Capital Ideas: The IMF and the Rise of Financial Liberalization

By Jeffrey M. Chwieroth | Go to book overview

EPILOGUE

A Subprime “Crisis” for Capital Freedom?

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 be or whether the turmoil will ultimately turn out to be a “crisis” for capital freedom.

Indeed, despite the growing calls for reregulation and the role that capital inflows played in fueling housing bubbles in the United States and other developed countries, unlike the Asian crisis, the subprime crisis has yet to stir many politically prominent calls for restricting capital mobility and overturning the norm of capital freedom. However, the Fund has accommodated in some countries the use of controls on outflows to manage pressures from the crisis, and has pointed once again to the potential role that controls on inflows can play in minimizing vulnerabilities associated with inflow bonanzas. More significantly, the subprime crisis has led the Fund to shift toward supporting regulatory measures aimed at financial market participants based in developed countries, signaling a change in the organization's interpretation and application of the norm of capital freedom. This shift constitutes an important step toward demonstrating that the Fund is able and willing to entertain measures that reflect the interests and experiences of emerging markets and developing countries. Such a step could prove useful in contributing to ongoing efforts to enhance the Fund's legitimacy.

Because events and policies are evolving quickly at the time of writing, any assessment of the scope of this policy shift and the reasons behind it are necessarily preliminary. With this important caveat in mind, it appears that this shift has been driven by preference changes and heterogeneity among the Fund's principals as well as adaptation and the efforts of norm entrepreneurs within the Fund. Although the agenda for reforming the international financial architecture has been wide-ranging in scope, the focus here is largely on a narrower set of issues related to capital account

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