Current IMF head Georgieva implicated in scandal
Every year the World Bank publishes its Ease of Doing Business report which scores and ranks 190 countries on an index comprising many measures of conditions facing the private sector. The report provides a widely followed guide on business-friendly structural reform, particularly in emerging markets. Following an independent external audit on "irregularities" in how the report was compiled in 2017 and 2019, the World Bank has decided to discontinue it altogether.
The audit has implicated the prevailing CEO of the World Bank, Kristalina Georgieva, for intervening to ensure that China's ranking improved in the 2017 version of the report (which is labelled the "2018" ranking). In the final report, China's ranking improved from 85th to 78th, allegedly thanks to changes in the method for calculating the ranking.
At the time, discussions to secure a capital contribution to the World Bank were ongoing. Ultimately, China increased its capital contribution and voting share in 2018. Georgieva is now the Managing Director of the IMF, having been elected in September 2019. She has issued a public statement disagreeing with the findings of the audit.
Quotes from the external audit by WilmerHale
“Actions taken by CEO Georgieva also played a key role in the changes to China’s data.”
“In his interview, the Senior Director for DEC [Development Economics] ultimately acknowledged that the Doing Business leadership made “judgement calls” to push the data in a certain direction to accommodate geopolitical considerations. He explained that when he went to meet CEO Georgieva, she thanked him for doing his “bit for multilateralism”. The Senior Director for DEC interpreted her comment to mean not angering China during the sensitive capital increase negotiations affecting the Bank’s future.”
“CEO Georgieva visited the home of a Doing Business manager to retrieve a physical copy of the report with the aforementioned data changes incorporated. During the conversation in the manager’s driveway, CEO Georgieva commented that it had been a “very unusual year” for the report and thanked the Doing Business manager for helping “resolve the problem” with China’s ranking. During her interview, former CEO Georgieva said this was the first and only time she had visited this employee at the employee’s home. She further stated that she could not recall why she felt it was necessary to visit the employee’s home personally rather than have the report delivered to her at work during business hours.”
"Irregularities" in the data
The audit also found irregularities in the 2020 scores (published in 2019) for Azerbaijan, Saudi Arabia, and the United Arab Emirates. but in the case of the latter two the impact on global ranking was minimal.
Note that the scores of Azerbaijan, China, and Saudi improved substantially, by c20%, over the 5-year period covered by the audit.
World Bank and IMF voting rights
Implications for EM investors
Multilateralism – This is another blow for the credibility of multilateral organisations in managing global coordination, after recent events such as: 1) former US President Trump's withdrawals from the Paris Climate Accord, World Health Organisation (WHO), and Trans-Pacific Partnership; 2) The WHO's handling of Covid; and 3) the UN's limp response to the Rohingya crisis and Myanmar coup.
The fact that the World Bank has conducted an external audit on the Ease of Doing Business report and published its findings without any redaction is to be applauded on the grounds of transparency.
However, the fact that: 1) the top leadership of the organisation is directly implicated; 2) one of those leaders – Georgieva – is now head of the IMF; 3) the main uncovered irregularity with the Chinese score coincided with negotiations with that country for a capital injection; and 4) the entire report has been discontinued, raise the suspicion that there is a more systemic problem here than merely the mechanics of producing one specific data set that many outside the finance and investment industry may never have heard of.
Coming so soon after Georgieva played a central role in the additional US$650bn SDR (Special Drawing Rights) allocation, which, while not fully completed, has alleviated stress on foreign reserves for many across the EM universe, this is particularly worrisome.
US-China – This is another potential avenue of tension between the US, with the US Treasury, which oversees the US shareholding in the World Bank, describing the report as containing "serious findings".
The US remains the largest voter in the World Bank and IMF, and may be motivated to amplify the role of China in this scandal in its efforts to portray itself as the champion of good governance in emerging market economic development and promotion of human rights in foreign policy.
On the other hand, China may be prompted by this scandal to shift even more urgently towards building up rival multilateral organisations and treaties, where it has a more influential voice, such as the Shanghai Cooperation Organisation, Asian Infrastructure Investment Bank where China has 27.5% voting share, the Regional Comprehensive Economic Partnership, and the Belt and Road Initiative.
IMF Programs – This may prove a distraction for the IMF leadership, which, in turn, may delay ongoing negotiations and reviews, eg Argentina most of all, given the scale of the program, and, to a lesser degree, the likes of Pakistan and Ukraine.
Economic Populism – To the degree that the World Bank and IMF are viewed as guardians of orthodox macroeconomic policy, anything that diminishes their credibility may fuel populist politicians who reject that orthodoxy on grounds that are ideological (eg President Erdogan in Turkey) or simply politically expedient (eg politicians in election cycles such as President Bolsanaro or his challenger Lula in Brazil).
EM investment analysis – Any analyst who has constructed an index will testify to the subjective views embedded in the choice of and weighting given to different metrics. Any honest analyst may also admit to manipulating those choices and weights to support a pre-conceived hypothesis (which, in reality, is a pre-conceived conclusion rather than a hypothesis). Often, I get a request that goes something like, "can you help me with a chart or data set that proves xyz".
Data may be objective, but interpreted data is most certainly not. 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 EM. Ease of Doing Business was a unique data set.
It has no bearing on what performs well or poorly over the next month, quarter, or even year, but eventually structural economic reform, which is what Ease of Doing Business was a measure of, is at the core of whether a country is becoming a better or worse place to invest, whether in a listed equity or bond, a manufacturing, service, or natural resource business.
Ease of Doing Business was never a perfect report and, at times, specific scores did not appear to tally with realities on the ground, but the assumption was that its imperfections were universal. It appears that this was not the case.
The last Ease of Doing Business scores for emerging markets (for what they are worth)...
IMF Covid-era lending flatters to deceive (Culverhouse), April 2021
New SDR allocation gets closer to reality (Culverhouse), March 2021
Revisiting the IMF SDR allocation — The time is right (Culverhouse), November 2020