Financial Reform and Global Economic Institutions

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  • G20
  • World Bank
  • IMF

The financial crisis has rekindled interest in the role of the International Monetary Fund, the international development banks and the regulatory institutions that span the private-public frontier. How do these actors contribute to the stability and/or instability of modern finance? What factors shape their decisions? What financial reform options are desirable and feasible, and how should these international organizations contribute?

Publications

By Guillermo Lagarda, Jennifer Linares and Kevin P. Gallagher (April, 2017)

The 2008 Financial Crisis and subsequent  financial turbulence have triggered economists and policymakers to revisit the extent to which capital account liberalization is optimal for all countries at all levels of development. While that literature has largely concluded that capital account liberalization may have detrimental effects on growth and accentuate financial instability in emerging markets, relatively little literature has examined the impacts of capital account liberalization on inequality—a subject that has also been under intense study over the past decade as well.

By Cornel Ban, Leonard Seabrooke, and Sarah Freitas (February 2016)

Who controls global policy debates on shadow banking regulation? By looking at the policy recommendations of the Bank of International Settlements, the International Monetary Fund and the Financial Stability Board, we show how experts tied to these institutions secured control over how shadow banking is treated. In so doing, these technocrats reinforced each other’s expertise and excluded some potential competitors (legal scholars), coopted others (select Fed and elite academic economists). The findings have important implications for studying the relationship between IOs technocrats and experts from other professional fields.

By Cornel Ban and Daniela Gabor (October 2015)

This article examines a neglected structural transformation in European finance: the growing importance of government debt as collateral for Europe’s repo markets, where banks borrow cash against collateral. Seduced by the promises of repo market-driven financial integration, the EU institutions and Member States encouraged private finance to generate its own architecture for the European repo market in the early years of the euro, sidelining known problems about systemic fragilities. These fragilities materialized after Lehman Brothers’ collapse and were exacerbated by the ECB’s collateral policies. The European sovereign debt crisis shows that governments, just like private asset issuers, can rapidly become vulnerable to repo pro-cyclicality and collateral crises.

By Kevin Gallagher (February 2015)

In Ruling Capital, Kevin P. Gallagher demonstrates how several emerging market and developing countries (EMDs) managed to reregulate cross-border financial flows in the wake of the global financial crisis, despite the political and economic difficulty of doing so at the national level. Gallagher also shows that some EMDs, particularly the BRICS coalition, were able to maintain or expand their sovereignty to regulate cross-border finance under global economic governance institutions. Gallagher combines econometric analysis with in-depth interviews with officials and interest groups in select emerging markets and policymakers at the International Monetary Fund, the World Trade Organization, and the G-20 to explain key characteristics of the global economy.

Gallagher develops a theory of countervailing monetary power that shows how emerging markets can counter domestic and international opposition to the regulation of cross-border finance. Although many countries were able to exert countervailing monetary power in the wake of the crisis, such power was not sufficient to stem the magnitude of unstable financial flows that continue to plague the world economy. Drawing on this theory, Gallagher outlines the significant opportunities and obstacles to regulating cross-border finance in the twenty-first century.

GEGI-edited Special Journal Issue of “Review of International Political Economy”
(Winter 2015)

GEGI-co-director Kevin P. Gallagher teamed up with economist Ilene Grabel to co-edit a special issue of the acclaimed Review of International Political Economy on capital controls and the global financial crisis. It has been well documented by economists and the International Monetary Fund that many countries were able to avoid the worst of the crisis by regulating the inflow or outflow of cross-border financial flows in their countries.  What is less well understood are the political factors that enabled some countries to regulate capital flows and others to not.  In addition to articles by Gallagher and Grabel, in this special mini-symposium Silla Sigurgeirsdóttir & Robert H. Wade, Manuella Moschella, and Jeffrey Chwieroth draw on case studies of the IMF, Iceland, Brazil, South Korea, and other emerging markets.  This peer reviewed collection highlights the importance of political dimensions that need to overcome in order for countries to successfully prevent and mitigate financial crises.

GEGI-edited Special Journal Issue of “Governance”
By Cornel Ban and Kevin Gallagher (Fall 2014)

In the years since the Great Recession, global financial institutions have been forced to reexamine and reevaluate the thinking that informs their policy prescriptions towards nations undergoing financial crises. In this special journal issue, the contributors review patterns of policy stability and change at the IMF, and work to explain the causes behind these policy recalibrations.

