Good evening and welcome to
the Marian Miner Cook Athenaeum.
My name is Isabel Lilles and I'm one
of the Ath fellows this year.
Corruption is an epidemic that plagues
societies all around the world
regardless of geographic location,
GDP or type of government.
Corruption is not just a bad deed
done by a handful of selfish people.
It is an issue so configured into our institutions
that it bleeds through all parts of the system,
incurring tremendous economic, social, and political costs.
It fosters all the things that makes
societies unhealthy and unstable,
including distrust, violence, and civil strife.
But with corruption prevailing in even
the upper echelons of our institutions that are
meant to protect and build a better society,
whose job is it to cure this epidemic?
Our speaker tonight will discuss what drives corruption,
why it matters and how the International Monetary Fund
combats it through its reform efforts.
Sean Hagan is General Counsel and
Director of the Legal Department
at the International Monetary Fund.
In this capacity,
Mister Hagan advices the Fund's management,
executive board and membership on all
legal aspects of the Fund's operations,
including its regulatory, advisory, and lending functions.
Mister Hagan has published extensively
on both the law of the Fund and a broad range
of legal issues relating to the prevention
and resolution of financial crisis,
with a particular emphasis on insolvency
and the restructuring of debt,
including sovereign debt.
Prior to his tenure at the IMF,
Mister Hagan was in private practice first
in New York, and subsequently in Tokyo.
He received his Juris Doctor from
the Georgetown University Law Center
and also received a Masters of Science
in International Political Economy from
the London School of Economics and Political Science.
As always,
I must remind you that audio and visual
recording is strictly prohibited.
Please silence and put away
your mobile devices at this time.
Along with our moderator for this evening,
President of Claremont McKenna College, Hiram Chodosh,
please join me in welcoming Sean Hagan to the Athenaeum.
(audience clapping)
Have a seat.
Thank you.
Sean, it's great to have you.
How does it feel to be in an academic
environment after getting out of the office
and off and away? It feels great,
it's really good to be here and it's
great to be doing this with you.
It's a lot of fun.
So let's start on the personal front.
I know our students are always interested
in what makes Sean Hagan a Sean Hagan.
Describe one or two special inflection points
way before you got involved with the Fund.
This is your 27th, 28th year?
28th year.
What happened in your life that was so critical for you
as a special growth moment to get to where you are today?
So I took a couple of relatively unorthodox
decisions that really shaped my career.
I was a history major
and when I was studying periods of history,
I was interested in economics.
I had this interest in economics.
Funnily enough, I'm really quite poor at math,
but for some reason I still liked economics.
When I went to law school,
I was finding myself fascinated by the intersection
of public policy, economics, and the law,
but I really didn't know how to translate
that into a career in any concrete way.
So I decided to do something which my
friends at that time thought was crazy.
I took a year off from law school
and went to the LSC to study, not law,
but actually international political economy.
It meant that I didn't graduate with my peers,
so it was a difficult decision.
But it was a good decision for me because
it was a decision that I made at the right
stage in my own intellectual exploration
and it convinced me that I wanted
to work in the international area
and for an international organization.
I would not have done that without that year.
A second inflection point came a couple of years later.
Again, it was an unorthodox decision.
Even though I wanted to work
for an international organization,
they weren't really that interested in me
and because
to be hired as a lawyer in these institutions,
you needed to have some experience.
I had no experience.
So they want you to work for a law firm,
three or four years at a law firm.
So I decided, okay, I'll go to a law firm.
Well, I moved to New York and I was a first-year associate.
Hiram, you've done this.
You work a lot of pressure,
but you work in a very small piece
of a very complex transaction,
and it could be a little bit frustrating.
Then I decided to do again something
that my friends thought was crazy.
I took a job working for a Japanese law firm in Tokyo
and I was the only foreigner in the firm.
How was your Japanese at that time?
It was pretty bad.
(audience laughing)
But I tell you what's interesting is that
English is the international language of business,
and therefore you are negotiating,
it could be a transaction between a
Japanese company and a German company,
everything would be in English.
So I decided to take it
and I moved to Japan for three years.
It was a wonderful professional experience because Japan
at that time was in some respects the way China is now.
It was the economic heavyweight.
So I did a lot of mergers and acquisitions work.
I was given responsibility that I
would never have received in New York.
Sometimes I thought they must be crazy to give me this
responsibility 'cause I didn't really know what to do,
but I learned on the job.
The other thing about it,
personally it was a wonderful experience.
I don't know if any of you have been to Japan.
It's a great culture.
It's a very different culture.
It's very very different from
anything that I have experienced.
I've lived in Asia before, but Japan was very different.
I became fascinated by the language,
and actually
asked my firm to allow me to take three months off
and I lived in a fishing village with
a Japanese family learning Japanese,
and ironically,
as I told you,
I had done all of this to work
for an international organization,
an opening came up at the IMF,
and ironically it was because of my
Japanese experience that I got the job.
So
the lesson that I took for myself
was sometimes it's worth taking a risk.
It's worth basically
making an unorthodox decision like that.
It certainly has helped me.
So math did not affect his career,
his fear of math. (audience laughing)
It affected many other things, but not my career.
And we always talk about lateral thinking,
but here we have lateral action.
He takes off to a fishing village so he can
improve his Japanese and take the national exam,
and that becomes the unexpected
reason. Exactly.
Or trigger for entry.
Yeah.
And the kind of career that you wanted to have.
So, set the stage for us.
When I was in college I didn't know the
difference between the IMF and the World Bank.
Our students I know have a great
grounding in international organizations,
but tell us a little bit about the
charter of the IMF. Sure.
What's there to do,
and then I wanna get into why is it focused on corruption.
Sure.
So
revealing my historical interest,
let me try to put it in historical context.
So the IMF, like the World Bank, like the UN,
was established at the end of the Second World War
and actually at that time really was an
explosion of international public law
which is the law that governs
relations between sovereign states.
