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is collaborating with JSTOR to digitize, preserve and extend access to
Journal of Post Keynesian
Economics.
http://www.jstor.org
Fiscal Policy and the Washington Consensus: A Post Keynesian Perspective
Author(s): Alcino F. Câmara Neto and Matias Vernengo
Source:
Journal of Post Keynesian Economics,
Vol. 27, No. 2 (Winter, 2004-2005), pp. 333-343
Published by: Taylor & Francis, Ltd.
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334 JOURNAL OF
POST KEYNESIAN ECONOMICS
There is a fundamental
difference between crises where a
country's
underlying
debt
position
is
sustainable
over
the
long
run
and
those where
debt
restructuring
is unavoidable.
Many
thought
that the crisis unleashed
by
the
Mexican default
of
August
1982
was of the former
type.
The
crisis,
however,
was
more
lasting
and acute
than
expected,
and,
in
fact,
the 1980s became known
in
Latin America as the "lost
decade."
By
the
mid-1980s,
most
analysts
were certain that the crisis
was
going
to
be
long
lived,
and
some
argued
that
a radical
change
in the
development
strategy
was
necessary.
The
policies
that were
suggested-and
then
imposed
in
the context
of
international
agreements-and eventually
be-
came known as the
Washington
Consensus
(Williamson,
1990),
were,
therefore,
the
result of the need for
a new
development
strategy.
In
many respects,
the crisis
of
the
developmental
state
and
the debt
crisis
represent
for
Latin
America what the "fiscal
crisis"
of the state
does
for
the
developed
world.
In that
respect,
the
market-friendly
ap-
proach
to
development
is the other face
of
the conservative revolution
of
Ronald
Reagan
and
Margaret
Thatcher
in
the
developed
world.
Fiscal
discipline
was the first item
in
Williamson's
decalogue,
the
oth-
ers
basically
argued
for
deregulation,
liberalization,
and
privatization,
and,
as
noted
by
Davidson,
"all ten
reforms
of
the
Washington
Consen-
sus
[were]
founded
on
classical
economic
theory
that
supports
the
laissez-
faire
doctrine
as
necessary
to solve
all
our economic
problems"
(2003,
p.
3).
The
emphasis
on fiscal
discipline
was
associated
with
the concern
that
high
fiscal deficits were behind macroeconomic
instability,
on
one
hand,
generating
inflation,
and,
on the
other,
generating
fears of
default
leading
to
balance-of-payments problems. Populist
macroeconomic
poli-
cies,
meaning
lax
fiscal
policy,
were,
in
the consensus
view,
the cause
of
the lost decade
(Bresser-Pereira
and
Dall'Acqua,
1991).
The result of
the
implementation
of the
Washington
Consensus
poli-
cies
in Latin America has been
a commitment
to
maintaining primary
surpluses (excluding
interest
payments),
even
in
periods
of
recession.
This is a
significant
change
with
respect
to the
Keynesian
views that
dominated
before,
one that
is
more extreme
than
the
anti-Keynesian
bias
in the
developed
world.
In
particular, primary
fiscal
surpluses
and
open
capital
accounts have
generated
an
environment
that
has curtailed
pub-
lic investment.
This
paper
discusses these
developments
in
light
of
Keynes's
own views on fiscal
policy.
It is
emphasized
that the
notion
of
the
euthanasia
of
the
rentier is a
necessary complement
to
the socializa-
tion
of
investment.
The
following
section discusses
what
Keynes really
said about fiscal
policy.
We
contrast
Keynes's
view
with
the
Washing-
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FISCAL POLICY
AND THE
WASHINGTON CONSENSUS 335
ton Consensus
view,
and
we
offer an alternative
based
on
Keynes's
ideas
and Post
Keynesian critiques
of
the consensus
(Davidson,
2003).
Keynes
on
fiscal
policy
In
popular
textbook
presentations, Keynesianism
is
represented
by
defi-
cit
spending.
Keynes
defended
public
works and
deficit
spending
since
the late
1920s,
and
particularly during
the
long
debates
of the Macmillan
Committee
(Clarke,
1988).1
In
particular,
he did not believe that such
spending
would
crowd-out
private
spending,
as
argued
by Treasury
of-
ficials. Public
spending
did not
use,
in
Keynes's
view,
a
given pool
of
savings-which
would reduce the loanable funds
to
private
agents-
but,
on the
contrary, by
increasing
the
level
of
activity,
it
led to
higher
aggregate
savings.2
However,
Keynes emphasized
the
importance
of balanced
budgets
in
the
long
term
(Brown-Collier
and
Collier, 1995; Carvalho,
1992).
