Capital Ideas: The IMF and the Rise of Financial Liberalization

Capital Ideas: The IMF and the Rise of Financial Liberalization

Capital Ideas: The IMF and the Rise of Financial Liberalization

Capital Ideas: The IMF and the Rise of Financial Liberalization


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. In Capital 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.


I began and finished this book when the world economy was in financial crisis. When I started graduate school in autumn 1997, the financial turmoil that would sweep across Asia and then move on to Russia and Latin America had just begun. In winter 1998 I was fortunate to have the opportunity to participate in Benjamin J. Cohen's course Theoretical Issues in International Political Economy, a seminar devoted to international money and finance taught by one of the leading authorities on the subject.

The course sparked my intellectual interest in understanding why governments would expose themselves to the vagaries of international capital flows by reducing controls on the movement of capital in and out of countries—a process known as capital account liberalization. As events unfolded in Asia and beyond, and many countries turned to the International Monetary Fund for assistance, I became interested in the role the Fund played in all of this. Critics of the Fund charged it with having precipitated the crisis by indiscriminately encouraging governments to liberalize their capital controls prematurely. In line with the typical characterization of the Fund as promoting “one size fits all” policy templates, the conventional wisdom for some time became that the Fund had uniformly pushed capital account liberalization on emerging markets and developing countries.

But once I started to look more closely at the Fund's policy prescriptions, it became clear that there was much more diversity of thought within the Fund than suggested by the conventional wisdom. Some staff members had been enthusiastic about forcing the pace of liberalization and ruling out the use of capital controls, while others argued for a more gradual approach and were sympathetic to the use of controls in some circumstances. I became curious about the origin of these diverse beliefs and how they developed and evolved. It was then that I became interested in constructivism.

At the time, constructivism was just beginning to have a significant impact on the field of international relations. In the 1998 50th anniversary edition of International Organization, Robert Keohane, Peter Katzenstein, and Stephen Krasner famously identified the debate between rationalism and constructivism as the primary point of contestation in international political economy. In 1998 there was still very little work on what we now might call “constructivist political economy,” yet I did find some inspiration from two important books that I was assigned to read in Cohen's course.

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