The IMF and capital controls: towards

postneoliberalism?

SACHA DIERCKX*

Ghent University

ABSTRACT This article examines whether the International Monetary Fund (IMF) is moving towards

a postneoliberal policy stance on capital controls. After a historical outline of the IMF’s formal and

informal position on capital controls, the article will focus on the IMF’s view after the global financial

crisis. In particular, a policy framework proposed by the staff in March 2011, will be rigorously

scrutinized. While the crisis may have played a role, it will be suggested that the framework is the

outcome of a process that has been going since at least the Asian crisis in 1997. Moreover, whereas the

changes of the IMF’s position are often stressed, the continuities have been underemphasized. It will be

argued that these continuities demonstrate that the IMF in general, and its policy stance on capital

controls in particular, still contain a neoliberal bias. As such, the IMF policy framework can be

characterized as an example of the ‘new constitutionalism’, an attempt to prevent that states would

deviate from neoliberal prescriptions.

Keywords: IMF, capital controls, neoliberalism, new constitutionalism

In April 2011 the International Monetary Fund (IMF) proposed its first ever guidelines for using capital

controls (Harding, 2011). The legitimation of certain controls was seen as a major turnaround by many

commentators (e.g. Rastello, 2011, Talley & Reddy, 2011). This new policy stance has contributed to

observations that the IMF is turning its back on the neoliberal ideas that it had promoted and pushed

through in the past decades (e.g. Faujas, 2010; Rodrik, 2010; Stiglitz, 2011). However, while some

analysts have offered a more nuanced view on the IMF guidelines (e.g. Gallagher, 2011), the details of

this proposed policy framework and the IMF’s position in general have up to now been scarcely analyzed

in a comprehensive way, and have not been properly theorized. This article will try to fill this void.

The first section will give an historical oversight of the IMF’s point of view on capital mobility and capital

controls. In the second section, the new framework will be rigorously scrutinized. We will examine why

capital controls could be legitimate, what kind of capital controls are endorsed, in what circumstances

and for what reasons. The third section will present a profound critical analysis of the IMF’s view and

offer some theoretical considerations. Three arguments will be made. First, the global financial crisis has

not marked a sea change in the Fund’s thinking on capital controls. The continuities in the IMF’s position

have been underemphasized. Second, the IMF still contains a neoliberal bias in general, and on capital

controls in particular. Third, the framework can be considered as an example of the ‘new

constitutionalism’, that could prevent emerging markets (EMs) from deviating from neoliberal policy

* Comments are welcome at sacha.dierckx@ugent.be.

prescriptions. The final section will summarize the arguments of this article and draw some implications

for a postneoliberal policy framework on capital controls.

1. HISTORY OF THE IMF’S FRAMEWORK ON CAPITAL CONTROLS

In this section we will give an historical overview of the evolution of the IMF’s framework on capital

controls. Two points must be noted. First, we will consider both the formal framework, codified in the

Articles of Agreement and other official documents, and the informal framework, such as the IMF’s staff

actual approach of capital account liberalization. Both are essential for an accurate understanding of the

changing policy framework. Second, this section is mainly a descriptive account. Theoretical

considerations will be dealt with in the third section of this article.

The original Articles of Agreement

During the Second World War, when the negotiations on the post-war economic order were settled, a

combination of forces was in favor of installing capital controls that would remain in place for at least

quite some time after the war. Harry Dexter White for the US and John Maynard Keynes for the UK led

the Bretton-Woods negotiations on a post-war economic order. They agreed on two things: first,

substantial control over international capital movements would be necessary, and second, controls

would be most effective if countries cooperated with each other in enforcing regulations (Helleiner,

1995; Crotty & Epstein, 1996). Keynes proposed voluntary cooperation, while White projected

mandatory cooperation (De Cecco, 1979). Whereas White thought of capital controls as a temporary

solution to the post-war economic problems, Keynes believed that they had to be a permanent feature

(Chwieroth, 2008, Panitch & Gindin, 2008). In any case, the ‘common sense’ assumed that international

capital movements had to be actively managed (Ikenberry, 1992; Chwieroth, 2007b). As economist

Arthur Bloomfield (1946; italicized in original) wrote: “a substantial measure of direct control over

private capital movements, especially of the so-called “hot money” varieties, will be desirable for most

countries not only in the years immediately ahead but also in the long run as well.”

There was strong opposition to the proposals, mainly from New York bankers who had strong influence

in Washington (De Cecco, 1979; Panitch & Gindin, 2008). Eventually, financial communities succeeded in

removing all references to potential mandatory cooperation (Eatwell, 1996; Helleiner, 2001). This

reflected the continuing power of financial capital in the US (Panitch & Gindin, 2008). The final version

of the IMF proposals “contained watered-down formulae relating to capital controls”, and there were

few references to private international capital transactions (De Cecco, 1979). Most significant was that

the burden of enforcing capital controls fell on countries with outgoing flows instead of controls ‘at both

ends’. However, the Articles of Agreement of the IMF (1945) still sanctioned the use of extensive capital

controls (Kirshner, 1999; Chwieroth, 2008). Article VI, section 3 stated: “Members may exercise such

controls as are necessary to regulate international capital movements (…)” (IMF, 1945). Moreover,

Article VI, section 1 prescribed: “A member may not make net use of the Fund’s resources to meet a

large or sustained outflow of capital, and the Fund may request a member to exercise controls to

prevent such use of the resources of the Fund.” To sum up, member states were given the right to use

controls, and the IMF could even request governments to use them as a condition for IMF financing

(Chwieroth, 2008; Joyce & Noy, 2008).

Some quite remarkable aspects deserve further highlighting. First of all, the focus was clearly on the

control of capital outflows (Helleiner, 2001). Arthur Bloomfield (1946) wrote that some management of

inflows could exist to reduce excessive accumulation of foreign debt, or restrict foreign ownership in

specific domestic industries. Still, controls on capital inflows were not frequently debated. As De Cecco

(1979) writes: “Clearly, short-term capital movements were not regarded as an essential part of the

adjustment mechanism foreseen by the Agreements; in fact, they were a nuisance, to be restricted

rather than fostered. But all the burden of establishing controls was to fall on the countries from which

capital flees and none on those to which it goes.” Two explanations are worth mentioning. First, the

introductions of capital controls on inflows would “probably not be necessary, largely because these

movements are likely to be closely restricted in their countries of origin” (Bloomfield, 1946). Economists

were mainly preoccupied with controls on capital outflows by nationals. Capital inflows were just not

really considered a problem, in contrast to outflows. Second, for opponents of capital controls putting

the burden of enforcement on countries with outgoing flows meant that the effectiveness of the

controls could be undermined.

A second noteworthy facet is that the controls were mainly to be quantitative. There was no indication

of a preference for market-based controls (such as taxes), neither in the Articles of Agreement nor in

debates of the economists at that time. The interwar experience had demonstrated that indirect

controls were inadequate. As Bloomfield (1946) stated: “It would appear, then, (…) that the only

practicable solution (…) is the imposition of direct controls.”

Third, while most commentators interpret the Bretton Woods agreements as a commitment to capital

controls even in the long term, other authors have a different interpretation. They believe that the

foundation had already been established for a more laissez-faire regime of international capital

movements (Konings & Panitch, 2008; Panitch & Gindin, 2008). For instance, Article I lists as one of the

purposes of the IMF “to assist in the establishment of a multilateral system of payments in respect of

current transactions between members and in the elimination of foreign exchange restrictions which

hamper the growth of world trade” (IMF, 1945). Article VIII, section 2, states that, after a transition

period, “no member shall, without the approval of the Fund, impose restrictions on the making of

payments and transfers for current international transactions”. This has been interpreted as a

commitment to capital account liberalization in the long term (Quinn & Inclán, 1997).

In this respect, the position of the US was of great importance. Despite the New Deal regulations,

financial capital was still a powerful force in American society (Helleiner, 1994). Partly because of its

economic and financial strength, capital controls were never an issue in the US (Panitch & Gindin, 2008).

Moreover, large segments of the US state thought of capital controls in other countries as a temporary

feature of the post-war economic order, that would disappear after a short transition period. So, it could

be argued that “US policy all along was to dismantle currency and capital controls once adjustment and

catch-up had occurred” (Newstadt, 2008).

