Explaining organizational outcomes: the International ... - Springer Link

Explaining organizational outcomes: the International Monetary Fund and capital account liberalization Ralf J. Leiteritz Development Studies Institute, London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK. E-mail: [email protected]

This article traces the discourse on capital account liberalization in the International Monetary Fund (IMF) during the 1990s. Based on constructivist insights, I argue that rationalist–materialist theories of international organizations neglect the social dynamics of behaviour and change. The empirical focus is on the transformation of IMF policy and discourse towards emphasizing the liberalization of international capital movements. External factors do not explain the rise of the discourse within the IMF. For that, I refer to the role of organizational culture as the crucial variable. However, the attempt to institutionalize capital account liberalization at the global level failed in the wake of the Asian financial crisis. In the second part, I explore the political decision-making process in the Fund’s Board of Executive Directors in order to shed light on the different interpretations of the crisis. I find that, far from imposing a single reading of the causes and effects of the crisis, different interpretations were advanced and contested in the deliberations of the Board. Communicative action explains why the Asian crisis constituted the ‘kiss of death’ for the formal institutionalization of the norm of an open capital account at the international level. Journal of International Relations and Development (2005) 8, 1–26. doi:10.1057/palgrave.jird.1800044 Keywords: capital account liberalization; International Monetary Fund; social constructivism

Introduction Why is the unrestricted movement of international capital not recognized as a global norm? While virtually all developed countries have cumulatively abolished capital controls during the last 30 years, many developing countries still maintain them today. Given the powerful incentives and constraints in the domestic and international arenas for opening the capital account, the reluctance to do away with the remaining restrictions on the free flow of international capital in the developing world is indeed remarkable.1 I suggest Journal of International Relations and Development, 2005, 8, (1–26) r 2005 Palgrave Macmillan Ltd 1408-6980/05 $30.00

www.palgrave-journals.com/jird

Journal of International Relations and Development Volume 8, Number 1, 2005

2

that part of the answer can be found in the direction taken by the international discourse on capital account liberalization during the 1990s.2 In this article, I study the attempt to institutionalize capital account liberalization in the statute of the International Monetary Fund (IMF). I show the indeterminacy of rationalist–materialist explanations of outcomes and change in international organizations.3 International organizations do not simply respond to structural changes based on strategic incentives and material constraints. Rather they also have an ‘inner life’. Organizations operate in a social environment in which material factors and events are interpreted through existing (individual) beliefs and (collective) norms. An influential branch of social constructivism in International Relations (IR) emphasizes — based on organizational sociology — not only the ‘soft power’ in the form of ‘expert authority’ that international organizations exercise vis-a`-vis states but also the considerable amount of autonomy they have vis-a`-vis their authorizing environment (Barnett and Finnemore 2004). Departing from this theoretical vantage point, I analyze organizational change at the IMF in the context of capital account liberalization. While theories emphasizing the interests and power of state actors in international politics shed light on the emergence and ‘cascade’ of the norm4 of open capital accounts, they fall short of capturing the complex determinants of change within the IMF. Given the at best ambivalent empirical evidence regarding the salutary effects of capital account liberalization, why did the organization so vigorously promote it starting in the late 1980s? I stress the role of ‘norm entrepreneurs’ within the IMF committed to changing the right of member-states to impose capital controls. To give the IMF the mandate and jurisdiction over the capital account policy of member-states was a crucial goal for these actors. Their success in bringing the organization to the brink of changing its statute to include capital account liberalization was facilitated by its specific organizational culture. Internally shared ideologies, values and routines predisposed the Fund to embracing the liberalization of international capital movements before powerful member-states forcefully pursued this agenda in the context of developing countries. In fact, IMF management and staff emerged as the major driver of institutional change (Abdelal 2004). However, with the IMF management and the most powerful members of its authorizing environment in favor of the capital account amendment, why did it not enter into international law in the end? Put differently, why was the norm’s ‘life cycle’ not completed?5 Again, rationalist–materialist explanations referring to the effects of the Asian financial crisis in 1997–1998 are insufficient. External events do not constitute an objective reality from which an unambiguous policy choice automatically results. For an exogenous shock to undermine an existing intellectual consensus on economic policies and instruments, it needs to be understood as a profound, deep-seated challenge to taken-for-granted

Ralf J. Leiteritz Explaining organizational outcomes

3

principles and assumptions. Hence, only the interpretation that capital account liberalization somehow contributed to the outbreak of the Asian crisis had the capacity to alter the extant consensus on the benevolent effects of capital account liberalization. In the political battle over how to understand the causes of the Asian crisis in the Fund’s Board of Executive Directors, asymmetric power relations were less important than communicative action for the decision of how to proceed with the capital account amendment. With the majority of IMF shareholders and an increasing number of staff rejecting the ‘hardliner’s’ interpretation of the crisis, their goal to institutionalize the new norm was doomed. The result has been the emergence of a new consensus focused on the gradual and sequential liberalization of international capital movements and a renewed tolerance of capital controls in developing countries on part of the IMF. In other words, ‘over time, the international consensus would change from ‘careful liberalization’ in which ‘careful’ was written in fine prints and ‘liberalization’ in bold characters to the opposite situation’ (Coeure´ and PisaniFerry 2000: 25). The article proceeds as follows. First, I discuss the rise of the open capital account discourse outside and inside the organization during the early 1990s leading up to the proposal to change the IMF charter to make capital account liberalization a requirement for membership. Second, I switch the level of analysis from internal discussions in the IMF to an analysis of the positions that Fund member-states took towards the capital account amendment in the Board of Executive Directors. In particular, I study the discussions in the wake of the Asian financial crisis in the first half of 1998. The final section concludes.

The Rise of the Capital Account Liberalization Discourse External imposition? Until the late 1980s, the discourse about capital account liberalization was confined to the realm of industrial countries. The biggest advances were made in the context of the Organization for Economic Cooperation and Development (OECD) with the ‘Code of Liberalization of Capital Movements’ adopted in 1961, after the restoration of full currency convertibility in Western Europe in 1959. According to this Code, the member-states agreed to ‘progressively abolish between one another restrictions on movements of capital ‘to the extent necessary for effective economic cooperation’ and with the aim to ‘endeavour to extend the measures of liberalization to all members of the International Monetary Fund’ (Article 1). As a result, policies converged around full capital account openness during the 1980s among the developed countries (Goodman and Pauly 1993). This was legally recognized in 1989 when the scope of the


4

OECD Capital Movements Code was widened to cover all international capital movements, including short-term financial transactions. However, it took till the beginning of the 1990s until capital account liberalization became a widespread phenomenon in the developing world (Edison et al. 2002; Brune and Guisinger 2003; Simmons and Elkins 2004). Rationalist–materialist theories of international political economy explain the behaviour and change of international organizations in terms of (dominant) state action. Since states create international institutions in the first place, they are supposed to be able to change them later once political circumstances or their interests require that. For example, pluralist approaches apply insights from principal-agent theory to explain policy outcomes in international organizations on the basis of information asymmetries between shareholders and management (Nielson and Tierney 2003). Realist theory, on the other hand, emphasizes the structural role of the most powerful members of the international system, particularly the United States (US), in determining organizational outcomes (Krasner 1985; Gilpin 2001). Once powerful memberstates are committed to a certain course of action given their material interests, international organizations as their dependents are expected to follow suit. Some scholars have referred to the rise of the so-called Wall Street-Treasury Complex in the domestic political economy of the US in order to highlight the critical role that the interests and power of member-states play for policy and institutional change of the IMF (Wade and Veneroso 1998; Gowan 1999). The early 1990s not only saw the rising dominance of private capital market actors in the domestic financial system of the US but also a high-ranking representation of ‘norm entrepreneurs’ devoted to the cause of free international capital movements in and out of the so-called emerging market countries. This meeting of minds and interests between the private and the public sector was symbolized by the leadership team at the US Treasury during the second half of the 1990s — Robert Rubin, a former managing director of the investment bank Goldman Sachs, and Lawrence Summers, a former economics professor at Harvard University. The result was a unique political constellation reflecting both material interests and the ideological commitment to aggressively push for capital account liberalization in emerging market economies. According to prominent economist and outspoken free tradeadvocate Jagdish Bhagwati, the Wall Street-Treasury Complex describes an alliance hiding behind the assertion of social purpose and cemented through personnel exchanges between both worlds: ‘a definite networking of likeminded luminaries [y] unable to look much beyond the interest of Wall Street, which it equates with the good of the world’ (Bhagwati 1998: 11–12, 2004: chapter 13). Rubin and Summers shared a strong belief in the superiority of marketbased or private sector solutions to macroeconomic issues and were openly


