Financial Liberalization in Developing Countries: Keynes, Kalecki and the Rentier

Abstract

Interest rate deregulation has become the favourite target of orthodox economists and financial liberalization has become all the rage. Adjustment programmes undertaken in collaboration with the IMF and the World Bank now typically include reforms in the financial system designed to increase the role of markets in determining interest rates and in allocating finance and savings. Underlying this shift in thinking is the hypothesis, initially formulated by McKinnon (1973) and Shaw (1973), that higher real interest rates on domestic financial assets increase the willingness to save income and hence reduce the savings constraint on capital accumulation, and encourage savings to be shifted to financial assets, thereby increasing the availability of investment finance. It is thus argued that the increase in the ratio of financial assets to income (i.e. financial deepening) will be associated with greater savings and faster growth.

United Nations Conference on Trade and Development, Geneva. The views expressed in this paper are personal and do not necessarily reflect those of the UNCTAD secretariat.