To sum up, the Bretton Woods arrangements did limit the extent of financial liberalization during the

first years of the post-war period in order to secure the (European) economic reconstruction, as the

negotiators had envisaged. But this was conceived as a temporary evil by large segments of the US

capitalist class and state officials (Konings, 2008). This is why the IMF’s framework on capital controls

has never been that one-sided, and has been rather ambiguous from the IMF’s very foundation. Panitch

and Gindin (2008) argue: “So while Bretton Woods recognized that states could operate capital controls,

what was more significant was the US state’s own refusal to use such controls, and the expectation both

in Washington and New York that other states would use them only for a transition period of

reconstruction.”

The norm adoption of capital account liberalization

This ambiguity intensified as the years passed by. The opinions of the IMF staff in the early post-war

period are subject to different interpretations. While most analysts believe that the staff’s ideological

commitment to Keynesianism secured the use of controls as a legitimate policy instrument (Chwieroth,

2008), some authors argue that the staff’s position was definitely not that one-sided (De Cecco, 1949).

In any case, their attitude towards capital controls gradually changed. During the early post-war years,

under the influence of the US state and Wall Street bankers, the IMF was reshaped into a protector of

financial interests (Felder, 2008). Individual country experience and the growing trade and development

facilitated by the gradual liberalization of controls encouraged the staff to become less favorable

towards controls. Former Executive Director of the IMF Jacques Polak (1998) writes: “The Fund’s first

history, covering the period from 1945 to 1965, noted the resurgence of the view, dominant before the

1930s, that freedom of capital movements was highly desirable in itself”. Nevertheless, in the first post-

war decennia, the staff largely ignored the issue of capital account liberalization (Chwieroth, 2007b).

As the contradictions during the post-war period grew during the 1960s and 1970s, a combination of

forces placed heavy pressure on the original IMF framework that legitimated capital controls as a policy

instrument. The first is the internationalization of productive and financial capital, which united both

industrial and financial capital in their opposition to restrictive capital controls. Especially the US, where

the support for capital controls had never been very strong, became very hostile to international capital

controls (Helleiner, 1994; Crotty & Epstein, 1996; Chwieroth, 2008). A second consequence of the

internationalization of capital was that governments faced the question of what to do about heightened

capital mobility (Chwieroth, 2008). As unilateral capital controls appeared to be ineffective, and as

cooperative action was blocked by US opposition, governments in advanced countries decided that they

had little choice but trying to reap the benefits of international capital flows (Goodman & Pauly, 1993;

Andrews, 1994; Helleiner, 1995). The third reason was domestic: in many advanced countries labor was

getting stronger and more radical. The elimination of capital controls would be a good way to discipline

organized labor (Crotty & Epstein, 1996). A fourth key source of change was the neoliberal academic

environment (Helleiner, 1995). As Chwieroth (2008) writes: “By the 1970s, most academic economists

had come to define capital account liberalization as desirable, and the Fund –which recruits almost

exclusively from the economics profession –saw its behavior affected accordingly.” The emergence of

the neoclassical synthesis, monetarism and new classical economics meant that few academic

economists now doubted the long-run desirability of open capital accounts.

This combination of forces meant that the support in favor of changing the IMF’s formal and informal

rules on capital mobility gradually grew. A first indication came in 1956, when Britain faced a speculative

attack on the pound sterling in the aftermath of the Suez crisis (Boughton, 2001). Whereas the Articles

of Agreement prohibited the use of the Fund’s resources for financing capital outflows, this was swiftly

put aside by the staff and the Executive Board. Against the spirit of the Articles, for the first time IMF

financing was used for capital account difficulties, instead of for current account problems, and the staff

did not use its power to impose a strengthening of capital controls. Afterwards, it has never used this

power when a country facing large capital outflows applied for IMF resources (Galbis, 1996; Polak,

1998). This informal policy was institutionalized in 1961, when the Executive Board approved new rules

that allowed the Fund to finance capital outflows (Polak, 1998; Chwieroth, 2008).

A second indication of the norm adoption of capital account liberalization appeared in 1972. A group of

experts appointed by the Committee of Twenty1 concluded that capital controls should not be a

permanent feature of the international monetary system, in contrast to what Keynes had defended

thirty years earlier (Pauly, 1995). They recommended the adoption of a code of conduct monitored by

the IMF to govern the future use of capital controls. In the end, however, the Committee of Twenty

could not agree on such a framework, so formally nothing changed. In 1976, the IMF’s Articles were

amended so that the promotion of capital mobility became one of the essential purposes of the

international monetary system (Chwieroth, 2007b). Yet they did not state that the Fund should promote

capital mobility, and the formal rules of the IMF’s framework on capital mobility remained unchanged.

Nevertheless, by the mid-1980s most of the advanced countries had loosened or eliminated controls

(Crotty & Epstein, 1996). The capitalist classes were fairly unified in a new, neoliberal policy program,

that was implemented in various ways by national politicians. In contrast with earlier decades, the IMF

has given greater attention to capital account issues from the late 1980s on (IEO, 2005). The Fund

actively began to encourage the liberalization of capital controls (Polak, 1998; Abdelal, 2006; Chwieroth,

2008; Weisbrot, Cordero & Sandoval, 2009). The staff had by now fully internalized the goal of capital

account liberalization. As Chwieroth (2008) explains: “In the mid-1980s, recruitment and promotion

patterns brought a new cadre of staff members, who were inclined to view liberalization as desirable, to

senior positions and consequently shaped the Fund’s adoption of the norm of capital freedom.” By the

early 1990s, the staff’s internalization of capital freedom as a norm was more or less complete.

Although the norm of capital account liberalization was not formally institutionalized, and therefore the

IMF could not use it in its conditionality packages, there is evidence that IMF program participation is

correlated with capital account liberalization, particularly during the 1990s (Polak, 1998; Chwieroth,

1 In full: “Committee on Reform of the International Monetary System and Related Matters”, established to

study the monetary system after the collapse of the Bretton Woods-system in 1971.

2007b; Joyce & Noy, 2008; Takagi, 2010). This is also confirmed by the Independent Evaluation Office

(IEO) of the IMF, which stated in an evaluation report that the IMF “did not hesitate to support capital

account liberalization as part of the of the authorities’ overall policy package as expressed in program

documents”, which may indicate ‘pressure’, although the report did not find evidence for such pressure

(IEO, 2005). The IMF may in any case have been instrumental for neoliberal economists and capitalist

classes in EMs and developing countries to strengthen their position and push through liberalizations of

the capital account (Soederberg, 2001; IEO, 2005; Chwieroth, 2007b).

Institutionalizing capital account liberalization?

In the mid-1990s, proponents of capital account liberalization pursued the institutionalization of the

new policy stance in the IMF’s formal rules. One of the big catalysts was the European governments

internalization of the norm of capital mobility. While before the US was the main adherent of capital

freedom, European governments became very supportive of capital freedom in the early 1990s

(Chwieroth, 2008). The project of the European Union was very influential in the acceptance and

internalization of the norm of capital mobility by the member states in general and France in particular

(Abdelal, 2006). After the adoption of capital freedom as a norm in the EU (1988) and the amendments

to the Code of Liberalization of the OECD (1989), European policy makers played a central role in

promoting the institutionalization of capital mobility liberalization.

A first step to institutionalization emerged in October 1994, when the Interim Committee2 issued a

statement in the ‘Madrid Declaration’ welcoming the trend toward full capital mobility (IEO, 2005). The

Executive Board directed the staff in 1995 to strengthen their work in encouraging and supporting

liberalization (Chwieroth, 2008). In April 1997, the IMF’s Interim Committee announced its intention to

revise the IMF Articles of Agreement. At the Hong Kong meeting in September 1997, the Interim

Committee adopted a statement that asked the Executive Board to complete work on the modification

of the Articles (Kenen, 1998). Two revisions were proposed (Interim Committee, 1997; Wade &

Veneroso, 1998; Abdelal, 2006). The first proposed revision would change Article I to include the

promotion of the orderly liberalization of capital accounts as one of the main purposes of the Fund. A

second proposal would give the Fund jurisdiction over the capital account of its members. Legitimation

for these revisions was found in the changed economic reality of large amounts of private international

capital flows (Wade & Veneroso, 1998). In practice, the changes would have given the Fund much

greater power over EMs and big developing countries. They would have permitted the staff to employ

conditionality to encourage capital account liberalization (Abdelal, 2006; Chwieroth, 2008).

