Macro-Criticality: The International Monetary Fund’s Black Box

Back in 2018, the International Monetary Fund (IMF) promised to tackle corruption within its member states when that corruption is “macro-critical”—that is, when corruption “affects, or has the potential to affect, domestic or external [macroeconomic] stability.” The IMF’s declaration that corruption is, or at least can be, “macro-critical” was an important development, one that anticorruption professionals applauded as a “major step forward.” For those less familiar with the IMF, though, the significance of the “macro-criticality” finding may not be immediately obvious. To understand this particular piece of IMF jargon, and why it’s so important for when and how the IMF engages in anticorruption work, it’s necessary to understand a bit more about how the IMF operates.

First and foremost, the IMF is a “monetary agency, not a development agency.” In contrast to a development agency like the World Bank, the IMF does not finance specific projects, nor is its mandate to promote economic development and poverty reduction as a general matter. Rather, the IMF helps protect global macroeconomic stability by lending funds to governments in dire straits. Furthermore, the IMF often requires, as a condition for receiving these emergency loans, that the recipient governments adopt institutional or policy reforms—a controversial practice known as “conditionality.” The IMF has also sometimes forgiven loans for particularly debt-burdened countries. And in recent years, the IMF has expanded its capacity development apparatus by providing advice to countries on a wide range of issues related to a country’s macroeconomic management, including central banking, monetary and exchange rate policy, tax policy and administration, and official statistics. All these services function to protect the international monetary system from potential risks, which is the IMF’s primary task.

But although the IMF’s mission is, at least in principle, narrowly focused on macroeconomic stability, the IMF has consistently faced the question of how to distinguish economic policy (which the IMF may influence) from social or political matters that are outside the IMF’s mandate (see, e.g., here, here, and here). Recognizing that there can be a porous boundary between economic and political matters, the IMF developed the concept of “macro-criticality.” So long as an issue—even a political or social issue—affects, or has the potential to affect, the macro-economy in a significant way, the IMF may treat the topic as it would any other issue traditionally recognized to be the IMF’s bread and butter.

And that’s why it was so important that the IMF has declared that corruption is a “macro-critical” issue. Once the IMF considers corruption in a given country to be macro-critical, the IMF may place anticorruption conditions on IMF loans to that country. The macro-criticality finding also validates data collection and capacity building measures related to corruption and anticorruption—measures that would otherwise seem to fall outside the IMF’s jurisdiction.

Nevertheless, confusion persists about when the IMF will consider corruption to be a “macro-critical” issue, and what exactly the IMF promised to do in its 2018 statement. One reason it’s hard to understand what the IMF actually committed to is because there are many ways for an issue to affect domestic or external macroeconomic stability. Perhaps most importantly, it’s important to distinguish a finding that an issue, such as corruption, is globally macro-critical—in the sense that there is robust evidence that this issue can have significant effects on macro-economic stability—from a finding that this issue is macro-critical in a particular country. Even a globally macro-critical issue may not by macro-critical in a specific country, either because the country in question already has adequate safeguards in place to address the issue, or because the macroeconomic risks associated with this particular issue are minimal in comparison to other country-specific threats.

  • Global macro-criticality of corruption. The IMF’s determination that corruption is (globally) macro-critical was based on empirical analysis of the macroeconomic implications of weak governance, research that demonstrated a general correlation between corruption and a range of adverse macroeconomic outcomes (see here and here). This global finding is a way to justify to the IMF’s member states why the IMF cares in general about corruption. Finding corruption globally macro-critical also implies that the IMF’s Board has determined that resources should be devoted to corruption-related data collection and capacity development voluntarily requested by member states, and that IMF staff should be encouraged to conduct research on the topic. Importantly, the global macro-criticality finding means that IMF staff must consider corruption as a regular part of their country work – also known as “surveillance” – just as they would regularly consider traditional IMF concerns. This is crucial: just as IMF staff consider the health of every member state’s financial and macro-economic situation, finding corruption globally macro-critical requires IMF staff to consider the level of corruption in every member state.
  • Country-level macro-criticality of corruption. What the declaration that corruption is globally macro-critical does not do, however, is exactly what many anticorruption advocates want to see the most: require that the IMF condition loans on certain anticorruption measures. The question whether such conditionality is appropriate depends on whether corruption presents a destabilizing effect for a particular country. But even if corruption is globally macro-critical, it might not be a very serious source of macroeconomic instability in an individual country. Furthermore, even if corruption in a given country does contribute to macroeconomic problems, other causes of the country’s macroeconomic problems may loom larger. In determining whether or what conditions to attach to loans, the IMF applies a “parsimony principle,” according to which conditionalities should target the highest-priority threats first, allowing some other issues to go unaddressed. Sometimes, as in the case of Ukraine, corruption is considered the dominant threat to macroeconomic stability and generates loan conditionality. But in a country facing other extreme fiscal or monetary problems, corruption might not be significant enough to generate loan conditionality. Of course, one might worry that the parsimony principle will provide a convenient excuse for IMF staff to avoid the politically controversial decision to impose a corruption-based conditionality.