5

hostile to what they labelled ‘dirigiste’ models of economic policy-making. As a result, in their foreign economic policy agenda a ‘big bang’ approach to domestic financial liberalization figured prominently. In the political doctrine of the Treasury [t]here was a hope that by forcing the pace of financial liberalization, (developing) countries might be compelled to more quickly upgrade their domestic regulations and institutions. Conversely, encouraging them to open only after the requisite domestic reforms were well advanced applied no pressure for reform; it was a road map to a destination that might never be reached (DeLong and Eichengreen 2002: 251). In sum, the US became a ‘norm leader’ during the Clinton administration vigorously promoting free capital mobility in various international forums through a combination of coercive and rhetorical means aimed at the delegitimation of capital controls. Far from being altruistic, other-regarding agents relentlessly trying to persuade state actors for the good of the world, as whom social constructivists usually depict ‘norm entrepreneurs’ (Keck and Sikkink 1998; Finnemore and Sikkink 1999), the US-led campaign unabashedly reflected material objectives and, at the ‘norm cascade’ stage, included a substantial arsenal of material levers to achieve normative change (Wade 2001). Yet, contrary to the external imposition thesis, the IMF pursued capital account liberalization as a policy strategy for developing countries before this powerful alliance of private and public interests in the US made the organization a prime target for the implementation of its agenda. An IMF paper noted in 1995: [t]raditionally, the IMF’s technical assistance in the area of foreign exchange systems focused on efforts to facilitate current account convertibility in its member countries; however, from the mid-1980s the focus shifted toward encouraging the adoption of full current and capital account convertibility (Quirk et al. 1995: 6, emphasis added). Manuel Guitiań, the director of the Monetary and Exchange Affairs Department at the IMF during the 1990s, publicly declared as early as 1992: [economic] logic advocates the dismantling of capital controls; developments in the world economy make them undesirable and ineffective; and a strong case can be made in support of rapid and decisive liberalization of capital transactions. All these considerations underwrite strongly a code of conduct that eschews resort to capital controls as an acceptable course of action for economic policy (Guitiań 1995: 86, emphasis added).


6

That policy change of the IMF actually preceded strong member-states’ demands for it constitutes a puzzle for both pluralist and realist explanations of organizational behaviour. While capital account liberalization has dominated the agenda in industrial states since the 1960s, its systematic extension to developing countries is inextricably linked to the ideational and operational activities of the IMF. This is not to deny the various formal and informal channels of interaction between the organization and powerful member-states (Woods 2003). The IMF does not exist in a political vacuum and its thinking and activities are undoubtedly connected to the wider social context outside the organization. Due to the permeable borders between the Fund and its authorizing environment, mutually reinforcing interests and discourses focused on capital account liberalization have emerged.6 While it is improbable that the IMF undertakes policy initiatives against the explicit will of crucial member-states, it is not simply the vicarious agent of member-states’ interests. The Fund possesses the authority via its intellectual leadership to advocate international norms without being expressly ordered to do so by its member-states. What conventional IR theories tend to ignore is an appreciation of the intersubjective social context in which international organizations operate and produce outcomes. This context is above and beyond simple strategic calculations about the material benefits and costs of specific actions. International organizations are no less social entities as their equivalents in the domestic arena. As a result, they are imbued with shared norms, identities, values, routines, and the like. These informal social institutions are a crucial element for an adequate understanding of organizational behaviour and change. I suggest that one of the reasons why rationalist– materialist IR theories have problems explaining the rise of the capital account liberalization discourse as applied to developing countries within the IMF prior to the emergence of the ‘Wall Street-Treasury Complex’ has to do with the fact that they overlook a critical factor that provides international organizations with considerable autonomy from their principals: bureaucratic culture. Organizational culture and its effects on policy outcomes at the IMF Bureaucratic culture consists of social practices driven by ideologies, norms and routines which govern the expectations and behaviour of organizational staff members (Argyris and Scho¨n 1978; Brunsson 1989; Schein 1992). It can reasonably be argued that only these informal arrangements and ideological convictions make a large public organization function properly. In addition, they exert a path-dependent effect on organizational change, limiting the extent to which reform initiators are able to go beyond modifications in the formal structure and rules to disrupt the underlying informal values and incentives


7

needed to incite meaningful and sustainable changes in organizational behaviour. The IMF’s organizational culture is shaped by a shared belief among its staff in a macroeconomic paradigm, that is, an ‘integrated set of theoretical and methodological propositions’ (Evans and Finnemore 2001: 19) squarely rooted in neo-classical economic theory (Boughton 2004: 17). A strong antiinflationary bias combined with fiscal conservatism has shaped the Fund’s intellectual framework from its very beginning (Babb 2003: 20–22). The result have been frequent attempts to dodge the norms and principles making up the post-war order of ‘embedded liberalism’ (Ruggie 1983) through policy and institutional changes — without the member-states necessarily devising or pushing them onto the organization in the first place. As Barnett and Finnemore (2004: chapter 3) demonstrate, the expansion of the Fund’s mission from its original narrow focus on solving balance-of-payments problems to include fiscal policies, domestic market structures, income policies and banking structure did not stem from member-states’ demands. The specific organizational culture, its ethos as a technocratic institution providing ‘objective’, quantified knowledge, constitutes an essential yet often overlooked element of the IMF’s autonomy from member-states’ control and oversight. Moreover, the claim to unrivalled ‘expert authority’ allows the organization to even diverge from the formal ‘rules of the game’ enshrined in its own charter. According to the Articles of Agreement drawn up in 1944 at Bretton Woods, each member-state has the right to maintain controls on international capital movements, provided only that these controls do not restrict international trade (Article VI, Section 3). This provision was directly related to the fact that capital controls constituted one important cornerstone of the ‘embedded liberalism’ compromise established after World War II. According to Keynesian thinking, capital controls were regarded as an important instrument of national policy-making in order to preserve the political independence of countries faced with the consequences of a liberalized international trade regime and within a system of fixed exchange rates (Kirshner 1999). In the presence of a strong need for full employment and growth and in the absence of a conventional adjustment mechanism for national economies following the war, for example, through expenditurereducing policies, the retention of capital controls was a critical part of the emerging social contract (Eichengreen 1996: 95). In fact, the IMF could even require the imposition of capital controls in order to prohibit the use of Fund resources to those countries that did not impose controls in t he event of large or sustained capital outflows and declare the memberstate ineligible to use the Fund’s resources if it failed to comply (Article VI, Section 1a).


