ABSTRACT
This chapter presents and assesses the traditional explanation and justification of opening domestic capital markets to improve domestic growth conditions and outline the criticism based on the Cambridge capital debates. If external account in equilibrium at less than full employment, expanding demand by active fiscal policy produces an external deficit, but if the external account is in deficit at full employment, restrictive fiscal policy reduces domestic demand and raises unemployment. The chapter argues that the success of financial liberalization requires domestic institutions and monitoring that can best be provided by the free entry of foreign financial service providers. It concludes by presenting Keynes's recommendation on how to retain policy autonomy and assessing the ability of developing countries, particularly in Latin America, to operate autonomous domestic policies in support of full employment in conditions of open international capital markets and potential policy alternatives.