Keynes
was
keenly
aware
of the limitations of fiscal
policy
in
times of
reces-
sion. He noted that
time
lags
would make fiscal
policy
a
second-best
solution
for
a recession
(1973,
p.
49; 1980b,
p.
22).
More
importantly,
Keynes
noted that
budget
deficits
have
a
cyclical component,
and that
deficits
were
just
a
symptom
of insufficient
spending,
investment
above
all.
In
other
words,
in a
recession,
tax revenues
decrease,
spending pro-
grams
(e.g., unemployment
insurance)
imply
higher
government
expen-
ditures,
and a deficit results.
Deficits are an effect of
a
recession
and do
not
represent
a reliable solution.
If
deficits were the
result of a
recession,
the best
way
to avoid them
was
to stabilize the
cycle by stabilizing
investment,
and the best
instrument
at
hand was
public
investment.
In
the
General
Theory, Keynes argues,
in
one of his most
controversial
propositions,
for "a
somewhat
comprehen-
sive socialization of investment"
(1936,
p.
378).
Keynes
also
warned
that
the socialization
of
investment did not
preclude
"all
manner of
compro-
mises
and
devices
by
which
public
authority
[would]
cooperate
with
pri-
vate initiative"
(ibid.,
p.
378).
Socialization
of
investment was not devised
as
"a
terrific
encroachment on
individualism,
[but]
on
the
contrary
... as
Perez
Caldentey
(2003)
suggests
that
Keynes
recanted from his
early support
of
public
works and
used
the framework
developed
in
the General
Theory,
which
put
emphasis
on
stabilizing
investment as the main
tool
of
countercyclical
fiscal
policy.
The
argument
is
further
developed
below.
2
In
fact,
as
Keynes
notes,
"savings
is
a
mere residual
[and]
the decisions to con-
sume and the decisions to
invest between
them
determine
incomes"
(1936,
p.
64).
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336 JOURNAL OF
POST
KEYNESIAN
ECONOMICS
the
only practicable
means
of
avoiding
the
destruction of
existing
eco-
nomic forms
[that
is,
capitalism]
in
their
entirety
and as a condition of
successful
functioning
of individual
initiative"
(ibid.,
p.
380).
Consistent with his
emphasis
on
countercyclical
public
investment,
Keynes argued
for a
separation
of the current or
ordinary
budget
and the
capital budget.
The
first was related to
government
consumption
and
should be
balanced
on
average,
or
even
in
surplus,
to finance the
capital
one. The latter was related to
public
investment and should be used for
countercyclical
purposes.
The main
difference between the two
types
of
expenditure
is
that,
whereas
consumption
implies
immediate
fruition,
capital
expenditures
provide
a
real return over
time.
Further,
by creating
a
favorable
expectational
environment for
private
investment,
capital
expenditures
would
help
stabilize the level of
output.
In
that
respect,
tax
policies
and
public
works,
which involved
deficit
budgeting,
should have
a
secondary
role,
and
capital budgeting
should
be the
central instrument
of
fiscal
policy.
It is clear
that as much as
deficit
budgeting,
capital
budgeting
may
lead to the
accumulation
of
public
debt.
Keynes
notes, however,
that
government
debt
is of
no
concern
provided
it does
not
get
"out
of
pro-
portion
to the
growth
of the
national income"
(1980b,
p.
366).
His ideas
on
debt
sustainability
are in
line with the
notion of
functional finance as
developed by
Lerner
(1943),
and with the
debt
sustainability
theorems
developed
in
line with Domar
(1944).
However,
Keynes
never became a
Lernerian,
in
the sense of
being
in
favor of
deficit
spending
as
a
solution
for
unemployment.3
Hence,
Keynes
favored
public
investment
financed
by public
borrow-
ing,
and
taxes should be
budgeted
with a view
of
making
debt
servicing
payments
over the life of
the investment
project.
However,
it would be
incorrect to
presume
that
Keynes's
views
on fiscal
policy stop
at this
stage.4
The
euthanasia of the
rentier
was an
integral part
of
the
analytical
framework
of the
General
Theory.
