Can an Earthquake at the World Bank Rattle the IMF, Too?
A scandal involving the World Bank’s Doing Business (DB) report has the potential to undermine the reputation, if not the legitimacy, of both the bank and its sister institution, the International Monetary Fund (IMF), which together constitute pillars of the post-World War II international economic order.
On September 16, the World Bank’s board of executive directors released a report, prepared by a Washington law firm, that accused senior bank executives and staffers of directly and indirectly pressuring the DB research team to raise China’s ranking in the 2018 installment of the report in response to Chinese concerns. The staffers were top aides to former President of the World Bank Jim Yong Kim and acted “presumably at the direction of President Kim.” The bank’s former chief executive, Kristalina Georgieva, was also singled out for exercising undue influence. Since Georgieva is now the managing director of the IMF, how this scandal is addressed by the boards of both the World Bank and IMF could result in decided and prolonged consequences for both institutions. Georgieva has since categorically disagreed with the allegations, while the World Bank has responded by shutting down DB.
Diplomacy and International Institutions
The DB report rankings measure business regulations for local firms around the world and are used by credit rating agencies and financial institutions to evaluate country risk and other significant indicators. Since the first DB report was launched in 2003, the rankings have become vitally important to many developing countries.
In January 2021, the bank’s ethics committee commissioned the law firm WilmerHale to investigate “data irregularities” in both the DB 2018 and 2020 reports that had come to its attention. The DB 2018 report was being crafted at the same time Kim and Georgieva were overseeing a capital increase campaign for the bank. According to the investigation, Chinese government officials communicated their concerns to senior bank leadership regarding China’s DB 2017 ranking and expressed the hope that their country’s ranking in the next report would better reflect various reforms.
According to the WilmerHale investigation report, Kim’s aides—and Georgieva herself—were actively involved in a variety of attempts to boost China’s standing, including changing the methodology used to calculate rankings. The WilmerHale investigation also singled out Simeon Djankov, then one of Georgieva’s top advisors, as being directly involved in identifying ways to massage the data to improve China’s ranking. As a result of these various pressures, China’s 2018 ranking moved up from a score of eighty-five, which it had been given in a version initially authorized for publication, to seventy-eight—the same score it had received in DB 2017.
WilmerHale’s report also detailed similar rank-changing issues with the DB 2020 report and gave specific examples of where Djankov’s instructions altered data that affected the rankings for Saudi Arabia and Azerbaijan.
What does this mean for the bank?
The scandal has diminished the bank’s credibility and underscored the longstanding dodginess of the DB report. As far back as 2008, the bank’s Independent Evaluation Group raised questions about the DB’s objectivity and reliability. In 2018, then World Bank Chief Economist Paul Romer publicly shared his concerns regarding DB’s methodological changes and susceptibility to politics. He resigned from his position soon after. The WilmerHale report notes that many of the methodological rules underpinning the DB are uncodified, leaving a door open to geopolitical tinkering. Earlier this month, a separate external panel of experts convened by the bank to review the DB report published its findings. While noting that the annual exercise is “potentially of great value” to governments, firms, and researchers, the panel called on the bank “to improve the methodology behind the data, fill important gaps in its substantive coverage, clarify what can and cannot be said on the basis of the data, and protect the integrity of the data collection process.”
Diplomacy and International Institutions
The revelation that geopolitical lobbying can alter country rankings not only undermines the legitimacy of the DB report but also raises questions about the bank’s larger culture. While the bank did the right thing by commissioning the WilmerHale investigation and making its results public, many experts will still wonder whether the investigation’s findings are just the tip of a larger iceberg at the bank. According to the inquiry, DB employees regarded Djankov as a bully, who managed “by fear and intimidation.” A year after he left the bank (after seventeen years of service) to become a senior fellow at the Peterson Institute for International Economics, bank employees still feared retaliation if they spoke out—and they had ample reason to, considering that the bank’s visa system ties staff to their jobs. This creates a disincentive for whistleblowing since a loss of employment means that staff must return to their home countries. Such conditions raise questions regarding how easy it is for staff in other parts of the bank to report wrongdoing—or even speak frankly inside.
What does this mean for the IMF?
The IMF’s board has met to discuss these revelations, and its ethics committee will be reviewing them as well. If the IMF adopts a narrow perspective and looks only at Georgieva’s subsequent work as managing director, it could be making a grave mistake. One cannot fence off the bank scandal and pretend the same issues cannot arise at the IMF. The IMF risks being tainted by Georgieva’s leadership, particularly if she refuses to acknowledge that improper pressure was brought to bear. Both institutions will come under intense scrutiny regarding how they handle China, which is now the third-largest shareholder in both.
Many World Bank and IMF member states will want to sweep this scandal under the rug. Both institutions are busy with their responses to the pandemic, and no one is especially keen on a leadership crisis or transition. The IMF’s board has a tendency to stand by its leaders, including Georgieva’s two immediate predecessors, both of whom were also embroiled in scandals.
These two pillars of the international economic order ought to navigate this scandal carefully. The price of doing nothing will be a crisis of legitimacy, which the world can ill afford at a moment when the structures of global governance are straining to respond to multiple crises.
Tamar Gutner is an associate professor at the School of International Service at American University.