Financial repression and the Latin American finance pattern

This article presents a critique of the theory of financial repression, in place of which it offers an alternative approach to development financing, based mainly on the Keynesian tradition. The concept of financial repression refers to the situation of a market suffering from institutional obstacles, both in terms of economic policy and administrative aspects, which prevent it from attaining an equilibrium position and thus jeopardize the rationality of the resource allocation process. The policy consequences that follow from a study of this theory mainly involve the liberalization of the financial sector as a contribution to the development process. The author seeks to identify the limitations of policy options based on the theory of financial repression and proposes other alternatives which fit in better with the structural conditions of Latin American financial markets and the place they occupy within the international credit markets. He concludes that it is necessary to develop new forms of credit creation and financial intermediation, and not just redirect the existing resources and institutions. The financial sector cannot be burdened with the exclusive responsibility for correcting the intrinsic features of a given development pattern, reallocating resources in given directions, or increasing the rate of investment. Consequently, in various situations the State has been obliged to use financial policy mechanisms that facilitate the industrialization process.