The IMF Wakes Up to Fight Graft

The International Monetary Fund is awakening from a long sleep with regard to combating corruption. If the IMF’s new policy announcements are followed by tough action, then the global fight against corruption could make real headway.

The IMF and the world’s leading central banks as well as finance ministries across the globe have been laggards in that fight. They have too often ignored corruption, even when it has been a direct cause of national economic disaster.

For many years, the IMF argued that its charter precludes it from getting involved in politics and that it had to focus exclusively on economics. That was always a lame excuse.

Devoted as it officially is to promoting sustainable economic growth, it has come to the realization that massive income inequality is due in large measure to corruption, as well as direct plunder of state coffers by leading public officials and politicians. Letting that practice fester, however, runs directly counter to achieving sustainable economic growth.

A more intrusive IMF

That is why the IMF’s Board of Directors has now at long last approved an anti-corruption “framework” to guide the work of the Fund’s staff. IMF Managing Director Christine Lagarde has issued a clear warning to governments everywhere: “We are going to be more intrusive.”

The last time the Fund firmly challenged a government on the issue of corruption was in the late 1990s when the Asian financial crisis hit. As Indonesia’s economy fell off a cliff, the government of then-president Suharto and the nation’s rotten banking system were in the IMF’s crosshairs.

Thereafter, as Argentina and Greece sought IMF rescue packages, the Fund seemed to have forgotten about corruption. This was all the more perplexing as cheating the national tax collector was a leading popular sport in both countries.

To be sure, the Fund’s leadership at the time was distracted. Its Managing Directors, Horst Koehler left early to become President of Germany. His successor, Rodrigo Rato, resigned and was later prosecuted and found guilty of banking fraud and corruption in Spain.

And that episode was followed by French politician Dominque Strauss-Kahn taking charge of the IMF, only to resign amid a blizzard of high-profile publicity surrounding his alleged alleged sexual abuse of a maid in a New York hotel.

Enter Lagarde

Lagarde has been at the helm of the Fund since 2011. Her anti-corruption crusade may be her most important legacy. She realized the importance of combating corruption in 2014 as Ukraine came close to bankruptcy.

The Fund’s staff swiftly appreciated that it would be impossible to resolve Ukraine’s solvency crisis without a major assault on graft. This meant a wholesale reform embracing the finance and planning ministries, the central bank and the entire justice system.

Gradually, Lagarde realized that corruption played a far larger role in the economic fortunes of many countries than the Fund had traditionally understood. She addressed the topic two years ago at an international conference. But she knew at the time that real progress would depend on her convincing the IMF’s conservative Board of Executive Directors to issue clear-cut policy guidance.

One reason why this wouldn’t be easy is that the IMF’s Board is drawn from finance ministries that include quite a number from countries perceived to be thoroughly corrupt.

This has now been achieved, largely thanks to Lagarde’s leadership and a major in-house economic research effort. The conclusion is that there can indeed be many situations where corruption could be viewed as “macro-critical” (the new buzz phrase in the IMF) and thus demand forceful reforms. Those are precisely the measures that the Fund will request in its funding operations for countries in economic crisis.

A new framework policy

The Executive Board approved the new framework policy in mid-April it was made public on April 22. On an ad-hoc basis, it had already accepted over the last couple of years that there were special situations where non-traditional IMF policy conditions related to anti-corruption were essential.

For example, in Ukraine, the IMF worked with civil society to promote establishment of a new and independent anticorruption agency and the appointment of a special prosecutor.

Ukraine President Petro Poroshenko has sought to retain control over the office of public prosecutor, but international pressures are now mounting for a credible justice system to be established, with the G7 foreign ministers underscoring this at their April 23 meeting in Toronto.

And in Mexico, the IMF pushed for the introduction of financial disclosure requirements, raised key conflicts of interest issues, as well as stricter penalties for corruption offenders.

A necessity not a choice

Past policy experience, supported by careful research, has convinced the IMF that assigning priority to anti-corruption is not a choice but a necessity.

Conversations with some Board members make it clear that they had slowly come to the realization that the IMF’s reputation and credibility would be badly tarnished if the Fund did not address corruption more seriously.

The Fund says it is not only going to be tough on countries whose fiscal accounts are full of leaks and whose central banks are not rigidly monitored. It will also explicitly call for tough new justice systems when necessary. This is new turf for the Fund, but essential — if enforcement of anti-corruption measures is to be meaningful.

Long overdue

The Fund’s strengthened anti-corruption approach is long overdue. Its own research shows that corruption robs global GDP every year of 1.5% to 2.0%. Lagarde says major fiscal management problems arise alone from demands for bribes for public procurement contracts that end up enriching public officials and agents and boost the final costs of deals by an average of 35%.

Where appropriate, the Fund will be evaluating corruption conditions in all of its member countries in its annual economic reviews. The IMF will also be publishing the findings, just as it will be publishing the anti-corruption conditions it may set for countries drawing emergency funds from the IMF.

Recognizing the importance of transparency is constructive. All the same, at this juncture some caution may be warranted. How tough will the Fund prove to be when looking at corruption in China and Russia, for example?

How successful will its current anti-corruption drive in Ukraine be in overcoming entrenched wealthy interests there?

How outspoken — to take just a few examples — will the Fund be about transparency in public accounts when it comes to Saudi Arabia and Malaysia and Egypt, where corruption is rampant?

And will the IMF turn to such major traditional member countries as the UK, France, Switzerland and the United States, and demand serious actions by them to end their roles as safe havens for vast amounts of laundered cash from across the globe?

Stay tuned.