Institutions and Finance in Developing Countries: Challenges to Orthodoxy

Abstract

w about how financial systems best operate and in turn how they must be transformed to reach a hypothetical world arising from a false set of deductive principles. The result of these exercises has led to a series of unintended consequences including frequent and costly financial crises and disintermediation with a growing disconnect between the world of finance and more productive sectors of the economy. While neo-classical writers have often searched for extraneous explanations for these crises (not enough financial liberalization, wrong order of liberalization, political influence, etc.), post-Keynesian and institutional economists understand the problem as fundamentally theoretical and therefore entirely predictable. They have ventured forwarded an alternative body of theory and with it a different set of guiding principles to ensure the finance serves the rest of the economy rather than the perverse inversion we have witnessed with terrible consequences in recent years.