The
euthanasia of
the rentier
would
imply
low
rates of
interest,
which
not
only
would
provide
a
better
envi-
3
For
a discussion of
functional
finance,
see
Forstater
(1999).
For a
discussion of
Keynes's
views on
Lemer's
functional
finance,
see
Colander
(1984).
Colander
(ibid.,
p.
1574)
suggests
that the main
reasons for
Keynes's
objections
toward
functional
finance
were
related
to
the
political
implications
of
such
policies.
However,
the dis-
tinction
between
ordinary
and
capital
budgets
hints
that
sustainability
implications
of
consumption
versus
investment
spending might
have
had a role
too.
4
Note
that
Brown-Collier and
Collier's
(1995)
well-written
and otherwise
detailed
analysis
of
Keynes's
fiscal
policies
views
omits
discussion of
interest rates and the
euthanasia of
the rentier.
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FISCAL
POLICY
AND THE
WASHINGTON CONSENSUS 337
ronment for
private
investment and full
employment
but would
also
make
debt
servicing
and, hence,
public
investment
economical.
Keynes
noted
that
"in
a
society
where there is no
question
of direct
investment under the
aegis
of
public
authority,
the
economic
objects,
with which it
is reasonable for the
government
to
be
preoccupied,
are
the domestic interest rate and the balance of
foreign
trade"
(1936,
p.
335).
That is
why,
to
guarantee
the euthanasia of
the
rentier,
Keynes
pointed
out that the central bank should be
able to set
the
rate of interest
independently
from
any
international
pressures. Keynes especially
in-
sisted
upon
the idea
that
movements
of
capital
could not
be left unre-
stricted
during
the
long preparatory
works
and the
negotiations
for
the
Bretton Woods
conference.
Keynes
argued,
"we
cannot
hope
to control
rates of
interest
at home
if
movements of
capital
moneys
out
of the
country
are unrestricted"
(1980a,
p.
276).
If,
however,
the
government permits
capital
funds to
freely
move across national
boundaries,
then
according
to
Keynes,
"the
authorities had no
direct control over the domestic
rate
of
interest or the
other inducements to
home investment"
(1936,
p.
336).
Hence,
capital
controls
are the
necessary complement
to
Keynes's
fiscal
policy proposals
for current
and
capital budgeting
and the socialization
of
investment.5
The consensus
and fiscal
policy
in the
periphery
To understand the
Washington
Consensus views on fiscal
policy,
we
must introduce one more distinction
beyond
the
current
and
capital
bud-
geting
view introduced
by Keynes.
Fiscal
discipline
in
general
is
associ-
ated
with nominal fiscal results.
In
other
words,
discipline
hinges
on
whether the
government
(in
all
its
levels)
has
a
surplus
(or not)
over its
expenses.
Yet
the
fiscal deficit
can
be subdivided into its financial and
nonfinancial
components.
The
primary
fiscal balance excludes
the in-
terest
payments
incurred
by
the
servicing
of the
outstanding
debt
and,
hence,
portrays
the
nonfinancial
part
of the fiscal accounts.
According
to Williamson
(1990),
one
of the
main Latin American
prob-
lems
was the
widespread
use of fiscal deficits as a macroeconomic
policy
tool.6 That is
why
fiscal
discipline
was the number one item in his list of
5
It
is
important
to mention that
during
the
Bretton Woods
period, capital
controls
were
widespread,
but
Keynesian policies regarding
current and
capital
budgeting
were
not. On the second
point,
see Brown-Collier
and
Collier
(1995).
6
Williamson
(2003)
has recanted
some of his
original
views but not the main thrust
of his initial
proposal.
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338
JOURNAL
OF POST KEYNESIAN ECONOMICS
policy
recommendations.
If
one looks at nominal fiscal
balances,
one
must
agree
with Williamson.
However,
if we
look
at the
primary
fig-
ures,
the
picture
of
fiscal
performance
for Latin America is
not inconsis-
tent
with the consensus.
If
we
take the three
biggest
Latin American
countries-Argentina,
Bra-
zil,
and
Mexico-it
is
clear
that,
since
the debt
crisis
of
1982,
there has
been
a resolute
fiscal
effort. Mexico
has had
primary surpluses
since
1983.
Argentina
and
Brazil
maintained,
on
average, primary
surpluses
in
the
1980s
and
1990s,
even
though
in
some
years
there
were
primary
defi-
cits. In all three
countries,
the nominal deficits
have been
relatively large.7
The
difference
between the
primary surpluses
and the nominal
deficits is
made of
interest
payments.
