The education of Horst Köhler

The IMF chief arrived determined to avoid big bailouts. Then came Argentina. Now can he rescue his reform agenda along with the country?

By Deepak Gopinath
September 2001
Institutional Investor Magazine

When International Monetary Fund managing director Horst Köhler negotiated with Argentinean officials on a bailout last month, he was faced with an agonizing dilemma. On the one hand, Argentina was on the verge of defaulting on its $128 billion debt, threatening a much wider financial crisis. Moreover, Argentina's economy minister, Domingo Cavallo, deserved credit for taking drastic steps to reduce the country's deficit, such as lowering civil servants, salaries. Köhler didn,t want to appear to turn his back on the country's efforts to dig itself out of its financial hole. On the other hand, a bailout would mark Argentina's second rescue in nine months, following a $40 billion, Bill Clinton,backed rescue package last December, and Köhler had taken office determined to curtail IMF bailouts. "We have to think about limits to the scale of crisis lending that the Fund can be expected to undertake," he told bankers in Paris soon after taking over the IMF last year.

How then to proceed? Köhler and U.S. Treasury Secretary Paul O,Neill, an even greater skeptic of big IMF bailouts, were both anxious that Argentina's IMF program not come unraveled. And that required finding a way to compel or cajole Argentina into cutting back its immense debt load. What officials could not agree on, though, was how such a restructuring was to be achieved , and how much to pressure private creditors to share the pain. Negotiations dragged on for 12 days, while Argentina's banking system hemorrhaged deposits from panicky savers. It was a time bomb ticking away.

Finally, in a hard-fought compromise, policymakers decided that Argentina would get an additional $8 billion from the IMF but with the proviso that $3 billion of the funds would be held back and tied to the country's progress in negotiating a "voluntary and market-based" debt restructuring (see Argentina, page 91). "What pressured people was the concern that you could have a run on the deposit base and the possibility of contagion during a period of worldwide economic weakness," says Citibank vice chairman and emerging-markets troubleshooter William Rhodes. "At the end of the day, no one wanted to really pull the plug because of that."

But others complained that the bailout would only postpone the inevitable next crisis, like giving a fix to an addict rather than administering a cure. "The amount of money involved is not enough to make a material difference to Argentina," contends Mohamed el-Erian, emerging-markets portfolio manager at Pacific Investment Management Co. And the informed consensus on the restructuring proviso was that it was too vague to prompt Argentina and its creditors to engage in any meaningful debt reduction. Nevertheless, Group of Seven officials say they had few other options. "Debt restructuring is not so easy and has to be worked on," says German deputy finance minister Caio Koch-Weser. "We were operating in real time, and Cavallo is doing his best. We are aware of the high risks and the uncertain world environment, but it was the best solution at the time."

In any event, the Argentina bailout , and the Turkey rescues before it , brings home the difficulties that Köhler faces. He came to his post vowing to radically reform the IMF. He wanted to all but abolish bailouts, be tough on IMF funds, being used to finance private investors, exits from countries in crisis and refocus the Fund on crisis prevention. Instead, with the Turkey and Argentina bailouts, observers see the IMF doing business pretty much as usual. Realpolitik appears to have found its counterpart in realfinanz.

"The [Argentina] deal still pretty much bails out private creditors," says economist Morris Goldstein, a former IMF deputy director of research. "The IMF has to make a judgment if a country's debt is sustainable. You can,t duck that decision, but the IMF and U.S. Treasury are not giving the debt issue the prominence it deserves."

Still, Köhler had to juggle conflicting demands from borrowers and major IMF shareholders like the U.S., the exigencies of the crisis itself and the glaring absence of a reliable international framework for resolving sovereign debtors, financial emergencies. The world is proving to be a much messier place than Köhler would have liked.

