The Past as Future? The Contribution of Financial Globalization to the Current Crisis of Neo-Liberalism as a Development Strategy
AbstractBretton Woods was grounded in the Keynesian view that financial markets are innately too unstable to be given free rein. This view, which also shaped the financial policies of developing countries during the 1st post-war quarter-century, was gradually displaced during the 2nd post- war quarter-century by Neo-liberalism, with financial market liberalization and heavy reliance on freely mobile international capital as its leading components. However, their adoption by the industrialized countries has been associated with exchange rate misalignments, excessive debt leveraging, asset price bubbles, slower and more unstable output and employment growth, and increased income concentration; and additionally in the developing countries by more frequent financial crises, exacerbated by over-indebtedness that forces many of them to adopt pro-cyclical macroeconomic policies that deepen their output and employment losses. This paper contends that the association reflects causality, rooted fundamentally in the innate propensity of financial dynamics to go off track along the lines of Minsky’s Financial Instability Hypothesis, an elaboration of Keynes’s view. An open economy extension of this hypothesis explains the frequency of banking/currency crises in the 2nd quarter-century in the developing countries far better than the convoluted “blame the victim” post-mortems that until recently have been the staple of the IMF. Its recent publications show the IMF analysts moving part way toward the Keynesian view of financial instability, but with a major disconnect between the empirical findings and their implications for theory and policy. As yet there is neither overt abandonment of the efficient market theorizing that had underpinned the IMF’s earlier enthusiasm for financial liberalization, nor candid reconsideration of its opposition to capital controls and other dirigiste policies implied by the Keynesian view. Probably this is because IMF policies are not “owned” by its bureaucracy or membership at large, but by the major financial center countries. Still, the worried discussions among these center countries that global financial discord could lead to deeper financial crises, debt deflation, intensified beggar-my-neighbor trade and currency competition, and the formation of antagonistic regional blocs have a 1930s aura. Optimistically, this could lead again, as at Bretton Woods, to coordinated stabilization policies, among at least the Big Three financial powers, that would also ease the way for developing countries to return to dirigiste development strategies. More likely, a reprise of the 1930s will be needed to create the political climate for accepting all this. Given the odds, developing countries should carve out their own policy space, with capital controls as prerequisite for widening that space.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Development and Comp Systems with number 0310002.
Date of creation: 08 Oct 2003
Date of revision:
Note: Type of Document - pdf; prepared on Win98
Contact details of provider:
Web page: http://18.104.22.168
Find related papers by JEL classification:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-10-12 (All new papers)
- NEP-DEV-2003-10-12 (Development)
- NEP-IFN-2003-10-12 (International Finance)
- NEP-PKE-2003-10-12 (Post Keynesian Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mody, Ashoka & Murshid, Antu Panini, 2005.
"Growing up with capital flows,"
Journal of International Economics,
Elsevier, vol. 65(1), pages 249-266, January.
- Malcolm Edey & Ketil Hviding, 1995. "An Assessment of Financial Reform in OECD Countries," OECD Economics Department Working Papers 154, OECD Publishing.
- HÃ©lÃ¨ne Poirson & Luca Antonio Ricci & Catherine A. Pattillo, 2002.
"External Debt and Growth,"
IMF Working Papers
02/69, International Monetary Fund.
- Soojin Moon & Ales Bulir, 2003. "Do IMF-Supported Programs Help Make Fiscal Adjustment More Durable?," IMF Working Papers 03/38, International Monetary Fund.
- Carmen M. Reinhart & Graciela L. Kaminsky, 1999.
"The Twin Crises: The Causes of Banking and Balance-of-Payments Problems,"
American Economic Review,
American Economic Association, vol. 89(3), pages 473-500, June.
- Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
- M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries," IMF Occasional Papers 220, International Monetary Fund.
- Gould, Erica R., 2003. "Money Talks: Supplementary Financiers and International Monetary Fund Conditionality," International Organization, Cambridge University Press, vol. 57(03), pages 551-586, June.
- Dorothy Power & Gerald Epstein, 2003. "Rentier Incomes and Financial Crises: An Empirical Examination of Trends and Cycles in Some OECD Countries," Working Papers wp57, Political Economy Research Institute, University of Massachusetts at Amherst.
- Philip Arestis, 2002. "Financial crisis in Southeast Asia: dispelling illusion the Minskyan way," Cambridge Journal of Economics, Oxford University Press, vol. 26(2), pages 237-260, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.