The institutionalization almost succeeded, but the Asian crisis threw sand in the wheels of international

finance (Abdelal, 2006; Chwieroth, 2008; Gallagher, 2010). The proposed revisions to the Articles of

Agreement were rejected by 1999, due to resistance from developing countries, but also from more

progressive policymakers in the core countries (Sarai, 2008). As Chwieroth (2008) writes: “Opposition

2 Now the International Monetary and Financial Committee (IMFC), a body which is composed of central bank

governors or (finance) ministers, and which reflects the composition of the Executive Board.

among and within the Fund’s principals led consideration of the amendment to be suspended

indefinitely.” Probably pragmatic motivations were also important. For instance, in the perception of

some US policymakers, a multilateral regime might have empowered the IMF, potentially increasing its

power at the expense of the US, while the US was at the center of a less rule-based regime (Abdelal,

2006). While the formal rules may not have changed, it might be useful to examine whether the Asian

crisis has altered the ideas and informal practices within the IMF on capital controls.

The Asian crisis as a turning point?

It is broadly accepted that the IMF was very unfavorable towards capital controls in the early 1990s (e.g.

Quirk, 1994). The staff tended to be supportive of any development that would increase developing

countries’ access to international capital markets (IEO, 2005). It emphasized the benefits of open capital

accounts, such as greater resources for investment, more efficient capital allocation, lower interest rates

and “discipline on economic policy” (Johnston & Ryan, 1994; see also IEO, 2005). As it thought of capital

inflows as typically advantageous, it paid few attention to the potential risks, or it understated them

(e.g. Mathieson & Rojas-Suarez, 1992). Thus, due to ideological prejudgments, the Fund overemphasized

the benefits of capital account liberalization, and downplayed the risks. Moreover, it labeled capital

controls as largely ineffective, especially in the long run (e.g. Mathieson & Rojas-Suarez, 1993; Johnston

& Ryan, 1994; Quirk et al., 1995; Dooley, 1996). It also strongly highlighted the long-term costs of capital

controls (e.g. Schadler et. al., 1993; Johnston & Ryan, 1994; Galbis, 1996). The staff expressed a “general

distaste for such controls (…)” (Quirk et. al., 1995) and consistently argued for other policies to deal with

the consequences of large capital inflows. These policies included fiscal tightening, greater exchange

rate flexibility, and in some cases tightening of prudential regulation and liberalization of capital

outflows (e.g. Calvo et al., 1993; see also IEO, 2005).

However, despite these recommendations, even before the Asian crisis the Fund’s policy stance was

never entirely dogmatic (e.g. Calvo et. al., 1993). There has always been a certain awareness that capital

account liberalization implicates risks (e.g. Mathieson & Rojas-Suarez, 1992; Quirk et al., 1995) and that

herding behavior exists (Calvo et al., 1993; Schadler et. al., 1993). The IEO report (2005) observes: “From

the beginning of the 1990s, the IMF’s management, staff, and Executive Board were aware of the

potential risks of premature capital account liberalization (…).” Even before the Mexican crisis of 1994

there was some approval of capital controls now and then. After the Mexican crisis the Fund gave

greater attention to the potential vulnerabilities of countries with large inflows (IEO, 2005). In 1995 two

notes were issued saying that temporary capital controls could in certain (exceptional) circumstances be

justified (IEO, 2005). A working paper found that both theoretically and empirically there was no robust

correlation between open capital accounts and the rate of growth (Grilli & Milesi-Ferretti, 1995). After

1995 the turnaround was more evident (IEO, 2005). Still, only market-based controls on capital inflows

were endorsed to a certain extent. Administrative controls, and controls on capital outflows were

strongly rejected (e.g. Quirk et al., 1995; Galbis, 1996; see also IEO, 2005).

Although a gradual change was thus already proceeding, the Asian crisis had a profound impact (IEO,

2005). The staff still believed in the advantages of open capital accounts (e.g. Rossi, 1999), but it now

started to pay greater attention to the risks of open capital accounts (IEO, 2005). First Deputy Managing

Director Stanley Fischer (1998) wrote shortly after the Asian crisis that “markets are not always right”,

and that “usually, these swings are rationally based, but they may on occasion be excessive, and they

may sometimes reflect contagion effects.” A more cautious approach on capital account liberalization

became trendy, with orderly liberalization, sequencing and gradualism as new key words (e.g. Prasad et.

al., 2003; see also Lee, 2002; IEO, 2005). However, Wade and Veneroso (1998) note: “It is difficult to

escape a sense of déjà-vu: for just the same was said after the disasters following the opening of capital

accounts in the Southern Cone in the early 1980s.” Besides, the Asian crisis was at first interpreted not

as a consequence of herding behavior, but as the result of ‘crony capitalism’ and national policy

mistakes (Soederberg, 2001). Moreover, capital controls were still considered as largely ineffective for

dealing with large capital flows (e.g. Laurens & Cardoso, 1998; Nadal-De Simone & Sorsa, 1999), and/or

very costly (e.g. Johnston & Tamirisa, 1998; Nadal-De Simone & Sorsa, 1999; Ariyoshi et al., 2000).

Strengthening the financial and macroeconomic environment was preferred over controls (e.g. Laurens

& Cardoso, 1998). The Fund did not at all abandon the goal of full capital mobility (Fischer, 1998; Lee,

2002; IEO, 2005; Chwieroth, 2008). Behind the scenes, the Fund often still pushed through capital

account liberalization (Gallagher, 2010).

Nevertheless, there was more openness to the use of temporary capital controls under certain

conditions (e.g. Rossi, 1999; see also Chwieroth, 2008). The IEO report (2005) observes: “As a general

rule, the IMF staff, in line with the evolution of the institution’s view, became much more

accommodating of the use of capital controls over time, albeit as a temporary, second-best instrument.”

Eichengreen and Mussa (1998) stated that market-based controls were not incompatible with “the still-

desirable goal of capital account liberalization”. Controls on outflows were far less accepted (e.g.

Loungani & Mauro, 2000; see also Polak, 1998), although even on outflows the IMF’s position became

more accommodating after the Asian crisis (e.g. Rossi, 1999; see also IEO, 2005). The IMF still opposed

the imposition of currency controls, however. In 1998, Jacques Polak summarized the view of the IMF on

capital accounts after the Asian crisis: “A fair representation of the current consensus on the subject

would seem to be that (1) most capital controls, especially those on capital outflows, are both

ineffective (except in the short run) and harmful to the country imposing them, (2) some controls on

inflows of short-term funds can be helpful in preventing excessive domestic demand, and (3) some other

controls (in particular on inflows of direct investment and portfolio investment) have both negative

effects (…) and potential benefits of a prudential or political character.”

In the run-up to the crisis

As the years went by, even more subtle changes became visible. Whereas before the beneficial effects

of capital account liberalization were presumed, some important papers now recognized that the

empirical evidence was meager. Edison et al. (2002) conclude: “There is mixed evidence that capital

account liberalization promotes long-run economic growth.” In an influential paper, that is frequently

referred to, Prasad et al. (2003) recognize that “it is difficult to establish a robust causal relationship

between the degree of financial integration and output growth performance”. Two papers observed

that developing countries do not benefit considerably from international financial integration, even

when they receive a lot of inflows (Gourinchas & Jeanne, 2004; Epaulard & Pommeret, 2005). Likewise,

while it had always been accepted that open capital accounts carry more risks, these risks were more

and more highlighted in the staff’s analyses (e.g. López-Mejía, 1999; Prasad et al., 2003; Gupta et al.,

2003; Ötker-Robe et al., 2007). It was also acknowledged that herding behavior and contagion could

exist, bearing no relation to country fundamentals (e.g. Ariyoshi et al., 2000; Borensztein & Gelos, 2000;

Bikhchandani & Sharma, 2001; Gelos & Wei, 2002; Bayoumi et al., 2003). Moreover, more staff

members now accepted that capital controls, both on inflows and outflows, could be effective in

temporarily achieving particular objectives (e.g. López-Mejía, 1999; Ariyoshi et al., 2000; Tamirisa, 2004).

There was even some sympathy towards longer-term capital controls, such as in China (e.g. Ariyoshi et

al., 2000; Prasad et al., 2005).