Köhler came to the IMF in May 2000 as nobody's first choice. The German government wanted Koch-Weser, a former top World Bank official. But the U.S. lobbied against him, out of concern that Koch-Weser wouldn,t support the administration's desire to limit the IMF,s development role. Meanwhile, African countries nominated Stanley Fischer, then the IMF's No. 2 official, and Japan nominated its former vice minister of finance, Eisuke Sakakibara. Only after Koch-Weser lost a straw poll of the IMF board did the U.S. agree to Köhler.

A German bureaucrat best known for having hammered out the details of the Maastricht Treaty as then-chancellor Helmut Kohl's right-hand man, Köhler arrived at the IMF when it was under fierce attack from all sides for its maladroit handling of the Asian and Russian crises. The U.S. Congress,mandated Meltzer Commission report, published last year, assailed the IMF for mission creep, meddling in the domestic politics of borrowers and fostering so-called moral hazard , letting investors think that there are no risks to investing in emerging markets because the Fund would always bail them out. Along with wanting to banish big bailouts, Köhler intended to remove the IMF from the poverty-alleviation business , leaving that to the World Bank , and streamline the often-overwhelming conditions that the Fund attaches to its loans. (He was converted to the Fund's poverty mission during a trip to Africa last year: see story below.)

Köhler's most pressing challenge, however, is not in the developing world but in his own backyard, where he must contend with managing an unprecedented level of turnover in the IMF's senior ranks. This summer three of the Fund's most important managers, members of its old guard, chose to announce their departures: first deputy managing director Fischer, who had basically directed the Fund's day-to-day operations for years; policy development and review department director Jack Boorman, who oversees all of the Fund's relations with member countries; and chief economist Michael Mussa. All played influential roles under former IMF managing director Michel Camdessus and were well respected by IMF staffers.

Köhler has been able to replace them with creditable, though less experienced, recruits (see story below). But the IMF boss, who brought to the Fund a reputation for being hard on staff, will have to be careful that he and his new management team don,t end up antagonizing the IMF's proud and independent-minded professionals. "A compelling managing director who is a good politician and knows how to use staff can move things a long way," notes Fischer.

Köhler's reputation for having a stormy temper preceded him at the IMF. "There was tension, and there were rough moments," says a senior IMF official. "He came in with views that were at odds with [those of] management , on conditionality, on poverty and on private sector involvement." Köhler's abrupt, autocratic style was in jarring contrast to the consensus-oriented approach favored by his predecessors. "Köhler is more direct than Camdessus; he goes head-on," says Karin Lissakers, a Clinton appointee who was the U.S. executive director of the IMF until April. "Camdessus was more indirect and subtle; he tested the waters."

Köhler has a history of management by confrontation. At the European Bank for Reconstruction and Development, which he headed from 1998 to 2000, "he was very difficult to work with," recalls an official. "He had a fierce temper and was abusive to everybody around him." Senior EBRD managers had to ask Köhler to refrain from chewing out staffers in public. Nicholas Stern, who was chief economist of the European bank under Köhler and now holds that post at the World Bank, denies rumors that he left the EBRD because he couldn,t get along with Köhler. But he does note that Köhler "can be impatient; people know that," adding, "if you want to get things done, I suppose that,s understandable."

According to people who worked with him at the EBRD, Köhler was passionate about his ideas and reacted strongly when he encountered opposition or problems in implementing them. Much of the tension at the EBRD revolved around management reservations about two of Köhler's pet projects: increasing lending to small businesses and setting up state-owned development banks in member countries. Small-business lending in particular "became a litmus test of loyalty to him," says an EBRD manager.

Köhler, who declined to be interviewed for this article, supposedly calmed down as he came to feel more at ease at the EBRD. "When he first got here, he had a tendency to yell, but as he spent more time here, he got it under control," says one senior official. At his EBRD farewell party, Köhler acknowledged that he had a direct style. "Germans say what they mean and mean what they say," one of those present recalls his saying.

