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The Past as Future? The Contribution of Financial Globalization to the Current Crisis of Neo-Liberalism as a Development Strategy


  • David Felix

    (Washington University)


Bretton 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.

Suggested Citation

  • David Felix, 2003. "The Past as Future? The Contribution of Financial Globalization to the Current Crisis of Neo-Liberalism as a Development Strategy," Development and Comp Systems 0310002, EconWPA.
  • Handle: RePEc:wpa:wuwpdc:0310002
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    References listed on IDEAS

    1. Ayhan Kose & Kenneth Rogoff & Eswar S Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries; Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
    2. 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.
    3. 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.
    4. Malcolm Edey & Ketil Hviding, 1995. "An Assessment of Financial Reform in OECD Countries," OECD Economics Department Working Papers 154, OECD Publishing.
    5. 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.
    6. Soojin Moon & Ales Bulir, 2003. "Do IMF-Supported Programs Help Make Fiscal Adjustment More Durable?," IMF Working Papers 03/38, International Monetary Fund.
    7. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, vol. 2(3).
    8. 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.
    9. Mody, Ashoka & Murshid, Antu Panini, 2005. "Growing up with capital flows," Journal of International Economics, Elsevier, vol. 65(1), pages 249-266, January.
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    JEL classification:

    • O - Economic Development, Innovation, Technological Change, and Growth
    • P - Economic Systems

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