8

In reality, however, the IMF has never invoked the provisions of Article VI enabling it to impose capital controls. Quite the contrary, the bailout of countries through the Fund occurred without imposing capital controls as early as the 1950s, and has been taken for granted ever since.7 The explanation given by the IMF for this policy choice contradicting its own statute has been to argue that an unchecked capital outflow will eventually cause problems for the current account and so indirectly affect the official remit of Fund authority (James 1996: 133–39, 161–65). Organizational culture is usually treated as a constraint on the successful implementation of reform initiatives mandated by the organization’s authorizing environment and/or its leadership (Weaver and Leiteritz, forthcoming). However, it can also enable institutional change in the absence of strong outside pressure. This is what happened with capital account liberalization at the IMF. As former IMF chief economist Jacques Polak put it: ‘the Fund has wholeheartedly embraced capital account liberalization in its surveillance, financing, and technical-assistance activities without being hindered by a lack of mandate or from the dated provisions of Article VI’ (Polak 1998: 50). Structural changes in the global economy during the 1980s privileging private capital flows at the expense of public flows and a ‘creative interpretation’ of the emerging ‘Washington consensus’ (Williamson 1990: 5–20) to include capital account liberalization opened up a ‘window of opportunity’ for norm advocacy from within the institution aimed at outlawing capital controls in the international monetary system. This internal campaign proved to be successful partly because capital account liberalization perfectly corresponded with the intellectual mindset of Fund staff and management stressing the fundamental superiority of market-based solutions to economic problems facing developing countries at the end of the 1980s.8 Undoing the case for capital controls from within The support for sweeping economic reforms in many parts of the developing world was at its height after the end of the debt crisis and the demise of the planned economies in the former socialist countries of Eastern Europe. Following the failed experiences with heterodox economic stabilization programmes in many countries in Latin America and Africa, new classical economics became the dominant perspective in development thinking and led to what James Boughton (2001b) has called the ‘silent revolution in policymaking.’ Associated with this framework are a negative view on government intervention in the economy and the unqualified support for policy reforms that remove obstacles to the unrestricted operation of free markets. In this framework, capital controls are regarded as a phenomenon


9

that harks back to an earlier era in the history of the international financial system linked to extensive state interventionism. Based on its focus on economic efficiency rather than national autonomy, neo-classical economics — at least in its interpretation through the IMF — espouses hostility to formal restrictions placed on the flow of private capital across national borders. As a result, several lines of attack were mounted by the IMF to demonstrate — at a minimum — the redundancy and — at a maximum — the damage done by capital controls for the success of economic policy in developing countries. First, their effectiveness was questioned given the dramatic advances in information processing technologies rendering existing government regulations putatively unenforceable. Following the establishment of current-account convertibility in many developing countries at the end of the 1980s, market actors have been equipped with sophisticated tools to circumvent capital controls such as over- and under-invoicing of imports and exports, and otherwise channel capital transactions through the current account (Eichengreen 1996: 94). Second, it was widely assumed that financial liberalization is somewhat of a latecomer compared with trade and current account liberalization and that extending the economic logic from one arena to the other was only natural and unproblematic. For example, Guitiań (1996: 176) saw no difference between liberalizing trade and financial flows portraying them as equal in their fundamental opposition to closed economic systems. The well-known discourse about ‘rent-seeking’ behaviour in national trade policies was transposed to the realm of monetary and exchange rate policy where capital controls were seen as a protectionist instrument sheltering special interests in the domestic economy, thereby hampering the efficient allocation of resources in order to achieve economic growth, and encouraging the pursuit of ‘inconsistent macroeconomic policies’. Chile-type controls on capital inflows were regarded as merely delaying ‘adjustments to fundamental macroeconomic policies, such as fiscal policy and exchange rate policy’ and contributing to ‘distortions and inefficiency’ (Quirk et al. 1995: 20). The Fund’s preferred solution in the case of large capital inflows in the early 1990s was the opposite of imposing controls: the rapid transition to full capital account convertibility ‘motivated by the openness of the economy in the context of limited administrative capacity’ (Quirk et al. 1995: 24). Having undermined the case for capital controls with the help of the dominant economic philosophy at the time, the conclusion was that international financial opening is an unstoppable force driven by immutable, exogenous factors beyond the control of national governments. IMF Managing Director Michel Camdessus thus called the trend toward capital account convertibility ‘irreversible’ (IMF 1998: 82). Instead of trying in vain to reign in the forces of the global capital market, developing countries were


10

advised to embrace its blessings wholeheartedly. The preferred outcome involved a strategy similar to the ‘big bang’ or ‘shock therapy’ implemented in some Eastern European and Latin American countries. Rather than emphasizing the critical institutional requirements for financial opening in the form of prudential regulations of the domestic financial system, the proponents of the ‘big bang’ approach merely hinted that ‘credible, sound domestic economic policies in a stable external environment’ (Guitiań 1996: 184) were necessary preconditions for removing capital account restrictions. The traditional argument for sequential economic liberalization with unregulated international capital movements only at the end of the reform agenda (McKinnon 1991) was discredited as ‘the best recipe for the permanence of capital controls’ (Guitiań 1996: 184). While the need for sound financial systems and the prudential supervision of markets was explicitly recognized in several IMF publications from 1993 onwards, the relevant formulations, let alone the policy advice given to countries, suggested only a secondary role vis-a`-vis the pursuit of ‘consistent macroeconomic, financial and exchange rates policies’ (Mathieson and RojasSua´rez 1993: 33). The Fund’s hostile view towards all forms of capital controls except as a temporary measure in cases where inadequate prudential regulation of the banking system may justify their maintenance on short-term inflows is revealed in a paper reviewing the organization’s experience with capital account liberalization in member-states published in 1995: In the recent cases reviewed for this paper involving large capital inflows, a suitable mix of fiscal, monetary, and exchange rate policies was considered an appropriate response, and the tightening of controls over capital movements as an alternative was generally discouraged (Quirk et al. 1995: 6). This position reflected the preoccupation with ‘getting the policies right’ in neo-classical economic thinking at the expense of institutional prerequisites before embarking on the path towards full capital account liberalization. Against a long-held view in economic theory, the author of an IMF paper published in 1994 saw little risk in opening up the capital account as part of ‘simultaneous ‘multi-pronged’ stabilization packages’ covering ‘a credible budgetary correction coupled with introduction of market interest rates and exchanges rates’ (Quirk 1994: 18). The showcase example in the developing world for the advocates of the ‘big bang’ approach was Indonesia where financial liberalization preceded trade liberalization and was maintained in the face of a balance of payments deficit since the early 1970s (Quirk 1994: 13). In contrast, the Mexican crisis in 1994–1995 — the ‘first crisis of the 21st century’ according to Camdessus (1995) — was unabashedly attributed to ‘some dubious policy choices’ on the part of the Mexican government and portrayed as being unrelated to the earlier process of rapid capital account liberalization


11

against the background of inadequate domestic institutions for prudential supervision.

Norm institutionalization through amending the charter Capital account liberalization was the name of the game at the IMF in the early 1990s. However, it was not officially recognized within the statute of the IMF — quite the opposite in fact. As a consequence, the battle cry for staff and management, mostly located in the Monetary and Exchange Affairs as well as the Policy Development and Review Departments, was to bring the legal norms and the reality of organizational conduct in alignment by way of a change of the IMF charter. Similar to the goal of current account convertibility, the liberalization of international capital movements was to become an official mandate for the Fund along with an extended jurisdiction in what would have been only the fifth amendment of its Articles of Agreement. Acknowledging that the IMF ‘has in some cases encouraged developing countries to open their economies to foreign capital inflows and to liberalize restrictions on capital account transactions’ (Quirk et al. 1995: 6) under the socalled Article IV surveillance consultations,9 financing arrangements, and technical-assistance programmes to develop foreign exchange markets, the main goal of the proposed amendment was to provide a formal legitimization and enforceability for lending decisions and policy advice hitherto been given in a legal grey zone or even in implicit violation of international law. The increasing pressure for capital account liberalization coming from the US Treasury emboldened the proponents of the amendment within the IMF and enabled the management to launch a campaign for the formal institutionalization of the ‘emerging global norm of capital mobility’ (Rogoff 2003). In order to achieve a change of the Articles of Agreement, a special 85-per cent majority in the decision-making body of the Fund, the Board of Executive Directors, is required. This body is composed of 24 Executive Directors (EDs) representing the Fund’s shareholders. The five largest shareholders (US, Japan, Germany, France, United Kingdom) as well as China, Russia, and Saudi Arabia have their own ED. The other 16 EDs represent groups of countries, the so-called multi-country constituencies. Voting power is weighted according to countries’ contributions to the Fund’s resources. As a result, the US has a share of slightly more than 17 per cent of the total votes. Together with the next largest vote holders (Japan, Germany, France, United Kingdom), each with 5–6 per cent of the votes, these five countries together control almost 40 per cent of the voting power in the Executive Board. Whereas the US can block any proposed change with its voting share alone, it needs allies among the rest of the Board members in order to ensure an amendment to the Fund’s statute.


