The Institutional Roots of Incremental Ideational Change: The IMF and Capital Controls after the Global Financial Crisis
| Author | Manuela Moschella |
| DOI | 10.1111/1467-856X.12049 |
| Published date | 01 August 2015 |
| Date | 01 August 2015 |
| Subject Matter | Article |
The Institutional Roots of Incremental
Ideational Change: The IMF and Capital
Controls after the Global Financial Crisis
Manuela Moschella
Research Highlights and Abstract
This article
• Contributes to the literature on ideational change by bringing to the surface an
incremental ideational dynamic after major crises that differs from the well-known
punctuated dynamic;
• Explains the incremental dynamic of ideational change after a major crisis based on
the flexibility of the institutional environment in which actors operate. Specifically,
rather than preventing change until an explosion of radical change occurs, institu-
tional frictions may also allow for successive adjustments over time;
• Illustrates the theoretical arguments by examining the changes that have taken place
in the IMF’s thinking on capital controls since the start of the 2008 crisis;
• Traces one of the most debated developments in the post-crisis international political
economy, namely the rehabilitation of capital controls.
Although much scholarly attention has been devoted to examining the punctuated dynamics of
ideational change, other dynamics exist. Ideational change may well occur incrementally in
ordinary times or,as this study shows, can also materialise after a major shock, such as a financial
and economic crisis. By examining the IMF’s new approach to capital controls in the aftermath of
the global financial crisis, the article demonstrates that the non-punctuated nature of ideational
change can be explained in light of the enabling (and not solely constraining) features of the
institutional context in which actors operate. Rather than preventing change until an explosion of
radical change occurs, institutional frictions may also allow for successive adjustments over time.
They may in fact allow for a gradual release of pressure, thereby preventing the impending
explosion.
Keywords: ideational change; incrementalism; IMF; capital controls
Introduction
The use of controls in cross-border capital transactions is probably one of the most
controversial issues in scholarly and policy-making circles. After having been offi-
cially enshrined in the international financial architecture designed at the end of
the Second World War, capital controls have progressively become ‘heterodoxy’, so
much so that capital account liberalisation had been a hallmark of global economic
governance over the past two decades.1The International Monetary Fund (IMF or
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doi: 10.1111/1467-856X.12049 BJPIR: 2015 VOL 17, 442–460
© 2014 The Author.British Journal of Politics and International Relations © 2014
Political Studies Association
Fund) has been at the forefront of the debate on the merits of capital account
liberalisation and controls, particularly because of its distinctive organisational
features. For one thing, the Fund has regularly produced research and empirical
evidence that has informed the global debate on this issue. Additionally, the fact
that the Fund may in principle use its conditionality in order to push its quasi-
universal membership to liberalise (or reduce the stigma associated with the use of
controls) made the Fund a powerful voice that can tilt the debate in favour or
against the use of controls. The IMF’s position on capital controls is thus not only
very important per se but is also one of the crucial litmus tests for assessing
ideational changes in global financial governance at large.
The purpose of this article is to examine the development of the Fund’s ideas on
capital controls since 2007—a process that is here defined as ideational dynamics.
Indeed, since the burst of the global financial crisis in 2007, the Fund has signifi-
cantly revised its previous policy stance on this issue. While in the 1990s the
predominant view was that capital controls should not belong to the policy toolkit
that countries can use to manage capital inflows (Grabel 2010; Chwieroth 2010a;
Moschella 2010a), the same controls are now regarded as useful instruments to
manage the macroeconomic and financial stability challenges resulting from large
capital inflows. The introduction of outflows controls in Iceland and Cyprus under
the aegis of the Fund further attests to the significant ideational transformations
that have unfolded since the burst of the crisis in 2007–08. The Fund’s changed
approach to controls therefore speaks directly to the research agenda that attempts
to map and evaluate the implications of financial crises from a political economy of
ideas perspective (cf. Baker and Underhill 2012).
Examining the ideational transformation that has recently taken place within the
Fund, the article argues that the Fund’s ideational shift represents a case of incre-
mental change that varies from the standard process of change identified in most
ideational studies in political economy. This standard process can be defined as a
punctuated process, that is, a process in which periods of ideational stability are
followed by periods of ideational change that, in turn, fall back on stability. In
contrast, in the case under investigation, ideational change was slower and more
incremental than most of the literature claims it to be even after a major shock.
So what factors account for such a dynamic? In the ‘punctuated’ explanation, the
dynamic of ideational change is largely explained in light of the institutional and
ideational frictions (or inertia) that characterise ‘ordinary’ times. Specifically, once
an idea becomes embedded in the design of an institution, the new equilibrium
becomes path-dependent, thus preventing change (Cox 2004) until the moment in
which radical uncertainty opens up the way for new ideas to emerge once again
(e.g. Hay 1996; Blyth 2002; Best 2003; Widmaier 2007; Chwieroth 2010b; Baker
2012).
Although this explanation applies to some of the most well-known dynamics of
change in economic policy in the past decades (cf. Hall 1993), the frictions have
been somehow exaggerated and have thus obscured the presence of other change
dynamics. The article argues that ideational change may be slower and more
incremental than is often acknowledged because the institutional set-up in which
actors operate is not only constraining but also enabling (for a different view see
THE IMF AND CAPITAL CONTROLS 443
© 2014 The Author.British Journal of Politics and International Relations © 2014 Political Studies Association
BJPIR, 2015, 17(3)
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