The reason why it was an explosion was because countries
were willing to pool sovereignty in those days
and they were willing to pool sovereignty because
they had been probably sovereignty during the war.
As allies they had been on the battlefield together
and they were convinced that there needed
to be a pooling of sovereignty
to basically prevent the type of
national sort of behavior that existed
during the 30s that had led to the war.
These were individuals who were convinced that
unless they took bold action it would happen.
So there were two aspects
of the system that they created that are important
to understand for purposes of understanding the IMF.
The first was that it wasn't just
the creation of international obligations,
but the creation of institutions.
So these institutions became subjects of international law
and they had staffs that were independent from the states.
These institutions were charged with monitoring
the observance of these obligations.
The second aspect of this architecture was they decided,
"Let's create specialized institutions."
They could've come up with one, the World Organization.
They decided, "No, no.
"Let's have organizations that are focused
"exclusively on political problems, the UN,
"and then the IMF on economic,"
and that concept of a specialized agency has persisted.
In the IMF's case,
what they wanted to do was establish obligations
of members that would prevent the type of
economic nationalism that had existed in the 30s.
You may remember that The Depression
in the 30s was exacerbated by
competitive devaluation of your currency
which allows your products to
become favorable in terms of price,
that's one way of promoting exports
is to depreciate your currency.
So they created a fixed exchange
rate system to prevent that,
and this was the Code of Conduct,
but what's interesting was that the
IMF was charged with monitoring it.
You can only change your exchange rate
with the permission of the Fund.
So the IMF when it was set up was
primarily a regulatory institution
and that system lasted until 1971
when the fixed exchange rate system came to an end
and countries were given the freedom
to float their exchange rates.
One could have argued that maybe the Fund
should have gone out of business.
In fact I have a friend who when I joined
said that he joined the Fund in 1971
and he got the offer just before the float
and when the float occurred,
he had to write to HR asking whether he still had a job
'cause he thought the IMF was going out of business.
But what happened
was the IMF found a new lease on life,
not through its regulatory function,
but through its financial powers
because the IMF had large amounts of resources
that it provided to countries
that were having debt problems.
Now in the 50s, 60s,
there weren't significant debt problems
because the only finance around was public debt.
Governments would lend to each other.
But from the 1970s onwards,
there was the explosion of private capital markets
where individuals and corporations in one country
looking for a higher rate of return
were lending money to emerging market who were
looking for savings from other countries
because they didn't have enough
of their own to make investments,
which is a great idea, it's very efficient,
it allowed many emerging markets
to develop their capacity,
but like everything else you can
have too much of a good thing.
Countries would over borrow
and lenders would not realize when they should stop lending,
and suddenly these countries could not repay their debt.
The IMF created a role for itself,
I think that's the only word I can use
during the Latin American debt crisis,
where it essentially brokered solutions between
these sovereign countries in Latin America,
starting with Mexico and the private lenders.
What it did
was it would lend a significant
amount of money to these countries,
but in exchange for them,
taking the reform actions that were necessary
to fix the underlying problem,
and in exchange for that,
the private lenders would reschedule the debt.
It became known as the catalytic role that we would play.
Our analysis of the problems,
our endorsement of the program, plus our money,
would allow a country to regain
access to the private markets.
That's essentially been what we have
been doing for the last 56 years.
So you had pooling of sovereignty,
you had at one point the globalization of capital.
Yeah.
You have this
unwitting interdependence,
and then you need an arbiter to come in
and help people work out when things go bust.
Now how does that relate to corruption?
Is it that corruption was considered
just a kinda domestic issue
and because of the greater global
interdependent of our economies,
all of a sudden corruption itself rises
to a level of international significance?
Is that what explains
the massive attention to corruption say from the late 90s?
Okay.
So
inherent in the Fund's establishment is the concept
that when one country
basically adopts and implements policies,
there's a potential spillover effect on other countries.
That's the underlying assumption.
Of course that interdependency has
just gone through a multiplier over the years.
One of the
major concerns of the Fund has had for a while
is that when you look at
policies that make a real difference,
what you want to do is to have countries
that are adopting policies that
what we call are sustainable, inclusive growth,
not explosive growth that can create volatility,
but sustainable inclusive growth,
and the word inclusive,
meaning
growth that basically does not create excessive inequality.
Because inequality in and of itself,
it's not a moral position we're taking,
we're just making the observation that
excessive inequality leads to instability.
So we look at a number of factors that
lead to sustainable inclusive growth
that creates stability in the country,
and therefore devoids adverse spillover effects.
Over the last 15, 20 years,
we've looked at a number of factors
that influence sustainable inclusive growth,
and one of them is corruption.
Why is that?
So let's unpack it a little bit.
We're not talking about
occasional transactions or even high-level transactions.
We're talking about where corruption
has become systemic in the economy,
where it's no longer the exception to the norm,
it is actually the norm itself and behavior.
When it's embedded,
it has a profound effect on sustainable inclusive growth.
For example,
one of the state's principal obligations
is to
raise money
and spend it.
When corruption is systemic,
it completely debilitates that capacity.
Tax administration.
When you have essentially complicity between the tax
collectors and wealthy tax payers
and they don't pay their taxes,
it de-legitimizes the entire tax system.
I've been in countries where
I'm in a cab and I ask the cab driver,
"Do you pay your taxes?"
He looks at me in the rearview mirror,
"You expect me to pay my taxes?
"All these wealthy businessman, they don't pay their taxes.
"Why should I pay my taxes?"
Of course that
creates incredible fiscal vulnerability
and instability that can lead to debt crisis.
One example.
But it's even worse on the expenditure side
because it distorts the expenditure decisions.
Instead of a state spending money on the types of things
that we know are critical for sustainable growth,
education,
health,
they'll spend it on a fancy new conference center
that generates kickbacks.
