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ABSTRACT
The paper explores a case of failure of economic ideas at bringing about institutional change. Specifically, it investigates the mechanism of legitimacy feedback that facilitated and, later, prevented the policy idea of orderly liberalization from being institutionalized into the amendment of the International Monetary Fund's (IMF's) Articles that would have extended the Fund's mission to the liberalization of capital flows. Drawing on archival research and interviews with IMF officials, the paper argues that the convergence of member countries' expectations around the proposal to amend the Articles was the product of the interaction between IMF-sponsored ideas and the validation of those actors that make up the Fund's social constituencies for legitimation within a specific historical context. The idea of orderly liberalization was consequential not because it was supported by the United States or backed up by a homogenous IMF staff, but because it reflected the economic interests of those actors – member states and private sector – who would bear the costs of an extension of the Fund's mission.
ACKNOWLEDGEMENT
The author's thanks go to three anonymous RIPE reviewers for their insightful criticisms and suggestions. Thanks also go to Christopher Gilbert, Erik Jones, Sandy MacKenzie and Ralf Leiteritz for helpful comments on an earlier draft. The author would also like to thank the University of California's Washington Center and the staff of the IMF Archives for the invaluable support provided in the early stages of writing.
Notes
1 On the issues of representation, political involvement and participation in the IMF decision-making see, for instance, CitationBini Smaghi (2004) and CitationWoods and Lombardi (2006).
2 The United States moved to international financial liberalization in 1974, the UK in 1979 and Japan in 1980. Australia and New Zealand removed their capital controls in 1983 and in 1984, respectively. Complete decontrols were adopted in the Netherlands (1986), Denmark (1988), France (1989), Belgium, Ireland, Italy and Luxembourg (1990). Several members of the European Free Trade Association (EFTA) – Sweden (1989), Austria, Finland and Norway (1990) – followed the path. Finally, liberalization took place in Portugal and Spain in 1993, in Greece in 1994 and Iceland in 1995.
3 The US Federal Reserve left the federal funds rate at 3% since September 1992. It started raising the rate by 25 basis points in February 1994. By September, the federal funds rate rose by 175 basis points, following projections of domestic economic recovery.
4 The views about capital account liberalization that circulated within the IMF are gleaned from many different sources. These include staff memoranda and background studies for Executive Board meetings available in the IMF Archives and IMF public documents, which are usually available on the IMF website. In particular, the IMF's position on capital liberalization is identified, building on the analysis of IMF Working Papers, Staff Papers, Occasional Papers, and the speeches of IMF staff members.
5 Economic growth refers here to a rise in real GDP.
6 IMF Archives. SM/94/202. ‘Issues and Developments in the International Exchange and Payments Systems’, 1 August 1994. Prepared by the Monetary and Exchange Affairs Department.
7 IMF Archives. SM/97/32. ‘Capital Account Convertibility and the Role of the Fund-Review of Experience and Consideration of a Possible Amendment of the Articles’, 5 February 1997: 6. Prepared by the Legal, Monetary and Exchange Affairs, and Policy Development and Review Departments.
8 IMF Archives. SM/94/202: 25.
9 On this point see also the Independent Evaluation Office Report (2005: 28).
10 IMF Archives. SM/95/164. ‘Capital Account Convertibility: Review of Experience and Implications for Fund Policies’, 7 July 1995: 7. Prepared by the Monetary Affairs and Exchange Department; and IMF Archives. SM/95/164, Supplement 1. ‘Capital Account Convertibility – Review of Experience and Implications for Fund Policies – Background Paper’, 10 July 1995: 20.
11 IMF Archives. SM/95/164: 8, 9; and IMF Archives. SM/97/32, Supplement 1. ‘Review of Experience with Capital Account Liberalization and Strengthened Procedures Adopted by the Fund’, 6 February 1997. Prepared by Monetary and Exchange Affairs, Policy Development and Review, and Research Departments.
12 IMF Archives. MD/Sp/98/5. ‘Capital Account Liberalization and the Role of the Fund’. Remarks by Michel Camdessus, Managing Director of the International Monetary Fund, IMF Seminar on Capital Account Liberalization, Washington, DC, 9 March 1998.
13 IMF Archives. SM/95/164: 12.
14 IMF Archives. SM/94/202: 53.
15 See, for instance, the proceedings of the 1994 Madrid conference in Boughton and Lateef (1995).
16 IMF Archives. BUFF/94/106. ‘Concluding Remarks by the Acting Chairman for the Seminar on Issues and Developments in the International Exchange and Payments System’. Executive Board Seminar 94/10, 16 November 1994.
17 In the words of two economists, ‘Before December 1994, Mexico was hailed as the prime example of success of market-oriented reforms. It was widely believed that … the country was poised for ascending to a sustainable high-growth, low-inflation equilibrium. … the strength of the country's fundamentals was rarely questioned’ (CitationCalvo and Mendoza, 1996: 170–75).
18 IMF Archives. SM/97/32, Supplement 1: 34.
19 IMF Archives. EBM/95/73. Minutes of Executive Board Meeting. ‘Capital Account Convertibility – Review of Experience, and Implications for Fund Policy’, 28 July 1995. Statement by K. P. Geethakrishnan, Indian Executive Director, 57–8.
20 J. O. d. B. Wijnholds, author's interview, Executive Director, Netherlands (and Armenia, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Georgia, Israel, Macedonia, Moldova, Romania, and Ukraine) [1994–2003], International Monetary Fund, Washington, DC, 26 May 2006; and A. Mozhin, author's interview, Executive Director, Russia [1996–present], International Monetary Fund, Washington, DC, 30 March 2006.
21 B. Esdar, author's interview, Executive Director, Germany [1997–2001], International Monetary Fund, Washington, DC, 23 May 2006.
22 IMF Archives. EBM/95/73. Minutes of Executive Board Meeting.
23 IMF Archives. EBM/95/73. Minutes of Executive Board Meeting. Summing Up of the Acting Chairman, Stanley Fischer: 68.
24 IMF Archives. EBM/95/73. Minutes of Executive Board Meeting. Statement by Alberto Calderon, Executive Director, Colombia: 48; and Statement by Zhang, Executive Director, Democratic Republic of China: 46
25 The literature on the Asian crisis is extensive and references are simply indicative here. For detailed analyses of the Asian crisis from an economics perspective, see CitationRadelet and Sachs (1998); CitationGoldstein (1998). For accounts of the crisis from a political economy perspective, see CitationHaggard (2000); Noble and Ravenhill (2000).
26 The Economist (1998) ‘The Perils of Global Capital’, 9 April.
27 IMF Archives. SM/98/75. ‘Summary of the Seminar on Capital Account Liberalization held on March 9–10 1998’, 25 March 1998.
28 As reported in CitationMckenna (1998).
29 As reported in CitationMckenna (1998).
30 IMF Archives. EBM/98/38. Executive Board Meeting. ‘Liberalization of Capital Movements Under an Amendment of Articles – Statement by the Managing Director’, 2 April 1998. Statement by Mohammend Dairi, Alternate Executive Director, Morocco and Statement by Thomas Bernes, Executive Director, Canada: 8 and 9, respectively. See also the position of Gregory Taylor, Executive Director, Australia: 27.
31 IMF Archives. EBM/98/103. Executive Board Meeting. ‘Strengthening the Architecture of International Monetary System; Strengthening Financial Systems; and Orderly Capital Account Liberalization – Draft Reports of Managing Director to Interim Committee’, 23 September 1998: 12, 13.
32 IMF Archives. EBM/98/38. Executive Board Meeting: 9. On IMF management's persistent advocacy for the amendment, see also CitationFischer (1998a).