Minsky and International Development Finance

Abstract

The paper discusses the application of Hyman Minsky’s financial instability theory to open economy issues. It is claimed that the financially fragile nature of the present-day capitalist economy retains its key features regardless of how intense the country’s interactions with the foreign sector are. The Minskian approach, as opposed to standard neoclassical development economics, provides the negation of external financing in developing countries by pointing out that it is, in essence, a Ponzi financing scheme. This result was confirmed by Evsey Domar in discussion of US policy in the post-war period. In fact, Domar’s solution to produce stability of the external debt to GDP ratio represents conditions for a successful Ponzi scheme. Shortcomings of the traditional development theory are also stressed. In this approach, constraints on developing countries are identified as deficient domestic savings, scarcity of domestic resources and inadequate capacity to produce capital goods. Proposed measures to overcome these constraints and to increase domestic savings, external financing via bilateral grants and concessional lending through international institutions are criticized. In the global economy, Keynes’s long-standing recommendation to use capital controls to limit foreign borrowing needs to be reappraised. Economic development in that case should be financed using domestic financial institutions and stimulating employment in domestic manufacturing and export-oriented sectors