The Institutional Roots of Incremental Ideational Change: The IMF and Capital Controls after the Global Financial Crisis

Abstract

This article • Contributes to the literature on ideational change by bringing to the surface an incremental ideational dynamic after major crises that differs from the well-known punctuated dynamic; • Explains the incremental dynamic of ideational change after a major crisis based on the flexibility of the institutional environment in which actors operate. Specifically, rather than preventing change until an explosion of radical change occurs, institutional frictions may also allow for successive adjustments over time; • Illustrates the theoretical arguments by examining the changes that have taken place in the IMF's thinking on capital controls since the start of the 2008 crisis; • Traces one of the most debated developments in the post-crisis international political economy, namely the rehabilitation of capital controls.Although much scholarly attention has been devoted to examining the punctuated dynamics of ideational change, other dynamics exist. Ideational change may well occur incrementally in ordinary times or, as this study shows, can also materialise after a major shock, such as a financial and economic crisis. By examining the IMF's new approach to capital controls in the aftermath of the global financial crisis, the article demonstrates that the non-punctuated nature of ideational change can be explained in light of the enabling (and not solely constraining) features of the institutional context in which actors operate. Rather than preventing change until an explosion of radical change occurs, institutional frictions may also allow for successive adjustments over time. They may in fact allow for a gradual release of pressure, thereby preventing the impending explosion.

Ruling capital: emerging markets and the reregulation of cross-border finance

“…These authors argued that the US Treasury Department and Wall Street investment houses were pushing for the freedom of capital movements wherever possible, including forcing the IMF into advising capital account liberalization worldwide and working to codify such a policy in the IMF Articles. Other researchers, such as Kirshner (2003), Mark Blyth (2003), andManuela Moschella (2011), see interests groups as key in shaping the general change in thinking about capital account liberalization and offer a more nuanced view of the specific role that those powerful interests played in actual IMF policy outputs.…”

“…Most recent accounts see the origin of the IMF amendment as coming from the IMF itself (Abdelal 2007;Chwieroth 2010a;Moschella 2011). Abdelal (2007) argues that this change was, in part, exported to the IMF from French socialists, who had originally been big advocates of capital controls.…”

“…IMF voting power reinforces the power of industrialized countries in the international monetary system. The IMF staff coordinated the process and set the agenda; and traditionally, IMF staff members had largely been seen as reinforcing the views of industrialized countries when it came to capital flows and other matters (Thacker 1999;Abdelal 2007;Copelovitch 2010;Chweiroth 2010a;Moschella 2011).…”

“…Thus, to the surprise of other staff departments and the executive directors from the industrialized countries, the research papers, especially, and many of the Board papers were making strong cases for CFMs on inflows and outflows, even suggesting that source countries regulate capital flows as well! The IMF was charged with redefining its cognitive map, which had long held capital account liberalization as a core principal (Moschella 2012a). A number of personnel factors explain how there was such a change in position among staff members from the one held in the late 1990s and early 2000s.…”

“…Moreover, a significant turnover had occurred at the IMF since the 1990s, and many big-bang liberalizers had left, especially those who had been in leadership positions. Many staff members used the mandate from Strauss-Kahn and the G20, new economic ideas, and the flexibility of the IMF Articles to reinterpret, or incrementalize, its thinking on capital controls (Moschella 2012a). Current and former staff members conducted some of the more rigorous econometric analyses showing that capital controls had helped stabilize EMDs in the run-up to the global financial crisis and had helped mitigate the worst of its aftermath (Magud Reinhart, and Rogoff 2011;Ostry et al 2010;Chwieroth 2012).…”