Speculation-led economic development: a post-Keynesian interpretation of financial liberalization programmes in the Third World

Abstract

The paper presents a post-Keynesian interpretation of the consequences of financial liberalization (FL) programmes in less developed countries (LDCs). The interpretation advanced here incorporates the new-Keynesian concepts of adverse selection and credit rationing into a post-Keynesian framework. It is argued that FL can lead to a particular kind of development, ‘speculation-led economic development’, which is characterized by a preponderance of risky investment practices and shaky financial structures. In addition, FL is likely to induce an increase in directly unproductive profit-seeking activities, a greater likelihood of financial crises, a misallocation of credit and, ultimately, diminished rates of real sector economic growth. Given the likelihood of these outcomes (as well as their realization in LDCs that have implemented FL), FL programmes are argued to be a poor foundation for stable and sustained real-sector economic growth, especially in the context of resource-scarce LDCs.

^* I am especially indebted to James Crotty, Gerald Epstein, and J. Mohan Rao for their comments on earlier versions of this paper. I also wish to thank Paul Burkett, George DeMartino, Gary Dymski, Don Goldstein, David Levine, Eric Nilsson, Bob Pollin, Ellen Tierney, Howard Wachtel, and participants in the GSIS faculty seminar for their comments.

^* I am especially indebted to James Crotty, Gerald Epstein, and J. Mohan Rao for their comments on earlier versions of this paper. I also wish to thank Paul Burkett, George DeMartino, Gary Dymski, Don Goldstein, David Levine, Eric Nilsson, Bob Pollin, Ellen Tierney, Howard Wachtel, and participants in the GSIS faculty seminar for their comments.

Notes

^* I am especially indebted to James Crotty, Gerald Epstein, and J. Mohan Rao for their comments on earlier versions of this paper. I also wish to thank Paul Burkett, George DeMartino, Gary Dymski, Don Goldstein, David Levine, Eric Nilsson, Bob Pollin, Ellen Tierney, Howard Wachtel, and participants in the GSIS faculty seminar for their comments.