12

The context for tabling the capital account amendment occurred during the run-up to the Fund’s Annual Meeting in 1997. Three issues dominated the agenda for the meeting of the Board of Governors in Hong Kong: (i) the proposed new Special Drawing Rights (SDRs) allocation that pitted developing vs developed countries over the amount of the new allocation; (ii) an increase in the Fund’s capital base (quotas) by 45 per cent with differences among the shareholders about the criterion for distribution of the increase; and (iii) the proposal for the change in the Articles of Agreement concerning capital account convertibility. As a matter of fact, the last item was seen as the least contentious on the agenda having received widespread support in the diverse constituencies of the Fund. The outcome of the meeting was to move forward on all three issues with the USD 90 billion quota increase eventually approved by the US Congress. In contrast, the new allocation of SDRs, albeit already approved as the fourth amendment to the Articles of Agreement by the Board of Governors at the Hong Kong meeting, did not pass Congress. The statement issued by the IMF’s Interim Committee on 21 September, 1997 regarding the liberalization of capital movements emphatically captures the dominant discourse during the first half of the 1990s: It is time to add a new chapter to the Bretton Woods agreement. Private capital flows have become much more important to the international monetary system, and an increasingly open and liberal system has proved to be highly beneficial to the world economy. By facilitating the flow of savings to their most productive uses, capital movements increase investment, growth and prosperity. Provided that it is introduced in an orderly manner, and backed both by adequate national policies and a solid multilateral system for surveillance and financial support, the liberalisation of capital flows is an essential element of an efficient international monetary system in this age of globalisation. The IMF’s central role in the international monetary system, and its near universal membership, make it uniquely placed to help this process. The Committee sees the Fund’s proposed new mandate as bold in its vision, but cautious in implementation (IMF 1997). The underlying goal of the amendment was clear: the formal recognition of the norm of unrestricted global capital movements in international law. Making capital account liberalization a central purpose of the IMF as well as extending its jurisdiction into this area represented a dramatic shift from what the founders of the organization had in mind some 50 years earlier. Following the example of current account convertibility, the intention according to IMF Deputy Managing Director Stanley Fischer (1997: 13) was to establish: a universally applied code of good behavior in the application of capital controls, enabling the Fund to determine when macroeconomic, structural,


13

and balance of payments considerations require adherence to — or permit exemptions from — obligations relating to capital account liberalization. Fischer’s reasoning is telling. He openly acknowledged that ‘there is no established body of analysis on capital controls — what works and what does not — and ‘a host of questions’ needs to be examined’ (IMF 1998: 84). Yet, rather than suggesting postponing the decision on changing the IMF charter until unambiguous answers to these questions are found, he believed that ‘a capital account amendment of the IMF’s Articles would provide an appropriate context in which such an analysis could be conducted’ (ibid.).10 Not only was the amendment to enhance the legal ambit of the Fund vis-a`vis its members, the simultaneously proposed increase in its capital base could conveniently be justified with the need to finance balance of payments problems caused by capital outflows in the wake of financial liberalization — a provision declared illegal by Article VI, Section 1a of the IMF charter.

The Asian Crisis and the Failure of the Capital Account Amendment Interpreting the crisis ‘Everything changed with the Asian crisis.’ This statement was repeated in virtually every interview that I conducted with IMF staff, Executive Board members, and outside observers. Yet, external shocks do not usually impose only one ‘correct’ policy response. Agents try to make sense out of the event and arrive at different implications for actions. Thus, as constructivists point out, the political response to exogenous shocks is socially constructed, not somehow automatically given. Competing interpretations of the repercussions of the Asian crisis for the agenda of financial liberalization were advanced suggesting different strategies with respect to the proposed amendment. Which of those strategies ultimately prevails over the others is not simply a matter of the existing distribution of power. Crisis narrations provide fertile grounds for studying how proposed actions in response to an external shock reflect shared or competing understandings about the functioning of global financial markets and the role of the IMF in the international monetary system. In this section, I analyze the statements made by several EDs concerning the capital account amendment as proposed by the Fund’s management in the aftermath of the Hong Kong declaration. Based on the unchanged interests of major state actors and the power constellation in the Executive Board, rationalist– materialist theories would expect that the supporters of the amendment were able to deploy their overwhelming material and ideological power resources in the service of their strategic goals. Similar to the situation after the Mexican crisis 3 years earlier, the dominant discourse should be able to prevail, blaming the Asian


14

crisis on domestic institutional deficiencies (‘crony capitalism’) and grave policy mistakes on part of the affected countries (Hall 2003). Following the official green light at the 1997 Annual Meetings granted by the IMF Interim Committee, Managing Director Camdessus submitted a draft of the proposed amendment to the Executive Board in March 1998, that is, at the time when the Asian crisis had just reached its climax. The proposal did not include specific language for changes other than to include capital account liberalization in the mandate of the Fund (Article I). However, it stated as the overall objective that ‘[t]he amendment will establish the general rule that members are prohibited from imposing restrictions on international capital movements without Fund approval’ with an exception made for ‘the right to impose restrictions on inward direct investment.’ The minutes of the Executive Board session discussing the proposed amendment on 2 April 1998 reflect the positions taken by various country representatives vis-a`-vis the proposal. Whereas the ongoing Asian crisis had apparently not seriously affected the general commitment to the goal of global financial openness,11 it did help to undermine the case for providing the Fund with the corresponding jurisdictional power vis-a`-vis its members. Three broad positions emerged during the discussion about how to implement the change in the Fund’s purpose.

The hardliner The first one is represented by the statements from the Executive Director for the US (Karin Lissakers), along with the British and Scandinavian Directors, as well as Camdessus. Based on the assumption that capital account liberalization is ‘driven by autonomous forces, rather than policy’ (US ED, EBM/98/85 (3 August, 1998): 80), the protagonists of this position were unconvinced that the Asian crisis required any sort of rethinking of earlier assumptions and proposals. In fact, the Asian crisis reinforced the need to hand legal authority over to the IMF in order to ensure the so-called ‘orderly liberalization of international capital flows.’ According to this interpretation, the causes of the Asian crisis rooted in the ‘poorly implemented liberalization and volatile capital flows’ (US ED, EBM/98/38 (2 April, 1998): 10). Therefore, bringing in the IMF is not only warranted in light of its ‘overarching responsibility for smoothing the functioning of the international monetary system’ but also because of the ‘very large-scale demand for financial support from the Fund’ (ibid.). Any changes to the mandate of the Fund were regarded as inextricably linked to relevant changes in its jurisdiction. This perspective rejected the confinement of the Fund to an advocacy role by arguing that advocacy must be backed up with the appropriate authority to enforce international standards and rules. The imposition of unilateral capital and exchange restrictions by countries in financial crisis was not only regarded as


15

‘the biggest threat to financial market stability’ but also constituted a ‘disorderly reversal of market opening’ (US ED, EBM/98/38 (2 April, 1998): 11). Such a purported breach of international norms must be reigned in with the legal power of the IMF. While paying lip service to the need for a sequential approach to capital account liberalization, this position remained committed to the principal assumption in the earlier ‘big bang’ strategy, namely that ‘appropriate sequencing should not mean that the liberalization of capital movements should wait for all reforms to be completed. [y] In economics, as in life, there is no reward without risk’ (Scandinavian ED, EBM/ 98/38 (2 April, 1998): 23). The cautious Several constituencies from developed (Western Europe and Japan) and developing countries argued that the Asian crisis had in fact undermined the previous beliefs and assumptions regarding the scope of the amendment. They insisted that things had changed over the previous few months requiring the rethinking of the plan to institutionalize capital account liberalization on a global scale. According to this interpretation, the Asian crisis highlighted the need to ‘consider clearly the detailed prerequisites of liberalization — a strong regulatory framework, a sound banking system, an adequate supervisory structure — as well as the appropriate sequencing of liberalization measures’ (ED for Canada and the Caribbean countries, EBM/98/38 (2 April, 1998): 8). There was also some sympathy for allowing controls on inward foreign direct investment on more than a temporary basis in order to prevent financial crises from occurring in the first place (Japanese ED, EBM/98/38 (2 April, 1998): 19). While agreeing to move forward on the change to the Fund’s mandate, the need to move beyond an advocacy role for the Fund in the area of capital account liberalization was questioned. In line with the position taken by former IMF chief economist Polak, this group argued that the Fund had considerable success in promoting current account and trade liberalization through the use of surveillance, technical assistance, and conditionality but without exercising its jurisdiction. Hence, the expansion of the legal remit of the Fund would be ‘neither necessary nor helpful in promoting the orderly liberalization of capital movements’ (Polak 1998: 47). The preferred strategy was to hold off on the decision-making schedule concerning the amendment until empirical studies about the prerequisites and effects of capital account liberalization found conclusive answers. The naysayer Somewhat surprisingly given the relatively strong reliance on capital controls in the largest developing countries such as China and India, only the ED


