November 2, 2021
Yesterday we shared with you part one of Kim Iskyan’s deep dive into the world of financial rankings gone wrong (and with it, the multilateral system as a whole).
Here’s the conclusion…
Rankings Gone Wrong, Part 2
As it happens (it’s always eventually about the money, isn’t it?), it wasn’t only about China not wanting to lose face with no improvement in its ranking year over year.
At the time the 2018 EoDB report was being finalized, Georgieva was also eyeball-deep in efforts to coax additional cash out of China as part of a broader effort to boost the World Bank’s capital base. The conversation with China – the third-largest shareholder in the institution and a key contributor to the capital campaign – would have been a lot more difficult, presumably, if China had EoDB egg on its face.
Why It Matters
A year and a few months later – in early 2019 – Jim Yong Kim unexpectedly and abruptly resigned from his position as the World Bank’s president, three years before his term in office was slated to end.
He joined a fund that invests in infrastructure projects in the developing world. It was an opportunity that he explained at the time was “unexpected,” but one through which he said he thought he could “make the largest impact on major global issues.”
It was a strange career move – leaving the pinnacle of the crossroads of development, emerging markets, and investment, for a position with a no-name institution that presumably paid better but enjoyed a crumb of prestige next to the five-course meal of the World Bank. And it was an option that very likely would have existed three years later. Kim either was in serious debt and needed some cash (no evidence of that at all) – or had a Spidey sense that he best get out while the going was good.
(Someone else with good timing: In January 2018, then-World Bank chief economist – and now Nobel Prize winner – Paul Romer left his position in a huff after just 15 months, claiming at the time that the EoDB data was manipulated… an assertion he later recanted.)
The WilmerHale investigation fingers Kim and Georgieva as the instigators of the data-fiddling that resulted in China’s improved position. However, Kim – as a private citizen long since divorced from the intricate politics of EoDB – seems to be out of harm’s way.
But Georgieva isn’t… She left the World Bank in October 2019 to become the head of Washington, D.C.-based multinational lender International Monetary Fund (“IMF”), which – like the World Bank – was founded in 1944 at the Bretton Woods conference that has since helped define the global financial system.
With money from 190 member countries, the IMF aims to keep the international monetary system on an even keel – through cultivating monetary cooperation, facilitating global trade, promoting sustainable growth, and reducing poverty. The people who work at the IMF, like those at the World Bank, fancy themselves to be among the sharper knives in the drawer, with degrees from the world’s top universities.
Georgieva, a Bulgarian economist, spent most of her career at the World Bank and the European Commission. If, after her run as World Bank CEO, she’d gone on to take up skydiving or an economics-endowed scholarship in Sofia or wiping the noses of her grandkids, the story of the fiddling of the figures of the 2018 EoDB might have lost its legs.
But that she’s at the IMF now makes all the difference… Following the release of the investigation on data irregularities, Georgieva denied that at the World Bank she had “put pressure on staff to manipulate data.”
“Let me be clear: The conclusions are wrong. I did not pressure anyone to alter any reports,” she said.
Right now, Georgieva is struggling to save her job. Shortly after the publication of the investigation, both Democrats and Republicans sitting on the House of Representatives’ financial services committee questioned whether she was the right person to continue to lead the IMF. The Senate Foreign Relations committee demanded “full accountability.” Treasury Secretary Janet Yellen declined to take a call from Georgieva, which is a government way of hanging someone out to dry. The Economist urged her to resign.
Why is everyone so upset over a few altered figures? It’s not as if we haven’t all at some point developed a hypothesis – really, a conclusion – and then scurried about to find the data to support it. (And there isn’t a stock analyst on earth who hasn’t tweaked a few figures, thanks to the wonders of Excel, to support a pre-ordained conclusion, especially when called on by the boss to do so.)