A former colleague from Köhler's days in the German Finance Ministry gives this appraisal: "There are all these rumors that he is difficult to work for, some of which are true; nobody is perfect. He can be hot-tempered and abrasive. But everybody who worked for him accepted that he did not have a personal agenda; he focused on the issues. He was very tough on himself, and he expected that everyone around him would follow the same example , and for some that was too much. Yet Köhler never shied away from difficult issues and was one of the few people in Bonn who would tell chancellor Kohl he didn,t agree with him."

Köhler's rough edges conceal a sensitive side, say many who know him. "He is a very caring, very emotional man," says an EBRD manager. "But he wants to be in charge, the person calling the shots." A workaholic, Köhler isn,t particularly personable, although he can be charming, according to colleagues. Nor is he much of a socializer in party-going Washington, preferring to spend free time with his family.

Köhler's initially stormy relationship with IMF personnel has improved. This is partly because he,s gotten to know them and partly because he has moderated some of his initial positions, such as flatly rejecting an IMF role in fighting poverty. "There's a really different atmosphere from a year ago," says a senior IMF manager. "He has been convinced that the staff is excellent, and he sees things happening, and that has created greater self-confidence."

Better relations with staff are critical to both of Köhler's most important and, within the IMF, controversial initiatives: streamlining loan conditionality and preventing country crises. The premise behind streamlining conditionality is that the IMF should focus on macroeconomic and financial considerations when sizing up would-be borrowers while leaving it up to the World Bank to wrestle with structural-reform issues. Disencumbering IMF loans of conditions would in theory put less strain on borrowing countries in addition to making them more receptive to reforms.

Among many Asians, the enduring image of the Fund is an infamous photo of Camdessus, his arms crossed, standing over former president Suharto as he signed Indonesia's agreement with the IMF during the 1997,,98 Asian crisis. That deal and, to a lesser extent, the fund's programs in South Korea and Thailand have become emblematic of IMF mission creep: overbearing Fund conditionality that tries to micromanage economies through detailed structural reforms.

Proliferating loan conditions are seen by many Fund critics , Köhler among them , as undermining countries, "ownership" of reforms and hence willingness to carry them out. According to former deputy research director Goldstein, the Fund imposed some 140 structural conditions on Indonesia in April 1998 that included everything from raising stumpage fees to eliminating the Clove Marketing Board.

Developing countries welcome a cutback in IMF marching orders, and the Fund's industrial-country shareholders have endorsed the plan. "It is a good idea," says John Taylor, the U.S. Treasury,s undersecretary for international affairs. "This new approach gets closer to the Fund's expertise and is more closely associated with the loans themselves." Fund officials concede that conditionality was overblown, in Asia in particular. "There was too much of it, especially in Indonesia," admits Fischer. "There is basic agreement that conditionality is appropriate on the fiscal and monetary side."

Nevertheless, Köhler's high-handed approach to overhauling conditionality rankled some staff members, whose toes he had trod on. They felt that he,d prematurely opened up the topic of conditionality for public consideration, before they,d had a chance to debate the issue. This was interpreted as a calculated move on Köhler's part to sidestep opposition from insiders, including IMF regional managers who stood to lose clout because of the change. "Everyone agreed that conditionality was too complex and too varied," says an IMF official. "But there should have been more debate within the Fund before seeking public views."

Many Fund staffers still believe that structural conditions, such as breaking up and privatizing state monopolies, are in many cases crucial to macroeconomic stability. "For the most part, conditionality was warranted," contends Anne Krueger, who took over from Fischer as the Fund's No. 2. "A lot of the things that fed into major problems had a micro component."

The tendency to pile on conditions will be a hard habit to break. The IMF's $8 billion April loan package for Turkey, for instance, not only called for privatizing Türk Telekom but also mandated reforms in the country's tobacco and sugar industries. "In Turkey structural conditionality ran wild," says Harvard University economist and IMF critic Dani Rodrik. "Turkey has done everything the IMF asked but still has zero credibility with the market."