16

representing Brazil and some smaller South American and Caribbean countries recorded a negative view on changing the mandate and the jurisdiction of the Fund during the meeting on 2 April 1998.12 He openly questioned ‘whether we actually need an amendment’ (Brazilian ED, EBM/98/38 (2 April, 1998): 24). While willing to give in on changing the purpose of the Fund in light of a majority in the Executive Board, the Brazilian ED vehemently rejected the need for Fund jurisdiction over capital account restrictions. This view expressed most clearly the prerogatives of national sovereignty vis-a`-vis the construction of an international norm effectively outlawing capital controls.13 The ED articulated his principled belief in the virtues of controls on international capital flows: ‘[r]estrictions on inward direct investment can serve numerous essential purposes, and we would like the freedom to impose such restrictions should they prove necessary’ (Brazilian ED, EBM/98/38 (2 April, 1998): 25). In addition, he was eager to distinguish between capital controls on the one hand, and prudential and national security measures on the other. The latter were regarded as being outside of the IMF’s purview. The new doctrine In light of the events in Thailand, Indonesia, South Korea, and Malaysia at the end of 1997, the Executive Board requested management to draft a comprehensive report about the issue of capital account liberalization in emerging market countries. This paper, prepared by the Research Department in the first half of 1998, officially demonstrated the return to a policy of sequential capital account liberalization on part of the IMF. It revised the earlier view about the alleged benefits of a rapid movement to capital account convertibility and qualified the received wisdom by distinguishing between the effects of long-term and short-term capital flows. While stating that the former have been unambiguously advantageous for developing countries, the ‘premature’ or ‘disorderly’ liberalization of the latter had been associated with the outbreak of financial crises. The authors of the study argued that problems of asymmetric information and domestic distortions are especially prevalent in financial markets leading to the result that ‘sharp investor reactions can give rise to unpredictable market movements and, in the extreme, financial crises’ (Eichengreen et al. 1998: 2). However, they remained committed to the assumption that global capital mobility constitutes an inevitable and irreversible fact of modern economic life. Reaping its benefits required ‘a combination of sound macroeconomic policies to contain aggregate financial imbalances and ameliorate the effects of financial disturbances and sound prudential policies to ensure proper private incentives for risk management’ (Eichengreen et al. 1998: 1). In other words, the previous ‘big bang’ approach was abandoned and replaced by the recognition not only of the adequate


17

domestic policy mix but also of institutional requirements and the ‘appropriate’ sequencing of capital account opening depending on the specific country context. Moreover, the paper summarized the existing studies on the consequences of financial liberalization by saying that they ‘provide weaker evidence of a positive effect on growth for capital account liberalization in particular than for financial development more generally’ (Eichengreen et al. 1998: 20). The hostile view towards virtually all forms of capital controls had been moderated by advocating the usefulness and indeed indispensability of prudential regulations of the domestic financial system, for example, in the form of tighter bank supervision. The authors also acknowledged that the distinction between prudential measures and traditional capital controls often walks a fine line and is thus subject to considerable interpretation (Eichengreen et al. 1998: 24). The reactions of the Executive Board to the paper during the session on 3 August, 1998 were far less acrimonious than at the earlier meeting on 3 April. Virtually all speakers concurred with the ‘sequencing approach’ advanced in the paper. The ‘cautious view’ clearly dominated the statements of the EDs with no representative arguing for the continued relevance or feasibility of the ‘big bang’ strategy. The Indian ED even joined the sole ‘naysayer’ by questioning the case for capital account liberalization altogether: ‘When the potential gains are uncertain but potential losses are formidable, it is prudent for the policy makers not to venture into the uncharted seas’ (Indian ED, EBM/98/85 (3 August, 1998): 49). This was a remarkable statement given his earlier support for the amendment, including extending the Fund’s jurisdiction. The evidence provided in the staff paper for the implication of capital account liberalization as one of the causes for the Asian crisis seemed to have effectively silenced the protagonists of the ‘hardliner’ view.14 Contrary to the attempt by the US ED to portray the crisis as a signal for the Fund to engage in ‘more of the same’, the emerging discourse rather emphasized a countryspecific approach to financial liberalization against the background of the substantial risks involved in this process. The issue of extending the Fund’s jurisdiction over the liberalization of international capital movements was put on hold pending further discussion. Since it was agreed during the meeting on 2 April 1998 that a proposal from the Executive Board to the Interim Committee needed to combine a change in the purpose with a corresponding change in the Fund’s jurisdiction, no progress on the amendment could be reported back to the Committee. In essence, the issue was taken off the Executive Board’s agenda and has not returned ever since. The analytical statements from the IMF during the last 5 years reflect the opinions of countries advocating a cautious view on capital account liberalization (Ariyoshi et al. 2000; IMF 2001: 145–73; Rogoff 2002; Prasad et al. 2003). They stress the sequential and gradual liberalization of international


18

capital flows. In addition, recent Fund publications and statements emphasize that the selective and temporary application of controls over short-term capital flows is a legitimate instrument that should remain in the policy arsenal of governments.15 Former Managing Director Horst Ko¨hler declared in September 2003: Today, we are also emphasizing a more carefully-sequenced approach to capital account liberalization. And I have no hesitation to recognize that the use of capital controls in exceptional circumstances should not be a taboo. (Ko¨hler 2003) This outcome is consistent with the expectation that incremental adjustments in concurrence with the dominating policy paradigm are the most frequent form of behavioural change in international organizations (Haas 1990). Paradigmatic shifts where the levels of the basic instruments, the instruments themselves, and the hierarchy of goals behind policy are simultaneously changed are arguably rare. Usually the instruments and tasks keep getting refined, yet the underlying belief system remains intact. It is therefore perhaps no surprise that the more radical proposal to reconfigure the purpose and legal ambit of the Fund did not become reality. Even though the proposal was supported by a powerful coalition of actors inside and outside the IMF, the capital account amendment died in the carnage left behind by the Asian crisis. But how exactly did the norm change get stuck at the ‘cascading’ stage in the IMF? Communicative action State negotiations in international financial institutions hardly constitute a rational truth-seeking dialogue in the Habermasian sense where actors argue their case by making validity claims and are principally open to be convinced by the ‘power of the better argument’, even if it contradicts their original interests and goals. Instead, interactions in the Executive Board of the IMF usually take the form of a bargaining mode where participants pursue their interests according to instrumental rationality with power relations or coercion as a critical determinant of outcomes. The ‘hardliner’ narration of the Asian crisis advanced by the most powerful members of the Executive Board stressed the continued need to give the organization a new mandate and the legal authority over the liberalization of international capital movements. On the other hand, the ‘cautious view’ provided for a different interpretation of the event.16 That the latter was ultimately able to shape the new policy approach of the IMF after the crisis suggests a limitation for conventional power-based approaches in IR theory.17 In order to transform universal capital account liberalization into an international legal norm as part of the Fund’s statute, the norm advocates