The contributors show that the crisis ignited a reassessment regarding how the IMF would position itself as a pivotal player in global economic governance. While some new ideas and evidence definitively emerged within IMF decision-making, this process was often tempered by the nature of the institution and the powerful interests that control its governing structure.

Where change did occur, its causal generators could be found in some combination involving IMF staff politics, innovations coming from academic and IMF economists and, perhaps most notably, the emerging economic powers’ creative leveraging of institutional fora both within and outside the Fund.

GEGI Working Paper Series
By Cornel Ban (November 2014)

Executive Summary

During the 1980s the IMF emerged as a global “bad cop,” demanding harsh austerity measures in countries faced with debt problems. Has the Great Recession changed all that? Is there more room to negotiate with the Fund on fiscal policy?

The answer is yes. If we take a close look at what the IMF researchers say and what its most influential official reports proclaim, then we can see that there has been a more “Keynesian” turn at the Fund. This means that today one can find arguments for less austerity, more growth measures and a fairer social distribution of the burden of fiscal sustainability. The IMF has experienced a major thaw of its fiscal policy doctrine and well-informed member states can use this to their advantage.

These changes do not amount to a paradigm shift, a la Paul Krugman’s ideas. Yet crisis-ridden countries that are keen to avoid punishing austerity packages can exploit this doctrinal shift by exploring the policy implications of the IMF’s own official fiscal doctrine and staff research. They can cut less spending, shelter the most disadvantaged, tax more at the top of income distribution and think twice before rushing into a fast austerity package.

This much is clear in all of the Fund’s World Economic Outlooks and Global Fiscal Monitors published between 2009 and 2013 with regard to four themes: the main goals of fiscal policy, the basic options for countries with fiscal/without fiscal space, the pace of fiscal consolidation, and the composition of fiscal stimulus and consolidation.

GEGI Working Paper Series
By Kevin P. Gallagher and Daniela Magalhães Prates (September 2014)

Abstract

A stable and competitive exchange rate is imperative for efforts to diversify an economy in an open economy setting. However, there are an increasing number of exogenous economic and political factors in Brazil and other emerging market economies that accentuate the difficulties of shifting toward a more developmentalist economic policy. Nevertheless, over the past decade or more Brazil has developed a broad array of tools that enable the country to address the exogenously determined factors related to exchange rate instability. These tools have been a modest success at best, but lay the groundwork for what may be the necessary economic policies and political conditions for a more comprehensive program to achieve stability-led diversified growth in Brazil.

GEGI-edited Special Journal Issue of “Governance”
By Cornel Ban and Kevin Gallagher (Fall 2014)

In the years since the Great Recession, global financial institutions have been forced to reexamine and reevaluate the thinking that informs their policy prescriptions towards nations undergoing financial crises. In this special journal issue, the contributors review patterns of policy stability and change at the IMF, and work to explain the causes behind these policy recalibrations.

The contributors show that the crisis ignited a reassessment regarding how the IMF would position itself as a pivotal player in global economic governance. While some new ideas and evidence definitively emerged within IMF decision-making, this process was often tempered by the nature of the institution and the powerful interests that control its governing structure.

Where change did occur, its causal generators could be found in some combination involving IMF staff politics, innovations coming from academic and IMF economists and, perhaps most notably, the emerging economic powers’ creative leveraging of institutional fora both within and outside the Fund.

GEGI Working Paper Series
By Kevin P. Gallagher and Yuan Tian (May 2014)

Abstract

In the wake of the financial crisis the International Monetary Fund (IMF) began to publicly express support for what have traditionally been referred to as ‘capital controls’. In addition to public statements, the IMF underwent a systematic re-evaluation of Fund policy on the matter, and published an official view on the economics of capital flows. In this view the IMF concluded that capital account liberalization is not always the most optimal policy and that there are situations where capital controls—rebranded as ‘capital flow management measures’—are appropriate. This paper empirically examines the extent to which the change in IMF discourse on these matters has resulted in significant changes in IMF policy advice. To answer this question we create a database of IMF Article IV reports and examine whether the financial crisis had an independent impact on IMF support for capital controls. We find that the IMF’s level of support for capital controls has increased as a result of the crisis and as the vulnerabilities associated with capital flows accentuate.

GEGI Working Paper Series
By Cornel Ban (March 2014)

Abstract

Since 2008 the IMF has become more open to the use of discretionary fiscal stimulus packages to deal with recessions, while changing its doctrine on the timing and content of fiscal consolidation. Rather than constitute a paradigm shift, these changes amounted only to a careful recalibration of its pre-crisis fiscal orthodoxy. The paper traces this evolution of the Fund’s doctrine to staff politics, more diverse thinking in mainstream economics and a careful framing of the message through the use of mainstream macroeconomic models. The findings contribute to the emerging debate on the internal sources of intellectual and policy change in international economic organizations.