One
may
ask
the
following:
What is
the
ef-
fect of the
fiscal
policy
mix
(primary surplus
and nominal
deficit)
that
the
main Latin American countries
maintained
since
the
debt crisis and
continue to
pursue,
in
part
as a result of
negotiations
with
the
IMF?
The conventional
view of fiscal deficits
is
that,
in
the
short
run,
they
stimulate
the
economy,
but in the
long
run,
given
that
national
savings
equal
domestic investment
and net
foreign
investment,
then
a
fall
in
na-
tional
savings (public
deficits)
must lead to a
fall
in
capital
formation or
net
foreign
investment.
In
both
cases,
the level
of
growth
must fall. Put
simply,
deficits are
good
in
the short
run but
not
in
the
long
run. Some-
times the
negative
long-term
effect
on
growth
is
presented
as the result
of
rising
interest rates
leading
to
lower
capital
accumulation.8
The
higher
rates of interest result from the
decrease
in
national
savings.
In
other
words,
public spending
crowds out
private
spending.
Leaving
aside the
logical problems
with the
crowding-out
argument-tackled
long ago
when
Keynes
debated the
"Treasury
view"-there is
very
little
evidence
that
deficits
affect the
rate
of
interest
(Gale
and
Orszag,
2003,
p.
475).9
Fur-
ther,
the
Latin
American
experience suggests
that the
causality
between
interest
rate and fiscal
deficit
is
reversed.
That
is,
a
higher
interest rate
will
lead to
higher
interest
payments
on
debt,
and
higher
nominal defi-
7
For
the
Argentinean
fiscal
efforts,
see
Damill et al.
(2003),
and
for
the Brazilian
fiscal
experience,
see Camara
Neto and
Vemengo
(2002).
In
both
cases,
the idea
that
fiscal crises
were
behind
the
balance-of-payments
problems
is refuted.
8
As we saw
in
the
previous
section,
Keynes
rejected
the
crowding-out
argument.
9
Gale
and
Orszag
(2003)
argue
that the
evidence is
mixed at
best,
but that most
macroeconometric
models
in
the
United States
imply
a
small,
but
significant,
positive
correlation between interest
rates and
public
deficits.
Causality
is never
questioned,
though.
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FISCAL POLICY
AND
THE
WASHINGTON CONSENSUS
339
cits. The
reasons for
that
are twofold.
First,
central banks
in
the
region
tend
to maintain
high
interest rates
(short-term
interest)
to avoid
capital
flight.
Second,
part
of
the
public
debt is
indexed
to
the short-term interest
rate.
As
a
result,
monetary
policy
translates into
high
debt
servicing.
Whatever the
effects of
public
deficits
on
growth,
those results cannot
be
brought
about
by higher
rates
of
interest,
in
the Latin American con-
text,
because
deficits have limited
impact
on rates of interest. Income
distribution
is, however,
affected
by
this fiscal
policy
mix. A
primary
surplus,
together
with a nominal
deficit,
implies
that the
government
is
paying
the
difference
to
debt holders.
Usually
debt
holders
are
wealthy
individuals,
corporations,
and banks.
In
other
words,
the
combination
of
primary surplus
cum nominal deficit
represents
a transfer of resources
from
society
as
a whole to
wealthy
debt holders.
The
redistributive
pro-
cess has
strong
social
consequences,
because,
in
most
cases,
primary
sur-
pluses
imply
that social
spending
has
to
be
squeezed
(Grunberg,
1998).10
Therefore,
the
effects
of fiscal deficits on the level of
activity
are
me-
diated
by
income distribution rather than
the
rate
of
interest.
In
wage-
led
economies,
redistribution toward debt
holders,
with lower
propensities
to
consume,
should lead to
output stagnation.
In
other
words,
in
wage-
led
economies,
financial liberalization
that
promotes
integration
to
in-
ternational
financial
markets,
coupled
with
large primary
fiscal
surpluses,
promotes
stagnating
rates
of
output
growth.
The
stagnationist
scenario
would be
reversed in
a
profit-led economy.
However,
anecdotal
evi-
dence
suggests
that Latin American countries tend to be
wage-led,
re-
sulting
in
a
more
likely
stagnationist
scenario.1l
In
that
sense,
the
long-run
effects
of
the fiscal deficits are
negative,
but
the
reasons have
nothing
to
do with
public
spending
crowding
out
private
spending.