This distinction between obligations of global and country-specific macro-criticality should inform the way anticorruption advocates analyze the IMF’s commitment to anticorruption measures. Indeed, an insufficient understanding of this distinction may lead to ineffective advocacy. For instance, consider recent calls by anticorruption professionals to require transparency conditions related to the IMF’s COVID-19 response (see here, here, and here). While it is easy to argue that transparency is globally macro-critical, as these posts do, the IMF conditions loans exclusively through the lens of country-level macro-criticality. Thus, arguments of a global nature are ineffectual. More effective would be country-specific investigations of the destabilizing effects, over and above other risks, of failing to require transparency. On the other hand, a focus on the country-level macro-criticality of corruption obscures the broader powers that the IMF ought to be exerting. Because corruption is globally macro-critical, the IMF must ensure an even-handed assessment of corruption across all member countries. But while mentions of corruption in IMF reports have more than doubled, they remain unevenly distributed across countries. And, so far as I know, the IMF has not yet reported on the ongoing status or operation of its centralized working group in charge of standardizing country assessments.

Although the 2018 promise to address corruption seemed expansive on its face, the macro-criticality finding was never a blank check to IMF staff to pursue all instances of corruption. Rather, it required the IMF to consider every instance of corruption, and, when appropriate, to intervene. Anticorruption advocates should pressure the IMF to live up to its promises by seeking clarity on how the IMF specifically considers anticorruption as a procedural matter. And, when a corruption threat is significant within a country, professionals should level a country-specific argument for IMF intervention. Otherwise, the IMF’s involvement in anticorruption will always remain a “black box.”

3 thoughts on “Macro-Criticality: The International Monetary Fund’s Black Box

  1. A fantastic post that really outlines the implications and complications of the IMF’s new designation for corruption. I’m interested in the standard the IMF will use to determine corruption macrocriticality: the “affects, or has the potential to affect, domestic or external [macroeconomic] stability” standard seems extraordinarily flexible! This could also potentially tie into the problems with the parsimony principle outlined later in the piece. It’ll be very interesting to see if the IMF will be able to avoid accusations of bias if corruption macrocriticality status is deployed such that it could be seen as avoiding political controversy or alienation of large contributor member states.

  2. This is an incredibly informative post and I think you do a great job in explaining the complexity of defining what exactly is macro-criticality. As I was reading your post, I began to wonder to what extent IMF shares its concerns and collaborates with other international financial institutions to combat anticorruption. As Jaylia mentioned above, the standard for macro-critical, as articulated by IMF, is flexible, so I can imagine situations where the judgment call for IMF-imposed conditionality is hard to decide. Since imposing conditions on loans are controversial, do you foresee greater cooperation between the IMF and, for example, the World Bank to clarify the standards on what sorts of anticorruption are under their respective purview? And do you think the IMF, when deciding to intervene, should consider whether there are other agencies/organizations that would be capable of handling the anticorruption instance?

  3. Fantastic post explaining the IMF’s promise to tackle corruption within its members state. From your post, I understand that once the IMF designates corruption as macro-critical, it may place anticorruption conditions on loans to the particular country. It would be enjoyable to learn more about how the IMF enforces these conditions once outlined. For example, once corruption in a member state is considered macro-critical, does the IMF wait until the country requests further funds in order to issue recommendations on tackling the identified corruption? Or if there exist outstanding payment of loans to the particular country, does the IMF place the conditions on such outstanding loan payment? Furthermore, once anticorruption conditions are placed on a given loan, how does the IMF ensure such conditions are followed? If the member states fails to follow such conditions are they barred from receiving future funds from the IMF or does the IMF overlook such omission?

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