The subtext to the staff grumbling was condescension toward Köhler, who does not possess the credentials of an elite academic economist. Born in Poland, the son of a farmer, Köhler, 58, grew up in West Germany, where his family fled from Communism in the 1940s. He earned a Ph.D. in economics and politics from the respected University of Tübingen, south of Stuttgart, in 1976. He then joined the German Economics Ministry, leaving after four years to work for Gerhard Stoltenberg, then governor of the state of Schleswig-Holstein. When Stoltenberg became finance minister in 1981, he took Köhler along as his speechwriter. By 1990 Köhler had risen to deputy finance minister. Köhler won plaudits as the point man on the Maastricht Treaty, which ushered in European economic and monetary union, but for being an astute negotiator rather than a monetary wizard. "Köhler is not an academic economist like Stan Fischer; in that sense, he's more like a politician," says Klaus Regling, who served as Köhler's aide at the Finance Ministry and is now chief economist of the European Commission. Köhler's varied background , he left the Finance Ministry in 1993 and spent five years as president of the German Savings Banks Association, a well-paid but largely public relations post , also breeds suspicion among IMF staffers, 700 of whom have Ph.D.s. "The IMF staff is very arrogant and feel conditions were put in for a reason," says one former Fund official. "When you say, ,Cut conditions to six from ten,, you are playing with program design , the car won,t run. Köhler is not a good economist, so he doesn,t understand."

Cavils aside, the message to streamline conditionality has begun to filter down through the Fund's hierarchy. "Now in every country program that comes up to the IMF board, the staff explain why a particular condition is in and why a condition is out," says outgoing policy department chief Boorman. "There,s now more concern about overloading programs but equal concern that the measures needed to assure the success of the program are fully incorporated."

But for leaner conditionality to work, Köhler must restrain the IMF's powerful shareholders, such as the U.S., from using the Fund as a policy cudgel. The Group of Seven's brief for promoting good governance and eliminating corruption, as well as its new insistence that the IMF work to combat money laundering, inevitably will create more conditions for borrowers. "Streamlining means saying no to countries, no to the G-7 and new agendas and no to nongovernmental organizations," says economist Goldstein, who wrote an influential study of IMF conditionality this year. "We have to look in a year and see if G-7 allows him to do it. It is an important test of Köhler's credibility , he can,t build his reputation just on the capital markets department."

Köhler has nevertheless staked a lot on the success of the capital markets department. The idea is that it will be in constant contact with market participants to keep abreast of the country-related stresses building in the capital markets and that it will work alongside other Fund departments to identify early warning signs of crises. As the IMF chief put it in a speech earlier this year, "The main lesson from the financial crises of the past is that crisis prevention must be at the heart of the Fund's mandate." The department will use quantitative vulnerability indicators developed by other Fund departments. "Capital markets staff will also be looking, listening and analyzing the markets," says IMF spokesman Tom Dawson. "It will help area departments analyze options and provide insights into what markets are thinking." Once a potential crisis has been identified, the Fund will encourage countries to take preemptive action. As the U.S. Treasury's Taylor observes, "Crisis prevention is not only having the information, it is taking action on the information in a prompt manner."

So far Köhler has enlisted a few dozen employees from the IMF's research, policy and monetary affairs departments to staff the new department, and he hired former Dresdner Bank investment banking chief Gerd Häusler to run it. The bank expects to recruit ten to 15 additional professionals from the global markets to round out the unit. Because Häusler takes office only this month, many of the details of the department,s operations remain hazy. The IMF research and policy-review departments had opposed consolidating the capital markets function in a separate department; they insisted that the existing system, wherein each department had a capital markets team, worked fine. They also maintained that important synergies between capital markets and research and between capital markets and policy review would be lost.

