Capital Ideas: The IMF and the Rise of Financial Liberalisation

Jeffrey M. Chwieroth

(Princeton University Press 2010) ISBN 978-0-691-14232-6, 311 pp.

One of the most important economic changes in the post-World War II period was the increased capital account liberalisation around the world. As part of this liberalisation, capital controls became widely seen as illegitimate. Jeffrey Chwieroth, a senior lecturer at the London School of Economics, has written a thoughtful intellectual history of that transformation, focused on the evolution of ideas about capital controls and liberalisation among the staff of the International Monetary Fund.

Chwieroth uses extensive interviews with the IMF staff to document the transformation of views within the IMF and a thorough knowledge of the post-WW2 history of economic thought to tie that transformation to changes within the economics profession. Despite being based on a PhD dissertation, Capital Ideas is relatively jargon-free and easy to read. A book on internal staff debates over economic theory could never be classified as “light” reading, but reading Capital Ideas is rarely a chore and Chwieroth deploys academic jargon sparingly and generally usefully.

The book begins with a critical review of state-centric and principal-agent (“PA”) theoretical approaches to analysing an organisation like the IMF, making the case that these theories undervalue the role of ideas and the importance of the intellectual background of the staff. Chwieroth makes a convincing case that the IMF’s staff’s considerable autonomy makes their views important to the development of IMF policy. The second part of the chapter sketches the broader theoretical approach he takes in the book, emphasising both the influence of staff recruitment patterns and the way people incorporate knowledge into existing professional norms.

Chwieroth then provides a concise history of the evolution of economic thought on capital account liberalisation and capital controls, showing how the interwar period belief in the necessity of capital controls evolved into the more recent consensus that capital controls were inappropriate. In particular, he draws on survey evidence of economists in a wide range of economics departments, dividing them between “neoliberal” and a group consisting of “heterodox” American departments, Keynesian departments such as Cambridge and continental European departments (which he labels “HKCE” departments.) The two groups have “strikingly different understandings of international capital markets upon completion of their professional training”.

For example, 58.4 per cent of graduates of neoclassical departments but just 28.5 per cent of graduates of HKCE departments surveyed agree with the statement: “The efficient market hypothesis (ie prices can be viewed as embodying the true value of assets) applies to the international capital market.”

Because the IMF drew its staff primarily from graduates of neoliberal economics departments, those ideas took hold at the organisation over time. One of the strengths of the book is the careful way Chwieroth traces attitudes among the staff, finding that capital account openness did not become dominant among the staff until the 1980s and 1990s. This shift gave the IMF a different perspective on capital flight in the 1980s than it had had during the 1940s and 1950s, with the new focus of debate being how fast to liberalise, not whether liberalisation was a desirable goal.

The most interesting portion of the book deals with the impact of the Asian financial crisis on the IMF staff’s views and the IMF’s efforts to secure an amendment to its Articles making promotion of capital account liberalisation a formal priority. The lessons the IMF staff drew from Malaysia’s mostly successful experience with capital controls in the 1990s focused on the best method of sequencing liberalisation and so did not impede the internally-motivated push to amend the IMF’s Articles. Policymakers outside the IMF were less certain about these conclusions and less enthusiastic about embracing capital account openness, leading to the indefinite postponement of the amendments.

The least satisfying part of the book is the Epilogue, which addresses impact of the sub-prime crisis. It is not surprising that the publisher wanted a book on international financial institutions to include some discussion of the crisis, but the discussion is inevitably dated as events continued to develop after it went to press.

This is not a book to take to the beach with a beer, but neither does it require being read in an uncomfortable straight backed chair under a fluorescent light. Chwieroth provides important insights into how a key international player’s actions are shaped by staff views. As the IMF role expands as a result of the continuing European crisis among the PIIGS, understanding the source of its thinking becomes critical.

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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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