IMF challenged on accountability, governance

17 June 2008

A scathing report from the Independent Evaluation Office (IEO) highlights the IMF’s lack of transparency and accountability, but there appears to be little interest amongst shareholders in IEO’s conclusions or the suggestion that Europe consolidate its representation on the IMF board.

The evaluation of IMF corporate governance covered the institutional structure of the Fund with special focus on the executive board. The IEO measured governance along four dimensions – effectiveness, efficiency, accountability and voice – and against three standards – the Fund’s own governing documents, other international organisations, and private and public-sector corporations. The report finds that accountability and voice are the weakest features of the Fund’s governance and notes “these weaknesses entail risks to the Fund’s legitimacy, which in turn has a bearing on its effectiveness.”

Despite both broad conclusions and detailed recommendations for each body of the Fund, the IMF board did not endorse any specific recommendation, contrary to its usual practice after discussing IEO reports. Inside sources indicate that the board feels that the issues brought up in the report, many of which deal with the design and functioning of the board itself, can only be addressed in national capitals.

accountability and voice are the weakest features of the Fund's governance

The IEO had four broad conclusions: there is need to clarify the roles and responsibilities of each of IMF’s governance bodies; the Fund should constitute a decision-making body called the IMF Council that would bring in more ministerial involvement; the executive board should shift from overseeing day-to-day operations to playing a more systemic and supervisory role; and a framework needs to be put into place to hold IMF senior management accountable for its performance.

Specific IEO recommendations that have previously been supported by civil society organisations include:

  • an end to executive directors being appointed by the five largest shareholders;
  • the publication of all board documents after two years; and
  • the creation of an open, merit-based selection process for the managing director and deputy managing director posts.

The most radical reform proposed was that “the board should meet less frequently. A refocused board could perhaps meet for one week a month, allowing more time for board members to consult their authorities and to do the background work needed to have greater impact during meetings.”

Some cold water was thrown on the Fund’s repeated claims that IMF lending programmes and conditionality are driven by the country authorities. The report finds that: “there is evidence of a ‘chilling effect’ that deters directors and their authorities – especially those from low-income countries – from challenging management and staff views for fear of negative repercussions.”

Much the IEO’s report covered some of the same ground as the high level panel on IMF reform hosted by US-based NGO New Rules for Global Finance. Its director Jo-Marie Griesgraber welcomed the IEO’s recommendations, saying “the sine qua non for a legitimate and effective IMF is accountability including evaluation, transparency, participation and an external complaint mechanism. To date, the board’s non-response to this IEO report is further evidence of the absence of accountability at the IMF.”

The IMF managing director Dominique Strauss-Kahn has indicated that he plans to announce some measures on governance reform in the coming weeks, including rumours that he has commissioned a high-level task force of outsiders to advise him on the process. But as with most IMF reform, not much is expected to happen quickly.

Other interesting findings

The IEO shed more light onto the internal workings of the IMF than any previous document or report. It also contained some illuminating findings that should interest those concerned about the Fund’s operations in developing countries.

The IMF executive board spends 400 hours a year in board meetings, but actually most of the directors are not even there. Directors are most often sitting in their chairs to discuss policy issues and internal financial and administrative matters, but even then board discussions only included on average nine of the 24 board members in 2006. About seven of the seats were filled by the alternates, but in the remaining one-third of board chairs, the duties were handled by other staff from the director’s office. The participation of actual directors falls rapidly to an average of just four when the board discusses Article IV reports, annual reports on IMF member country economies. When the board discusses Article IVs combined with financing requests, which happens most often with low-income countries, only an average of three directors attended the meetings.

The only view that matters: the US view

One finding of the IEO report was that practice of preparing “summings up”, the public documents that report the decisions of the executive board, “is outdated and undermines efforts at transparency, particularly with respect to external audiences.” Amongst the litany of background papers for the IEO report was an in-depth study of the documents. The paper’s author and former adviser in the Canadian executive director’s office Jeff Chelsky describes how the Fund has been deliberately vague and used “constructive ambiguity”.