19

needed to make their case in the arena of the Executive Board. They needed to convince a clear majority of the developing countries’ constituencies that the amendment prohibiting the use of capital controls was in their best interests as well. By subjecting their arguments to a semi-open discussion, discursive space was provided for the contestation of the dominant position and for the introduction of alternative perspectives (Risse 2000, 2004). Yet, without an external event fundamentally challenging the underlying beliefs and assumptions of emerging policies and institutions, a ‘cascading norm’ will most likely complete its international ‘life cycle’. Concomitantly, cogent arguments made by well-known academics stressing the questionable empirical foundation for capital account liberalization were virtually excluded from the discourse (Stiglitz 2000). An external shock, however, provides actors with the opportunity — or indeed the need — to rethink their beliefs and assumptions. Powerful states usually have the luxury of not needing to learn according to Karl Deutsch’s well-known aphorism. Hence, more often than not, their interests remain constant. However, general uncertainty enhances the possibility for deliberation (communicative action), since ‘arguing’ as opposed to ‘bargaining’ between actors becomes a precondition in order to establish a common knowledge base upon which to formulate interests and preferences (Mu¨ller 1994). As a result, previously marginalized or excluded arguments against capital account liberalization could now be inserted into the discourse. Given the general confusion over how to make sense out of the Asian crisis and its main causes, the dominant view was forced to defend itself in the intellectual and political battle over the ‘better argument’. Universal truth claims — always reflecting specific interests and preferences — that were previously taken for granted, suddenly became subject to open contestation. Consequently, the dominant discourse advancing a position without unambiguous empirical support could be challenged in light of clear countervailing evidence. Weaker state actors can capitalize on this opening of the discourse. The Asian crisis clearly drove home the risks of capital account liberalization for developing countries. By injecting an alternative discourse into the debate that highlighted the pitfalls of the dominant economic framework, less powerful members of the Executive Board could suggest a different course of action, which was also regarded as more legitimate in the outside environment. It is at this point that power asymmetries within political decision-making bodies are less efficacious compared with the persuasiveness of the speakers’ validity claims. While material power relations are always present in the minds of actors, they recede in the background during the discursive contest over the ‘better argument’. Given the increasing recognition that capital account liberalization was implicated in the origin of the Asian crisis in the Fund’s intellectual environment — represented by prominent mainstream economists


20

such as Paul Krugman and Jeffrey Sachs — and within its own staff, the ‘cautious view’ was able to gain critical legitimacy. Making the free flow of capital part of international law subsequently lost its appeal and status as the ruling discourse. The upshot was that weaker states — relying on supporting evidence from Fund staff and outside sources — were able to successfully challenge the ‘hardliner’ interpretation of the crisis and so shape the policy and institutional direction of the Fund.

Conclusion Ideas and norms play an important role in the international financial system. They shape how states perceive their interests and act upon them. They are usually based on macroeconomic theories. The lesson learned from the Great Depression during the 1930s was to severely restrict the flow of international private capital between countries in order to preserve their national autonomy. Keynesian economic thinking provided the intellectual bedrock for this policy choice enshrined in the charter of the IMF. On the other hand, the preference of countries for an open capital account under the legal authority of the IMF is not a natural outcome of either economic logic or structural changes. Instead, such an interest has to be socially — here understood as discursively — constructed with the help of norm entrepreneurs. In which circumstances do these actors determine policy and institutional outcomes in international organizations? The contribution this article makes to answer the above question is twofold. First, policy and institutional change of the IMF is not merely the result of external events and the resulting organizational adjustment. International organizations have an inner life that makes outcomes and change in response to external stimuli relatively unpredictable. The following statement from the ‘official’ IMF historian, James Boughton, therefore gives a misleading, somewhat benign impression: The evolution of the Fund has been driven almost entirely by shifts in demand — shifts in world economic and political conditions — not by forces from within seeking to reinvent the institution so as to hang onto a role once the original purpose had faded away. (Boughton 2004: 20) On the contrary, the emergence of an open capital account discourse in the IMF cannot simply be attributed to outside factors, economic logic, or pressure from powerful member-states. Instead, internal norm entrepreneurs in the organizational leadership and among staff found fertile ground for their campaign to outlaw capital controls in the specific bureaucratic culture of the IMF. Reinforced by demands for institutional change from powerful


21

member-states during the early 1990s, the abolition of the traditional right of member-states to impose capital controls seemed like a foregone conclusion. Yet, the expected change — the end point of the norm’s ‘life cycle’ — did not materialize. That leads to the important question of when international organizations do change their formal mandate and their operational practice (Tierney and Weaver 2004). Second, I have stressed that an external shock is indispensable for challenging the existing cognitive consensus about organizational policies and objectives. Beyond this generally accepted insight, I have referred to the efficacy of communicative action in the political battle over how to interpret the Asian financial crisis and its repercussions for the proposed capital account amendment. During the moment of the external shock and the resulting uncertainty about policies and instruments — not, however, about the longterm goal and desirability of global financial openness — IMF member-states engaged in an arguing-mode of interaction. The outcome of this discursive process was open-ended, that is, not predetermined by material and ideational power relations. As a consequence, the ‘better argument’ in the form of the staggered approach eventually had a chance to prevail in the discussion about capital account liberalization in the IMF.18

Acknowledgements For helpful comments on earlier versions of this article, I thank Jeffrey Chwieroth, Anthony Elson, Markus Lederer, Kunibert Raffer, Jens Steffek, Robert Hunter Wade, Wesley Widmaier, as well as two anonymous reviewers and the editors of JIRD. The research reported in this article was supported by a PhD students travel grant from the Crisis States Programme at the London School of Economics and Political Science’s Development Studies Institute.

Notes 1 In the aftermath of the financial crises of the 1990s, many emerging market economies, especially in East Asia, have substituted the removal of capital controls with the dramatic buildup of foreign exchange reserves. This is certainly one factor behind the relative stability seen in international financial markets after the Asian crisis. However, it also redirects important financial resources for the purpose of crisis prevention that could otherwise be used to stimulate domestic investment and enhance economic growth. 2 Capital account liberalization is a subset of financial liberalization referring to the reduction of policy barriers to the purchase and sale of financial assets across national borders (Williamson and Mahar 1998). Allowing domestic businesses to take out loans from foreign banks, allowing foreigners to purchase domestic debt instruments, and allowing foreigners to invest in the domestic stock market are three indicative examples of capital account liberalization. Capital account liberalization can be measured either qualitatively by looking at statutory changes in national regulations, or quantitatively by looking at changes in the values of economic variables (Edison et al. 2002). For the purpose of this article, I am concerned with formal restrictions placed on capital account transactions. In addition, I will use the terms capital account liberalization and financial liberalization interchangeably in the remainder of the article.


22 3 Here I lump together the assumptions of rationalism and materialism constituting the metatheoretical foundation of many contemporary IR theories. On one hand, they are committed to methodological individualism based on individual or collective agents making decisions (with full or limited information) according to cost–benefit calculations. On the other hand, the basis for these calculations is more often than not assumed to be self-interest as measured in material gains or losses. Given fixed actor interests in rational choice, change is explained in terms of changing constraints, not on the basis of changing actor preferences (Snidal 2002: 84). 4 The term ‘norm’ has two meanings. On one hand, norms describe ‘regularities of behaviour among actors [y] and give rise to expectations as to what will in fact be done in a particular situation.’ On the other hand, norms reflect prescribed behaviour ‘which gives rise to normative expectations as to what ought to be done’ (Hurrell 2002: 143). 5 Martha Finnemore and Kathryn Sikkink have proposed a three-stage ‘norm life cycle’. The end point of their model, ‘norm internalization’, refers to a situation where ‘norms acquire a takenfor-granted quality and are no longer a matter of broad public debate’ (Finnemore and Sikkink 1999: 255). 6 I thank an anonymous reviewer for this point. 7 In 1956, the Fund provided lending to finance large capital outflows, when the United Kingdom borrowed to stop a speculative attack on the pound sterling in the wake of the Suez crisis (Boughton 2001a). 8 For example, the debt crisis left many developing countries, especially in Latin America, desperate for new capital inflows. Fund staff strongly suggested (forced?) that relaxing or even abolishing capital controls was a promising strategy for developing countries to attract private capital looking for profitable and safe investment opportunities. 9 Article IV of the IMF charter (adopted at the time of the second amendment of the Articles in 1978) gives the Fund the right to exercise ‘firm surveillance’ over the exchange rate policies of its members. The procedures require that in principle members consult with the Fund annually. For details, see Pauly (1997). 10 Revisiting the issue in a recent reflection, Fischer (2004: 115) remains convinced that ‘the concept of the capital account amendment was a good one.’ However, even 6 years on he is forced to concede that the empirical evidence for the alleged optimality of capital account liberalization is still at large. 11 As one of the multi-constituency EDs put it: ‘(c)hanging Article I of the Fund’s charter [y] is now more an issue of legislative technique than of political consensus building’ (Belgian ED, EBM/98/38 (2 April, 1998): 14). 12 Perhaps most striking is the statement by the ED for the South-East Asian countries: ‘notwithstanding the crisis, countries in my constituency remained committed to capital account liberalization’ (Malaysian ED, EBM/98/38 (2 April, 1998): 28). As a result, he indicated his support for the proposed amendment of Article I. Compare this to the remark made by former Malaysian Prime Minister Mahathir during the Annual Meetings of the IMF in September 1997 that currency trading is immoral and should be stopped. 13 The opposition from some Latin American countries to the new norm needs to be seen in the context of their domestic economic policies. The constituency represented by the Brazilian ED maintained controls on capital inflows (Chile, Colombia) or outflows (Brazil) during most of the 1990s. 14 In addition, one has to consider the fact that changes of the Articles of Agreement require national parliamentary approval. Given the link between the amendment and the simultaneous request for additional IMF funding, there was the considerable risk that submitting the amendment for approval to the traditionally recalcitrant US Congress could backfire, that is, have unintended consequences for the institution. Rawi Abdelal (2004: 36–37) argues that the