The
question
to be asked
then
is
why
a
country
would
promote
a
se-
vere fiscal
adjustment,
in
terms of the
primary target,
if
the final effects
turn
out to be low levels of
output growth
and
worsening
income
distri-
bution.
The
primary
deficit
is
a
very
narrow
concept,
and
it
has
been
10
The
paper
will
emphasize
the liberalization
of
the
capital
account
rather than
the
trade account
of the balance of
payments.
Trade
liberalization affects the fiscal
ac-
counts
by reducing
tax
revenues,
a
pressing problem
for the
poorest developing
coun-
tries
(Grunberg,
1998;
Toye,
2000).
Capital
account liberalization affects interest
rates
and,
therefore,
the
financial
component
of
government spending,
which
seems
to
be more
relevant for middle-income
countries.
!
For
structuralist
models with
wage-
and
profit-led
regimes,
and a discussion
of
applications
to
developed
and
underdeveloped
economies,
see
Taylor
(2004).
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340 JOURNAL
OF POST KEYNESIAN ECONOMICS
well known since the times of
Keynes
that deficits are
not
good
mea-
sures
of
the fiscal stance.
In
other
words,
primary targets
do not allow
for
the
controlling
of
aggregate
demand. The reason for
using
the
pri-
mary
deficit as a
target
for
policy,
with
the
implicit
objective
of main-
taining
a stable
ratio
of debt
to
gross
domestic
product
(GDP),
is
related
to
the
effects of
globalization.
In
an
open economy,
the
rate of interest is
set to
keep
the
foreign exchange
under
control,
and to
avoid
capital flight,
as
Keynes
warned
in
the Bretton Woods
discussions.
As a
result,
the
interest
payments
on
debt cannot
be
controlled,
particularly
because
the
debt is indexed to the
base rate of interest
determined
by
the
monetary
authority. Accordingly,
the
only
variable left
for the
government
to
try
to
control the
ratio
of
debt
to
GDP
is
the
primary surplus,
and that
is
why
the IMF
imposes
primary
surpluses
on
developing
countries.
In
this
respect,
one should note that
primary
surpluses
have
little,
if
anything,
to do with
generating credibility.
Foreign
investors
concerned
with
foreign
debt should
look at
the
export performance
of the
country,
the
only
secure source
of
foreign
reserves,
rather than at
primary
fiscal
balances. Unless one assumes that
foreign
investors are
irrational,
the
credibility argument
seems of
limited relevance.
Hence,
the
practical
effect
of the
Washington
Consensus
policies
in
Latin
America is to
promote
a
permanent
primary surplus. Beyond
the
income
distribution
implications spelled
out
above,
the second
and cru-
cial
effect,
from a Post
Keynesian
perspective,
is
the
effect
of
primary
surpluses
on
public
investment. Public
investment,
as
we
saw,
was the
main
instrument of fiscal
intervention
devised
by Keynes
in
his
General
Theory.
Primary surpluses
in
the context of
an
open
capital
account
im-
ply
that the
biggest
part
of the
government
goes
to
interest
payments.
The
practical
effect is
that
public
investment is
squeezed by
debt servic-
ing
spending,
and
the
revenge
of the
rentier-in
Pasinetti's
(1997)
apt
expression,
instead of its
euthanasia-takes
place.
In
sum,
the
Washing-
ton
Consensus renders
Keynes's
socialization of
investment
impossible
in
the
periphery.
A
Post
Keynesian
alternative
The
IMF
has
been,
for all
practical
purposes,
the
enforcer of the
Wash-
ington
Consensus
in
Latin
America
and
elsewhere
in
the
developing
world.
Critics
correctly
characterize the IMF's
fiscal
policy
advice as
"one
size fits
all"-that
is,
it
is
not
tailored to the
specific
circumstances
of
the
country,
which in
fiscal
matters,
translates into
reducing
fiscal
deficits. The IMF's
prescription
of
fiscal
austerity
restricts
economic
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FISCAL POLICY
AND THE WASHINGTON
CONSENSUS
341
growth
and social
expenditures,
thus
harming
the
poor
in
particular.