Despite these more mixed visions on capital account liberalization, there was still a broad disapproval of

capital controls. For instance, Bello and Guttal (2005) note: “Even when the IMF admitted that capital

controls worked to stabilize the Malaysian economy during the 1997 financial crisis, it remained

generally opposed to capital controls. The IMF refused to endorse even the gentlest capital controls.”

This is admitted by the IEO report (2005), which concludes: “The documents prepared by the IMF staff in

the context of multilateral surveillance during 1990-2003 consistently favored capital account

liberalization.” And on capital controls: “It is possible here to make a broad characterization that the IMF

staff was in principle opposed to the use of such instruments, either on inflows or outflows.” The staff

assumed that there are better solutions to the problems associated with capital account liberalization

than controls. For instance, Ariyoshi et al. (2000) conclude: “The evidence presented in this paper

supports the conclusion that capital controls cannot substitute for sound macroeconomic policies.” The

emphasis was on macroeconomic ‘soundness’, the quality of domestic institutions and the depth of

financial markets (e.g. Prasad et al., 2003; Le Fort, 2005; Ötker-Robe et al., 2007; Zakharova, 2008).

There was still a lot of skepticism on the (long-term) effectiveness of controls (e.g. Le Fort, 2005; Prasad

et al., 2005; Ötker-Robe et al., 2007), and it was still emphasized that the costs are large (e.g. Prasad et

al., 2005; Wei & Zhang, 2007). The most significant observation is that the absence of empirical evidence

on the beneficial growth effects of capital account liberalization did not lead to the abandoning of the

theoretical view that open capital accounts are beneficial (e.g. Prasad et al., 2003; Kaminsky &

Schmukler, 2003). On the contrary, the staff attempted to find new evidence that would demonstrate

the theory and nuance earlier empirical material. For instance, it was argued that capital account

liberalization would boost productivity growth instead of output growth, which would only be fully

evident in the long run (e.g. Kose et al., 2006; Kose et al., 2008). Another argument was that open

capital accounts are generally beneficial, but mostly when certain threshold conditions are met (e.g.

Kose et. al., 2006).

Conclusion

Although the Articles of Agreement of the IMF were not as straightforward as has been largely accepted,

they were important in the legitimation of post-war capital controls. Nevertheless, over the years capital

controls became more and more out of fashion, both in (advanced) member states and within the IMF.

The institutionalization of capital account liberalization failed, however, after the Asian crisis in 1997.

Even if the IMF was never entirely dogmatic on capital controls, the Asian crisis was influential in

pushing the staff to gradually become more open to certain controls. On the last two decades before the

global financial crisis broke out in 2007, three observations are essential for the next sections:

(1) The IMF has always recognized that open capital accounts bear risks and that the benefits of

liberalization are not always larger than the costs. As Carvalho (2002-2003, italicized in original)

writes: “Most researchers seem to start from a parti pris in favor of liberalization to such an

extent that they seem embarrassed by this conclusion.” Despite the IMF’s traditional partiality in

favor of liberalization, the empirical evidence gathered by the staff has always been dubious.

(2) Still, the emphasis in the IMF’s discourse has gradually changed over time. At first, it

overemphasized the benefits and underemphasized the risks. Then, the risks were

acknowledged, sequencing became the new buzzword, but it was maintained that controls were

ineffective and/or very costly. Moreover, it was argued that there are better solutions to the

risks associated with open capital accounts. Finally, after 2003 it was increasingly admitted that

the benefits of liberalization are not that large. The views on temporary, market-based controls

in extraordinary circumstances became more accommodating, but more permanent controls

and controls on outflows were still broadly rejected. The modification of the original discourse

was a gradual process, but the Asian crisis clearly had some influence: “From around 1994, and

certainly after the Mexican crisis, some within the IMF became more cautious in their policy

advice on capital account issues in country work, but it was only after the East Asian crisis that

the whole institution’s approach clearly changed” (IEO, 2005).

(3) Despite these gradual changes, “the staff team still clearly retain a belief in the long-run

desirability of liberalization” (Chwieroth, 2008). It is fair to say that the Fund still acts as a

“cheerleader” of capital account liberalization (IEO, 2005). Besides, before the global financial

crisis there were some indications that the staff had regained some of its confidence in its

positive view on open capital accounts.

2. THE NEW FRAMEWORK: THE GLOBAL CRISIS AS A TURNING POINT?

In this section, we will revise the current IMF framework on capital controls. This study will be largely

based on the policy framework on managing capital inflows, proposed by the staff in March 2011, which

received quite some attention in the media. It is important to recognize the limits of the IMF’s

framework. First, the framework is designated for EMs and low-income members. It is assumed that

advanced economies do not need capital controls. Second, the framework only takes in consideration

measures on capital inflows. For this reason, and to see to what degree the framework is internalized by

the staff, we will also rigorously examine working papers, staff position notes and other official IMF

documents.

Is an open capital account advantageous?

A first observation is that capital mobility is still seen as advantageous for the world economy in general

and for receiving countries in particular. In a staff position note that was an important step on the way

to the proposed policy framework, the authors compare the benefits from capital mobility to the

benefits from free trade, although they also found empirical evidence that countries with capital

controls were able to avoid the worst growth outcomes associated with financial fragility (Ostry et al.,

2010). The policy framework explicitly expresses the view that “inflows are typically beneficial for

receiving countries” (IMF, 2011b; see also Mody & Murshid, 2011; Matheson, 2011; Ostry et al., 2011).

This was also stressed by former Managing Director Strauss-Kahn (IMF, 2010c). Furthermore, the

authors of the framework are convinced that the present wave of inflows to EMs is going to be

persistent, and will bring important investment and growth benefits (IMF, 2011b). One of the

advantages of capital inflows would be a lower cost of capital for both the public and corporate sectors.

As such, capital account liberalization should be the purpose of every country. In this manner, the

framework does not deviate from the earlier policy stance on capital account liberalization, and even

overemphasizes the benefits from open capital accounts in comparison to earlier papers that were

published after the global financial crisis (e.g. Deléchat et al., 2009; Mitra, 2011).

However, the framework also acknowledges that inflow surges “can carry macroeconomic and financial

stability risks” (IMF, 2011b). Broadly, four risks are detected. The first is that capital inflows could lead to

upward pressure on exchange rates that causes a loss of competitiveness. This could result in an

unsustainable current account deficit (IMF, 2011b; also Cardarelli et al., 2009; Atoyan, 2010; Ostry et al.,

2010). A second risk that is identified by the authors is that capital inflows complicate monetary policy

(IMF, 2011b). For example, capital inflows make interest rate policy less effective. However, the

framework does not really address this risk in detail, and in staff papers this risk is more or less ignored

(e.g. Ostry et al., 2011) or downplayed (e.g. Pradhan et al., 2011), although sometimes it is recognized

that capital flows complicate monetary policy (e.g. IMF, 2011a). Third, there is the possibility of

overheating, as manifested by a closed output gap and inflation pressure (IMF, 2011b; also Ostry et al.,

2011; Pradhan et al., 2011). Capital inflows may lead to persistent inflation and worsening inflation

expectations, making it difficult to attain inflation targets.

The fourth risk recognized by the authors is that inflows “have tended to reverse suddenly and in a

synchronized manner, in the past” (IMF, 2011b). Although there are some critical voices, most IMF

papers acknowledge the existence of herding and/or unsustainable asset bubbles (e.g. Mecagni et al.,

2009; Ghosh et al., 2009; Blanchard & Milesi-Ferretti, 2009; Atoyan, 2010; Ostry et al., 2010; Mitra,

2011; Gelos, 2011). In the policy framework, variations in capital flows are described as “a normal

cyclical phenomenon”, but they have been magnified by both policy mistakes and herding behavior in

financial markets (IMF, 2011b). On the one hand, it seems that the authors still keep national policy

mostly responsible for cyclical capital flows. On the other hand, it is admitted that herding behavior may

exist and that asset price bubbles may develop. The possibility of sudden reversals of capital flows is

recognized, and the authors suggests that push factors, which are not influenced by EMs policy, are

dominant in these reversals (see also Frank & Hesse, 2009). For example, the framework implicitly posits

that a rise in US interest rates could result in a reversal of capital flows to EMs. The existence of

contagion is also admitted.

