Allegations that the head of the IMF manipulated a flagship World Bank rankings to boost China have upset the organizations – and revealed a dire truth about international financial institutions.
The World Bank and IMF are member organizations with powerful core shareholders and are therefore anything but independent of geopolitics.
Country reports, forecasts and rankings are not delivered on stone tablets and have always been prone to delicate negotiations between the institutions and the participating countries.
“National authorities have always sought to manipulate the analysis of international financial institutions and the language in documents in order to present themselves in a better light,” said Eswar Prasad, senior fellow at the Brookings Institution and former head of the IMF’s China division.
“Interactions between national authorities and institutions are particularly strained in the context of high-quality public documents, including country-by-country reports and cross-country comparisons,” he added.
China, for example, refused to publish the IMF’s annual health check on its economy until 2007, and has blocked publication a number of times since then.
Still, finance ministries can sometimes support criticism from the likes of the IMF, especially when they are tight on cash. They can then blame others for unpopular decisions that they always knew they had to make.
When Britain went to the IMF in 1976, the Treasury secretly backed the harsh medicine the Fund tried to impose, while the government’s official stance was to negotiate and complain.
The delicate balance that institutions seek is to have sufficient autonomy and independence so that their words and actions are internationally credible without forgetting that in the real world they operate with chaotic politics.
This equilibrium appears to have been upset by IMF Managing Director Kristalina Georgieva in her previous role as head of the World Bank.
It is now widely accepted that the Doing Business report, which was amended in 2018 to improve China’s ranking, had become extremely problematic. Regardless of their values, country rankings had become extremely important for all emerging markets.
“Every time you rank countries, it’s controversial,” said Samy Watson, former executive director for Canada on the board of directors of the World Bank. “In all fairness, you can ask if this is supposed to be the bank’s job.”
A recent Doing Business methodology review commissioned by the World Bank found that the report’s findings are detached from the realities of the field.
In this hornet’s nest, the changes to the 2018 report were made in a way that the World Bank believes was “irregular” because “they were made outside of the appropriate review process”.
Kevin Davis, a New York University law professor who has written extensively on the World Bank, said, “There has always been a tension between wanting to make sure you get it right and correcting any problems and, on the other hand, going for different things to open forms of impermissible influence ”.
The problem Georgieva and the World Bank leadership faced was that the Doing Business report was “a subjective endeavor,” according to a former senior US Treasury official.
“It’s not balance of payments data or GDP data, but rather a forecast. Is it the case that employees can go to a laboratory? . . and give a scientific answer to the prognosis? No, that’s not how it works. A forecast or ranking requires some back and forth, ”the person added.
If these are the mitigating factors for Georgieva, and ultimately the reason why the IMF board decided this week to support her continued leadership in the fund, it does not mean her position is safe.
The circumstances in 2021 are different from normal interaction between powerful shareholders and the institutions. One problem is that preference was given to China, which creates deep domestic problems in the US.
“The fact that it was China made it such an important issue,” said the former US official, adding that if it had been “just Brazil,” it would have invested 120th of the resources to investigate.
And IMF officials privately admit that at a time when the Fund is playing a new role, more as an advisory body and less as a lender to major economies, any doubts about the credibility of its reports are potentially catastrophic to the institution’s future are.
For many keen observers of these institutions, the core problem is maintaining the future credibility of the IMF and the World Bank. And if that meant a top civil servant’s career could be sacrificed, so be it.
Georgieva might have survived the immediate battle for her future, but she could not win the war, especially if the US government believes that her continued service is undermining the IMF or making it less attractive domestically.
US Treasury Secretary Janet Yellen sounded ominous in her statement to the Fund this week when she called for “strong measures to strengthen accountability” and prevent wrongdoing. She also said the US would monitor developments and evaluate new evidence should it become available.
One person familiar with the ongoing discussions said the Treasury Department was already awaiting a second report, due in six to eight weeks, that would focus on potential misconduct by World Bank staff in general.
Meg Lundsager, Policy Fellow at the Wilson Center Think-Tank and previously on the IMF Board of Directors for the United States, described the situation for the World Bank and the Fund as “very discouraging,” especially as both organizations are urgently needed.
“Countries now face many challenges and these two institutions are vital to help countries respond,” she said. “This message will be lost.”