbalance in their balance of payments. Over time, however, [the Fund] began to pressure countries to make structural economic reforms. For example, during the Asian crisis of 1997, the Fund imposed more than 160 conditions on Indonesia to qualify for its credits. This approach has led to serious criticism. The Fund’s role should be to analyze if countries have the appropriate conditions for receiving aid. The Fund should not be trying to design countries’ economic policies,” he adds.


Lately, both Luiz Inácio Lula Da Silva, president of Brazil, and Néstor Kirchner, his counterpart in Argentina, have been playing with dynamite, leveling harsh critiques of the Fund. Reestablishing good ties with both Brazil and Argentina is critical for the IMF. Argentina, Brazil and Turkey now account for 70% of the organization’s open loans, a total that amounts to some $17 billion (14.193 billion euros), according to Expansión, the Spanish daily.


The French candidate for running the IMF was Jean Lemierre, the director of the European Bank of Reconstruction and Development (EBRD). When Lemierre withdrew from the race to head the IMF, Rato was declared the apparent winner, with at least 85% of the total vote.


Why Rato?

The International Monetary Fund was created in 1944 in the town of Breton Woods, New Hampshire. It now comprises 184 member-countries, and a veritable army of nearly 2,700 officials. Throughout its almost 60-year history, Europeans have always run the Fund because of a tacit agreement between Europe and the United States about sharing control of the IMF and the World Bank. The roster of past IMF directors includes Camille Gutt (Belgium), Ivar Rooth (Sweden), Per Jacobsson (Sweden) Pierre Paul Schweitzer (France), H. J. Witteveen (Netherlands), Jacques de Larosière (France), Michel Camdessus (France) and Horst Köler (Germany). Until now, no Spaniard has ever headed the Fund.


For 32 of its 60 years, someone from either France or Germany has run the Fund, creating a great deal of friction. Many countries have accused France and Germany of trying to control major international organizations by placing their citizens at the helm. In Europe, Jean Claude Trichet, a Frenchman, heads the European Central Bank. Jean Lemierre still runs the European Bank for Reconstruction and Development (EBRD). Rato’s nomination represents a defeat for the Chirac-Schröder [French-German] alliance, which deployed diplomatic artillery and pressure to block Rato’s ascent. How, then, did Rato become the winner?


According to Guillén, Rato’s political experience and skill as an economist are the key weapons that Rato will deploy over the next four years. “Running the IMF requires lots of political experience. Although the fundamental role of the Fund is to offer technical solutions, it also requires diplomatic skill and knowledge of the intricacies of politics. As Rato himself said recently, ‘Economic policy is always more political than it is economic.’ This way of thinking is going to be very beneficial for the IMF because, when all is said and done, the Fund is an organization in which influence and voting power are determined by the contributions countries make. Ultimately, support for a candidate depends on the contributions.” American support has been a key for Rato. According to Guillén, the U.S. makes about 20% of all IMF contributions.


“Rato won this game because the United States had a decisive impact,” adds González. “In foreign policy, you have to sow in order to reap, later on. Spain has been sowing for quite some time.” Spain has had close ties with the United States, especially after Spain backed the U.S. war in Iraq. Moreover, the close ties between Spain and Latin America also played a key role. Rato has a profound knowledge of Latin American problems because of the significant investments that Spanish companies have made in Latin America.


Argentina is one of the most important tasks on the IMF’s list,” McDermott says. “Historically, Spain has had a very close relationship with Argentina. Moreover, over the last 15 years, Spanish companies have become some of the largest investors in Argentina. This situation, added to Rato’s diplomatic skill, will allow him to influence relations between Spanish multinationals and the Argentine government. Moreover, Rato will be able to negotiate with the big Spanish banks in Argentina, and play a key role in reconstructing that country.” McDermott adds that this complex web of interests could be very attractive if Rato “manages to make an impact in the short run.” González also emphasizes that Rato is remarkably aware of the Latin American situation because of the high profile of Spanish companies in the region. Rato could play a key role, “so [that the Fund] doesn’t tighten things too much, and the countries [of Latin America] wind up suffocating.”


However, there is a danger that Rato will become too indulgent, warns McDermott. “Knowing the problems of the region, and having ties with the banking sector and the Spanish multinationals there; Rato is more sensitive to the problems of each country. That means, Rato can speed up and improve the process of debt renegotiation and/or improve Argentina’s relationship with the IMF. However, he cannot act like someone who is too sensitive [to Latin American interests]. He must behave as someone who defends the interests of the IMF – and especially, the interests of the G-7 (the seven largest economic powers, who have more weight in the Fund.) Rato will have to learn how to manage relations between Argentina and the G-7,” warns McDermott.


Restoring the Meaning of the IMF

Although Latin America, in general, and Argentina in particular, are going to demand a great deal of Rato’s attention, he will also be fighting other battles.   The IMF needs to restore the organization’s lost prestige and redefine its role in the international arena. González pleads for the Fund to rejuvenate itself, and work along the same lines that inspired its creation 60 years ago.


“The economy of the twenty-first century has nothing to do with the reconstruction of international relations after World War II, which was the original starting point for the IMF. Nevertheless, the Fund continues to be grounded in that mentality,” says González. The IMF “is a necessary organization that has failed to adapt to the needs of current reality. In other words, if the IMF did not now exist, we would have to invent it.” González makes this recommendation: “The IMF should guarantee the smooth functioning of markets so that they are transparent and cannot be manipulated. In today’s sort of market, there is no way to impose any borders on money. As a result, it is impossible for the IMF to try to regulate everything or guarantee everything. Its role must be limited to acting as the arbiter that guarantees the transparency of markets.”


Rato seems to have everything it takes to begin that transformation. “Conflicting interests are so important; I do not believe that Rato can carry out all the transformations that are needed. However, at least Rato is going to be able to get them started. The key is, Rato is not going to be the sort of director who is indulgent, or who sticks to routine.”


According to Guillén, Rato’s consistent defense of free markets will be an ace up his sleeve as he reforms the IMF. “Rato is aware of the limits of free markets but he is also a firm believer in markets. He defends free markets as the force that can best allocate resources. That’s the approach he wants to establish at the Fund.” Nevertheless, Guillén warns that Rato can face a dilemma the next time a major economic crisis erupts. “Every five or six years, there is a balance of payments crisis somewhere in the world. If that happens in Asia, Rato may not perform well, because he does not have any special knowledge of that region. On the other hand, if it happens in Latin America, he will do better. However, in my opinion, it’s more likely that the [next] crisis will be in Asia – especially China.”


Juan José Toribio, formerly executive director of the IMF, said recently that “Rato must convince governments and public opinion that economic multilateralism is beneficial for everyone.” Jeffrey Sachs, director of the Earth Institute at Columbia University, recently told the Financial Times that the IMF, “as the top macroeconomic institution, should speak with clarity about how it will deal with the most disadvantaged countries, and achieve greater development, with a view toward combating poverty and illness. I have not lost all hope, but IMF policy has not been very satisfactory up to now.”