So you can see it distorts expenditures
and some of the most corrupt
countries have massive overcapacity
in infrastructure because that's
the way you generate kickbacks.
Another area is investment.
One of the major responsibilities of any state
is to attract and regulate investment.
But
if corruption is systemic, it's a tax on investment.
It's an extra cost, but it's even worse.
It creates so much uncertainty that
it will actually deter investment.
There is this myth that CEOs
say, "Well, you know the only thing worse
"than an inefficient corrupt government
"is a clean and efficient corrupt government
"because at least with corruption,
"you can get things going."
When you talk to major CEOs,
you realize that that's rubbish.
They do not want a situation where
they invest a large amount of money
in an oil refinery, for example, in a country,
which is a huge capital injection,
only to know that they might be subject to extortion
for kickbacks throughout the life of the company.
They would much prefer to invest in a country
that might be a bit more expensive,
but where they have predictability in operations.
There's a lot of empirical evidence
that shows Hiram the extent to which
systemic corruption basically reduces
both domestic resource mobilization,
but also foreign investment.
Final point I would make
which is perhaps the most relevant for this group is
it has a debilitating impact on the youth
because when corruption is systemic,
it really undermines the incentive to get a good education.
Why is that?
Because
it matters less what you know, it matters who you know.
If you're living in a corrupt country,
everything is based on relationships,
merit is less important,
so it reduces the incentives for
younger people to get education.
There was a survey done about three years ago,
and they asked the youth around the world what they saw
as being the single biggest problem?
They ranked corruption ahead of poverty
because they were wise enough to realize
that corruption actually for many countries
is the cause of poverty.
Right, and it's not only role that people play in society,
it's actually getting access to education
which itself often is-- Exactly.
An opportunity for someone to extract a rent.
Exactly.
This is the point,
it exacerbates inequality
because the people who normally
are the most vulnerable who depend
on services so they can get that leg up,
they don't get that because the money is spent elsewhere.
So
when you look at
the alternative theories for
what drives it, what causes it,
you have everything from the political theory,
basic power corrupts,
and it's all about the concentration or monopoly of power,
and the bargaining ability of people
not to be able to overcome that,
you have economic theories of just risk-benefit,
and then you have ethical theories.
In your work,
in trying to just understand what drives it, what causes it,
what primary framework do you think the IMF uses or do you
use professionally to understand its underlying causes?
So here
is where
we try to be
pragmatic and humble which is,
I've read a lot of the literature that you mentioned
and I think you could have an endless debate
about what the anthropological
and social causes are for corruption,
and I think there's a lot of truth in many of them.
For the Fund
where we've reached a consensus that
this is a huge barrier for countries
the question is, "Okay, What do we do about it?"
It's really a complicated issue and
it's really important that you approach it with humility.
Let me just share some observations with you.
The first thing,
and this was something that was said by somebody else,
which is that
corruption is a crime of calculation.
It's not a crime of passion.
So what you need to do
is to change the incentive structure.
So
from a lawyer's perspective,
you naturally think, well,
what's the most important incentive
that you need to bring to bear to stop corruption?
Look, we haven't talked about this, Hiram,
but one of the questions is,
what is the definition of corruption?
'Cause you can have a
long discussion on this. Right.
To be simple,
corruption,
everybody accepts the idea that it's the
abuse of public office for private gain
and the abuse can range from a broad,
we were talking about this with the students over dinner,
it can be ethical,
but everybody agrees that
criminal activity is corruption, at a minimum.
We're talking about bribery,
embezzlement.
People understand that as corruption.
Well the best way to address this issue
is to have a credible threat of prosecution.
People understand that and will react to that.
I have to tell you,
when I first got into this work as a lawyer,
I kind of reached for that lever.
I have learned that this is,
you need to have that,
but you can't over rely on this.
Why?
First of all,
if you rely excessively on putting people in jail,
there is a risk that an anti-corruption strategy
just becomes a political strategy
and it's the current administration
putting the previous administration in jail.
So I have realized that while you need
to have a credible thwart of prosecution,
you need to have a broader
regulatory and institutional reform
that creates other incentives for good behavior.
Let's just go back to the
crime of calculation.
Yeah.
This is the economic theory of corruption.
One of the things that I observed when I was
doing some work with you in Indonesia is that
often people don't understand how coercive
the practice of corruption can be
when an organized crime is involved.
So you'll recall that the first judge to take Tommy Suharto
to trial and to convict him was killed
and Tommy Suharto was later convicted for that murder.
Yeah.
And so it really struck me that we think about
it a sort of a blank slate of calculation,
when actually the refusal
to participate in a bribe can
leave someone vulnerable
to violence. Absolutely.
That's one.
Second,
on the
extreme repressive approach to corruption,
the other problem in addition to the abuse
because that is a common narrative,
new regime comes in,
puts a bunch of people in jail because what?
Because they're corrupt.
But the larger problem is that
when you create such high stakes for corrupt activity,
you risk corrupting the process to
hold someone corrupt-- Yes, exactly.
Because money will talk.
Yeah.
So this is something that's always puzzled me though,
like if
we don't really have to understand the underlying causes,
what explains, again, in the case of Indonesia,
someone we worked with refused a $200,000 bribe,
one of the first bankruptcy Supreme Court appeals,
refused it, why?
What was it?
What was that ethical threshold that that judge
had reached that maybe many others in Indonesia
who'd been under Suharto's thumb weren't capable?
Yeah.
Well, I don't know what it was,
but I don't think it was because he felt that there was a
threat of sanction. Right, right, right.
It was an internal--
It was internal one, and so the question is,
I mean, and this is,
I have come to the conclusion that at the end of the day,
what we're trying to do is
create institutions inasmuch as we're
trying to create civil service
that actually is proud of being sort of independent
from both private influence and public interference.