Three Big Problems
The first issue is that the IMF, as the Economist explains, is “the custodian of data standards for the world’s macroeconomic statistics.” That data, compiled on every angle and corner and cranny of the economies of member countries, is used to inform decisions about finance, economics, and policy by the IMF, investors, and other lenders. And Georgieva’s (alleged) prioritization of political expediency over data integrity at the World Bank taints the entire research operation of the IMF.
More broadly, the IMF – like many multinational organizations (such as the World Bank, the United Nations, and the World Health Organization) that serve multiple masters with conflicting agendas – suffers from a tension between its research aspirations and its diplomatic imperatives. At the World Bank, Georgieva allowed the need to appease China to trump the objectivity of the EoDB product.
How will the IMF (under Georgieva) react the next time it faces a similar decision point – where, say, it might have to offend China or some other noisy rich country? The objectivity of the decision making of Georgieva – and, by extension, the IMF – has been compromised.
And, of course, let’s not forget that the culprit at the World Bank was China. U.S. policymakers – whose support Georgieva needs if she is to remain the head of the IMF – are toxically allergic to any whiff of China-pandering. Anti-China sentiment is one of the very few policies that unites both sides of the aisle in American politics. Of all the countries to cave in to, Georgieva chose the very worst.
Why It Matters to (Emerging) Markets
One of the first victims of the scandal has been the Ease of Doing Business survey itself. In June 2020, the World Bank “paused” the annual report following internal reports of irregularities. In mid-September – the day after the publication of the WilmerHale report – the EoDB survey was axed altogether.
It made sense to excise what threatened to become a cancer to the organization. It’s still an incalculable loss for countries looking to benchmark their policies to higher standards, to investors looking for insight on a market’s business climate, and as a motivating factor to egg on countries to reform.
As emerging and frontier market brokerage Tellimer explains…
The loss of a supposedly independent, rigorous, objective, comparable data set with global coverage and a time series stretching back to 2006 matters for long-term investors in [emerging markets]. Ease of Doing Business was a unique data set.
What’s more, though, the episode is a Hummer-hits-Corolla ding to the credibility of the entire multilateral organization community… from the Paris Climate Accords, to the World Trade Organization, to the World Economic Forum, and every other alphabet-soup group of international do-gooders… particularly those where the U.S. sits at the head of the table.
If the World Bank couldn’t keep itself free from political influence (from China no less!), who can?
It’s also a signal to China to accelerate its efforts to develop parallel rival groups – like its Asian Infrastructure Investment Bank, which aims to fund billions of dollars in projects throughout Asia every year… the $4 trillion (or so) Belt Road Initiative to build out infrastructure from East Asia to Europe… and the Shanghai Cooperation Organization (a Eurasia-focused economic, political, and security alliance spearheaded by China). China is reading the room, and it’s seeing that it’s not welcome.
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Georgieva Is On Borrowed Time
The U.S. is the most important shareholder of the IMF, and it’s clear that Georgieva doesn’t have the support of the U.S. government. She’s likely to follow the same ignominious path out the door as some of her predecessors.
One former IMF head, Rodrigo Rato, was sentenced to four years in prison for embezzlement (at least not committed during his time at the IMF). Another, Frenchman Dominique Strauss-Kahn, quit in May 2011 amidst allegations that he sexually assaulted a hotel maid.
A third, Christine Lagarde, was in December 2016 convicted of financial negligence from her time in the French government – but was not removed from her position. She went on to green-light the single worst lending decision in the decidedly mixed history of the IMF. And then – talk about failing upwards – in November 2019 she was made head of the European Central Bank, a position that rivals that of Jerome Powell, the head of the U.S. Federal Reserve, in global macroeconomic importance.
Georgieva didn’t commit a crime… But she may have done something at least as bad: undercut the credibility of the multilateralism of the World Bank and, by association, other organizations operating in the same realm. And we’ll all suffer.
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Executive Editor, American Consequences
With Editorial Staff
November 2, 2021