In any case, crisis prevention will be tough to pull off. For a start, why would the IMF capital markets department be any better at detecting incipient country troubles than, say, international banks? "There is skepticism about the early-warning enterprise," says one IMF economist. "The models out there are all imprecise."

Ernest Stern, global finance expert at J.P. Morgan Chase & Co. and former World Bank chief operating officer, puts it this way: "We have never been able to prevent crises before, but we can certainly try to reduce their frequency or increase our capacity to see warning signs."

Follow-up is as vital as foresight , and seemingly as difficult. "One concern I had was not overselling crisis prevention," says Fischer. "Not all crises are unanticipated. In Turkey and Ecuador the problem was not with seeing what was coming but getting those involved to take action. Even if we had perfect foresight, we would still have problems."

Indeed, bankers fault the Fund for not pressuring Turkey into devaluing the lira toward the end of 2000. "Most observers believe that last December the IMF should have insisted on either a float or a devaluation, so that first program got off to an unfortunate start," says Citibank's Rhodes. "Apparently, the IMF was convinced by the Turkish authorities that such an action would blow the economy out of the water, but the problem was that you needed to have an adjustment in the exchange rate similar to the one in Brazil in 1999, and the Turkish government put it off, with the obvious results."

Says Goldstein: "The problem is that in a lot of cases, the IMF won,t say a country is doing the wrong thing. The perfect example is Argentina's 8 percent de facto devaluation this spring [which roiled markets]. The issue is not analysis, it is backbone." Adds Desmond Lachman, a former deputy director of the IMF,s policy department who is head of economic and market research at Salomon Smith Barney, "Once the IMF gets very involved with a country, it generally doesn,t blow the whistle and doesn,t cut its losses, even if there is only a low probability the program will work."

In the past, the IMF's capital markets experts have been frustrated when their alarms went unheeded. Deutsche Bank chief economist David Folkerts-Landau remembers issuing warnings about Thailand's worsening plight in 1996 , a year before Bangkok's devaluation of the baht sparked the Asian crisis , when he headed up the Fund's capital markets surveillance group, a small team that was part of the research department. No policy changes resulted, he says. "Häusler faces a serious management problem in making sure his department's work feeds into other departments," says Folkerts-Landau. "The Fund's relations with countries are driven by area departments, so surveillance has to become an integral part of area departments." In recognition of that difficulty, Häusler has been given the additional title of counselor, which makes him more senior than other Fund directors.

Some critics see a fundamental flaw in the Fund,s crisis-prevention strategy. "Most of the crises we have had to deal with in recent years were only marginally within the competence of the Fund, and even if they were, there was little the Fund could do," says former World Bank chief economist Joseph Stiglitz, now a Columbia University economics professor. "The problem is not the identification of a problem, it is the solution." An outspoken critic of the IMF, Stiglitz ticks off instances where the Fund recognized a problem but was unable to avert a crisis: high leverage in South Korea, the Thai trade deficit, overvalued currencies in Russia and Brazil. Nevertheless, Citi,s Rhodes believes that more attention to crisis prevention will pay off. "There will always be some crises, but you can reduce their number if you work hard enough on such issues as transparency, consultation and keeping creditors and investors advised," he says. "The more time and effort and results on crisis prevention, the less you have to do on crisis management, and Secretary O,Neill and Köhler agree on that."

Köhler recognizes that the Fund will have to work more closely with market players to make the crisis-prevention initiative succeed. He created a capital markets consultative group to encourage high-level talks with bankers and financiers. And in May, at a meeting of Hong Kong's Institute of International Finance, he called for a "public-private partnership" to promote financial stability. Financiers welcome the chance to hold a tête-a-tête with the IMF chief. "The creation of the capital markets consultative group and the capital markets group is very positive," says Charles Dallara, managing director of the IIF. "It is very important that the Fund deepen its understanding of financial sector issues."