In
addition,
we
argue
that
the IMF's
emphasis
on
primary
surpluses
and
open capital
accounts has
led to a
squeeze
of
public
investment,
and
the
ability
of Latin American countries
to
pursue
countercyclical
fiscal
poli-
cies
along Keynesian
lines.
The
share
of
public
investment
in
GDP,
and
especially
the share
of
infrastructure
investment,
has declined
during
the
past
three decades
in
a number of
countries,
particularly
in
Latin America. Because
the
pri-
vate
sector
has not increased infrastructure
investment as
Washington
Consensus
authors had
hoped,
significant
infrastructure
gaps
have
emerged
in
Latin
America. These
gaps adversely
affect the
growth po-
tential
of those countries and limit social
development.
Not
only
are the
governments
of these countries now
seeking
to reverse the
declining
trend of
public
investment,
partly
through
increased
private-public
part-
nerships
(PPPs),
but
also,
multilateral
development
banks have
signaled
that
they
are
prepared
to redirect
some
of
their
lending
to
infrastructure
projects
in
order to close infrastructure
gaps.
Against
this
background, questions
have
been raised about the
widely
used
approach
to fiscal
analysis
and
policy,
which focuses on the
pri-
mary
fiscal
balance
even within
the
IMF
(e.g.,
IMF,
2004).
A
major
concern,
according
to the
IMF,
is
that this
approach
may
unduly
con-
strain the
ability
of
countries
to
take
advantage
of
increased
opportuni-
ties
to finance
infrastructure
projects.
In
this
context,
some have advocated
shifting
to
the current fiscal
balance
(which
excludes
public
investment)
as the fiscal
policy target
of
choice.
This
change
would
correspond
to
Keynes's
own views on fiscal
policy.
More
important,
in
Latin
American
countries,
the
operations
of
public
enterprises
are included
in
the
fiscal indicators and
targets imposed by
the
IMF,
and
as
a
result,
they
improperly
restrict
public
investment. The
IMF
(2004)
admits that the
coverage
of fiscal indicators and
targets
var-
ies
significantly
across
countries,
with
coverage
being,
in
general,
broader
in Latin
America than
elsewhere,
and
that this is reflected
in
IMF-sup-
ported
programs.
Post
Keynesian theory,
based on
Keynes's
views on
fiscal
policy, suggests
that
the
exclusion of the
operations
of
public
en-
terprises
from
fiscal
indicators
in
countries
where
currently
the entire
public
sector is
covered is
an
essential
step
toward
sound fiscal
policy.
This
would
allow
public
firms
to
carry
part
of the
burden of
public
in-
vestment.
One should add that
investments
in
infrastructure
usually
have
a
crowding-in
effect,
leading
to
higher
levels
of
private
investment.
However,
even
if
the
IMF
has
started
to
discuss
the
problem
of
public
investment,
it
has
been more
moderate
with
respect
to
the effects of
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342 JOURNAL
OF POST
KEYNESIAN ECONOMICS
capital
account
liberalization,
and
its effects on interest
rates and
public
finances.12
Developing
from
Keynes's
General
Theory
and Bretton
Woods'
writings,
Post
Keynesian
analysis
(e.g.,
Davidson,
2003)
dem-
onstrates
that what
most orthodox
economists
mean
by
a
policy
of
fiscal
discipline
will not
produce
a
fully employed
economic
system.13
This
point
is corroborated
here,
because
primary
surpluses
cum
high
interest
rates-the
former
imposed by
the
IMF and the latter
resulting
from
an
open
and
deregulated
capital
account-will
continue to constrain
the
ability
of
the
government
to
pursue
countercyclical
fiscal
policies.
Post
Keynesians
have
long
emphasized
the
need for
greater
regulation
of
global
capital
markets,
and some
propose
new
international
institu-
tions such as
a World
Financial
Authority
(Eatwell
and
Taylor),
an
In-
ternational
Monetary Clearing
Union
(Davidson),
or
a
publicly
controlled
international
transaction
system
(D'Arista).14
A
comprehensive
reform
of the
international
financial
system,
along Keynes's proposals
at
Bretton
Woods,
as
advocated
by
Post
Keynesians,
however,
is
necessary
not
just
to stabilize
financial
markets and
reduce
balance-of-payments
cri-
ses.
A
more closed
capital
account
would
allow
lower rates
of
interest,
lower debt
servicing
spending,
and more
space
for
public
investment.
International
financial reform
is the
necessary
complement
for sound
fiscal
policy
in
the
periphery.
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