The real rot at the IMF
• It betrays the original raison d’être of the world organization: to provide counter-cyclical loans to countries in difficulty so that their economies can recover with less harm to their populations.
There are many reasons to criticize the International Monetary Fund and the World Bank, but the crisis of legitimacy currently facing the two institutions does not rest on either side. Instead, it arose for the wrong reasons, and it serves to reinforce the real problems that have hampered the functioning of the Bretton Woods institutions.
The current controversy stems from the World Bank’s alleged manipulation of its annual Doing Business index to improve China’s ranking. He is threatening to claim the scalp of IMF Managing Director Kristalina Georgieva, who was the Managing Director of the World Bank at the time of the irregularities allegations.
The World Bank has appointed a US law firm, WilmerHale, to investigate the case. But his report is based on innuendo rather than evidence, which prompted Nobel Prize-winning economist and former World Bank chief economist Joseph E Stiglitz to describe it as “a chess job of war ”and part of an attempted coup against Georgieva. The survey also focused primarily on China, underestimating the possible role of World Bank President David Malpass in influencing the ranking, with a surprising reformer of the world in the Doing Business 2020 report.
The WilmerHale report is a godsend for Republicans in the US Congress, who demand Georgieva’s resignation. But the current moralistic fervor about data manipulation overlooks the fact that the Doing Business Index – which has now been discontinued – was deeply flawed and overtly political from the start. Unfortunately, he has become extremely influential in driving investor perceptions and decision-makers’ choices.
The problems were legion. To begin with, the indicators he used emerged directly from an orthodox “Washington Consensus” approach to economic policy, regardless of its validity or applicability in different contexts. As Columbia University historian Adam Tooze noted, Doing Business has always been “a shaky, unpredictable construct peppered with discretion and complex judgments.” My own review centered on how the index viewed any government regulation as expensive and undesirable, and treated taxation only as a cost rather than a way to ensure infrastructure, institutions, and an educated workforce. that businesses need to operate.
In 2018, Paul Romer, then Chief Economist of the World Bank, said right-wing ideology at the Bank had played a critical role in methodological changes that changed the ranking of countries, and apologized to the government. of Chile’s left for the artificial lowering of its rank. . A more recent independent academic assessment noted that the index only measures de jure rules rather than their de facto implementation, and “sometimes rewards policies that benefit companies at the expense of broader social goals.”
Georgieva’s fate will be decided at the annual meeting of the IMF’s Executive Board this month. But even if she remains in her post, the Doing Business controversy has damaged her stature and influence (which may have been the point). More importantly, this episode should not obscure the real problems of the functioning of the Bretton Woods institutions: the disproportionate power of the United States; the IMF’s deeply pro-cyclical approach to countries requesting its support, which contradicts its original mandate; and the reluctance of advanced G7 economies to allow multilateral institutions to tackle global issues.
When the IMF was created in 1944, it fell far short of John Maynard Keynes’ vision of an international clearing union that would treat all countries equally. Instead – and unsurprisingly – the institution reflected the relative power of countries at the time. The United States got a decisive share of the voting rights and quotas and, with the countries of Western Europe, could determine the policies, programs and allocations of the IMF.
Despite significant changes in the global economy since then, this internal power structure has remained largely unchanged. Even after the most recent reallocation, in 2016, the United States retains a 16.73% vote share, while OECD countries have a combined share of over 60%. During Donald Trump’s presidency, the United States blocked a new allocation of quotas that, among other things, would have increased China’s share. The United States and the European Union can exercise veto power over any IMF decision. And under a long-standing transatlantic gentleman’s agreement, the head of the World Bank is appointed by the United States, while the head of the IMF is from a European country.
But perhaps the most damning criticism of the IMF concerns the functioning of its programs. The Fund’s loans not only remain insufficient for countries facing balance of payments problems, but also come with so many adverse conditions, including severe budget cuts, that most countries seek to avoid them. Despite this, the IMF even imposes interest surcharges on countries that are forced to borrow heavily from the IMF over an extended period, thereby worsening economic performance.
The IMF’s focus on fiscal austerity has been widely criticized, including by its own economists, but has persisted during the Covid-19 crisis. This betrays the original raison d’être of the IMF: to provide counter-cyclical loans to countries in difficulty so that their economies can recover with less harm to their populations.
To its credit, Georgieva has sought to increase the IMF’s unconditional funding through a new allocation of $ 650 billion in Special Drawing Rights (the reserve asset of the Fund). She also called for less austerity in stimulus plans and a reform of the international debt architecture. Perhaps this is the reason why those who try to remove her also oppose any gradual change in the Bretton Woods institutions.
Such efforts are not only unfair, but also short-sighted. If an international organization like the IMF cannot provide basic global public goods or tackle global public ills like the pandemic and the climate crisis, then it is not fit for purpose. The G7 has shown itself unequal in the task of global leadership, yet its leaders are trying to hijack the use of multilateral institutions to address the enormous transnational challenges we face. Future historians will wonder why the rich countries of today shot themselves in the foot like this.
• Jayati Ghosh, executive secretary of International Development Economics Associates, is professor of economics at the University of Massachusetts at Amherst and a member of the Independent Commission for the Reform of International Business Taxation.