Capital Ideas: The IMF and the Rise of Financial Liberalization

By Jeffrey M. Chwieroth | Go to book overview

CHAPTER EIGHT

Capital in Crisis
FINANCIAL TURMOIL IN THE LATE 1990S

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 management initiated this proposal and supported it enthusiastically and unwaveringly.

The proposal failed, however. Although some governments had privately voiced misgivings about the amendment prior to the Asian crisis, the severity of the crisis and criticism of the Fund's response to it undermined support. Inside the Fund, the staff attributed the crisis to policy and institutional failures, legitimating policy adjustment and structural reform, rather than controls on outflows, as the appropriate response. The U.S. Treasury and IMF management offered a similar view.

Yet as the crisis unfolded, it spawned within the Fund an important reassessment of prevailing beliefs about capital freedom. But, significantly, these prevailing beliefs, which identified capital freedom as a desirable long-run goal, served to channel how this reassessment played out. Rather than implicating capital account openness per se as responsible for the crisis, prevailing beliefs led the staff to identify “disorderly liberalization” as a principal culprit. This interpretation in turn presented a “crisis” for the big-bang approach and led to an almost complete unraveling of support for it within the Fund. However, the reassessment of this particular norm interpretation and application did not induce reconsideration for the norm of capital freedom itself.

Nevertheless, this reassessment did lead some staff and academic economists to reappraise prevailing standards of behavior for capital controls. Here Malaysia's experience with controls on outflows also was of great significance. Prevailing beliefs had led many to expect the controls to

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