Yeah, so--
So in a positive norms,
rather than in terms
of negative incentives. So this is a very
pragmatic approach to say,
"Gosh, we don't really understand nearly enough,
"and we're not gonna spend a lot
"of energy trying to understand.
"We're gonna just treat it as a phenomenon."
Yes.
So now what are the approaches to this phenomenon?
So let's go back to your
tax example. Yeah.
People will not pay taxes if they think
their neighbors are not paying tax,
even the very wealthy, especially.
People will pay taxes if they think
people around them are paying tax.
People will engage in corrupt activity,
petty corruption, petty bribes,
if they think everybody else is doing it.
So from a Fund perspective as you think about this in terms
of governmental authority or the private sector trying to
influence and interfere with impartial decision-making,
what are the primary strategies for turning that around?
Okay.
One of the critical ones is leadership or individuals.
You mentioned
the judge.
We're on Indonesia a lot,
but there are other countries where
this has happened where you have
somebody coming in
who is willing to take the risk to shake up the system.
In Indonesia, for example,
there is a former Minister of Finance,
Sri Mulyani Indrawati, who I knew very well.
She became the Minister of Finance.
She had been in an NGO for many years.
She arrived in the ministry and essentially made it
very clear that there was gonna be zero tolerance
and that ministry was one of the most corrupt,
in part because there were excessive rents
and bribes in the customs administration.
So she fired everybody.
She didn't prosecute anybody,
but she fired everybody in that unit.
She made it clear
that there was zero tolerance for corruption.
She also reached out to the private sector and said, "Look,
"I know the reason why you've been bribing
"customs officials because of
"the ineffectiveness of our customs administration.
"So we wanna partner with you.
"We promise to basically streamline our regulatory framework
"to allow for more efficient customs administration
"as long as you commit not to bribe."
There was a list of companies who took the oath.
It's amazing, but corruption came down significantly.
So this is one of the things I wanna,
you have to realize you can't
approach this issue exclusively
by looking at the demand-side.
You've also got to look at the supply-side.
In other words,
for every bribe that is taken, one is offered.
So you have to also look at
finding ways to discourage the offering of bribes,
and also finding a way of avoiding,
'cause this is a big problem, Hiram,
a lot of corrupt officials
wanna conceal the proceeds of their corruption
and they use accounts and in many advanced economies,
including the United States, to conceal their wealth.
So there's efforts that needs to be taken
in countries like the United States
to prevent that from happening.
So at the lower levels of the civil service though,
did she also have to change the whole approach
to HR to-- Yes.
Performance culture?
Because frankly, in a lot of societies,
public officials,
it's the only way for them to put bread on the table.
I was doing some work with
the Attorney General's office in
Afghanistan and
a prosecutor in Kabul was making
just over poverty wages.
There's just no way to survive
without actually taking a tip.
Actually, it was like a bar.
It went into a jar,
and then it was shared equally with the office.
Economically speaking,
there's not that much of a difference
between that tip and paying a fee,
a license fee. Exactly.
So it could have been legalized, brought above the table,
right? Yeah, so--
So you have to deal with
the people who are working particularly
at the lower levels of civil service
to make sure that there's a performance culture
and also that they can actually make a wage to
be able to raise a family.
Absolutely.
So a major element of any anti-corruption strategy
is to basically address compensation in the civil service.
There are a number of examples of
where that has played a central role.
One country in particular where
the issue of leadership and compensation
played an important role is Singapore.
Singapore, when it was part of Malaysia,
was one of the most corrupt regions in the world.
Lee Kuan Yew comes to power
and he introduced a sort of
zero-tolerance anti-corruption strategy
and had a number of elements.
It had a repressive element.
There was strict penalties.
There was a leadership quality.
He had an incredibly frugal lifestyle
and he basically made it clear
that if you wanted to succeed,
you have to replicate that.
But the third thing is that he dramatically increased,
dramatically increased salaries in the public service.
He would say,
"Yes,
"the public servants in Singapore are well-paid,
"but they are not rich
"like public servants in other countries."
So I agree with you.
There was a major reform in Georgia recently also where
they essentially dismissed a significant portion
of the police and the prosecutors,
but at the same time increased the salaries significantly.
So we've got leadership, we've got zero tolerance,
we've got looking at both sides of the equation.
What else?
Tell us a little bit about
the efforts to grow more transparency?
Yeah.
So
this is an important component because when you think
about where the opportunities for corruption are,
they are when a public official has the power to grant
a permit or a license.
Well,
that power exists
in a significantly way in an over-regulated economy.
In fact, in some countries,
excessive regulation is there
because it provides an opportunity for rent seeking.
Now,
the solution isn't deregulation,
I mean we're not talking about,
nor is it getting rid of discretion.
I mean you need to have discretion in key areas
whether it's bank resolution, bank supervision, whatever,
but there is a real
benefit of streamlining regulation and, in particular,
and this is one of the big promises of technology,
of using technology to create transparency
in the exercise of discretion.
For example,
we talked about a customs official in Indonesia.
Now you can do your customs application online.
You don't have a middle person
who's gonna use that as an opportunity to extract rent.
So,
the regulatory reform piece to this
is a huge part of the solution.
So when the IMF talks anti-corruption,
does it help or hurt internal anti-corruption efforts?
I mean the Fund is a controversial institution
in a lot of the world. Yeah.
So tell us a little bit about
the political dynamics of an IMF agenda in
a location that may not have the greatest view of the IMF.
Yeah, so that's a good point.
So,
there's two elements to this.
I mentioned that we have a regulatory and a financial role.
So the regulatory role changed with the
collapse of the fixed exchange rate system,
but we continue to do something
which is called The Article IV.
Th The Article IV is
all countries are required to basically
be audited by the IMF every year
and that means we do an analysis of their economy,
what policies are supporting sustainable inclusive growth,
which ones are not.
That includes the United States.