23

15

16

17

18

capital account amendment was ultimately destroyed by powerful members of the US Congress, who threatened to withhold support for an increase in US contributions to the IMF if the Treasury continued to support the amendment. In response, the Treasury surreptitiously withdrew its strong backing for the amendment. For a useful overview of the Post-Asian crisis discussion about a ‘new international financial architecture’, see Hveem (1999). An essential element of this new discourse was that short-term international capital flows need to be subject to increased regulation. That the interpretation of the ‘naysayer’ was not more prevalent especially among developing countries is a good indication of how far the ‘norm cascade’ had already advanced. Malaysia’s experience with controls on capital outflows imposed in September 1998 provides an example. Despite positive experiences with the effects of the measure, it was gradually withdrawn after only a few months in operation (Abdelal and Alfaro 2003). Apart from realist theory, this shortcoming also applies to the Neo-Gramscian approach to international political economy, which does recognize the importance of ‘intellectual hegemony’ in addition to economic and political power resources (Cox 1987). Yet, even the combination of overwhelming ideational and material power in the hands of the ‘hardliner’ was insufficient to overcome the serious legitimacy problems for the capital account amendment generated by the Asian crisis. However, the international campaign to outlaw capital controls is far from over. It can be argued that the main protagonists still reside in the US Treasury. After the Asian crisis, norm advocates have simply changed their battlefield from the multilateral to the bilateral arena making capital account liberalization a crucial element of recently completed and ongoing negotiations about bilateral free-trade and investment treaties with developing countries. See the testimony by John B. Taylor, Under-Secretary of the US Treasury for International Affairs, to the US House of Representatives’ Committee on Financial Services (1 April 2003).

References Abdelal, Rawi (2004) ‘Freedom and Its Risks: The IMF and the Capital Account’, Chicago, IL: Annual Meeting of the American Political Science Association, 2–5 September. Abdelal, Rawi and Laura Alfaro (2003) ‘Capital and Control: Lessons from Malaysia’, Challenge 46(4): 36–53. Argyris, Chris and Donald A. Scho¨n (1978) Organizational Learning, Reading, MA: AddisonWesley. Ariyoshi, Akira, Karl Habermeier, Bernard Laurens, Inci Otker-Robe, Jorge Ivań CanalesKriljenko and Andrei Kirilenko (2000) ‘Capital Controls: Country Experiences with Their Use and Liberalization’, Washington, DC: International Monetary Fund, Occasional Paper, No. 190. Babb, Sarah (2003) ‘The IMF in Sociological Perspective: A Tale of Organisational Slippage’, Studies in Comparative International Development 38(2): 3–27. Barnett Michael and Martha Finnemore (2004) Rules for the World: International Organizations in Global Politics, Ithaca, NY: Cornell University Press. Bhagwati, Jagdish (1998) ‘The Capital Myth: The Difference between Trade in Widgets and Dollars’, Foreign Affairs 77(3): 7–12. Bhagwati, Jagdish (2004) In Defence of Globalisation, Oxford: Oxford University Press. Boughton, James M. (2001a) ‘Northwest of Suez: The 1956 Crisis and the International Monetary Fund’, IMF Staff Papers 48(3): 425–46. Boughton, James M. (2001b) Silent Revolution: The International Monetary Fund, 1979–1989, Washington, DC: International Monetary Fund.


24 Boughton, James M. (2004) ‘The IMF and the Force of History: Ten Events and Ten Ideas That Have Shaped the Institution’, Washington, DC: International Monetary Fund, IMF Working Paper, 04/75. Brune, Nancy and Alexandra Guisinger (2003) ‘The Diffusion of Capital Account Liberalisation in Developing Countries’, Philadelphia, PA: Annual Meeting of the American Political Science Association, 28–31 August. Brunsson, Nils (1989) The Organization of Hypocrisy: Talk, Decisions and Actions in Organizations, New York: John Wiley & Sons. Camdessus, Michel (1995) ‘The IMF and the Challenges of Globalization — The Fund’s Evolving Approach to its Constant Mission: The Case of Mexico’, Zu¨rich: Zu¨rich Economics Society, 14 November, available at http://www.imf.org/external/np/sec/mds/1995/mds9517.htm (16 December, 2003). Coeure´, Benoıˆ t and Jean Pisani-Ferry (2000) ‘Events, Ideas and Actions: An Intellectual and Institutional Retrospective on the Reform of the International Financial Architecture’, Siena: CDC-CEPII-CEFI International Conference on Reshaping the Architecture of the International Financial System, 23–24 May. Cox, Robert W. (1987) Production, Power, and World Order, New York: Columbia University Press. DeLong, Bradford J. and Barry Eichengreen (2002) ‘Between Meltdown and Moral Hazard: The International Monetary and Financial Policies of the Clinton Administration’, in Jeffrey A. Frankel and Peter R. Orszag, eds, American Economic Policy in the 1990s, 191–254, Cambridge, MA: MIT Press. Edison, Hali J., Michael Klein, Luca Ricci and Torsten Sløk (2002) ‘Capital Account Liberalization and Economic Performance: Survey and Synthesis’, Washington, DC: International Monetary Fund, Working Paper, 02/120. Eichengreen, Barry (1996) Globalizing Capital: A History of the International Monetary System, Princeton, NJ: Princeton University Press. Eichengreen, Barry, Michael Mussa and with Staff Team (1998) ‘Capital Account Liberalization: Theoretical and Practical Aspects’, Washington, DC: International Monetary Fund, Occasional Paper, No. 172. Evans, Peter and Martha Finnemore (2001) ‘Organizational Reform and the Expansion of the South’s Voice at the Fund’, Washington, DC: G-24 Technical Group Meeting, 17–18 April. Finnemore, Martha and Kathryn Sikkink (1999) ‘International Norm Dynamics and Political Change’, in Peter J. Katzenstein, Robert O. Keohane and Stephen D. Krasner, eds, Exploration and Contestation in the Study of World Politics, 247–77, Cambridge, MA: MIT Press. Fischer, Stanley (1997) ‘Capital Account Liberalization and the Role of the IMF’, Hong Kong: International Monetary Fund, IMF Seminar on Asia and the IMF, 19 September. Fischer, Stanley (2004) IMF Essays from a Time of Crisis: The International Financial System, Stabilization, and Development, Cambridge, MA: MIT Press. Gilpin, Robert (2001) Global Political Economy: Understanding the International Economic Order, Princeton, NJ: Princeton University Press. Goodman, John B. and Louis W. Pauly (1993) ‘The Obsolescence of Capital Controls? Economic Management in an Age of Global Markets’, World Politics 46(1): 50–82. Gowan, Peter (1999) The Global Gamble: Washington’s Faustian Bid for World Domination, London: Verso. Guitiań, Manuel (1995) ‘Capital account liberalization: bringing policy in line with reality’, in Sebastian Edwards, ed., Capital Controls, Exchange Rates and Monetary Policy in the World Economy, 71–90, Cambridge: Cambridge University Press. Guitiań, Manuel (1996) ‘The Issue of Capital Account Convertibility: A Gap Between Norms and Reality’, in Manuel Guitiań and Saleh M. Nsouli, eds, Currency Convertibility in the Middle East and North Africa, 169–88, Washington, DC: International Monetary Fund.


