The global financial crisis has rekindled the debate about the benefits and risks associated with the integration of world’s capital markets. This is all the most so for emerging market countries which, in the first phase of the crisis, experienced a dramatic slowdown in private capital flows as a consequence of the process of global deleveraging. The sudden stop of capital inflows put severe downward pressure on the exchange rates and harmed the real economy, pushing most emerging economies into recession. The large reversal of capital flows to most emerging markets in the final quarters of 2009, as a consequence of the ease in global monetary condition, has then raised new problems for the recipient countries that face the challenge of stemming inflationary pressures and asset bubbles. Against this backdrop, several national authorities have introduced or considered the use of capital controls calling into question the dominant intellectual approach to financial liberalization.
This paper contributes to the current debate by analyzing the recent changes in the IMF’s stance on capital controls. After having long rejected the option, the IMF has recently taken a public position in favour of the use of capital controls. While it is probably too early to characterize the IMF’s intellectual shift as a paradigm shift, the shift nonetheless represents an interesting case study for all scholars working on the evolution of ideas and their influence on public policy. Furthermore, the Fund’s ideational shift provides an interesting laboratory to identify the conditions under which learning from policy failures and crises takes place.
Combining the insights of comparative and international political economy, the paper argues and illustrates that the Fund’s support to capital controls is not a case of social learning – i.e. a case where beliefs are reassessed primarily as a result of policy failures. Rather, it is more a case of political learning – i.e. a case where policy advocates become more sophisticated in enhancing the political feasibility of policy proposals. That is, IMF staff members have learned how to push through their proposal in favour of the use of capital controls by challenging the validity of data used by opponents and mobilizing political support.
The paper supports this argument by reviewing and analyzing the analytical framework underlying the IMF’s new position. The analysis does not lend empirical support to the view that the Fund has altered its beliefs about the desirability and viability of capital controls with the burst of the global financial crisis. Such a reassessment had already taken place between the end of the 1990s and the beginning of the 2000s and not in the wake of 2007. The paper therefore sheds light on some of the conditions that prevent new ideas from becoming dominant.
Keywords: IMF; learning; ideas; capital controls; emerging markets