Rhodes sees the new emphasis on dialogue as a welcome acknowledgment that the Fund lacks the resources to manage crises on its own. "Horst realizes that over 95 percent of financial flows to emerging markets come from the private sector, so it is natural he wants to work with it," says Rhodes. "The IMF cannot do it alone , if a country gets into trouble, they don,t want to be in the position of bailing out private investors, so it is obvious the private sector has to do its part."

U.S. Treasury undersecretary Taylor is enthusiastic about the potential impact on the markets of closer collaboration between the IMF and the private sector: "The more information that comes out, the better; that way there will be fewer shocks and surprises, and markets should adjust more." Of course, any exchange of confidences between the IMF and bankers poses problems of its own. For Köhler, the obvious challenge is to avoid inadvertently triggering the very crisis the IMF wants to avert. "There always is a concern about talking to the private sector about country-specific conditions, in that the information can be market-worthy, and that poses a fundamental dilemma. The market-sensitive information is what the Fund might have to say about proposed solutions, conditions and timing and can become self-fulfilling," says J.P. Morgan Chase's Stern. "The problem is, where do you ensure there is the kind of Chinese wall that exists in investment banks if you are dealing with a broader set of institutional investors?" In other words, the Fund might be forced to err on the side of caution in its information-sharing with the private sector, undermining the whole project.

Köhler's crisis-prevention initiative also stops short of addressing the critical issue of what criteria the IMF should use to decide whether to provide bailouts and how large the bailouts should be. And the Fund has yet to lay out a clear plan for ensuring that private investors aren,t bailed out when it renders emergency aid to a country. IMF member countries have been divided on whether to take a rules-based or case-by-case approach to encouraging banks and investors to restructure debt they are owed by crisis-torn countries. So far the new U.S. Treasury team hasn,t made its position clear. "We feel that there should be private sector involvement but that it shouldn,t be coerced by the public sector as a general rule," says Taylor, echoing the IMF's approach.

But absent a way to organize an orderly debt workout that enlists the private sector, the IMF will continue to get stuck supporting countries like Argentina that are in no-win situations. "Our view is that we haven,t solved Turkey or Argentina," says Pimco's el-Erian. "A muddle-through approach for those countries involves significant cost for other emerging economies. How long can Brazil operate under the cloud of Argentina?"

Unlike many IMF borrowers, Köhler has some maneuvering room. Thanks in part to higher fees, the IMF isn,t facing an imminent confrontation with the U.S. Congress over a capital increase. "The Fund has made a lot of changes to counter criticism," says former U.S. executive director Lissakers. And the U.S. Treasury has yet to decide exactly what it wants from the IMF. "Köhler has the opportunity to take the institutional reins and formulate a new program," says former official Folkerts-Landau. But that window of opportunity will stay open only until the next really big crisis puts the Fund back in the bailout business. Says economist Barry Eichengreen of the University of California at Berkeley: "Horst Köhler has a clear vision of a more focused, streamlined Fund. The difficulty he faces is that the world is not becoming more focused and streamlined."

The new guard

The resignations of International Monetary Fund first deputy managing director Stanley Fischer, policy review department chief Jack Boorman and chief economist Michael Mussa represent a devastating blow to the IMF's senior-management ranks. But the departure of these stalwarts of the old guard also presents IMF managing director Horst Köhler with an extraordinary opportunity to remake the IMF on his terms. The question is, Will their replacements , most notably tough-minded free marketer Anne Krueger , let him?

"There should be turnover in positions like this," says Fischer of his decision to step down. Inasmuch as he ran the IMF day-to-day under Köhler's predecessor, Michel Camdessus, and was himself a candidate to succeed him as chairman, the 57-year-old Fischer was in an understandably uncomfortable position and agreed to stay on only until Köhler got his sea legs. And policy guru Boorman, 59, had informed the IMF early last year of his desire to leave. Both Fischer and Boorman supported big aid packages for countries in trouble as well as extensive conditions for IMF loans , both of which Köhler philosophically opposes (story). Chief economist Mussa, 57, resigned in large part, sources say, because his department stands to lose clout, and staff, to Köhler's capital markets unit.

