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Capital Ideas

Capital Ideas: The IMF and the Rise of Financial Liberalization

Jeffrey M. Chwieroth
Copyright Date: 2010
Pages: 352
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  • Book Info
    Capital Ideas
    Book Description:

    The right of governments to employ capital controls has always been the official orthodoxy of the International Monetary Fund, and the organization's formal rules providing this right have not changed significantly since the IMF was founded in 1945. But informally, among the staff inside the IMF, these controls became heresy in the 1980s and 1990s, prompting critics to accuse the IMF of indiscriminately encouraging the liberalization of controls and precipitating a wave of financial crises in emerging markets in the late 1990s. InCapital Ideas, Jeffrey Chwieroth explores the inner workings of the IMF to understand how its staff's thinking about capital controls changed so radically. In doing so, he also provides an important case study of how international organizations work and evolve.

    Drawing on original survey and archival research, extensive interviews, and scholarship from economics, politics, and sociology, Chwieroth traces the evolution of the IMF's approach to capital controls from the 1940s through spring 2009 and the first stages of the subprime credit crisis. He shows that IMF staff vigorously debated the legitimacy of capital controls and that these internal debates eventually changed the organization's behavior--despite the lack of major rule changes. He also shows that the IMF exercised a significant amount of autonomy despite the influence of member states. Normative and behavioral changes in international organizations, Chwieroth concludes, are driven not just by new rules but also by the evolving makeup, beliefs, debates, and strategic agency of their staffs.

    eISBN: 978-1-4008-3382-5
    Subjects: Economics, Political Science, Finance

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. List of Figures and Tables
    (pp. ix-x)
  4. Preface
    (pp. xi-xvi)
    Jeffrey M. Chwieroth
  5. List of Abbreviations
    (pp. xvii-xx)
  6. CHAPTER ONE Introduction
    (pp. 1-22)

    Few issues have attracted as much controversy as the removal of controls on international capital flows—a process known as capital account liberalization. The International Monetary Fund has been at the center of this controversy. The formal rules of the IMF provide member states with the right to use capital controls, and these rules have not changed significantly since the organization was founded in 1945. But informally, among many staff within the Fund in the 1980s and 1990s, capital controls, once part of economic orthodoxy, became identified as an economic heresy. Although liberalization was not encouraged indiscriminately, the belief that...

  7. CHAPTER TWO Normative Change from Within
    (pp. 23-60)

    This book delves deeply into inner workings of the IMF, opening up the black box of the organization so that we can better grasp how intraorganizational processes, in addition to the influence of member states and formal rules, shape organizational behavior and change. In the first part of this chapter, I critically review state-centric and PA approaches. While offering useful insights, these approaches cannot shed adequate light on how IOs, endowed with considerable autonomy, approach their various tasks. The narrow focus of these approaches on material incentives and information leads them to overlook how the staff, their beliefs, and their...

  8. CHAPTER THREE Capital Ideas and Capital Controls
    (pp. 61-104)

    The strong technocratic character of the IMF’s organizational culture means that economic theory plays an essential role in shaping the content of the staff’s expertise. Cycles, trends, and shifts in economic theory shape the content of this expertise by helping to determine what constitutes an economic problem and how such problems are best solved. When the staff members approach their tasks, they necessarily come to rely on the content of their training to develop specialized knowledge and to form judgments about policy. Cycles, trends, and shifts in the beliefs prevailing in the economic profession about capital controls and their liberalization...

    (pp. 105-120)

    The Articles of Agreement provide many of the formal rules that guide the Fund’s operations. Although other formal IMF rules operated differently in practice from the intent of their drafters, as Eichengreen observes, “Capital controls were the one element that functioned more or less as planned.”¹ Most governments in the early postwar era employed a range of restrictions that limited capital mobility, with the widespread acceptance of Keynesian beliefs underpinning this norm. Both formal IMF rules and the informal staff approach defined controls as a legitimate policy practice.

    This chapter begins by tracing the institutionalization of the norm of capital...

  10. CHAPTER FIVE The Limits and Hollowness of Keynesianism in the 1960s
    (pp. 121-137)

    Keynesianism generally prevailed during the first fifteen years of the Bretton Woods system, with capital controls situated firmly within the boundaries of legitimate policy practice. But the 1960s were a decade of significant transition. The academic and policymaking communities discarded Keynesianism to varying degrees, replacing it with new beliefs more closely in line with the neoclassical synthesis and monetarism. Although monetarism would steadily gain ground in the academic and policymaking communities, in this decade the neoclassical synthesis had a far greater impact. Capital controls remained within the boundaries of legitimate policy practice, but the beliefs underpinning their legitimacy were notably...

  11. CHAPTER SIX Formal Change and Informal Continuity: THE REFORM NEGOTIATIONS OF THE 1970S
    (pp. 138-146)

    By the 1970s even the “hollowed out” version of Keynesianism that had emerged in the 1960s was on the verge of being overturned. Capital controls still retained legitimacy, albeit a weaker form, as defined by formal IMF rules and the informal staff approach. But international monetary reform negotiations in the 1970s would further weaken the legitimacy of controls within the context of the former, though, interestingly, not the latter.

    Heightened capital mobility proved to be increasingly disruptive for the Bretton Woods exchange rate system. European and Japanese officials, and the IMF management and staff, made clear their preference for using...

    (pp. 147-186)

    The 1980s and 1990s were a period of significant change to the IMF staff’s informal approach. Without a legal mandate or active influence from member states or IMF management, the staff discarded their earlier attachment to Keynesianism, replacing it with beliefs that spanned the full continuum of neoliberalism. What is remarkable about the evolution of the IMF approach during this period is that it took place almost exclusively on an informal level. A new informal approach emerged that identified capital freedom as desirable, at least in the long run.

    Yet beyond this broad consensus at the level of abstract principles,...

    (pp. 187-225)

    The latter half of the 1990s witnessed within the Fund both the high-water mark and demise of enthusiasm for capital freedom. It was a period of gradual, albeit incomplete, ideational and institutional convergence in which an attempt was made to align formal IMF rules with the informal staff approach. By the mid-1990s many members of the staff had been informally advocating liberalization for nearly a decade. This was in an environment in which leading IMF principals had completed their transition to capital account openness and sought to institutionalize capital freedom as a formal requirement for all IMF member states. IMF...

  14. CHAPTER NINE Norm Continuity and Organizational Legitimacy from the Asian Crisis to the Subprime Crisis
    (pp. 226-254)

    In the decade after the Asian crisis, the IMF and its member states implemented a number of reforms to the international financial architecture. Yet the norms that underpinned this architecture changed little. The Fund’s staff and principals generally remained cautious in supporting gradualism, though some continued to be optimistic that “windows of opportunity” could be exploited to move ahead rapidly with liberalization. The use of selective restraints on capital mobility also failed to elicit the cries of outrage that it once did in the 1990s. Still, some leading principals, especially U.S. and EU officials, remained adamant that the norm of...

  15. EPILOGUE A Subprime “Crisis” for Capital Freedom?
    (pp. 255-300)

    The subprime crisis has generated signs that the norms of financial governance are changing, with governments having implemented dramatic measures that fly in the face of long-held policy taboos and norms. Many developed country governments have partially nationalized their financial systems and embarked on Keynesian-style fiscal expansion. Even the IMF, traditionally a preacher of fiscal discipline, has pushed governments to loosen their purse strings to combat the global downturn. Amid growing calls for reregulation of the financial system, advocates of liberalization and self-regulation find themselves on the defensive. But it is not yet clear how radical or extensive reform will...

  16. Index
    (pp. 301-311)