Finance and Development: Institutional and Policy Alternatives to Financial Liberalization Theory

Levy Economics Institute Working Paper No. 377

26 Pages Posted: 19 Jun 2003

See all articles by Philip Arestis

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Machiko Nissanke

University of London, School of Oriental and African Studies (SOAS) - Economics

Howard Stein

University of Michigan at Ann Arbor

Date Written: April 2003

Abstract

There are many recent worldwide examples of severe financial crises that are linked to periods of financial liberalization. Given the ubiquity of these crises, there is the legitimate question of why governments still pursue financial liberalization policies. Answers to this question range from the recent institutionalization of norms of "acceptable" financial policies and perceived potential gains of attracting private capital inflows to the implied gains arising from the economic logic embedded in the theory underlying financial liberalization. This paper will focus on the latter arguing that financial transformation along the lines proposed by McKinnon-Shaw has engendered widespread banking crises precisely because of the weak foundations of the theory. The financial liberalization theory is critically evaluated on both theoretical and empirical grounds. An alternative theoretical approach is presented that focuses on ways to effect financial and banking transformation that is more consistent with economic development that draws on an institutional-centric perspective.

Keywords: financial liberalization, banking crises, institutional-centric perspectives

JEL Classification: O16, O23

Suggested Citation

Arestis, Philip and Nissanke, Machiko and Stein, Howard, Finance and Development: Institutional and Policy Alternatives to Financial Liberalization Theory (April 2003). Levy Economics Institute Working Paper No. 377. Available at SSRN: https://ssrn.com/abstract=402200 or http://dx.doi.org/10.2139/ssrn.402200

Philip Arestis (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Universidad del País Vasco (UPV/EHU)

Barrio Sarriena s/n
Leioa, Bizkaia 48940
Spain

Machiko Nissanke

University of London, School of Oriental and African Studies (SOAS) - Economics ( email )

Thornhaugh Street
London WC1E 7HU
United Kingdom

Howard Stein

University of Michigan at Ann Arbor ( email )

Ann Arbor, MI 48109
United States

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