Capital Ideas: The IMF and the Rise of Financial Liberalization

Published by EH.NET (June 2010)

Jeffrey M. Chwieroth, Capital Ideas: The IMF and the Rise of Financial Liberalization. Princeton, NJ: Princeton University Press, 2010.? xvii + 311 pp. $30 (paperback), ISBN: 978-0-691-14232-6.

Reviewed for EH.NET by Joseph M. Santos, Department of Economics, South Dakota State University.

?

In Capital Ideas, Jeffrey M. Chwieroth, a senior lecturer in the Department of International Relations at the London School of Economics and Political Science, attributes longstanding IMF support for capital-account liberalization to (endogenous) dynamics shaped largely by its staff, rather than to (exogenous) rules or incentives imposed on it by its member states.? As such, Chwieroth deemphasizes strict state-centric and principal-agent interpretations of how the International Monetary Fund works in this case.? Instead, he argues that IMF culture and intellectual norms in the economics profession have together constructed capital-account liberalization as desirable.

Chwieroth models the evolution of IMF culture as five so-called intra-organizational processes: professionalization, administrative recruitment, learning, adaptation, and entrepreneurship.? Taken together, professionalization and administrative recruitment describe how the economics profession, from which the IMF recruits almost exclusively, imbues the organization with practices and beliefs that prevail in the discipline for better or worse.? Once instilled, organizational beliefs about how the world should work ? so-called ?normative conceptualizations,? including the desirability of capital-account liberalization ? change slowly if at all.? Change of this sort requires learning ? a process that updates policy goals or ?desirable ends? ? as opposed to adaptation ? a process that updates policy instruments or ?desirable means.?? However, unlike adaptation, learning occurs infrequently because it requires an internal entrepreneur ? that rare staff member with strategic agency sufficient to exploit differences, however slight, in intra-organizational normative conceptualizations so as to reshape them.

In chapter two, Chwieroth builds this theoretical framework on extant sociological and constructivist analyses of how international organizations work and evolve.? Then, in the subsequent seven chapters and epilogue (on the subprime crisis), he substantiates his argument by applying this framework to what he demonstrates to be the interrelated histories of twentieth-century economic thought (and how it relates to capital controls) and the IMF.

Chwieroth explains that the IMF initially accepted and, indeed, supported capital controls as a permanent feature of the post-World War II international financial system.? As such, IMF policy reflected the Keynesian notion that market expectations (and the financial flows and market swings that they manifested) were divorced from market fundamentals ? an assumption that had prevailed in the economics profession at the IMF?s inception.? Of course, as economic thought shifted toward the neoclassical synthesis, which held that markets were efficient in the long run, the dominant normative conceptualization in the profession shifted as well: by the 1960s, long-run capital-account liberalization was desirable and, as such, the profession broadly supported only market-oriented and temporary controls on some short-term, speculative capital flows.? Later, new-classical economics and the rational-expectations revolution, which essentially asserted the efficiency of all speculative flows, further reinforced the profession?s belief in capital-account liberalization.

Chwieroth demonstrates how, from the late 1970s onward, IMF recruitment, learning, and internal-entrepreneurship patterns ultimately realigned the institution?s thinking about capital freedom with that of the profession?s.? Based on his earlier work, published in the 2007 volume of International Studies Quarterly, Chwieroth identifies academic departments most responsible for promoting, through their scholarship published from 1963 to 1980, the capital-freedom norm. And, based on original survey data, he concludes that economists trained in these so-called neoclassical departments ? other department categories include heterodox American, Keynesian, and Continental-European ? tended to subscribe throughout their careers to neo-classical norms.? This is important because these neoclassical departments are, with few exceptions, those from which the IMF has traditionally recruited.? Chwieroth explains that as the proportion of these neoclassical-trained economists at the IMF rose from the late 1970s onward, intra-organizational learning and internal-entrepreneurship patterns effectively fashioned institutional support for capital-account liberalization.

In his last chapter, Chwieroth examines how, in the wake of the Asian financial crisis, the IMF ? and, in particular, its seemingly unwavering support for capital-account liberalization ? engendered resentment in emerging and developing economies, prompting them to adopt export-led growth strategies and, in doing so, self-insure against future capital flight.? This outcome has, at best, diminished the relevance of the IMF ? an institution otherwise well suited to establish global standards for financial supervision ? and, at worst, fueled global imbalances that likely contributed to the recent financial crisis.? Chwieroth suggests reforming IMF governance so that emerging and developing economies gain significantly greater opportunities to shape intra-organizational processes and, so, IMF culture.? Doing so will, in his view, rightly enable the IMF to shift the focus of the capital-liberalization debate from means ? whether to liberalize all at once or gradually ? to ends ? whether to liberalize at all.

Hence, in Capital Ideas, Chwieroth artfully blends history, sociology, and economics to demonstrate convincingly that while developed Western states ? and, in particular, the United States and the United Kingdom ? do not direct the IMF to endorse capital-account liberalization, the intra-organizational processes that govern the institution and the segment of the economics profession from which it recruits do effectively inculcate the IMF with this and other such Western-associated economic-policy norms.

Nevertheless, Chwieroth dismisses rather easily the case for capital-account liberalization: for example, he states simply that, ?the case for capital freedom is based on an analogy with standard theoretical arguments for free trade in goods and services? (p. 44) and labels as ?hypothesis-confirming bias? the contention that disorders caused by capital-account liberalization result from unsound policies in the affected countries.? Though he need not have favored capital-account liberalization, readers may wish that he had analyzed, with the same comprehensive and theory-rich approach that he employs so successfully elsewhere in the book, specific instances where speculation divorced from sound macroeconomic fundamentals instigated destabilizing capital flight.? (In this regard, he mentions, though only in passing, South Korea in the late 1990s.)? Doing so would have strengthened the case for the IMF reforms that he recommends; reforms that would, in effect, allow the IMF to learn developing- and emerging-economy capital ideas.

?

Joseph M. Santos (joseph.santos@sdstate.edu) is Professor of Economics at South Dakota State University, where he teaches courses in macroeconomics and monetary policy.? His study of Canadian and U.S. agricultural policies during the interwar period, ?Going against the Grain: Why Do Canada and the United States Market Wheat So Differently?? appears in American Review of Canadian Studies (2010).