Foreign Debt and Economic Development: An Analysis of Financial Instability in Developing Economies

The recent disruptions within the global financial system have led to a notable reassessment of heterodox economic theories in hope that their unique insights into the capitalist business cycle can help illuminate the underlying instabilities that may have contributed to recent crises. This thesis focuses in particular on the work of noted post-Keynesian economist Hyman P. Minsky and his associated theories of financial fragility and the inherent instability of modern financial capitalism. It emphasizes the theoretical foundations of Minsky’s work, notably his financial instability hypothesis, and then applies this conceptual framework to the recent Asian financial crisis of 1997-98. This analysis is supported by a quantitative overview of both domestic and international economic data primarily focusing on the variables commonly attributed to Minskian financial fragility; primarily capital investment, asset prices, and credit expansion. Careful examination of these factors leads to the conclusion that the Asian financial crisis was a prime example of Minsky’s financial instability hypothesis.