Capital Ideas: The IMF and the Rise of Financial Liberalization

By Jeffrey M. Chwieroth | Go to book overview

CHAPTER ONE

Introduction

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 the free movement of capital was desirable—what I call the norm of capital freedom—became the new orthodoxy.

Critics of the Fund have subsequently charged it with encouraging governments to liberalize their controls prematurely, thereby precipitating the wave of financial instability that swept much of East Asia in 1997–1998 before moving on to Russia and Latin America.1 Critics also used this wave of financial instability to renew charges that the Fund was promoting “one size fits all” policies that ignored the different circumstances of its member states. Without a careful examination of the evidence, many critics of the Fund have jumped to the conclusion that the IMF staff uniformly advocated capital account liberalization. In examining a critical case of how international organizations (IOs) work and evolve, this book shows that many of these criticisms are unfounded.2

While the staff shared a belief that capital freedom was desirable in the abstract long run, they conducted a vigorous internal debate about how to proceed toward this goal. To put it differently, though the staff adopted the norm of capital freedom in the 1980s and 1990s, they disagreed about how this norm should be interpreted and applied. As I discuss more fully below, this finding not only has important empirical implications for critics of the IMF, it also has important theoretical implications for scholars seek-

1 Joseph Stiglitz, Globalization and Its Discontents (New York: W. W. Norton, 2002), p.
15; Padma Desai, Financial Crisis, Contagion, and Containment (Princeton, N.J.: Princeton
University Press, 2003), p. 217.

2 See also IEO, The IMF's Approach to Capital Account Liberalization (Washington, D.C.:
IMF, 2005), which also documents variation in the IMF's advice but, in contrast to this
book, does not seek to explain it.

-1-

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