Can capital flow management (CFM) decrease risks?3

As the IMF identifies several risk to capital inflows, a second question to be asked is whether capital

controls can mitigate the risks associated with large and persistent inflows. The framework suggests that

“it may be appropriate for several countries, based on their current circumstances, to consider

prudential measures or capital controls in response to capital inflows” (IMF, 2011b). However, some

qualifications are required.

First of all, the authors question that capital controls may lead to the preferred outcome. In general, the

staff sometimes emphasizes that controls can be effective for reaching some particular objectives (e.g.

Clemens & Kamil, 2009; Ostry et al., 2010; IMF, 2010a), sometimes argues that the effectiveness is

limited in general (e.g. Cardarelli et al., 2009; Shah & Patnaik, 2011), and is sometimes more ‘optimistic’

on the effectiveness on controls (e.g. Binici et al., 2009; Reinhardt et al., 2010). Strauss-Kahn said in

November 2009 that "the problem is that most of the time it does not work". (Guha, 2009). In the

proposed framework, evidence on the effectiveness of capital management techniques is defined as

“mixed” (IMF, 2011b; see also IMF, 2010).

Second, the costs of capital controls are almost certainly very high (IMF, 2011b; also Cardarelli et al.,

2009; Shah & Patnaik, 2011; Ostry et al., 2011). The development of capital markets in EMs may be

adversely affected, the cost of administration is high and likely to increase over time, suppression of

exchange rate volatility could have negative consequences, and finally, capital controls may cause

capital outflows, market turmoil, and a decreased future willingness to invest in the country that applies

capital controls. Maybe the largest cost of all, from the viewpoint of the authors, is that capital

management may be used to “substitute for appropriate macroeconomic policies” (IMF, 2011b).

Third, capital controls can only be used as a ‘last resort’ and in very specific circumstances. The first

priority should be to enact reforms that “increase the capacity of domestic capital markets” and that

“enhance the resilience of the financial system”. A prudential framework is considered as the most

important instrument to deal with capital flows and to prevent crises (see also IMF, 2011d; Cardarelli et

al., 2009; Clemens & Kamil, 2009; Atoyan, 2010; Mitra, 2011).

In the second place, macroeconomic policy responses are also perceived as superior (IMF, 2011b; also

IMF, 2011a; IMF, 2011d; Cardarelli et al., 2009; Atoyan, 2010; Magud & Sosa, 2010. Mitra, 2011; Ostry et

3 The framework uses the term capital flow management, which broadly corresponds to capital controls. We will

use them as synonyms.

al., 2011). A first macroeconomic policy response is to allow the exchange rate to strengthen, except

when there is evidence that the exchange rate is overvalued. In practice this will exclude a large

segment of countries from using CFM. A second macroeconomic policy response is to accumulate

foreign exchange reserves when these reserves are inadequate from a precautionary perspective.

Although it is admitted that this is associated with large costs, sterilized intervention is considered

superior to CFM. A third macroeconomic policy response is to use monetary and fiscal policy. Interest

rates should be lowered when the economy is not overheating and if it is consistent with inflation

targets. However, as large capital inflows often cause overheating, it is difficult to use interest rates as

an effective policy instrument. Fiscal policy should be tightened as a countercyclical measure, although it

is admitted that this may not always be very effective, particularly in the short run. A figure from a staff

position note summarizes the circumstances in which capital controls could be used:

(From Ostry et al., 2010)

Thus, while capital controls may possibly decrease risk, they are most of the time ineffective, and the

costs are very high. Additionally, certain circumstances have to be fulfilled before capital management

techniques may be used: the exchange rate should not be undervalued, reserves should be adequate or

sterilization costs excessive, the economy should be overheating so that expansionary monetary policy is

not advisable, and fiscal policy should have been tightened.

What kind of capital controls are legitimate?

Even though the framework clearly reveals a preference for macroeconomic and prudential policy

measures to deal with capital inflows, it states that capital controls could be used. Other papers have

also called capital controls ‘legitimate’ in certain circumstances (Atoyan, 2010; Ostry et al., 2010; Ostry

et al., 2011; Pradhan et al., 2011; IMF, 2011d). This section will explain which kind of capital controls are

considered legitimate by the IMF policy framework. It is important to acknowledge that the Fund does

not always legitimize certain controls and delegitimize other controls. The staff takes a pragmatic

stance, arguing that specific circumstances need specific measures. For instance, a staff position note

states that “there is no “one-size-fits-all” approach to capital control design”, that “measures need to be

targeted to the risks at hand” and that “the design of capital controls needs to be tailored to country

circumstances” (Ostry et al., 2011). Nevertheless, we can discern an obvious preference for some

techniques over others.

First, as described above, the framework only deals with restrictions on capital inflows. Restrictions on

capital outflows have always been more controversial (see Soederberg, 2004). The authors suggest that

future work will focus on dealing with capital outflows for EMs and low-income members (IMF, 2011b).

Other IMF documents indicate that controls on capital outflows will not be legitimized anytime soon.

There are few working papers on outflow controls, and in documents such as the World Economic

Outlook (IMF, 2011d) they are ‘ignored’ as well. The few papers that refer to outflow controls reject

them. For example, Ghosh et al. (2009) write: “Controls on outflows would at best de facto “freeze”

credit lines at their current levels while almost surely leading to a collapse of fresh inflows.” There is one

document (IMF, 2011b) that states that some countries facing a balance of payments crisis could use

outflow controls: “ (…) controls on capital outflows may be necessary in circumstances where the

potential level of outflows exceeds both the member’s adjustment capacity and the financing available

from the official sector.” Thus, according to the Fund, in ‘normal’ circumstances only controls on capital

inflows may be legitimate.

The second classification of CFMs is based on the type of capital flows involved. As the composition of

inflows in the current wave has generally shifted towards portfolio flows, the IMF focuses mostly on

portfolio inflows (IMF, 2011b). It is acknowledged that “the shift toward portfolio flows could be

structural in nature and imply continued volatility”. According to the authors, this is problematic as

portfolio flows have in the past been more volatile than other types of capital flows and as their

volatility has recently risen. In the first place, the framework is concerned with portfolio debt inflows.

Second, controls on portfolio equity inflows could also be endorsed. Restrictions on foreign direct

investment (FDI) are not mentioned in the framework. It is reasonable to assume that the Fund

disapproves of restrictions on FDI. This is consistent with the ‘common sense’ view that FDI are less

volatile than portfolio flows and foreign loans (e.g. Tong & Wei, 2009), although this is challenged in

other documents (e.g. IMF, 2011d).

Third, the framework prefers non-residency-based controls (e.g. reserve requirements on foreign

exchange deposits) over residency-based controls (e.g. reserve requirements on nonresidents deposits)

(IMF, 2011b). The motivation is that “non-discriminatory application of measures to resident and

nonresident investors and the absence of restrictions on mobility of flows generally provide

reassurances to markets that countries remain receptive to inflows”. Only in the last instance may

residency-based CFMs be appropriate, when other options have not been effective or are infeasible.

A fourth classification on which CFMs can be classified, is direct (quantitative) restrictions, which limit

the amount of a certain type of capital inflows, versus indirect (market-based) restrictions, for instance

taxes on capital inflows. The latter does not prohibit transactions, it only discourages investors by

increasing the cost. As the IMF identifies market-based restrictions as more transparent, they are to be

preferred (see also Ostry et al., 2011). While it is clear that the IMF favors market-based controls,

specific country circumstances may justify the use of quantitative restrictions (also Ostry et al., 2011).

Additionally, it is also clear that restrictions on convertibility are unmentionable for the Fund.

Fifth, the framework considers capital controls to be a temporary measure, not a permanent feature of

the world economy. As such, measures to limit capital inflows are still conceived as “being deployed

temporarily in reaction to an inflow surge” (IMF, 2011b). They should not be used as a permanent

solution, and should be reversed as the pressure of capital inflows eases. A staff position note even

more explicitly states that capital controls are only justified if the capital inflows are likely to be

transitory (Ostry et al., 2010). This was also underlined by Strauss-Kahn (IMF, 2010c). Moreover, it

should be assessed on a regular basis if the capital controls are still ‘appropriate’ (Ostry et al., 2010).

Nevertheless, in a later note the authors leave open the possibility that controls could be used against

more persistent inflows (Ostry et al., 2011).

