EYE ON THE MAIN CHANCE

The IMF and the Lagarde scam

First Person Singular - A.M.

I owe this story to my departed friend, I.G. Patel. During the early 1950s, he was with the research department of the International Monetary Fund, the formidable international financial institution set up at the end of World War II to arrange short and medium-term credit for its mentor countries. Its twin institution, the World Bank, was to arrange long-term capital for economic rehabilitation and development.

A member country had approached the Fund, seeking a credit to tide over a balance-of-payments crisis it was suddenly facing. The research department had to prepare a paper analyzing the background of developments, which had led to the crisis and offer its views on the admissibility of the loan application. I.G. was assigned to prepare the draft of the paper in some rush and had to work over the weekend. A secretary was placed at his disposal, working overtime, to help him prepare the paper. The director of the research department casually hinted that, since this young girl was sacrificing her weekend to come to work, I.G. might be ‘nice’ to her — take her out to lunch, for instance. I.G. took the hint and treated her to a sumptuous lunch at a very posh restaurant located close to the Fund building. He was taken aback, when, a couple of days later, the girl, submitted her claim for overtime payments, itemizing her claim; one entry said, “Going out to lunch with Mr. Patel, 1.45pm to 3.15pm each day.” True, she had a free lunch, but was she nonetheless not working overtime during the hours spent on the two lunches, and, in her view, she was justified to charge expenses for that period too. The Fund’s treasury division approved her claim.

The story is amusing. However, it also reflects a climate of social morality. The United States of America is the largest stockholder of both the Fund and the Bank. The ethos of the two institutions is heavily influenced by the prevalent corporate moral code in that country, which encourages the culture of keeping an eye on the main chance as far as money-making is concerned. Maximize one’s earning, it should always be the goal; when an opportunity comes, even if a few corners need to be cut, by all means do so.

The story of going out to lunch with Mr Patel did not involve any issue of transgressing a rule or permissible limits. But certain recent developments in the IMF, and right at its very top, do.

The twin financial institutions based in Washington, D.C., the World Bank and the International Monetary Fund with the US as the largest stock-holder, are run in the manner of American corporate bodies. By a tacit agreement, the president of the World Bank will always be a citizen of the US, while the managing director of the Fund will rotate among the west European nations. This arrangement has remained undisturbed since the two institutions were set up over six decades ago. All attempts by Russia, China and developing countries like India to reform the structure of their management have been successfully resisted by the Western governments.

That does not prevent though occasional hiccups of other kinds to rattle the management of either body. The IMF is having problems in recent years with the occupant of the post of its managing director, nothing less. In 2007, when it was the turn of France to nominate the managing director of the Fund for the next ten years, the country’s then president, Nicolas Sarkozy, chose to name Dominique Strauss-Kahn, an economist of repute and a former finance minister of the country, to the post. Strauss-Kahn, a man of tremendous energy and always full of fresh ideas, took initiatives to invigorate the Fund. In particular, he played a key-role to involve it in efforts to tackle the ‘sovereign debt’ crisis following the failure of quite a few governments in south Europe to redeem securities issued by them. DSK’s reputation soared; the Jerusalem Postdescribed him as the sixth most powerful Jewish person in the world. He had, at the same time, another kind of reputation too. Women easily fell for him, or he for them; his sexual dalliances were often talked about. In France’s social milieu, though, this was hardly considered disgraceful.

Not so in the US. Anglo-Saxon mores are altogether different, as DSK soon discovered. In May 2011, a chambermaid in a New York hotel filed a complaint of sexual assault by the IMF managing director. He was promptly arrested and placed under house arrest on a million-dollar bail. Waves of shocked outrage blew across the US. The Fund’s board of executive directors met hurriedly and was pressurized by the US administration to remove him and request the government of France to name a replacement. Sarkozy was still president of France; this time he decided to suggest his finance minister, Christine Lagarde, to the position. She formally assumed charge as the Fund’s new managing director in late 2011. Quiet descended on the US; seemingly everything was the best in the best of all possible worlds.

