Ronald McKinnon (1935-2014)

As an engineering undergraduate in 1966, I listened to John Kenneth Galbraith delivering his 1965 Massey Lectures on "The Underdeveloped Country." These are the Canadian equivalent of the ABC's Boyer lectures. Galbraith had been John Fitzgerald Kennedy's ambassador to India in the early 1960s, possibly the only economist to have fulfilled such a role in the past sixty years. As such, he had had a great opportunity to examine one of the largest "underdeveloped" economies first-hand. As I recall, he argued that educated labour (or "human capital," as we call it now) was not an impediment to the development of the Indian economy, instead it was lack of capital.

This diagnosis was not unique to Galbraith: conventional wisdom then was that with more capital many "underdeveloped" economies would grow and evolve. It was another Canadian economist, also removed to the United States, who dispelled this notion. In the early 1970s, Ronald McKinnon, who died recently, aged 79, after a fall on an escalator at San Francisco International Airport, had developed the theory of "financial repression," with another Stanford professor, the late Edward Shaw (1908-1994).

As Galbraith and others had argued previously, conventional wisdom (incidentally, a phrase popularised by Galbraith) was that a lack of capital was the main barrier to economic development. Development economists argued for government boosting the nation's capital stock through financed investment and foreign aid. McKinnon and Shaw instead focussed on the maturity of the nation's financial system. At that time, banks in these countries were often required to hold extensive reserves (often in government bonds), to cap interest rates charged in loans or paid on deposits, sometimes to favour particular sectors, or to facilitate the government fund its budget deficit, and often lending at below-market rates.

McKinnon and Shaw called this "financial repression," which resulted in negative real interest rates, and impeded economic growth by reducing banks' ability to lend by squeezing the amount of money saved. Different sectors paid different interest rates in this fragmented market, discouraging investment, and hence growth. In his 1993 book, The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy, McKinnon outlined how to liberalise government policies in domestic finance and foreign trade so as to create more open markets.

Ronald McKinnon was born in Edmonton, Alberta, on 10 July 1935. He first studied economics at the University of Alberta, and completed his doctorate at the University of Minnesota in 1961. He joined Stanford in 1961, and remained there for 53 years.

His academic interests included exchange rates, finance, economic development, and monetary systems He argued that immature or distorted financial systems often exacerbated crises, and recently argued aginst the Federal Reserve's policies of quantitative easing and zero interest rates. But these monetary policies differed from the interventions in underdeveloped economies of his earlier work, and his fears of inflation, distortions in the banking system, and reduced lending in consequence were not realised. The problem since 2008 has been lack of demnd and regulatory constraints, not the unprofitability of loans.

Ronald McKinnon will be remembered for his pioneering work in highlighting the dangers to economic growth of government-induced distortions in the financial system.


John Kenneth Galbraith, The Underdeveloped Country, Canadian Broadcasting Corporation, 1965. Listen to the lectures here.

Ronald McKinnon, Money and Capital in Economic Development, Brookings Institution Press, 1973.

Ronald McKinnon, Money in International Exchange: The Convertible Currency System, Oxford University Press, 1979.

Ronald McKinnon, The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy, Johns Hopkins University Press, 1993.

Ronald McKinnon, The Rules of the Game: International Money and Exchange Rates, The MIT Press, 1996.

Ronald McKinnon and Kenichi Ohno, Dollar and Yen: Resolving Economic Conflict between the United States and Japan, The MIT Press, 1997.