Finally, and related to the fifth feature, the Fund sees controls as a ‘unilateral’ measure, in two ways.

First, it does not want controls to be a widespread phenomenon. The IMF writes “it is important to be

cognizant of the multilateral risks if CFMs where to be broadly and indiscriminately adopted, for

example through a process of imitation or diffusion” (IMF, 2011b). These ‘risks’ are more explicitly

stated in a staff position note (Ostry et al., 2010): “In addition, controls imposed by some countries may

lead other countries to adopt them also: widespread adoption of controls could have a chilling longer-

term impact on financial integration and globalization, with significant output and welfare losses.” The

paper points out that the multilateral dimensions need to be taken into account in the assessment of

the capital controls. It is not surprising, then, that a moderate proposition such as the multilateral

Securities Transaction Tax is disapproved of, because it is “an inefficient instrument for regulating

financial markets and preventing bubbles” (Matheson, 2011). The Fund does certainly not see capital

controls as a possible feature of the multilateral international monetary system (e.g. Blanchard & Milesi-

Ferretti, 2009; Mateos y Lago et al., 2009). A second way in which the IMF does not consider controls as

a bilateral or multilateral measure, is that there are no suggestions on obligations for other countries

(IMF, 2011b). In a certain way this is logical: as the IMF’s emphasis is on receiving countries, obligations

for source countries would imply a restriction on outflows, which is rejected by the IMF. Thus, a country

may in certain conditions use capital controls, but it must not expect cooperation on the task of

effectively enforcing them.

Conclusion

The IMF still considers full capital mobility to be advantageous for the world economy and for countries

that receive capital inflows. However, it is recognized that inflow surges can carry considerable risks, and

that markets may be prone to herding behavior. This does not mean that capital controls are the ‘right’

answer. The effectiveness of controls is questioned, and the costs of capital controls are very high. Thus,

prudential measures are to be preferred over controls. Moreover, capital controls may only be used

when the exchange rate is not undervalued, when reserves are adequate or sterilization costs very high,

when the economy is overheating so that expansionary monetary policy is not advisable, and when

fiscal policy is profoundly tightened. If controls should be used, they should be temporary, preferably

non-residency based, market-based, country-specific and designed to target the specific risk, which is

mostly caused by some sort of portfolio debt or equity flows.

To sum up, while there are signs of a relaxed standpoint on capital management techniques, the

importance of the framework should not be overstated. In this respect, it is illustrative that the

framework itself recognizes that only one-quarter to one-third of the countries studied in the policy

framework study would currently meet the criteria to potentially validate the use of capital controls (7

out of 22 countries, 9 out of 39 countries). This is also evident in a staff position note, which states that

almost all examined countries (10 countries in Asia, Turkey, Brazil and South Africa) would have to

pursue more orthodox macroeconomic policies, before they could legitimately use capital controls

(Pradhan et al., 2011). Moreover, the IMF itself admits that the controls that are so far implemented,

and that are seen as legitimate by the Fund, are considered “at the margin” by market participants, and

that they will not hold back investors (IMF, 2011b).

3. A POSTNEOLIBERAL IMF POSITION ON CAPITAL CONTROLS?

In this section, we will theorize the policy framework and the new policy stance of the IMF on capital

controls. The analysis presented in the second section raises several questions. First, what is the novelty

of the policy framework? Second, what role did the global crisis play? Third, does the staff fully support

the new policy stance?

How innovative is the new framework ?

A first question is to what degree the policy framework differs from the IMF’s earlier view on capital

controls and capital account liberalization. While a lot of analysts underline the novelty of the

endorsement of controls, the continuities have been underemphasized. Although there may be a change

in stress on some aspects, the principles that are underlined by the IMF have not changed much. First,

the Fund still presumes that open capital accounts are typically beneficial. Second, it also acknowledges

that open capital accounts and inflow surges may carry risks, which was already recognized at the height

of the liberalization era in the first half of the 1990s. Third, while capital controls may possibly decrease

the risks of open capital accounts, they incur large costs and are most of the time ineffective. Fourth,

there are better instruments than controls to deal with large capital inflows. Thus, this is clearly not “the

end of an era in global finance”, as Rodrik (2010) has called the IMF’s changed policy stance.

However, while the basic assumptions may not have changed, there has been a gradual change in the

practical management of controls. Contrary to common sense interpretations, the role of the global

financial crisis in this transformation was not enormous. Already in 1995 the IMF “cautiously argued for

the occasional desirability of controls on inward capital flows to developing economies” (Crotty &

Epstein, 1996). After the Asian crisis there were internal differences within the IMF on the use of

controls on short-term capital inflows (Wade & Veneroso, 1998). As early as 2004, there were observers

that wrote that the IMF seemed “to be softening its stance toward capital controls” (Epstein, Grabel &

Jomo, 2004; see also Soederberg, 2004). Change was thus already underway before the global financial

crisis (see IEO, 2005). Thus, both the novelty of the IMF’s vision and the impact of the global financial

crisis on this vision should not be exaggerated.

The crisis probably had some influence though. Especially the changing circumstances may have been

essential, with EMs and developing countries experiencing first large capital outflows after the crisis

broke out, and then large capital inflows when the US introduced monetary easing policies. But the crisis

did certainly not mark a sea change in the economic thinking within the IMF, just as the Asian crisis did

not create a great transformation. In capital account liberalization terms, the IMF’s changing position

has been a ‘gradual’ process, not a ‘big bang’ process. However, the crisis may have speeded up a

process that was already underway, or it may have avoided that the process was reversed. Ilene Grabel

and Ha-Joon Chang (2010) give a good description of the development: “Like most transformations, this

reform has been gradual. Reform in the IMF view of capital controls actually began soon after the Asian

crisis, as countries such as Chile, China and India imposed controls. Most analysts found that these

controls were beneficial in key respects. This success led the IMF to soften its hardline stance: it

admitted that controls might be tolerable in exceptional cases provided they were temporary, market

friendly and focused strictly on capital inflows. (…) What was just a trickle of controls before the current

crisis is now a flood.”

However, while the changes are more gradual than abrupt, and while the basic assumptions still remain

the same, the framework does present two innovations. First, it is the first time in a long time that the

Fund explicitly and officially calls capital controls in certain circumstances ‘legitimate’. This is now the

dominant position within the IMF, whereas before it was just one position. Second, it is the first time

that the IMF has presented guidelines on when controls are possible, and what controls may be used

(Harding, 2011). Although there have been more attempts (see e.g. Fischer, 1998), this is the first time

that a framework has been established by the Fund.

One question remains: has the staff fully internalized the use of controls as a legitimate policy

instrument? Is it true, as Grabel and Chang (2010) suppose, that “the IMF did not drive this process of

reform, but its staff have adjusted their thinking quickly in response to the exigencies of the crisis”? At

first sight, it seems that acceptance within the IMF is quite broad. For instance, since the World

Economic Outlook (WEO) in April 2010, it has been repeated in every WEO that capital controls can be a

useful and legitimate policy response to capital inflows (IMF, 2010d; IMF, 2010e; IMF, 2011d).

Moreover, as noted above, various important staff position notes have repeated the legitimacy of

capital controls (Ostry et al., 2010; Ostry et al., 2011; Pradhan et al., 2011). This in stark contradiction

with the situation before the crisis. As Broome (2010) observes, “its support for the judicious use of

exchange controls in a capital account crisis such as Iceland has experienced does indicate a somewhat

greater degree of flexibility in the IMF’s approach to crisis management than in the past”.

On the other hand, there are signals that the IMF staff does not fully support or has not fully internalized

the framework. In the World Economic Outlook of April 2011, a whole chapter is dedicated to the issue

of volatile capital flows (IMF, 2011d). However, while the legitimacy of capital controls is confirmed in

the preface and the first, introductory chapter, the chapter on capital flows does not mention capital

controls, not even in the policy implications (IMF, 2011d). Furthermore, when we examine country

reports and Article IV Consultations Concluding Statement of the Mission in 2009, 2010 and 2011, it

appears that the staff has not internalized the proposed policy framework yet. There are almost no

references to the introduction of capital controls, and most references are negative4, although there

were a few (potential) endorsements of controls5 (see also IMF, 2009). Possibly, it is too early to see the

impact of the policy framework, but does not seem likely that the staff fully supports the use of controls

as a legitimate instrument (see also Weisbrot et al., 2009).

