Capital Ideas: The IMF and the Rise of Financial Liberalization

By Jeffrey M. Chwieroth | Go to book overview

CHAPTER NINE

Norm Continuity and Organizational Legitimacy
from the Asian Crisis to the Subprime Crisis

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 capital freedom should not be reversed.

There was thus a high degree of norm continuity in the decade after the Asian crisis. In fact, most of the reforms to the international financial architecture can be seen as a direct reflection of a particular interpretation advanced to explain financial instability in the late 1990s, namely that it resulted primarily from poor fundamentals and institutions in crisisafflicted countries, which in turn legitimated policy adjustment and structural adjustment in these countries. Consequently, developing, monitoring, and encouraging the implementation of standards and codes for macroeconomic policy and domestic financial systems in emerging markets and developing countries became a principal focus of the IMF and the G-7. This focus left little space for consideration of other policies, such as regulatory measures aimed at financial market participants in developed countries, that would be consistent with an alternative interpretation that stresses factors intrinsic to the operation of international capital markets as partly responsible for financial instability.

While standards and codes serve a useful purpose, such measures alone cannot guarantee financial stability. Yet prior to the subprime crisis, despite having developed an increasingly sophisticated understanding and appreciation of factors intrinsic to the operation of international capital markets that can trigger financial instability, the IMF showed little willingness to entertain additional measures, such as regulations aimed at financial market participants in developed countries. This chapter begins by explaining norm continuity within the Fund between the Asian and subprime crises. The preferences of leading principals are, of course, im-

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