It includes emerging markets.
Remember, the IMF is not a development institution.
So it is an institution that basically provides
policy recommendations to all countries.
So in the context of that regulatory,
we will
assess whether or not there's a corruption problem,
and if there is,
we will give our views as to how severe it is,
how it's impacting, and that will be published.
The country may like it or may not like it,
but it's too bad because that's
part of our regulatory function.
Where it gets more complicated is
when we're wearing our financial hat.
There are countries coming to us asking for assistance
and there we are being a bit more intrusive.
We're saying,
"In order for you to receive our money,
"you're gonna have to introduce reforms."
This is the conditionality that is often controversial.
My known experience
is
that often when we are intervening,
particularly in a crisis,
it's not the IMF agenda versus a country's agenda,
rather it's the IMF coming into a country that's in a crisis
and there are important reform elements in that country
that have been asking for reforms
for an extended period of time
and see the crisis as an opportunity
to basically breakthrough vested interest in the status quo
'cause what blocks change is vested interest,
vested economic interest
and corruption is a huge barrier in that respect.
So often the ones that are asking for our programs
to have this element or that element are in fact
civil society or others in that economy
that are basically making the difference.
So that doesn't mean it's not sensitive.
All I would say also is that
people are willing to talk about this openly now.
20 years ago, you wouldn't even use the word corruption.
You would use the word governance.
Now people will are willing to talk about it
because I think people recognize
that it's as problematic as it is.
In your experience when you've
in some ways partner with
internal groups-- Yeah.
Or individuals,
what comes to mind as the most promising sector that you've
worked with that has really driven change from within?
That's a great question.
So,
you remember Hiram when we were,
so Hiram and I did some work together
in Indonesia a number of years back and
we created an anti-corruption commission.
The reason why we created this
was because we couldn't rely on
the police 'cause they were corrupt,
we couldn't rely on the prosecutors
because they were corrupt,
and we couldn't rely on the court system
'cause it was corrupt,
so we had to create a self-contained
investigative, prosecutorial,
and judicial body
anti-corruption commission.
Now the problem with this,
and actually it received a lot of support from society,
the problem was,
so you create this on paper,
but why is it gonna be any (chuckles) different?
The difference was,
and this is what I think was
critical for the reform in Indonesia,
and I think in Indonesia has made a lot of progress
was that civil society.
The NGOs
that had been throwing stones regularly
at the government because it was corrupt
decided that they were gonna take a risk
and take leadership positions in these
new institutions, and they did.
Now the anti-corruption commission
in Indonesia is extremely intrusive.
I mean you'll sharpen my memory of it,
but as I remember it,
it was a bunch of 25 and 26-year-olds.
Some of them were.
I mean they were really outstanding.
I mean absolutely
fearless-- Yeah, yeah.
In terms of what they would
take on. Yeah.
And
extremely technically effective.
Yeah,
and the same thing is going on
right now in the Ukraine where we have
another significant anti-corruption program
in place and it's civil society.
In fact,
one of the things that
we really pointed out to the point where we actually
held up our financing for this specific issue
is we wanted to ensure that the law required
civil society to play a role
in the selection of the individuals
who would actually be appointed
to the anti-corruption commission.
So one last question before we open it up.
So I remember when we were working together in Indonesia,
the IMF's role in judicial reform was controversial
because-- Yeah.
That belonged to the World Bank.
Yeah.
So you've always struck me as someone
who really take stock of the institutional
context in which you're working
and obviously the IMF is not alone
in working on anti-corruption.
So reflect a little bit on your competitors,
or your partners, (Sean chuckling)
the other institutions that are trying to get into
the same space in various ways and how much of a
coordination and political challenge that can be.
Yeah, it is.
It's a challenge,
not necessarily because
we're competitors,
but because
we operate
with
different constraints.
In other words, in the Fund,
we are
in a crisis mode
where countries are desperately trying
to regain the confidence of the capital markets
and they need to basically show that
they're serious about what they're doing,
even if it takes a while to implement,
they're serious about what they're doing.
So we tend too, how can I put this,
we tend to operate in the Fund with a
degree of discipline
and focus.
The bank basically is a development institution.
It has a very long time frame,
and therefore the gestation period
for many of their projects is very long.
The key to success is, in terms of partnering,
is where we come in, we identify where the weaknesses are,
we basically provide leadership in the design,
but let the bank take the lead in implementation
because they're the ones who have,
I mean, for example,
in many of these countries,
the IMF may have an office of one or two people.
The bank has an office of 100 people.
It's true that the amount of money that we're
bringing to the table vastly outstrips the bank
in terms of we're helping the whole country stay afloat,
while the bank is just doing specific projects,
but the bank's institutional long-term investment
is critical to success.
So one of the things that we're doing more
and more now is actually partnering with the bank
and the other regional development banks
for them to essentially implement
the type of institutional and regulatory
reform that I'm talking about.
Fascinating.
Well, let's open it up for some questions.
(audience clapping)
(claps) Thank you.
Please raise your hand if you have a question.
As always, priority goes to students.
Yeah, good.
Thank you so much for your talk.
So you spoke a little bit about the temptation to pull kind
of the effective-prosecutorial-threat lever a little bit
at least as far as the demand side
goes for bribes by public officials.
But at least in the United States,
we have the Foreign Corrupt Practices Act.
Yeah.
I was wondering if you see that
as an effective kind of supply-side weapon
for corrupt, I guess for the offering of bribes,
and if you could apply them a little bit about
how that's affected your work at the IMF.
Yeah.
So,
actually in this area, the US was a leader.
The Foreign Corrupt Practices Act was really
the first comprehensive legislation
enacted by an advanced country
to criminalize a bribery of foreign officials
and it really did set the standard
and it was followed by the OECD,
the Organisation of Economic Co-operation and Development,
creating an anti-bribery convention
that kind of replicated it and all OECD countries
became signatories and the OECD not only
requires them to adopt the legislation,
but they actually monitor the implementation.