Another reading would be that the staff has fully internalized the framework, but that the conditions

that would legitimize controls are just very rare. As explained earlier, the Fund admits that the

framework would not endorse controls in many cases. Moreover, as the director of the Western

Hemisphere Department of the IMF, Nicolás Ayzaguirre, has explained, the IMF is ‘accepting’ capital

controls, it is not ‘recommending’ them (IMF, 2011c). In any case, as Grabel (2010) notes, “we should

expect to find continuing evidence of tension and equivocation in future IMF reports that preclude a

clear and decisive Fund verdict on capital controls”.

4 E.g. on Israel: http://www.imf.org/external/np/ms/2009/121409a.htm and

http://www.imf.org/external/pubs/ft/scr/2011/cr1121.pdf; on Turkey

http://www.imf.org/external/np/ms/2010/121710.htm; on Colombia

http://www.imf.org/external/pubs/ft/scr/2009/cr0923.pdf; on Chile

http://www.imf.org/external/pubs/ft/scr/2010/cr10298.pdf. 5 On Iceland http://www.imf.org/external/pubs/ft/scr/2011/cr1116.pdf; on Israel

http://www.imf.org/external/np/ms/2010/112910.htm).

A postneoliberal framework?

If the novelty of the framework is overestimated, can we speak of a ‘postneoliberal’ policy stance? While

it would bring us to far to present a comprehensive conceptualization of ‘neoliberalism’, it is necessary

to specify what is meant by neoliberalism. Broadly, neoliberalism can be defined in two ways. The first

way is to define neoliberalism as an ideology, which states that capitalist markets are always rational

and efficient. One of the assumptions of the neoliberal ideology is the efficient markets hypothesis

(EMH), “the idea that the prices generated by financial markets represent the best possible estimate of

the value of any investment” (Quiggin, 2010). If you define neoliberalism this way, it is reasonable to say

that the IMF has never been entirely neoliberal in a dogmatic manner. On the other hand, Chwieroth

(2007b) writes that one of the key attributes of neoliberalism is “shared knowledge about the

desirability of liberalizing capital controls in the long run.” In this description, we can define the IMF staff

as still neoliberal, despite the more nuanced vision of the latter years. In country reports6 and other

documents (e.g. IMF, 2010b) it is obvious that full capital account liberalization is still an objective of the

staff.

The second conceptualization defines neoliberalism as a class project, designed to support the interests

of (financial) capital and to increase the rate of profit, at the cost of labor. One of the significant

differences with neoliberalism as an ideology is that this conceptualization acknowledges that this class

project is an adaptative project, that may incorporate or coopt subaltern classes and make certain

concessions if necessary. This way it is a more flexible project than a dogmatic, ideological neoliberalism.

It is this conception of neoliberalism that is used in this article. It will now be examined whether the IMF

policy framework is neoliberal according to this definition.

A first essential observation is that the IMF always strongly emphasizes that capital controls should

definitely not be used to diverge from orthodox economic policy (e.g. Ostry et al., 2010). The framework

makes clear that “measures that affect inflows merit greater scrutiny because they can potentially be

used to substitute for appropriate macroeconomic policies” (IMF, 2011b). The IEO report (2005) remarks

on the staff’s diverging assessment on capital controls in two countries are interesting in this respect. It

considers the support for controls in one country as related to the fact that that country already had a

IMF-supported program in place, whereas the country whose capital controls are rejected did not have a

IMF program in place. Former Executive Director Camdessus clarifies this idea in a speech (Interim

Committee, 1997): “The point is not to encourage countries to remove capital controls prematurely or

prevent them from using capital controls on a temporary basis, when justified. The objective is rather to

foster the smooth operation of international capital markets and encourage countries to remove

controls in a way that supports the drive towards sustainable macroeconomic policies, strong monetary

and financial sectors, and lasting liberalization.” So where capital controls are not endangering the

neoliberal project, they are accepted; where they could be used to put in place less orthodox economic

policies, they are rejected. This is consistent with Susanne Soederberg’s (2004) critique: “In this sense,

6 E.g. on China http://www.imf.org/external/np/sec/pr/2011/pr11225.htm; on Tunisia

http://www.imf.org/external/np/ms/2010/061510a.htm; on Iceland

http://www.imf.org/external/pubs/ft/scr/2011/cr11125.pdf.

capital controls are only to be used as a means to reach the larger end, namely, the proper (neoliberal)

management of financial liberalization.”

The second indication that the IMF does not accept deviations from the neoliberal project is the IMF’s

emphasis that ‘policy credibility’ must always be kept in mind when using controls on inflows. The

framework makes this clear (IMF, 2011b): “Clear communication with the markets as to the policy

objectives was seen as important in signaling the likely next steps to deal with inflows, and whether

these were perceived to be part of a broader and longer term strategy to develop local financial markets

and encourage financial integration.” In a staff position note it is emphasized that a credible exit

strategy from capital controls is crucial to preserve policy credibility (Ghosh et al., 2009).

A third observation is that the ability to contain crises and to regulate crises is a crucial part of the

neoliberal story. As Rude (2008) writes: “If financial instability is a means by which capital disciplines

world capitalism, capital has to find a way to regulate and control it, to make a liberalized global

financial system not just resilient enough to survive its own disorder but also resilient in such a way as to

maintain its fundamental hierarchical structure.” While the framework is probably not able the avert

crises, the endorsement of certain controls may be used to contain the worst consequences of volatile

capital flows. Thus, the policy framework fits perfectly with the capacities of the US state and the

international financial institutions such as the IMF to deal with crises without endangering

neoliberalism. These capacities have been expanding ever since the beginning of the neoliberal project

(Helleiner, 1995; Konings, 2008a).

The fourth indication that the Fund still fully supports the neoliberal class project is the Fund’s rejection

of controls on capital outflows. There are several reasons why the IMF is more withdrawn on endorsing

outflow controls (Soederberg, 2004). First, restrictions on outflows hinder a quick exit by speculators,

while controls on inflows leave open many other options for financial capital. Second, there is a close

connection between liberalization of capital outflows and net capital inflows. Thus, the more liberalized

capital outflows, the more capital flows in and the more foreign capital penetrates the national social

formation, which makes it harder to pursue unorthodox economic policies. Third, while inflow controls

do not generally lead to substantially more policy autonomy, outflow controls could be used to increase

policy autonomy. For these reasons, controls on outflows threaten the norm of free capital mobility as

the only alternative. As Soederberg (2004) writes: “Indeed, by sanctioning a particular type of capital

control it is engaging in a political judgement call, which is based upon certain material interests, as

opposed to mere economic logic.”

This brings us to the fifth reflection. The Fund threats capital controls as a technical matter, not as a

political issue. So, Olivier Blanchard, Director of the Research Department of the IMF, writes on his blog

that “while the issue of capital controls is fraught with ideological overtones, it is fundamentally a

technical one, indeed a highly technical one” (Blanchard, 2011). In this way economic policy is

depoliticized, so that it can be left to technocrats and economists and be ‘protected’ from democratic

decisions that could endanger the class-based character of neoliberalism. However, as Crotty (2000)

writes: “It is clear that there are no serious technical or economic – as opposed to political –

impediments to the use of capital controls.” The depoliticization of economic policy has thus been an

important strategy of neoliberalism to cope with possible resistance from subaltern social forces

(Birchfield, 1999; Harvey, 2005). It also draws attention away from the power relations that are changed

by capital account liberalization. Capital controls may alter the power relations between labor and

capital to the advantage of the former (Crotty & Epstein, 1996). Jayadev (2007) demonstrates

empirically that open capital accounts are correlated with a lower labor share in national income. By

encouraging open capital accounts as depoliticized, technical ‘good economic policy’, the Fund therefore

engages in a class-based project that favors internationally mobile capital.

So, to conclude, in the definition of neoliberalism as a class project, capital controls are not necessarily

opposed to a neoliberal project. They can be used to reproduce neoliberal power structures as opposed

to a more equal and just society (Soederberg, 2002). It seems that the Fund does not deviate much from

a neoliberal policy stance on capital controls. The questions then becomes: how should we conceive this

framework, as it does not imply a postneoliberal position?