The most crucial job to fill was that of Fischer, effectively the IMF's COO. "Stan was a hugely important person. He was trusted by the board, staff and governments," says the IMF's former U.S. executive director Karin Lissakers. Rejecting Köhler's candidate, the Bush administration picked Anne Krueger, 67, a Stanford University economist who,d served as the World Bank's chief economist during the Reagan years (the U.S. traditionally gets to decide who will hold the Fund's No. 2 job).

Regarded as extremely intelligent, Krueger nevertheless lacks both Fischer's monetary expertise and his experience as a financial policymaker; her academic specialty is international trade. "Krueger has no experience as a monetary economist, is from the old-fashioned Washington consensus school and risks obfuscating the boundaries between the World Bank and the IMF," says former World Bank chief economist Joseph Stiglitz.

A Republican and passionate free-trade advocate, Krueger's bruited nomination to Bush's Council of Economic Advisers was under attack from U.S. steel executives, who feared she would balk at steel import quotas, when she was tapped for the IMF. "I was surprised when I got the job," she says. "I didn,t ask what was behind it."

Krueger is said to be short on political skills. At the World Bank she had a reputation for being overly ideological and vindictive toward those who didn,t accede to her views. An authorized, but independent, history of the World Bank (The World Bank: Its First Half Century, Brookings Institution Press, 1997) alleges that she adopted a system to "detect staff divergences from establish-

ment positions" and that only eight of 37 senior staff members remained in her department after three years of her tenure. "Krueger dismantled an effective research operation, not by intellectual argument, but by bureaucratic means and subterfuge," contends Lawrence Westphal, an economics professor at Swarthmore College, who was a division chief in the Bank,s research department but says he was forced out.

Krueger disputes the charges. "I am an academic and believe in standards of proof and dislike the term ideological," she says. "The bank had a lot of emphasis on planning models and was more dirigiste , I didn,t work hard to perpetuate that. Staffers left because they didn,t like what happened; they were not pushed out."

Krueger has not been a harsh critic of the Fund, even defending its controversial handling of the Asian crisis. "Overall, the international financial institutions, and especially the IMF, did well in working out the structural adjustment programs with policymakers in the afflicted countries," she testified before Congress. Krueger is not, however, a fan of poverty lending or of debt relief, and she takes a hard line on governance issues. She may also seek to include trade liberalization among IMF loan conditions. All this sets up a potential clash with Köhler, who is a convert to helping the poor and wants to cut back on loan conditions.

But Krueger insists she is keeping an open mind. The challenges facing the Fund are to "handle situations where there are difficulties and crises in countries," she says noncommittally, "and to devise policies for countries to achieve their goals without getting into a crisis situation." Krueger does hint that she would favor a hard line on borrowers. "Where a country doesn,t follow sound macroeconomic policies, there,s not much the Fund can do," she says, without ever mentioning Argentina.

Köhler and Krueger may try one another's patience. "Neither is easy to deal with , it's likely to be a stormy relationship," says Charles Wyplosz, an economist at Geneva's Graduate Institute of International Studies. Adds a former colleague of both: "Anne can be aggressive; she is very strong-willed and very opinionated. It would be a miracle if the two got along." Yet Köhler will have to tread lightly in dealing with Krueger lest she quit and confirm the impression that he's impossible to work for. "This gives Krueger power," says the former colleague. "Köhler won,t be able to stand if Krueger leaves. He,s got to be walking on eggs to keep the team together."

At least Köhler gets his choice for the IMF's top policy job , Timothy Geithner, former Treasury undersecretary for international affairs under Lawrence Summers , although Köhler would have preferred to see Geithner in Krueger's job. The policy development and review department that Geithner will run come November is the Fund's nerve center, where much of its policy is formulated. PDR also acts as the Fund's policeman on all policy issues and country programs (the "keeper of the orthodoxy," some call it). Not surprisingly, the department attracts the crème de la crème of IMF economists, and its head has customarily been a top economist and senior insider (Boorman was both).

