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On the promise of enormous benefits from financial openness, many developing countries have embraced financial globalization by adopting internal and external financial liberalization. Yet, despite the rhetoric of its proponents, there is little evidence of enhanced development finance or any concomitant improvement in economic development. We critically examine the mainstream theoretical rationale for financial globalization and liberalization as well as their explanations of the widespread financial instability and crises that have been associated with financial openness. The paper also draws on broader theoretical traditions to explain the ubiquity of recent financial crises. Pointing to an alternative more dynamic analysis of the symbiotic relationships between finance and economic development, we propose an institutional-centric approach that forms a basis for understanding the transformation required for financial development. For development to occur, financial flows need to feed into real sector circuits to enhance expansion and accumulation, whilst national flows need to tap into international flows to complement the speed and capacity of the domestic flows.
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