Governing Cross-border Capital Flows: The Dynamics of Capital Account Policies

In line with the themes set out by the editors of this book, this chapter sheds light on the governance dynamics in the sector of global finance. Focusing on the historical evolution of the policies governing the movement of cross-border capital flows, the chapter illustrates that these policies can be fruitfully analysed from a diachronic perspective that brings into reliefs the mix of policy instruments and architectural features that usually characterize governance arrangements at each point in time (Capano et al. 2012). The chapter then moves on to investigate the factors that help account for the governance dynamics of capital account policies from the 1940s to the present. Anticipating briefly the findings discussed below, the arrangements governing the movement of cross-border capital flows has evolved from an initial equilibrium point characterized by governance arrangements based on “command-and-control” policy instruments (such as capital controls) administered by domestic governments under the auspices of a public intergovernmental organization, to a new governance equilibrium based on softer policy instruments such as voluntary standards and best practices, whose enforcement has been primarily delegated to the exercise of market discipline. In the aftermath of the global financial crisis, then, the direction of governance dynamics has somehow reversed its previous trend because of mixed combination of preceding modes of governance (Table 2.1).