Chelsky finds the use of ‘code words’ particularly problematic. He spells out that the board actually agreed a policy on the use of code words in 1983 which still stands today. IMF board summaries separately describe views of board members that are not a consensus. The positions are described based on the number of directors that agree, with a “few”, “some”, “a number of”, “many”, “most”, and “nearly all” being clearly defined. However one country merits a special phrase to describe its views: the US. Without clarification that it was simply the view of one director, published summaries of board discussions use the phrase “the view is held that” to indicate what the US says.

Almost more disturbing is that the Fund staff see absolutely no problem with the system as it is designed. In the secretary’s department’s comments on the evaluation, they wrote: “Although the interpretation of code words has evolved over time, there is currently – in the interest of transparency and good governance – no ambiguity in their usage.” The secretary appears to have drunk too heavily of the PR department’s spin serum.

Despite these low turnouts, nearly a quarter of the board’s time is spent on each of bilateral surveillance (Article IV reports) and policy issues at the IMF. Even the board admits its uselessness in handling bilateral surveillance, as only 20 per cent of board members thought they added significant value to the Article IV process. But that beats staff, only 15 per cent of them thought the same.

The staff response to the IEO report contained some interesting information as well. The board was criticised by the IEO for having no mechanism in place for overseeing the IMF managing director, but it turns out that such a mechanism was established in October 2007 just before Strauss-Kahn arrived. However, as of late May the working group of the board tasked with specifying the performance assessment framework was still in the process of developing performance objectives, which would be used at the end of 2008 to assess Strauss-Kahn. Thus the managing director will work through half of the year without even knowing what his goals and targets are.

In an interesting development, Strauss-Kahn requested that Fund staff develop a whistleblower protection policy. Perhaps he did not want to Fund to appear to be so far behind the World Bank in modern governance arrangements, as the Bank announced its whistleblower policy in June (see Update 61). He should turn his attention to another area that he can clarify immediately: declassification of secret documents. The IEO’s recommendations include: “Current criteria to classify documents as ‘strictly confidential’ and ‘secret’ should be reviewed and made public. Also criteria should be made public for the declassification of ‘strictly confidential’ and ‘secret’ documents.”

It also turns out the International Monetary and Financial Committee (IMFC), an advisory body of finance ministers that meets twice a year, may cause more trouble than it is worth, hence the recommendation to constitute a Council. The poor process for selecting the IMFC chair, who has always been a white male from a rich country, undermines the committee’s work. The deputies to the IMFC ministers, generally senior civil servants, seem to be resented by executive directors, perhaps as part of a power struggle over policy decisions. Nearly 70 per cent of board members complained that the IMFC deputies meetings add little value though they are the venue for creating early drafts of the IMFC communiqué.

European board seats causing trouble

Sources have indicated that part of the board’s problem in addressing the IEO report was continued opposition within Europe to discussing issues of constituencies and representation. As promised (see Update 60), European commissioner for economic and monetary affairs Joaquin Almunia issued a call for the consolidation of European representation in international bodies as a recommendation in the report issued on the 10-year anniversary of the launch of the euro. At a mid-May launch event in Brussels Almunia commented on the need to develop "common positions on international issues so that we can speak with a strong single voice. Once accomplished, the logical next step will be to consolidate our representation and obtain a single seat in international fora.”

Almunia’s call was echoed by Jean-Claude Juncker, Luxembourg’s finance minister and the chair of the eurogroup of finance ministers. Strauss-Kahn also attended the event, but his comments were not helpful to those keen on reducing European overrepresentation: “The problem is not whether the Europeans . should have a single chair in the IMF, the World Bank and other international institutions, the question is whether or not they are able to have a single policy because having several chairs in different institutions is not a problem as long as they all say the same thing.”

Domenico Lombardi from Oxford University and former US Treasury secretary Jim O’Neil think that the second half of 2008 is the time for Europe to consolidate: “The current IMF arrangements are not an insurmountable challenge for countries that have already had the courage to surrender their domestic monetary sovereignty. The six-month French presidency of the EU, to begin in July, will be the perfect opportunity to lay this card on the table – and to see just how ‘European’ a hand President Nicolas Sarkozy is willing to play.” If European intransigence on quota reform is anything to go by, Lombardi and O’Neil shouldn’t hold their breath.