By Cornel Ban (March 2013)

Economists and political economists emphasize the importance of exogenous shocks, international economic competition, policy conditionality and partisan politics as the main drivers of literature on economic policy change. This paper evaluates the explanatory robustness of these factors and stresses the importance of incorporating economic ideas as a fruitful new direction in research on this topic.

By Daniela Gabor; Cornel Ban (January 2013)

Abstract

This paper argues that scholarship on the varieties of capitalism could provide a more complete understanding of fiscal policy convergence in the Eurozone after 2010 if it better examined the interdependencies between banks and sovereigns. Recently, this scholarship has explained fiscal convergence through a global imbalances framework. While the interaction between coordinated and liberal capitalisms, and their distinctive macroeconomic policy preferences, generates global imbalances, rebalancing can only occur if the incentives governing national polities change dramatically. In Europe’s case, sudden stops in capital inflows from coordinated capitalisms triggered an asymmetric response, forcing deficit (liberal and mixed) economies to address such imbalances. As wage-setting institutions could not restore exchange rate competitiveness a la Germany, governments were compelled to adopt the conservative macroeconomics of the coordinated economies in an institutional setting ill adapted to such policies. In contrast, our account highlights the constraints that financial actors in sovereign bond markets place on the conduct of fiscal policy. Drawing on recent contributions in the literature on financialization, we introduce the concept of the ‘collateral motive’ – investors’ demand for government bonds to meet their funding needs – and link it to the shift to transnational, market-based, collateral-intensive banking models. We show how this becomes a pivotal mechanism for fiscal consolidations as the singular response to the ongoing Eurozone crisis. The implication of our argument is that recent fiscal policy in the Eurozone cannot be adequately understood without analyzing the process through which the collateral motive ignited a run on peripheral sovereign bond markets which in turn compelled states to stabilize these markets through austerity.

GEGI Working Paper Series
By Cornel Ban (May 2013)

Abstract

Soon after the Lehman crisis, the International Monetary Fund surprised its critics with a recalibration of its research and advice on fiscal policy. But the selective incorporation of Keynesian ideas and rejection of some elements of neoclassical economics that this paper uncovers are very limited and could be seen as part of an effort to reprogram the instruments and settings of neoliberalism for the context of the Great Recession. This paper argues that this limited change was facilitated by the convergence of two factors: growing divisions in mainstream macroeconomics and internal entrepreneurship at the Fund, with the latter process bringing to the fore the importance of staff reshuffles, conceptual layering and methodological framing in both the success and the limits of this revisionist thinking. These findings contribute to the emerging debate on the internal sources of intellectual and policy change in international economic organizations.

By Cornel Ban (November 2012)

Abstract

Historically, high sovereign debt and austerity policies have coincided with regime-changing popular uprisings. Nicolae Ceausescu’s Romania was no exception. Why, when faced with a sovereign debt crisis in the 1980s, did his regime choose to pay its foreign debt as early as possible, at the cost of economic recession and dramatically compressed consumption? How did these choices relate to the regime’s failure to survive the end of the decade? The article argues that while exogenous shocks shattered the economic bases of the regime, it was the ideas with which the regime understood development and interpreted the crisis that shaped government policy responses in the 1980s. When the price of oil and development finance went up abruptly in 1979, the low energy efficiency of Romanian industry pushed the country into a situation where debt levels became unsustainable. Committed to a view of development that blended nationalist and Stalinist ideas, but with a focus on policy sovereignty, Ceausescu diagnosed the crisis as evidence that debt-financed development and policy independence were incompatible. Consequently the regime decided to pay off foreign debt through a mix of austerity, import substitution, and export-led accumulation of dollar reserves. By the time all debt was paid off in 1989, the regime’s economic sources of legitimacy were exhausted. In the external environment of 1989, this policy regime change contributed to political regime change even in the absence of an organized civil society. In addition to casting a new light on the causal mechanisms of the Romanian revolution of December 1989, the findings of this article contribute to emerging scholarship that stresses the nexus between debt-induced economic crisis and popular uprisings.