25 Haas, Ernst B. (1990) When Knowledge is Power: Three Models of Change in International Organizations, Berkeley, CA: University of California Press. Hall, Rodney Bruce (2003) ‘The Discursive Demolition of the Asian Development Model’, International Studies Quarterly 47(1): 71–99. Hurrell, Andrew (2002) ‘Norms and Ethics in International Relations’, in Walter Carlsnaes, Thomas Risse and Beth A. Simmons, eds, Handbook of International Relations, 137–54, London: SAGE. Hveem, Helge (1999) ‘A New ‘‘Bretton Woods’’ for Development?’ Journal of International Relations and Development 2(4): 415–25. IMF (1997) ‘Interim Committee Statement on The Liberalization of Capital Movements Under an Amendment of the IMF’s Articles’, IMF Survey (6 October): 302. IMF (1998) ‘Seminar Discusses the Orderly Path to Capital Account Liberalization’, IMF Survey (23 March): 81–4. IMF (2001) World Economic Outlook, Washington, DC: International Monetary Fund. James, Harold (1996) International Monetary Co-operation since Bretton Woods, Washington, DC and New York: IMF and Oxford University Press. Keck, Margaret E. and Kathryn Sikkink (1998) Activists Beyond Borders: Advocacy Networks in International Politics, Ithaca, NY: Cornell University Press. Kirshner, Jonathan (1999) ‘Keynes, Capital Mobility, and the Crisis of Embedded Liberalism’, Review of International Political Economy 6(3): 313–37. Ko¨hler, Horst (2003) ‘Asia’s Emerging Markets: A Growing Force in the World Economy’, Speech in Kuala Lumpur on 3 September, available at http://www.imf.org/external/np/speeches/2003/ 090303.htm (16 December, 2003). Krasner, Stephen D. (1985) Structural Conflict: The Third World against Global Liberalism, Berkeley, CA: University of California Press. Mathieson, Donald J. and Liliana Rojas-Suarez (1993) ‘Liberalization of the Capital Account: Experiences and Issues’, Washington, DC: International Monetary Fund, Occasional Paper, No. 103. McKinnon, Ronald (1991) The Order of Economic Liberalisation: Financial Control in the Transition to a Market Economy, Baltimore, MD: Johns Hopkins University Press. Mu¨ller, Harald (1994) ‘Internationale Beziehungen als kommunikatives Handeln’, Zeitschrift fu¨r Internationale Beziehungen 1(1): 15–44. Nielson, Daniel L. and Michael J. Tierney (2003) ‘Delegation to International Organizations: Agency Theory and World Bank Environmental Reform’, International Organization 57(2): 241–76. Pauly, Louis W. (1997) Who Elected the Bankers? Surveillance and Control in the World Economy, Ithaca, NY: Cornell University Press. Polak, Jacques J. (1998) ‘The Articles of Agreement of the IMF and the Liberalization of Capital Movements’, in Stanley Fischer, Richard N. Cooper, Ru¨diger Dornbusch, Peter N. Garber, Peter B. Kenen, Carlos Massad, Jacques J. Polack, Dani Rodrick and Savak S. Tarapore, eds, Should the IMF Pursue Capital-Account Convertibility?, 47–54, Princeton, NJ: Princeton University, Department of Economics, International Finance Section, Essays in International Finance, No. 207. Prasad, Eswar, Ayhan Kose, Kenneth S. Rogoff and Shang-Jin Wei (2003) ‘Effects of Financial Globalization on Developing Countries: Some Empirical Evidence’, Washington, DC: International Monetary Fund, Occasional Paper, No. 220. Quirk, Peter J. (1994) ‘Capital Account Convertibility: A New Model for Developing Countries’, Washington, DC: International Monetary Fund, IMF Working Paper, 94/81. Quirk, Peter J., Owen Evans and with Staff Team (1995) ‘Capital Account Convertibility: Review of Experience and Implications for IMF Policies’, Washington, DC: International Monetary Fund, Occasional Paper, No. 131.


26 Risse, Thomas (2000) ‘ ‘‘Let’s Argue!’’: Communicative Action in World Politics’, International Organization 54(1): 1–39. Risse, Thomas (2004) ‘Global Governance and Communicate Action’, Government and Opposition 39(2): 288–313. Rogoff, Kenneth S. (2002) ‘Rethinking Capital Controls: When Should We Keep an Open Mind? Finance & Development 39(4): available at http://www.imf.org/external/pubs/ft/fandd/2002/12/ rogoff.htm (22 April, 2004). Rogoff, Kenneth S. (2003) ‘The IMF Strikes Back’, Foreign Policy (144), available at http:// www.foreignpolicy.com/issue_janfeb_2003/rogoff.html (16 December, 2003). Ruggie, John Gerard (1983) ‘International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order’, in Stephen D. Krasner, ed., International Regimes, 195–231, Ithaca, NY: Cornell University Press. Schein, Edgar H. (1992) Organizational Culture and Leadership, San Francisco, CA: Jossey-Bass. Simmons, Beth A. and Zachary Elkins (2004) ‘The Globalization of Liberalization: Policy Diffusion in the International Political Economy’, American Political Science Review 98(1): 171–89. Snidal, Duncan (2002) ‘Rational Choice and International Relations’, in Walter Carlsnaes, Thomas Risse and Beth A. Simmons, eds, Handbook of International Relations, 73–94, London: SAGE. Stiglitz, Joseph E. (2000) ‘Capital Market Liberalisation, Economic Growth, and Instability’, World Development 28(6): 1075–86. Tierney, Michael and Catherine Weaver (2004) ‘Principles and Principals? The Possibilities for Theoretical Synthesis and Scientific Progress in the Study of International Organizations’, Washington, DC: Conference on Theoretical Synthesis in the Study of International Organizations, 6–7 February. Wade, Robert (2001) ‘The US Role in the Long Asia Crisis of 1990–2000’, in Arvid John Lukauskas and Francisco L. Rivera-Batiz, eds, The Political Economy of the East Asian Crisis and its Aftermath: Tigers in Distress, 195–226, Cheltenham: Edward Elgar. Wade, Robert and Frank Veneroso (1998) ‘The Asian Crisis: The High Debt Model Versus the Wall Street-Treasury-IMF Complex’, New Left Review 228: 3–23. Weaver, Catherine and Ralf J. Leiteritz (forthcoming) ‘Our Poverty is a World Full of Dreams: Reforming the World Bank’, Global Governance. Williamson, John, ed. (1990) Latin American Adjustment: How Much Has Happened?, Washington, DC: Institute for International Economics. Williamson, John and Molly Mahar (1998) ‘A Survey of Financial Liberalization’, Princeton, NJ: Princeton University, Department of Economics, Essays in International Finance, No. 211. Woods, Ngaire (2003) ‘The United States and the International Financial Institutions: Power and Influence Within the World Bank and the IMF’, in Rosemary Foot, Stephen Neil MacFarlane and Michael Mastanduno, eds, US Hegemony and International Organisations: The United States and Multilateral Institutions, 92–114, Oxford: Oxford University Press.

About the Author Ralf J. Leiteritz is a PhD candidate in the Development Studies Institute at the London School of Economics and Political Science. He is currently a visiting scholar in the Department of Political Science at the Universidad de los Andes in Bogota´, Colombia. His work has appeared in Global Governance, Review of International Studies, and WeltTrends.