The policy framework as an example of the ‘new constitutionalism’

To assess how we should conceive the framework it might be interesting to take a look at the reactions

on the framework by national state officials in the IMFC. Although it was suggested that there was a

relatively great consensus within the Executive Board on the framework (Harding, 2011), member state

reactions have been diverse in the IMFC. Ayzaguirre has explained (IMF, 2011c): “Some countries have

considered that we should not have ever mentioned that capital controls are a legitimate part of the

toolkit. Some others consider that even trying to have guidelines for capital controls is unacceptable.”

Broadly, there were three sorts of comments on the proposed framework. First, there is a group of

countries that emphasize that controls should definitely be an exception (the US7, Germany8, the UK9,

France10, Italy11, the Netherlands12, Norway13) or that are very skeptical of the use of controls (Chile14,

Belgium15, Switzerland16). Second, there are countries that do not really give their opinion (Canada17,

Ethiopia18). Third, there are the BIC-countries (Brazil19, India20 and China21) that welcomed the IMF’s

endorsement of capital controls.

7 http://www.imf.org/External/spring/2011/imfc/statement/eng/usa.pdf

8 http://www.imf.org/External/spring/2011/imfc/statement/eng/deu.pdf

9 http://www.imf.org/External/spring/2011/imfc/statement/eng/gbr.pdf

10 http://www.imf.org/External/spring/2010/imfc/statement/eng/fra.pdf

11 http://www.imf.org/External/spring/2011/imfc/statement/eng/ita.pdf

12 http://www.imf.org/external/spring/2011/imfc/statement/eng/nld.pdf

13 http://www.imf.org/External/spring/2011/imfc/statement/eng/nor.pdf

14 http://www.imf.org/External/spring/2010/imfc/statement/eng/chl.pdf

15 http://www.imf.org/External/AM/2010/imfc/statement/eng/bel.pdf

16 http://www.imf.org/External/spring/2011/imfc/statement/eng/che.pdf

17 http://www.imf.org/External/spring/2011/imfc/statement/eng/can.pdf

18 http://www.imf.org/External/spring/2011/imfc/statement/eng/eth.pdf

19 http://www.imf.org/External/spring/2011/imfc/statement/eng/bra.pdf

20 http://www.imf.org/External/spring/2010/imfc/statement/eng/ind.pdf

However, while the advanced countries largely support the framework, China and Brazil are very critical

of the framework. First, they argue that there is insufficient consideration to the ‘push’ factors or the

policies in advanced economies, by which it is clear they target the US. Yi Gang, Deputy Governor of the

Chinese central bank, said that the Fund should “strengthen macroeconomic surveillance and

coordination of the major reserve currency-issuing countries”. While the focus on push countries may

not be adequate to China and Brazil, it is definitely not the case that there is no attention at all on push

factors (IMF, 2011b; see also IMF, 2010b; IMF, 2011d). Second, and more importantly for this article,

they regard the framework as an attempt to limit the capital controls that may be legitimately

introduced. Brazil’s Finance Minister Guido Mantega’s statements are clear: “We oppose any guidelines,

frameworks or “codes of conduct” that attempt to constrain, directly or indirectly, policy responses of

countries facing surges in volatile capital inflows. Governments must have flexibility and discretion to

adopt policies that they consider appropriate, including macroeconomic, prudential measures and

capital controls.”

Clearly then, Brazil interprets the framework as an instrument to restrain the policy autonomy of

member states, as only certain controls may be used, and only in certain circumstances. In this regard,

the renewed IMF dynamism on capital controls can be seen as an example of what Stephen Gill (1998)

calls ‘new constitutionalism’. As Gill (2008) observes: “Central, therefore, to new constitutionalism is the

imposition on public institutions, partly to prevent national interference with the property rights and

entry and exit options of holders of mobile capital with regard to particular political jurisdictions. These

initiatives are also linked to efforts to define appropriate policy, partly by strengthening surveillance

mechanisms of international organizations (…).”

The suggested amendment of the Articles of Agreement in 1997 can undoubtedly be understood as an

attempt to ‘constitutionalize’ neoliberalism (Soederberg, 2001). While the IMF was already promoting

and encouraging capital account liberalization, the proposed amendment would lock-in open capital

accounts. The proposed policy framework can be seen as a more subtle, and more flexible form of new

constitutionalism. It was developed as a way to outline the “global rules of the game” (IMF, 2010b; IMF,

2011b). Although it creates no legal obligations under Fund surveillance, the framework itself indicates

that “it forms part of a broader effort to sharpen Fund surveillance (…)” (IMF, 2011b). In a paper in 2010,

it was stated more explicitly that the IMF should have the mandate “to identify actions that members

should take or refrain from” in designing capital account policies (IMF, 2010b). It is also remarkable that

Ayzaguirre has declared that the IMF has the mandate to preserve the stability of the international

monetary system, and that the Fund could use this mandate to suppress the proliferation of capital

controls (IMF, 2011c).

Thus, to sum up, due to the neoliberal bias of the IMF, the framework that was developed can be

understood as an example of ‘new constitutionalism’. It is an attempt to restrain the use of controls by

EMs and transfer economic policy from democratic policymaking towards the IMF staff. This is probably

the most important reason why Brazil and China have protested against the framework.

21

http://www.imf.org/External/spring/2010/imfc/statement/eng/chn.pdf and

http://www.imf.org/External/spring/2011/imfc/statement/eng/chn.pdf

4. CONCLUSION:

This article has argued that the ruptures in the IMF’s position on capital controls since its foundation

have been overstated, and that the continuities have been underemphasized. Even after the norm

adoption of capital account liberalization, the IMF has never been entirely dogmatic on open capital

accounts. Still, there has been a change of emphasis over time, especially after the Asian crisis. Despite

these changes, the IMF staff still clearly believed in the long-run desirability of full capital mobility.

Just as the Asian crisis had some influence in the gradual process of a more flexible policy stance, the

global financial crisis may as well have speeded up this process. There have been two innovations. First,

the Fund has now explicitly called controls ‘legitimate’ in certain conditions. Second, it is the first time

that the IMF has presented guidelines on capital controls. However, while the views on temporary,

market-based controls in extraordinary circumstances have become more accommodating, more

permanent controls, multilateral controls and controls on outflows are still strongly rejected. Thus, the

novelty of the IMF position should not be overstated. Full capital mobility is still seen as advantageous

for the world economy and for EMs.

It seems, then, that the Fund does not (yet) deviate from a (pragmatic) neoliberal class project on capital

controls. The new IMF position should not be seen as a large turn away from neoliberalism, but as an

attempt to ‘constitutionalize’ neoliberal policies. As Soederberg (2002) writes on the Chilean experience,

it “should make its supporters hesitant to embrace country-level capital controls without addressing the

underlying policy paradoxes and power structures (…).”

The more pragmatic IMF vision is a double-edged sword: while it may undoubtedly limit some of the

most disruptive effects of volatile capital flows, it could also give the Fund more legitimacy (see also

Felder, 2008). But if the conclusions of this article are correct, then a more legitimate but unchanged

IMF would be a dangerous combination. Soederberg (2004) observes: “Largely due to its appearance as

a pluralistic multilateral lending institution and its exclusive emphasis on the economic dimensions of

capital controls, the IMF is not only able to reproduce the “common sense” assumption that free capital

mobility is a natural phenomenon driven by the external forces of globalisation, but also its ability to

cloud the fact that the Fund’s judgement call is primarily political in nature.”

If the IMF were truly to become a postneoliberal organization, its position on capital controls should be

substantially more flexible and accommodating in at least three ways. First, the Fund should as a

minimum accept controls on capital outflows, quantitative controls, and permanent capital controls. As

such, the IMF would ‘permit’ countries to acquire more policy autonomy to deviate from orthodox,

neoliberal policies. Second, it should give technical assistance to countries that would increase the

effectiveness of capital controls, instead of questioning the effectiveness (see also Gallagher, 2011).

Third, it should stress the multilateral coordination of controls, which means that IMF member states

should cooperate to enforce the controls of other countries. As such, the effectiveness of controls would

again be increased, and this could also help to reduce conflicts between states on the introduction of

capital controls. However, for now at least, this vision looks rather utopian, and “optimism about the

emergence of a post-neoliberal IMF seems misplaced (…)” (Gabor, 2010). It may not be ‘our

grandfather’s IMF’, as Grabel (2010) claims, but for now it does not seem significantly different from our

father’s IMF.

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