Politics and Bretton Woods institutions

‘The “Doing Business” controversy has shaken confidence in the World Bank and the IMF. But it must not obscure the real problems with the Bretton Woods institutions: the disproportionate power of the US, the IMF’s deeply procyclical approach, and G7 economies’ unwillingness to enable multilateral bodies to address global problems.’ – Excerpts from the Project Syndicate (PS) published article ‘The real rot at the IMF’ by Jayati Ghosh

In an article ‘Serious issues in WB’s doing business report’ that I wrote for this newspaper a year ago I quoted from Jayati Ghosh’s article from back then titled ‘Stop doing business’ as: ‘The World Bank should no longer publish its Doing Business index, owing to its flawed design and vulnerability to manipulation. The Bank also owes the developing world an apology for all the harm this misleading and problematic tool has already caused.’

Moreover, also highlighted in my article was World Banks’s (WB’s) ‘Data irregularities statement’ it issued in late August 2020, whereby it directed its internal audit function to assess ‘data changes’ concern in its ‘last five Doing Business reports’. Since then, WB kept the Doing Business (DB) report paused. A year later, on September 21, WB issued a statement on DB report in which it indicated the following: ‘After reviewing all the information available to date on Doing Business, including the findings of past reviews, audits, and the report the Bank released today on behalf of the Board of Executive Directors, World Bank Group management has taken the decision to discontinue the Doing Business report. … Going forward, we will be working on a new approach to assessing the business and investment climate.’

This statement from WB, came a few days after the release of ‘an independent external review of the facts and circumstances around previously reported data irregularities in the 2018 and 2020 Doing Business reports’ titled ‘Investigation of data irregularities in Doing Business 2018 and Doing Business 2020’ on September 16, to the executive directors of WB. This report pointed towards certain aspects with regard to the role of Kristalina Georgieva – current managing director (MD) of IMF, who was then CEO of WB – among others, with regard to the DB report.

With regard to this, Nobel Laureate, Joseph Stiglitz in his September 27, 2021 article ‘A coup attempt at the IMF’ stated, among other things, that ‘The report contains allegations – or more accurately “hints” – of improprieties involving China, Saudi Arabia, and Azerbaijan in the 2018 and 2020 indexes. Georgieva has come under attack for the 2018 index, in which China was ranked 78th, the same position as the previous year. But there is an insinuation that it should have been lower and was left as part of a deal to secure Chinese support for the capital increase that the Bank was then seeking. Georgieva was the World Bank’s chief executive officer at the time.’

Moreover, in a recent TV interview to Bloomberg, he defended the MD in these words ‘…in fact, if you look closely to what she [Kristalina Georgieva] stood up for data integrity. What she said is we’re not going to monkey with the methodology. She instructed her staff to make sure the data is right… the whole controversy is about whether China was at 83rd or 75th in the ranking, and that difference is not statistically significant.’ In the interview, he also pointed out: ‘In the case of David Malpass [current president of WB Group], Bloomberg itself exposed the attempt of David Malpass to interfere with the methodology that was used in Doing Business report, a far greater concern than telling your staff to make sure the numbers are right, and yet it is so strange that there has been no discussion about the intervention in the methodology of our greater concern, than what she did, which was trying to maintain the integrity of the data given the methodology.’

On October 11, the IMF released ‘Statement by the IMF executive board on its review on the investigations of the World Bank’s Doing Business 2018 report’, whereby ‘The Executive Board considered that the information presented in the course of its review did not conclusively demonstrate that the Managing Director played an improper role regarding the Doing Business 2018 Report when she was CEO of the World Bank.’

While the MD stood vindicated, the controversy around DB report itself has highlighted the possible role of politics in the workings of Bretton Woods institutions, reducing trust in aspects of transparency and authenticity of data and methodology. Time for action to undo such negative perceptions about Bretton Woods institutions is indeed long overdue. A recently published PS article ‘The Bretton Woods credibility crisis’, argued in this regard: ‘The World Bank and the International Monetary Fund play a critical role in the global economy precisely because their independent research is universally trusted. But following a scandal involving the World Bank’s flagship report, urgent action is needed to regain the public’s confidence.’

Moreover, the long time span it took to dismantle the DB report should also be a source of concern, and something which should be address to fast pace processes involved, so as to overall limit the damage that such possible irregularities are likely to cause to economic agents, and the economy itself; for instance, the likely wrong rankings of countries that may have occurred over the years, most probably would have negatively affected decision making of investors. To get a better sense of long time spans involved, could be understood from the following statement by Joseph Stiglitz in the same TV interview to Bloomberg: ‘…the report that was the subject of controversy was the Doing Business report, and that was a report that was always problematic. In fact, just a decade ago I testified to Congress about why that was a bad report and ought to be scrapped.’

This highlights the long time span involved, even when during this time many other voices against it kept coming whereby, for instance, as per a 2020 Financial Time (FT) article ‘World Bank suspends its business climate index over data “irregularities”’, indicated that on account of irregularities/politics involved pushed the chief economist of WB to resign. The article pointed out in this regard: ‘In 2018, Paul Romer, the World Bank’s chief economist, resigned after alleging in a media interview that Chile’s ranking, which dropped from 34 in 2014 to 55 in 2018, may have been deliberately skewed by World Bank staff ideologically opposed to Chilean president Michelle Bachelet’s socialist government. Conversely, in the 2018 report, India jumped to position 100 from 130 the year before… raised questions over India’s performance, arguing that the large improvement was based on a change in World Bank methodology and not an equivalent change in the business environment.’

Similarly, in a very short time, given the context of institutional change, which is generally longer time-taking, Pakistan’s, as per the DB Report 2020, increased by 28 positions, which should be taken with more than a pinch of salt. In my same article from last year, I argued in this regard the following: ‘The government was quick to take pride and credit when the World Bank’s flagship ‘Doing Business 2020’ report indicated that Pakistan’s ranking in its ‘ease of doing business index’ had improved by 28 positions, and had gone to 108th position as compared to its previous report. Yet there is all too quiet from the government circles as the doing business index is faced by serious methodological challenge - and not for the first time that questions have been raised on its methodology - with regard to underlying data concerning four countries - China, the United Arab Emirates, Azerbaijan, and Saudi Arabia.’

If the Bretton Woods institutions are to reduce the likely role of politics in their work, which should otherwise be only produced on the basis of technical merit, they would have to bring ‘greater democracy’ in the way they are being run – big shareholders cannot have a predominant voice, rather, the technical staff should have an equal say. Moreover, as pointed out by Jayati Ghosh in her article published recently (and quoted above), the underlying neoliberal/Washington consensus basis will have to be revisited to provide better policy solutions and rankings. According to her, for example, ‘My own critique centered on how the index viewed any government regulation as costly and undesirable, and treated taxation only as a cost rather than as a means of ensuring the infrastructure, institutions, and educated workforce that businesses need in order to function.’

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021