By Moisés Naím

Originally published in the Financial Times, on March 4, 2004

News that Horst Köhler, the managing director of the International Monetary Fund, is poised to become Germany's next president marks the end of a murky process that, according to insiders, would have led to his reappointment for another five-year term at the IMF. Mr Köhler's term was to expire in May 2005 and news of his imminent departure has triggered intense speculation about his likely successor. This should be the perfect opportunity to end the entrenched and opaque way that succession is managed at the IMF - and the World Bank.

Mr Köhler's appointment in 2000 followed a ferocious battle between member states - not least over the quid pro quo tradition of giving the IMF job to a European and the World Bank to an American. In an organisation that purportedly champions transparency and good corporate governance and fights cronyism, it is particularly ironic that the process of appointing - or renewing - a chief executive entails practices unacceptable to most large corporate boards and institutions. In principle, there is nothing unusual about this at the IMF and World Bank - and that fact should be scandalous. Before news of Mr Köhler's new job, the near-certainty among senior IMF officials that he would be reappointed automatically showed that nothing had changed in the murky and obsolete process.

Mr Köhler's very entry to the IMF in 2000 represented the victory of tradition over reform. The US had vetoed the German government's first proposed candidate, Caio Koch-Weser, the deputy finance minister. For the first time, two non-European candidates had been proposed, a Japanese and an American. Surprisingly, the American candidate - Stanley Fischer, the IMF's respected deputy director - had been nominated by 20 African countries, while the Clinton administration refused to support him. Only the intervention of Germany's chancellor, Gerhard Schröder, ensured the success of a second German candidate: Mr Köhler.

The arguments and manoeuvring that led to Mr Köhler's appointment attracted media scrutiny that at least raised public awareness of what insiders had long known: the unacceptable procedures behind leadership selection at these critical international financial institutions.

With Mr Köhler's appointment, politics trumped due process and obscure back-room deals made a joke of the much vaunted transparency the IMF preaches to others. The only good news, it seemed, was that the process was such a public embarrassment that change looked virtually inevitable. Indeed, both the IMF and World Bank boards immediately created working groups to recommend internal reforms. They eventually issued a report containing rather obvious but still useful guiding principles: candidates' qualifications should be clearly specified, directors should be involved in a timely manner, attention should be paid to transparency and accountability, and an external advisory group of eminent people should collaborate with board members to short-list suitable candidates. Buried in the report was an obvious, but revolutionary, principle: "A plurality of candidates representing the diversity of members across reg- ions would be in the best interests of the Fund; the goal is to attract the best candidates regardless of nationality."

This is perhaps why, in another illustration of their governance flaws, the IMF and World Bank boards formally endorsed the report while refusing to adopt it. Thus, despite the fiasco of 2000, those in charge of the Bretton Woods institutions - the board members and ministers, central bank governors and politicians - remain unwilling to adopt reforms that are as obvious as they are necessary.

The argument typically used to defend the secretive and exclusionary selection succession process is that, while defective, it is still better than the hyper-democracy that has crippled so many United Nations agencies. While this concern is valid, it is not true that eliminating some practices that contradict current governance standards would impair the functioning of the IMF and World Bank. Their effectiveness stems not just from the financial resources at their disposal or the quality of their advice, but also (and most importantly) from their legitimacy. That legitimacy is severely undermined by a process that discriminates against the majority of nationalities when selecting leaders of organisations whose mandate is to serve the entire world. The major shareholders of the World Bank and the IMF will obviously continue to have the votes on leadership of these institutions. But they do not need to stick to a tradition that bans qualified candidates because of their nationality.

The next chief executive of the IMF - and the World Bank - must be selected through a process that gives them and their institutions the legitimacy that only a competitive and transparent process can bestow. Their personal qualifications and not their passport should be the main criteria.

The writer is the editor of Foreign Policy magazine