Tim Geithner’s Misguided Foreign Bailout Plan

With Treasury Secretary Timothy Geithner now calling on U.S. lawmakers for at least US$100 billion in fresh taxpayer cash to support increased IMF bailouts to foreign countries, a hard look needs to be taken at governments that lack the internal controls to manage the huge inflows of capital being proposed as panaceas to the global downturn.

To ignore the fact that many foreign governments lack the ability to adequately protect taxpayer and aid donor funds from corruption and leakage is a dangerous approach that may lead to greater, not less, financial instability at the end of the day. The Obama administration’s eagerness to race ahead with hundreds of billions of new dollars for shaky (and sometimes shady) foreign economies smacks eerily of the naiveté the Bush administration displayed when it blindly dumped the original US$350 billion into the Trouble Asset Relief Program (TARP) with little to no oversight.

While the Obama administration has indeed made a commitment to ensuring that American taxpayers can follow their stimulus money (most visibly through its www.recovery.gov website), most taxpayers around the world are not as lucky. If Geithner’s proposal is implemented, the question is not if, but rather when, significant chunks of that money will go missing.

Regardless of one’s views of the merits of the U.S. stimulus package, the American government is relatively well-equipped to provide some basic oversight to the process. Internal audit agencies such as the Government Accountability Office and the inspectors general are professional and well-staffed; the legislative branch benefits from thousands of professional committee staffers; and civil society groups and the media in the U.S. are sophisticated actors capable of bringing malfeasance to light and holding government accountable. The situation is far different abroad, however.

Overseas, Oversight is Weak

Two new reports issued by international non-governmental organizations in February 2008 highlight the very real dangers facing policymakers and citizens in developing countries where billions of dollars are similarly being poured into opaque and poorly understood financial systems. The Open Budget Index 2008, published by the International Budget Partnership, and the Global Integrity Report: 2008, published by Global Integrity, raise serious red flags.

China has announced plans for a massive stimulus package of around US$600 billion. Who’s going to follow the money in China? It’s hard to tell.

The Open Budget Index for China, which assesses the transparency and availability of key budget and auditing documents, notes, “…though China makes its audit report public and provides information on whether the audit report’s recommendations are successfully implemented, the scope of audit coverage is fairly limited.” Global Integrity’s latest assessment of China’s anti-corruption and accountability safeguards confirms that, “…many of the [audit report] findings are shelved.” The likelihood of effective legislative oversight over the Chinese government’s bailout plans is slim; Global Integrity warns, “There is very little that [the Chinese legislature] can do to revise a budget. The budget is brief, there is not sufficient information and the process is short. The review has never been a meaningful process.”

The situation is arguably worse elsewhere, where conflicts of interest abound. In December, one of Montenegro’s largest banks won a 44 million euro bailout from the government; the bank is partially owned by the Prime Minister, his brother, and his sister.

In Serbia, where the government announced a nearly US$2 billion stimulus package in January, Global Integrity warns of a lack of conflicts of interest regulations for senior government officials, while the Open Budget Partnership observes that, “Serbia does not make its audit report public and does not provide any information on whether the audit report’s recommendations are successfully implemented.”

A month later, Lithuania’s government announced that it was preparing a US$2 billion stimulus package. Unfortunately, as Global Integrity notes in its latest assessment of the country, Lithuanian state-owned enterprises, which are likely to benefit from the increased government spending, operate with little effective controls or oversight. “No clear rules exist [for accessing state-owned companies’ financial records], and in practice financial records of state-owned companies are treated as commercial secrets,” the assessment notes.

All of this is grim news for those working towards stabilizing emerging and frontier markets in the midst of a global financial meltdown. The bottom line is that pouring billions of dollars into fiscal and budgetary systems that struggle to keep track of their normal budgetary expenditures, never mind these new mass infusions of capital, is a recipe for leakage, theft, and diversion of resources. In some cases, there may even be broader political fallout should these stimulus and bailout funds be perceived as favoring a country’s elite rather than trickling down to the average citizen.

As China watchers have noted, a least part of the motivation behind Beijing’s stimulus is to tamp down growing civil unrest as unemployment rises. Should a serious scandal erupt involving Chinese stimulus funds gone missing, one wonders whether the stimulus will ultimately have hurt, rather than have helped, the government’s attempts to quell social protests.

What should be done?

What should be done in light of these challenges? Policymakers in both developing countries and multilateral institutions considering additional bailout programs should adopt at least two common-sense approaches to mitigating the risks associated with the potential for diverted capital.

First, a Hippocratic “do no harm” approach must be the starting point for any discussion. If fiscal, budgetary, and oversight mechanisms are so weak as to virtually guarantee that bailout and stimulus funds will go missing, alternatives should be explored, such as directly funding social safety net programs in lieu of attempting to jump start an economy through increased government spending at the macro level.

Second, transparency and accountability must be the watchwords of any bailout or stimulus program. Despite the underdeveloped public financial management systems in many developing countries, there are ways to monitor the flow of funds from national governments to localities through alternative approaches such as “citizen audits” and other grassroots expenditure tracking programs. At a minimum, both governments and aid donors must err on the side of transparency when it comes to identifying how, when, and where bailout funds are flowing, and both must be held accountable if and when those funds go missing. The early lessons from the U.S., especially as they relate to TARP’s lackadaisical approach to oversight, suggest that it is never too early to demand that sort of basic transparency.

— Nathaniel Heller

Nathaniel Heller is Managing Director of Global Integrity, an international non-governmental organization that tracks corruption and governance trends around the world.

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