They actually monitor the extent to which
countries like the United States are actually
enforcing through prosecution, so it's a very,
and the US took a leadership position.
The area where there's room for improvement in the US
is on the other end.
I mentioned this, you've got the supply-side,
but then you've got the corrupt official
who wants to park the money somewhere,
not necessarily in his or her own country,
but in a financial center.
There is a standard that's been adopted,
it's called the Financial Action Task Force,
it's the anti-money laundering thing,
and there I think there's a recognition
that the US has got a ways to go.
Why is that?
Because, and this goes back, Hiram,
to the issue of transparency.
One of the best ways to prevent
public officials from trying to conceal their money
is to require the banks who are providing the services,
a Citibank in New York or whatever,
to require
whoever is sending the money to reveal
who the real beneficial owner is,
rather than a dummy company that's where
the directors are like lawyers who,
but to require the beneficial ownership disclosure,
and there the US has a ways to go.
It's not an issue, primarily of federal law,
it's an issue actually of state law,
Delaware
and Wyoming,
that basically I think there's
a recognition have a ways to go
to require the type of transparency that's needed
to allow for the prosecution of money laundering,
which is what this is.
So that's an area where I think more needs to be done.
Yes.
Thank you so much for coming tonight.
As President Chodosh's last question sort of got to,
you briefly spoke to ways in which the IMF
is working to cooperate with other international
institutions in different countries.
I was curious if you comment perhaps on
efforts by primarily the Chinese,
but other countries as well,
to create perhaps competitor institutions to the IMF
and its sister organizations in international arena
and to try and sort of use those
rather than what they see as Western institutions.
Thank you.
Yeah.
So,
we talked a little bit about
growing interdependence in a global economy
and it's not surprising that that interdependence
occurs at different speeds
and that there certain regions
that integrate faster than others.
When a region integrates
in way that's at a certain point,
they wanna create their own institutions
and those institutions will basically do a number of things,
the Eurozone, for example,
basically its own monetary policy in currency.
Increasingly,
those regions also wanna have their own crisis institution
can provide financing, like the Fund.
Why, why is that?
Because they can control the decision-making.
In the Eurozone it means that,
for example with the emergency stability mechanism,
which they wanna translate into the European Monetary Fund,
it means that the decisions are made by Eurozone countries.
It does not include the US or other
countries voting on a European program,
so it's understandable
that when you have regional integration
there is a desire to set up mini-IMFs.
From the Fund's perspective,
whatever we might think about it,
we're not gonna change that.
So what we try to do is
basically cooperate with these institutions
in a way that basically helps them.
I mean, for example,
the Eurozone crisis is a good example
where essentially the institutions had not been
fully formed by the time of the Eurozone crisis
and the market did not have a great deal of confidence
in their ability to design conditionality.
We came in because we had some capability in that space.
But over time I would imagine as these
institutions continue to develop in Eurozone,
they will gain their own credibility
and we will become less relevant.
I think it's something that we have to accept.
The same thing is happening, for example,
in Southeast Asia with the Chiang Mai Initiative,
some of you may have heard of that
which is amongst the Asian
where they're pooling their financing
to deal with potential crisis.
I think we accept that.
It's interesting, these countries in Southeast Asia,
they have this mechanism,
but in order to activate it,
you have to have a program (chuckles) with the IMF first.
So I think we will still be relevant,
perhaps our financial leverage
will not be as strong as it has been,
but I think we will always have a role.
Hi, thank you for your talk.
My question is about the,
so you mentioned that if a state is in crisis,
then it has to meet certain
requirements and conditions set by
the IMF to be able to be bailed out.
Are these requirements like about institutional reforms
to address the country's corruption
or is it like just like short-term,
once it meets the standards and then
gets the funding to solve its crisis,
and then when the IMF left,
will it be able to switch back to the
old path of the way they're operating?
Thank you.
Yeah, that's a great question,
and it's kind of more general.
So,
when a country approaches the IMF,
it's having what we refer to
as a balance-of-payments crisis.
What we mean by that is that
the foreign exchange that it earns
from its exports in goods and services,
or that it gets from borrowing
is not enough to pay for the imports that it wants
or the money that it has to pay back.
It doesn't have the hard currency.
What's happened is that it's come to us because
it used to be able to refinance its debt
and suddenly the banks are saying, "No, no.
"We don't wanna refinance you 'cause
"we don't think you can pay back,"
so it comes to us and what we recommend
will depend on what we see is the source of the problem.
So we don't have a one-size-fits-all conditionality.
It's not a single computer program.
In some cases,
it's a question of the country
actually having pretty good institutions,
but they just went on a spending binge
and they have to cut back on their
expenditures so they can make ends meet.
In other countries,
the balance-of-payments crisis isn't
because they were spending too much,
but because they were earning too little.
Their economies were not sufficiently competitive,
they weren't able to export enough.
The conditionality their often involves
deeper more structural changes in the economy
to make the economy more competitive.
So the nature of the reform
depends on the nature of the problem.
Some people refer to it as austerity,
but the reality is is that when countries come to us
they often come to us as a last (chuckles) resort,
so inevitably they associate the IMF with that pain.
In fact in the Asian crisis, it was known as the IMF crisis.
We were actually identified as causing the crisis,
when in fact what happened was they came to us
and the medicine that they had to take was painful.
What we try to do is to get countries to come earlier on,
but that doesn't mean that the IMF doesn't make mistakes.
We do,
and the reason why we make mistakes is in part
because we have to respond in a crisis
were you have limited amount of information
and you're often left with choosing
between very bad (chuckles) policy options.
In retrospect when everything is unfolded,
you've realize that fiscal policy was too tight.
We should have basically let the
exchange rate go a little bit more.
