Scandals threaten IFI governance

IMF, World Bank leaders accused

14 September 2011

With the new IMF head and a World Bank managing director under judicial investigation, IFI governance reforms remain slow and controversial.

Christine Lagarde’s term as the new IMF managing director, which began in July after a flawed, rushed process (see Update 76), began amid controversy when French magistrates decided in August to formally investigate her for “complicity in forgery” and “complicity in misuse of public funds”, charges which carry a possible prison sentence of 10 years and a fine of up to €150,000 ($211,000). The French court of justice announced in August that Lagarde would be investigated by a special commission of the court. The case relates to Largarde’s use of a closed door arbitration tribunal to approve a €285 million payment to Bernard Tapie, businessman and confidante of French president Nicolas Sarkozy, when she was France’s finance minister (see Update 76). The French investigative website Mediapart published a leaked copy of the court’s rationale for the investigation, which noted that the case contained “numerous anomalies and irregularities” and that “the minister [Lagarde] seems to have personally contributed to the events, notably by giving voting instructions to the state’s representatives.” However, it may take several years for any judgement to be reached.

Lagarde’s after tax salary at the IMF, including allowances, will be $551,700 per year, an 11 per cent increase compared to her predecessor’s starting salary.  Under the terms of his contract, and despite resigning, her predecessor, Dominique Strauss-Kahn, is eligible for a separation payment of up to $252,558. Interestingly, the main difference between Lagarde’s contract and Strauss-Kahn’s is an additional paragraph saying she is “expected to observe the highest standards of ethical conduct” with an instruction to “participate in the ethics training programme” of the Fund, and the stipulation of an annual “confidential and informal performance feedback process between [Lagarde] and executive directors.”

By contrast, in June, elections to the UN’s Food and Agriculture Organisation (FAO) showed that leadership contests might be more open under double majority voting – giving one country one vote alongside the Fund’s current one share one vote system (see briefing).  José Graziano da Silva of Brazil beat the former Spanish foreign minister, Miguel Ángel Moratinos Cuyaubé, by 92 votes to 88 to become the new FAO head.

No transparent process, controversial characters

China’s acceptance of Europe’s continued stranglehold over the IMF top job saw it reap an instant dividend, when Zhu Min, former deputy governor of the Chinese central bank, and then special advisor to Strauss-Kahn, was appointed to an additional post of deputy managing director at the Fund just days after Lagarde’s appointment. Zhu had also served at the World Bank for six years. The US maintained its grip on the number two position, when White House advisor David Lipton was given the post of first deputy managing director at the same time.  Both postings were announced without any visible selection process, further undermining the credibility of past commitments to appoint all top management through open, transparent processes (see Update 75).

The appointment of Lipton will be regarded with particular wariness by the Fund’s critics who remember the role he played as US treasury undersecretary in Korea during the Asian financial crisis in the late 1990s.  In The Chastening, an in-depth account of the crisis, Paul Blustein documents how Lipton played a key role in enforcing tough economic conditions on Korea that led to the deepening of the crisis.  He had also worked as an advisor to Russia, Poland and Slovenia in the early 1990s, during the well known ‘shock therapy’ undertaken during the post-communist transition. 

Meanwhile, the US seems set to extract a further return for supporting Lagarde: maintenance of its grasp on the top job at the Bank. US Treasury under-secretary for international affairs Lael Brainard told a Congressional committee in June that "the World Bank has benefited tremendously from American leadership over the past several decades," and "it would be a terrible cost to us to forfeit that leadership at a time where it seems more important than ever."

Sarah Wynn-Williams of NGO Oxfam International denounced the IMF selection process as "farcical", adding:  "There were noises made about openness, but the decision was made before the candidates were interviewed.”

World Bank MD in trouble

Meanwhile, controversy continues to surround current Bank managing director Mahmoud Mohieldin – appointed in September last year without an open transparent process (see Update 72).  Mohieldin, former Egyptian minister of investment under ousted dictator Hosni Mubarak, is currently subject to investigation by the Administrative Prosecutor’s Department in Cairo into allegations surrounding the sale of public real estate without a competitive bidding process. This follows an Administrative Court ruling in May annulling the privatisation of Omar Effandi, Egypt’s largest department store, because of “defects” and irregularities. In an August blog, Michael Termini of US NGO the Government Accountability Project (GAP) says “the ruling specifically identified the minister of investment (Mohieldin) as a responsible party.”  GAP has asked the Bank three times to disclose Mohieldin’s financial records, but each request has been rejected. According to Termini, “the World Bank appears to be curiously insulating Mohieldin from investigation.”

The Bank’s continuing failure to live up to commitments to open merit based processes for all senior management was highlighted again by the June appointment of Madelyn Antoncic as the Bank’s new vice-president and treasurer.  Once again no public information was available about the appointment until after it happened. Financial crisis watchers will remember that Antoncic spent nine years at Lehman Brothers, most of the time as Chief Risk Officer, until the firm went bankrupt in 2008 because it failed to properly appraise investment risks.

IMF moving slowly on seats

Meanwhile, other promised IMF governance reforms appear to be slowing down. Shortly after the IMF announced the completion of the approval process for the IMF voting reform agreed in 2008 (see Update 60), Indian executive director to the IMF Arvind Virmani fired the first round in the revision of the IMF quota formula due for completion by 2013. In an IMF working paper, Virmani dismantles the existing formula for determining voting rights at the IMF, saying that there is "a large gap between economic reality and IMF quotas. Dissatisfaction among global public opinion can only be reduced or eliminated if quota shares are changed to reflect the current and fast changing economic reality." He goes on to argue that “if we want a simple and transparent formula, then it needs to have only two variables: the relative size of economies as measured by GDP [at purchasing power parity] shares in world aggregate GDP … and the proportion of the world’s poor living in the country to reflect ‘voice’.” The lack of any democratic variable in the current IMF quota formula has long been the subject of controversy (see Update 60).

Finally, to get over the problem of arbitrary management selection based on nationality, Virmani suggests that "an independent international panel of non-government professionals could be set up by the IMF to rank potential candidates by their degree of ‘internationalism’ (converse of nationalism/parochialism) and apply a cut-off above which they would be suitable to head an ‘international’ organisation such as the IMF.”

The 2010 IMF agreement to consolidate the eight chairs currently held by European countries into six (see Update 72) is yet to be implemented. African IMF governors issued a declaration in Kinshasa, Democratic Republic of Congo, in August, reiterating their call for a third African chair on the IMF executive board. Forty-five African countries, soon to be 46 when South Sudan joins, are currently being represented by only two executive directors despite covering by far the largest number of active IMF programmes. Even a third African chair would still leave an average of 15 countries per constituency; more than any other board member.