UNCTAD
By Kevin P. Gallagher (July 2011)

This note examines the extent to which international investment agreements (IIAs) may affect the ability of States to implement sovereign debt restructurings when a debtor nation has defaulted or is close to default on its debt. Numerous defaults and restructurings of the 1990s, Argentina’s debt restructuring after its crisis in 2001, as well as the recent global financial and economic crisis have all emphasized that governments may need some freedom to maneuver in this area. While thus far, Argentina is the only nation to be subject to IIA claims related to the nations’ sovereign debt default and subsequent restructuring, today’s situation where numerous countries face the risk of debt
crises, suggests that the prospect of holdouts (i.e. investors who refuse to negotiate and demand that the debt instruments be honored in full) bringing additional investor-State dispute settlement (ISDS) claims cannot be ruled out. It is therefore important to ensure that IIAs do not prevent debtor nations from negotiating debt restructurings in a manner that facilitates economic recovery and development.

In the News

Opinion Pieces

The Political Economy of Shadow Banking
Review of International Political Economy
By Cornel Ban and Daniela Gabor
January 2017.

Demise of the US Ex-Im Bank would leave the field to China
Financial Times
By Gregory Chin and Kevin Gallagher
June 22, 2015

Obama Abandons Allies on China’s Marshall Plan
The Globalist, Bangkok PostJakarta Post
By Kevin Gallagher
March 18, 2015

Austerity vs. Democracy in Greece
Foreign Affairs
By Mark Blyth and Cornel Ban
January 29, 2015

The IMF’s perestroika moment
Washington Post
By Cornel Ban and Kevin Gallagher
December 17, 2014

BRICS: Toward a Rio Consensus
The GlobalistJapan TimesSouth Africa Business ReportPhilippine Daily Inquirer
By Kevin Gallagher
July 14, 2014

Interviews

Is Greece to Blame for the Crisis?
Foreign Affairs
Cornel Ban interviewed
August, 2015

Real Money with Ali Velshi
Al Jazeera America
Kevin Gallagher interviewed
July 16, 2014

Quotes

Kinder, Gentler IMF Austerity Stance Came Too Late to Aid Greece
Bloomberg Business
Cornel Ban paper cited
July 7, 2015

Europe’s economic powerhouses snub US, sign up to China-led ‘world bank’
Al Jazeera America
Kevin Gallagher quoted
March 17, 2015

Coke Brothers
Foreign Policy
Kevin Gallagher quoted
July 22, 2014

Emerging Nations Bloc to Open Development Bank
New York Times
Kevin Gallagher quoted
July 15, 2014

BRICS announce $200B challenge to world financial order
Al Jazeera
Kevin Gallagher quoted
July 15, 2014

The biggest challenge for BRICS success? Big brother China
Reuters, CNBC, Times of India, News Hub, News Duet
Kevin Gallagher quoted
July 15, 2014

BRICS eye political capital with US$150b deal on new reserve fund and bank
South China Morning Post
Kevin Gallagher quoted
July 15, 2014

BRICS New Development Bank Soon To Be A Reality
South Africa Breaking News
Kevin Gallagher quoted
July 15, 2014

BRICS Fight Waning Clout With $150 Billion Deal at Summit
Bloomberg Businessweek
Kevin Gallagher quoted
July 14, 2014

China’s Xi begins 2nd trip to Latin America, in sign of expanding role
McClatchy News Service
Kevin Gallagher quoted
July 14, 2014

Latin America has power to reshape relations with China – but will it use it?
Christian Science Monitor
Kevin Gallagher quoted
July 14, 2014

G20 Urges U.S. Action on IMF Reforms by April
Inter Press Service News Agency
Kevin Gallagher quoted
February 25, 2014

Events

Has the Crisis Changed the IMF?
November 20, 2014
Join us for a lunch discussion on what changed in the IMF since the 2008 crisis, what hasn’t and why. The discussion is based around a forthcoming special issue of Governance co-edited by Pardee School professors Cornel Ban and Kevin Gallagher. Ban and Gallagher’s presentations will be followed by the remarks of Strom Thacker, professor of political science at the Pardee School and Alasdair Roberts, professor of public policy at Suffolk University and editor of Governance.

Between Change and Continuity: The International Monetary Fund and Economic Crises
April 2013
This workshop explored IMF’s position on monetary policy and macroprudential policy before the crisis and during its early stages, shifts in the IMF’s procedural orthodoxy and the effects of the crisis on the contents of the IMF’s conditionality programs.  Attendees also examined the regulatory implications of financial innovation and the emergence of the shadow banking in particular, the international politics of the IMF’s policy shifts and the ways in which they connect with domestic politics; and the IMF’s involvement in Latin America, Eastern Europe and Southern Europe from political science, economics and international law perspectives.