About Clay Hackney

Clay Hackney is a student and Olin Fellow at Harvard Law School.

The IMF’s (Non-)Engagement with Corruption in Military Spending

In a move that has been hailed by the anticorruption community as a “major step forward,” the International Monetary Fund (IMF) has declared that it will address corruption in its member states, insofar as that corruption is “macro-critical” – that is, when corruption “affects, or has the potential to affect, domestic or external [macroeconomic] stability.” As I stressed in a previous post, the focus on “macro-criticality” is the IMF’s solution to a persistent problem with how to distinguish economic policy (which the IMF may influence) from matters that are outside the IMF’s mandate—because, after all, the IMF is a “monetary agency, not a development agency.” Grounding anticorruption in the Fund’s mission to support the international financial system allows IMF staff to discuss anticorruption strategies frankly with country authorities.

Yet certain corruption-related topics still seem off limits, notwithstanding their arguably macro-critical characteristics. For instance, although the IMF has touted its comprehensive framework for reviewing corruption risks, the IMF’s strategy leaves out certain key channels that facilitate corruption, such as the corrosive effect of corruption on, and in, military spending. The wholesale omission of military spending from the IMF’s anticorruption strategy demonstrates that the IMF’s attention to macro-critical corruption problems is tempered by understandable concerns about the reputational blowback that might result from intervention into politically sensitive areas. Understandable as it may be, the IMF’s decision to exclude military spending from its anticorruption strategy deprives member countries of the broader benefits that are provided when the IMF acknowledges a concern as macro-critical.

Understandable as it may be, the IMF’s decision to exclude military spending from its anticorruption strategy deprives member countries of the broader benefits that are provided when the IMF acknowledges a concern as macro-critical.

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A Covid-19 Checkup: How the IMF’s Transparency Measures Have Fared So Far

With a trillion dollars in lending capability, the International Monetary Fund (IMF) is one of the best-equipped institutions to deal with the Covid-19 public health and financial crisis. Since March, the IMF has met an “unprecedented number of calls for emergency financing” with “unprecedented speed and magnitude,” through renegotiations of rapid credit facilities, refinancing initiatives, and debt relief assistance for more than 100 countries, totaling over $100 billion in disbursements so far. In the early days of the pandemic, there was a great deal of concern among anticorruption advocates over the way these emergency funds would be monitored (see collections of pieces here and here). The IMF’s initial approach generally did not impose formal transparency or governance requirements as a condition for receiving emergency Covid relief funds. Rather, the IMF chose to rely more on after-the-fact safeguards: recipient countries were told to spend as needed but to “keep the receipts.”

The IMF’s approach is understandable. As Jason Keene argued on this blog, the IMF at that early stage faced a trade-off between speed and transparency, and may have reasonably concluded that it would not be advisable to bargain over transparency measures if doing so would slow the deployment of much-needed funds. This conclusion, as a May 2020 IMF publication revealed, was influenced by the IMF’s experience with the 2014-2016 Ebola outbreak in West Africa: Many, including a prominent public health journal, blamed the IMF for the lethality of the Ebola epidemic, provoking a backlash against what was seen as unduly burdensome loans, a focus on austerity, and the underfunding of medical systems in vulnerable countries (see here, here, and here). Given this background, it’s understandable that the IMF might, on balance, favor speed over transparency, providing loans for Covid-related public health and budgetary shortfalls without much conditionality.

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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.

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