The debt crisis slowed but did not stop the expansion of global financial markets after the end of the Bretton Woods era. The growth of capital flows, which had begun in the 1960s and 1970s, accelerated in the 1980s and 1990s. This chapter deals with the IMF’s response to the widening scope of international capital. The record demonstrates that the IMF saw no conflict during this period between encouraging capital account liberalization and its mandate to promote economic stability.

The first section provides an overview of the reemergence of global finance. The trend was more pronounced in the upper-income countries but was also a part of the increased economic openness of some emerging market nations. The movement to the integration of financial markets was driven by many forces, including advances in communications and financial instruments, the growing acceptance of market-based resource allocations, and the promotion of deregulation by those who stood to benefit from this trend.

The IMF has been criticized for fostering premature capital deregulation, and the evidence on this charge is presented in the second section. The evidence confirms that the IMF encouraged its members, including those that borrowed from it, to decontrol capital movements. While the IMF did not compel governments to remove capital account restrictions, it did underestimate the risks associated with increased financial flows. There was ample evidence of the instability associated with financial deregulation in the experiences of several South American countries.