There's a lot of ex-post
analysis that we do.
We have an independent evaluation office
that is excruciatingly critical of our
programs when we get it wrong.
All I would try to say is we're pretty transparent about it.
All of the IO reports are published
and it's probably our harshest critic,
and we try to learn from the last crisis.
The problem with crises is that
they're never the same (laughs),
so often we learn the wrong lessons,
but I do believe we're getting better at it.
Thanks for your talk.
So you said the IMF kind of acts as a land
of last resort and says that, "Oh hey,
"undertake these reforms and in return
"we'll pushback the private debt schedules,"
or something of this sort.
Yeah.
Recently banks have a new option.
(mumbles) capital management came in
and told a bunch of banks that,
"Hey, give me your banks.
"I'll take on your debts,"
and they have a new recourse mechanism.
They managed to get the US codes to say,
"Hey, those in the government,
"you need to pay back what they demand
"and only then can you pay back other debt holders."
So given that that precedent has been set,
how do you think the IMF would deal
with vulture capitalism of that sort?
Yeah.
So,
okay, this is a great question.
So let's bring everybody else up to
speed on it 'cause it's important.
So we talked about the Latin America debt crisis.
So Latin American debt crisis was as painful as it was,
there was a certain
predictability about how to resolve it.
Why is that?
Because you had a sovereign country
with a handful of banks.
These banks were like Citibank,
whatever, Chemical Bank,
some of these things are (chuckles) gone now, but anyway.
They had a long-term interest in negotiating
with these countries and finding a solution
because they had businesses in these countries
and they were also subject to the
regulatory suasion of the United States,
and the United States is one of our biggest shareholders,
so the the United States were able to get agreements.
So these debt reschedulings,
these debt re-struk-syuns were relatively straightforward.
What happened however was international finance moved on
and instead of sovereign borrowers borrowing from banks,
banks were cut out of the picture and you had,
they issue bonds
and that changed the dynamic fundamentally.
Why is that?
The classic one was Argentina
which is where the vulture-fund litigation started.
Argentina basically had
three or 400 different bond issuances
in eight or nine jurisdictions
and thousands of bondholders.
These bondholders were not subject
to any regulatory suasion.
They had no long-term interest in these countries.
They had one objective
and that's to maximize their value of their claim.
If that meant suing the country
and playing hardball, as you've just suggested,
that's what they would do.
So one of the huge challenges for the Fund
was how do we basically create a framework that allows
debt to be restructured with these type of actors?
These vultures would buy the debt on the secondary market
for like 20 cents on the dollar,
and then litigate against a sovereign.
Now some of the vultures were actually very constructive
because if you bought it at 20,
you're gonna be willing to do a deal at 40.
So actually some of them were able
to play a very constructive role,
but some of them would play hard roll.
So we had a big debate
in the public sector
for several years back in the early 2000.
It was one of the most sort of important periods
of my own career where we tried to reform the system
to create a form of bankruptcy for sovereign debt.
The IMF put out a proposal where it would amend
its own charter to replicate US bankruptcy,
and as many of you know,
this issue arises with companies as well in
the United States with vulture creditors.
The way you resolve it in bankruptcy is the law says
that if you can get a majority of creditors, 2/3,
to agree on a deal,
you can make it binding on everybody else,
so you bind the vulture in.
We proposed to do something like that
and we drafted an amendment to the Articles of Agreement.
But I mentioned to you seven years ago
there was a willingness to pool sovereignty.
Well, no longer.
So the US would not accept that.
What we did instead
was we replicated these bankruptcy provisions,
but through private contract
so the bond agreements themselves have these provisions.
One of the big questions that's
going to arise in the next 20 years
is whether or not private law
is gonna be an adequate substitute
for what is a public law issue,
and we will see over time.
So you touched on or you touched on this
a little bit in your answers to your previous questions,
but my like very vague understanding of the IMF is
or how the IMF is funded is primarily through
this quota system and contributions
from its member countries.
That being said, when the IMF decides who to loan to,
is that process at all politicized or does it have
to be politicized because of the member countries?
If not,
what sort of benefits are member countries
getting from contributing to the IMF?
Okay, so, yeah.
So, good question.
So the IMF has a quota system.
What happens is when you become a member,
so let's start,
the members of the IMF are sovereign states.
So when you become a member of the IMF,
you're given a quota.
The quota is based on the size of
your economy in the world economy,
and that determines your voting rights,
how much money you can borrow if you want it.
So in some respects,
the IMF is more like a corporation in terms of this idea of
your voting rights depends on how much money you put in.
That's the way.
It's not one country, one vote.
The US is the largest shareholder, about 17%,
but we've done a lot of reforms right now.
All the BRICS countries are
actually the top 10 shareholders.
So China is actually now number three,
will soon become number two.
So there is a sense that politically, at least,
the IMF has gone through a transition in terms of ownership.
In some respects,
this is a crisis that existed not only for the IMF,
but also, for example, the UN,
where you have the Security Council,
the veto, the permanent veto.
The Security Council is criticized because the permanent
veto is occupied by really the victors of World War II,
and there's a sense that they knew to move on.
I think the IMF is in some respects one of the most
modern institutions in terms of governance
because it's been able to shift
voting power towards emerging markets.
But your question is about
not necessarily the distribution of political power,
but almost how you insulate it
from the decision-making process.
So
in the Fund
you really have two sources of legitimacy.
One of them is the political legitimacy
that we just described.
The countries feel like they have a vote
that represents their voice.
China feels like, "Hey, I am number three,
"soon to be number two in the IMF,"
"that's appropriate,
"therefore this is an institution
"that's worth me devoting some energy to."
But what's another source of legitimacy in
the Fund is the independence of the staff
which gives it its intellectual legitimacy
because what happens at the Fund is that even though
a lot of the decisions are taken by
the executive board, which is political,
all the analytical work is done by the staff who
owe an exclusive duty of loyalty to the Fund.
