International Markets and Open Economy Macroeconomics: A Keynesian view

In the late 1980s, with the Cold War at an end and the debt crisis apparently resolved, it seemed reasonable to believe the developing countries would be the main beneficiaries of a dynamic world economy. The extension of free trade throughout the world and the integration of capital markets implied a truly ‘global economy’ of the kind anticipated by Keynes and his colleagues at Bretton Woods some 50 years ago, allowing rising incomes in non-industrial economies from rapid export growth and massive foreign investment. Moreover, during the 1980s a remarkable degree of agreement had emerged as to the principles of sound economic policy that should guide policy makers in developing countries. The model of economic development established in the immediate post-war years — which had focused on problems of agrarian transformation, forced industrialisation and income redistribution — was replaced by a new paradigm (sometimes referred to as the ‘Washington consensus’) of trade liberalisation, fiscal stabilisation, structural adjustment and privatisation.