For anyone out there looking for a dissertation topic, I (TP) have got one for you. During the Asian Financial Crisis, there was naturally a lot of fussing about the correct way to cope with the problems. All of the big policy makers and economists were involved from all around the world, and there was no shortage of reasonable people having reasonable disagreements about very fundamental issues in economic policy making. So, why did countries adopt the policies that they did? If economic theory was too confusing for economists and sundry policy makers, how did countries get to where they did? It’s part of my dissertation to explain why. But, what about the way that people framed the discussion in foreign countries and in multilateral lending institutions like the IMF? Why were they so married to one particular ideology? My theory is that many of these people advocated particular policies–free capital markets and floating exchange rates–for no other reason than the words "free" and "floating" sound good, and they invoke images of freedom, liberalism, and capitalism.
In a sense, I feel like Edward Sapir, a linguistic anthropologist who has whole school of thought partially named after him–the Sapir-Whorf Hypothesis. Before he went to graduate school, he was working as an insurance adjuster in Peoria, Illinois. This was in the 20s and 30s, when people were first driving. He noticed that a lot of his claims involved folks who were driving around with empty gasoline cans in their car who were shocked–Shocked!–when these cans exploded during accidents. The reason that they always gave for this was that the can was "empty." You know, empty, with connotations of inert, void, whatever…doesn’t sound like something that would be likely to explode, except if that something is gas vapors. This led him to the thought that maybe the way we speak (language) constrains what we do (culture).
So when the Asian Financial Crisis hit, Western governments and international lending bodies were clambering for the affected governments to get rid of their crony economic systems and impose real liberal capitalist systems. Get rid of monopolies, deregulate state-controlled industries, things like that. All good things, no doubt about it. So long as we’re doing that, we might as well make sure that we have free capital markets and floating exchange rates. You know, free, floating, liberal, open, etc.
To borrow the phrase of a famous economist, the problem is that "trade in widgets is not like trade in dollars." That is, there is no economic theory that says that free capital flows and floating exchange rates are better than capital controls and pegged currencies. For trade in widgets and gadgets, we have the theory of comparative advantage and the general equilibrium theory of the market. It helps to prove, both in terms of common sense and through rigorous mathematics, that free trade in goods among countries is superior to trade barriers. It makes everyone better off. If you have a monopoly and your economy is tanking, get rid of that monopoly. There is no corresponding theory for trade in dollars, rupiah, ringgit, euros, whatever. The closest thing we have is the axiom that some exchange rate regimes are good for some countries at some times, others good for other countries at other times. For that reason, a tanking economy with fixed exchange rates does not necessarily get better by floating. The irony is that Mahathir Mohamad in Malaysia bucked the international discourse for open capital accounts and floating exchange rates by fixing the exchange rate and closing the capital account. Despite outrage from the West, Malaysia got better. Indonesia followed the discourse, and got hammered so bad that Soeharto eventually had to step down.
The point is that these particular economic policy decisions are not necessarily good or bad, but that they have trade-offs. Why were so many in the international community so adamant about one rather than the other, regardless of those tradeoffs? (This includes in particular Deputy Treasury Secretary Lawrence Summers, lately of Harvard University fame.) Of course, other economists, notably folks like Nobel Laureate James Tobin and wacko liberal Paul Krugman, called for the capital controls and fixed exchange rates before even Malaysia thought of it, but few listened until after the dust had settled. I certainly have no way of proving my theory, or even of forming a reasonable hypothesis through which to test it. If you know how, you’ve got yourself a dissertation.