The trick is
to combine the two.
If we just had to the staff and we didn't have the board,
we would just be a think tank,
but because you have this board,
one of the most difficult parts of my job
is trying to keep the board and the staff in balance
and to avoid staff decisions being politicized.
So the staff are basically trying
to make their best case on the analytics
rather than basically trying to
second-guess where the political is.
It's a really difficult process,
but I think that the two together,
when they work effectively,
actually make the institution work well.
Hi,
thank you again so much for coming to speak with us tonight.
You mentioned earlier that you hoped many countries
would come before the IMF or the lender of last resort.
So there's a whole field dedicated to what
kind of indicators show sovereign debt problems,
but how do you personally start to evaluate
a potential sovereign debt problem,
be it foreign direct investment flight
or credit-rating agencies on sovereign debt,
where do you start to see those indicators
kind of vary in what they tell you
and how does that inform your decision-making?
Yeah.
It's really tricky because,
so,
if you were to talk about a company
being insolvent,
the way you measure that under most systems is you look at
the value of the assets and the valuable of the liabilities
and you know a country is insolvent when the
value of the liabilities exceed the assets.
The problem with doing that in a (chuckles) sovereign
is that the assets are at least theoretically inexhaustible
because the assets are the taxing power of the country,
so theoretically a sovereign can
continue to tax and raise money.
So the judgment as to whether or not a
country is insolvent or becoming insolvent
is a judgment about how much a country can tax
before it becomes counterproductive.
What do I mean by counterproductive?
The revenue you get from taxing,
if you tax too much,
you destroy growth and growth destroys your revenues.
So it becomes actually counterproductive.
So it's a judgment about the sustainability of the debt,
the long-term sustainability of the debt.
We've invested a lot of time and energy
in coming up with models on sustainability,
but at the end of the day,
it's more of an art than a science.
Sometimes we get it right
and sometimes we get it wrong.
Thank you for the talk.
Earlier on, you talked about Article IV,
which is all the members of IMF have
to accept to be audited once a year and
you make it public to the whole world
the results of what came out of the audit
and it's so crucial to some of the countries
who get foreign investments because
if they get good results on new publication,
of course they would get more investment in that country.
So how effective is that audit-ion?
Like the audits that you do in those countries,
do you have officials there who do those audits?
So it's
people who are there already who do the audits
because like there are countries that depend or
they're foreign like investment depend on those
publications. Yeah.
So, it's a great question.
I really believe that even though a lot of people focus
about the Fund as a crisis institution and the money,
the point that you've raised is so critical because
these audits that we do are about crisis prevention,
in other words,
basically raising flags at an earlier stage.
In some respects,
the anti-corruption reform that we're doing now
is designed as an example of increasing
the effectiveness of these reports
and it's not just corruption.
In other words, if I can give you an example,
one of the things that was quite difficult for us
was just before the Arab Spring.
We had done some The Article IV's
on some of these countries
and from the perspective of monetary policy,
bank regulation,
fiscal policy, the countries looked fine,
but clearly there were some deeper structural problems,
enormous sense of inequality,
of exclusion in the society that
we missed in the The Article IV.
So increasingly now the desire is not to just look,
when we do an Article IV,
at some of the short-term, medium-term issues,
but look at some of the long-term issues
that can affect the viability of a country.
Corruption is one of them, but inequality is another one.
Another one is gender.
The Fund has done a lot of work on gender inequality,
demonstrating the extent to which
policies that don't support gender inclusion
in the workplace can have an enormous impact
on sustainable growth in the long-term.
I mean, for example,
if you read our Article IV for Japan,
a lot of it is about promoting gender equality in Japan.
We'll take one more question.
Hi, thanks for speaking today.
I had a question about the monopolistic competition
that you observed in certain countries.
I was wondering if you've ever seen situations
where it's been a primary driver of corruption
and particularly how you go about
measuring that, quantifying that,
and then especially like prescribing a solution for a
private sector problem which seems kind of difficult to me.
Okay.
So,
there's the private monopoly issue
and then there's what I call the cartels that
are created through excessive regulation.
The latter one is one where we are actively involved,
where we basically,
because an excessive regulation often is for the benefit
of certain industries that have an enormous amount
of influence in the legislative bodies.
I can say this, for example in Greece,
one of the biggest problems in Greece
in terms of making it a competitive economy
was the extent to which it was excessively
regulated in so many different areas
principally to avoid competition
to the benefit of vested interest.
That's something that we take on.
Private monopolies
that are basically the result of
growth in industry is something which
we traditionally have not looked at,
but I can tell you it has become an emerging issue,
particularly in the tech industry
and particularly because we now have an emerging issue
about tech companies that operate globally,
but the public policy response in terms of dealing
with monopolies are really not in sync,
for example, between the United States and Europe.
Google was subject to significant antitrust action
in Europe, but not in the US.
The reason why we're concerned about that
is that it may become a proxy fight
in a type of investment trade war where
the US may feel that Europe is doing this
because Google is an American company.
So one of the things that we are really
interested in doing is creating some harmonization
as to the way different jurisdictions
handle the issue of monopoly.
Right now,
I don't wanna go into this in too much detail,
but
the antitrust objectives in the US in terms of policy
right now are different from what they are in Europe
which takes a much more aggressive attitude about that.
So one of the questions is,
in an interdependent world,
we come back to Hiram's point about interdependence,
we need to create greater harmonization
because these companies operate globally,
and therefore we need to find a global response.
The IMF's done battle in Seattle before,
but this question gives it a whole new meaning.
So we'll have Sean come back (Sean laughing)
and talk to us about IMF versus Amazon, Boeing and so forth.
Well, let's give all of you a hand for some
superb questions and some great answers by Sean.
Sean, thank you so much
for coming. It's a pleasure.
(audience clapping)
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