Financial liberalization (FL), a cornerstone of the Post-Washington Consensus Regime (PWCR), has faced its share of scrutiny, particularly during economic crises. However, through institutional support and its ability to foster long-term economic growth, FL has managed to maintain legitimacy even during turbulent times.
Institutional Strengthening: NIFA I and NIFA II
The creation of global frameworks such as the New International Financial Architecture (NIFA I & II) played a significant role in stabilizing FL during crises. NIFA I introduced the G-20 and the Financial Stability Forum, both of which standardized lending practices and promoted financial stability. These mechanisms proved invaluable during crises in Iceland and Ireland, where they mitigated economic shocks.
In 2009, NIFA II expanded the Financial Stability Forum into the more inclusive Financial Stability Board. Simultaneously, the International Monetary Fund (IMF) took on a crisis management role, offering flexible credit and Structural Adjustment Programs (SAPs) to help countries recover. These initiatives underscore how global institutions have bolstered FL’s credibility by providing much-needed support during economic downturns.
Growth Despite Instability
Critics often cite the volatility of FL economies, marked by “lending booms” and sudden downturns. However, data shows that FL economies experience faster GDP growth over time compared to non-liberalized counterparts. By attracting foreign investment and improving credit allocation, FL economies can recover quickly from recessions, allocating resources more efficiently and fostering economic resilience.
For example, the quantity effects of FL such as increased savings and investments drive economic activity, while the quality effects ensure better capital allocation across markets. These factors highlight FL’s ability to emerge stronger post-crisis, demonstrating its legitimacy as a driver of economic progress.
A Resilient Pillar of Global Growth
While not without its challenges, FL has solidified its legitimacy through institutional innovations and economic recovery mechanisms. By leveraging frameworks like NIFA and the support of the IMF, FL has consistently demonstrated its capacity to navigate crises and fuel growth, making it a critical pillar of the global financial system.
Aequitas Media 