Development Economics and Structuralist Macroeconomics
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Development Economics and Structuralist Macroeconomics

Essays in Honor of Lance Taylor

Edited by Amitava Krishna Dutt

Lance Taylor is widely considered to be one of the pre-eminent development economists in the world and is known for his work on development planning, macroeconomics of development, stabilization policy, and the global economy. He has also been the major force behind structuralist economics, which is seen by many to be a major alternative to orthodox development economics and policy prescriptions. The essays in this volume, written by well-known scholars in their own right, make contributions to each of these areas while honoring the contributions made by Lance Taylor.
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Chapter 8: Financial fragility in developing economies

Duncan K. Foley


Duncan K. Foley 1 INTRODUCTION The epidemic of financial crises in developing and newly industrializing countries that accompanied the liberalization of domestic and international capital markets in the 1990s has underlined the relevance of Hyman Minsky’s (1975, 1982) conception of financial fragility to the contemporary world economy. Minsky’s own work focused on financial fragility in fully industrialized capitalist economies with highly developed financial institutions and markets. Minsky saw a tendency for financial positions to become increasingly indebted in periods of prosperity, and hence increasingly vulnerable to debt-deflation crisis, as both borrowers and lenders become tolerant of higher ratios of debt to equity finance. In Minsky’s view a financially fragile economy posed a difficult problem for a central bank; in attempting to control financial fragility by tightening monetary policy and raising interest rates, the central bank could trigger the financial crisis it sought to avert. The drama of financial crisis in the international economy in the 1990s played out in a rather different context. Industrializing economies with high structural profit rates and good opportunities for profitable investment but relatively undeveloped financial institutions faced large inflows of short-term debt capital in the context of the ‘Washington consensus’inspired liberalization of international capital flows. Positive shocks to investment and profitability in these economies triggered unstable capital inflows which led in turn to external and internal financial crisis as the resulting current account deficits became unmanageable. In this repeated pattern of events, however, we can see...

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