Only seemingly. An independent commission of enquiry had meanwhile been investigating, in France, a complaint of hanky-panky in a government arbitration on a dispute between the nationalized bank, Crédit Lyonnais, and the well-known business tycoon, Bernard Tapie, who once owned the Adidas sportswear empire. The official committee of arbitration decided in favour of Tapie, who walked away, as a result, with an award of 400 million euros. Allegations of foul play followed. A commission of enquiry launched an investigation and released its formal recommendations last month. The commission has adjudged that the allegations were factually correct and has recommended prosecution of a government official, including the finance minister of the country at the time the offence was perpetrated — Christine Lagarde — for criminal negligence along with other related charges. Cases have been launched in the French courts. If found guilty, Lagarde could be sent to prison for one year and, in addition, fined to the extent of 15,000 euros. Paris newspapers and newscasters are having a whale of a time, and there is increasing pressure on the country’s government to have Lagarde re-called from the position of IMF managing director. Evidently, you can get away in France with sexual improprieties, but not with financial malfeasance.

The reaction in the US is to the contrary. The board of the Fund’s executive directors, again at the prodding of the US administration, has met and issued the gem of a wishy-washy statement: the matter is pending before the French judiciary, Lagarde has only been charged, legal proceedings are on, it would be wrong not to wait for the final judicial verdict; meanwhile the board of executive directors would want to stress that it had full confidence in its managing director.

What was conveniently forgotten was that barely three years ago in the case of Strauss-Kahn, the executive board had behaved totally differently. DSK had merely been charged, the charge had not yet been proved; but never mind, he was immediately shown the door. Ironically, subsequent investigators cast serious doubt on the testimony of the hotel maid and the case against DSK was withdrawn.

The behaviour of the Fund’s board of executive directors, largely under the advice of the US government, exemplifies the duality of the American moral code — especially of the corporate sector. The Anglo-Saxon orthodoxy concerning sexual gallivanting, was the key factor in the rushed hustling out of Strauss-Kahn. As the Latinos would say, the silly English-speaking world takes sex much too seriously. The Lagarde affair, it would be claimed, belongs to a different genre and involves the natural urge for self-advancement. American corporate ethics seem to suggest that every individual possesses the basic right to try to maximize earnings. If this can be done through legitimate means, well and good. But there might be instances where bureaucratic whimsy or purposive delaying tactics on the part of a civil servant stands in the way, endangering a go-getter’s endeavour to complete a project on schedule and clinch a deal, which would add to his or her earnings. In such a situation, the offer of a bribe — ‘speed-money’ — to somebody in order to remove the hurdle was worthwhile and the authorities should look the other way when a transaction of this nature takes place. Conceivably, Tapie had placed some speed money or availed himself of some such mode of facilitation to swing the arbitration in his favour, and Lagarde, gladdening corporate hearts, had taken a light view of the matter.

What is considered relatively innocuous in a corporate-dominated advanced country need not be so in the instance of a poor country straining to develop with lean resources. For once the dividing line between corrupt and non-corrupt practice gets blurred, the fabric of social morality is torn asunder in a struggling country, and its economy, instead of advancing, could fast become awfully vulnerable to different kinds of hazard. If maximization of private gain is accepted as an acceptable ground for offering speed-money to a civil servant, the latter might use the same plea to fiddle public accounts or shower favour on parties, howsoever undeserving, in getting a contract. The consequence could be disastrous, grievously affecting implementation of vital development projects. Should the culture of speed money come to dominate the system, a citizen’s daily living might turn into a nightmare, trains could get derailed while running on substandard rails, power supply might break down every now and then because the output promised by the party offering the highest speed money would never get produced, high-rise buildings could come crashing any day since the foundation was built with grossly inferior material.

I.G.’s story symbolized the ushering in of an epoch of money-making through some means or another. Entering in her expense account the time spent to enjoy free lunch, and acceptance of that entry as legitimate by the IMF’s treasury department was only a trend-setter. Those with their eye on the main chance gradually become oblivious of the dividing line between the legal and the illegal. Even an oblique gesture of sympathy from powerful international bodies such as the Fund and the Bank, adds to the enormity of the moral debacle. True, corruption has indigenous roots too, but the Fund’s stance on the Lagarde scam furnishes the itch to cut corners with an aura of respectability.