Geithner, 39, is neither an economist nor an insider. So he may find PDR's snooty economists a bit stand-offish. "They will ask, ,What did you get your Ph.D. in?," notes David Folkerts-Landau, chief economist at Deutsche Bank and former head of the Fund's capital markets surveillance group.

Nevertheless, Geithner, who spent 12 years at the U.S. Treasury, the last four as the point man on international economic issues, has a reputation for being a smart manager and has more international financial experience than the rest of the new team. "Tim should be a positive addition," says Citibank vice chairman William Rhodes. "He's very knowledgeable and got good training under both [former Treasury secretaries] Robert Rubin and Larry Summers. He's the right person for the job." Geithner could shake up the IMF. "It will be interesting to see how someone who is not so weighed down by tradition will do," says outgoing PDR chief Boorman. "He can bring a lot of innovation."

Harvard University professor Kenneth Rogoff, who comes in as chief economist, is little known outside academic circles but has a stellar reputation in international macroeconomics and finance. Reputed to be brilliant (he's also a chess grand master), Rogoff could boost the research department's influence in policymaking.

"Köhler has a good chance to become a great managing director," says Klaus Regling, European Commission chief economist and a onetime aide to Köhler. "The big question is how the new team performs with him." And he with them.

A conversion on Africa

There is always something new out of Africa. , Pliny the Elder

When Horst Köhler took over the International Monetary Fund in May last year, he was more than a little skeptical about the IMF's playing a role in trying to alleviate poverty. "Köhler's mind-set," says Goodall Gondwe, head of the IMF's Africa department, "was that the Fund's mandate meant de-emphasizing its work in Africa and concentrating on crisis issues, leaving poverty and growth issues to the World Bank. It was a Meltzer-report mind-set." The so-called Meltzer report, issued last year by a U.S. congressional commission headed by conservative economist Allan Meltzer of Carnegie Mellon University, recommended that relieving poverty should be the Bank's mission, not the Fund,s.

But on a weeklong trip to Africa in July 2000, Köhler underwent a dramatic change of heart. His hosts made sure that he toured dispensaries without medicines and a school without sufficient classrooms, where some students had to sit outside under a tree. "He was shocked by what he saw," says Gondwe. Adds another senior IMF official, "Köhler could see firsthand that poverty was widespread and that macroeconomic stability was important and realized his mistake."

Moreover, Köhler got along well with African leaders , better, some say, than his predecessor Michel Camdessus, who had a tendency to be patronizing. In meetings with the IMF chairman, African heads of state argued vehemently against the Meltzer approach, insisting that the Fund's brief encompassed reducing poverty because it demanded macroeconomic stability. "Köhler had a conversion on poverty," says Karin Lissakers, U.S. executive director to the Fund at the time. "The trip to Africa had a profound impact on him."

By the time Köhler left Dakar, Senegal , only the second stop on his five-country tour , he was championing the cause of Africa's poor. The IMF even released a formal statement declaring that the Fund would remain involved in poverty matters.

Köhler's Africa experience also underscored his commitment to reducing the number and scope of conditions attached to IMF loans. "He said we should be advising governments and letting them decide what to do," says Gondwe.

Köhler undertook a second trip to Africa this spring, accompanied by World Bank president James Wolfensohn. In meetings with 22 African leaders gathered in Bamako, Mali, and Dar es Salaam, Tanzania, the pair underlined their institutions, commitment to Africa. But goodwill notwithstanding, curing poverty has proven to be a daunting task and will no doubt remain so. The number of sub-Saharan Africans subsisting on less than $1 per day soared from 242 million in 1990 to 302 million in 1998.