WASHINGTON, March 17 (Reuters) - The International Monetary Fund sounded
more like its critics on Monday when it admitted there is little evidence
globalization is helping poor countries.
The IMF, which has often been the target of violent anti-globalization
protests, in a new study found economic integration may actually increase
the risk of financial crisis in the developing world.
"Theoretical models" show that financial integration can increase economic
growth in developing countries, the research found, but in practice it is
difficult to prove this link.
"In other words, if financial integration has a positive effect on growth,
there is as yet no clear and robust empirical proof that the effect is
quantitatively significant," the new report said.
An overview of the study, which was put together by four researchers
including the fund's chief economist Kenneth Rogoff, describes the
conclusions as "sobering".
The IMF often recommends that poor countries open their economies to
foreign investors and free-market policies. But critics say those policies
damage vulnerable economies, raising poverty rates and destroying the
environment.
The fund's report found a small group of developing countries have picked
up the "lion's share" of capital flows as financial links between countries
have become more integrated. Nations with good economic policies are more
likely to reap the most benefits and steer clear of financial crisis.
HIGHER RISK OF CRISES
International financial integration should also help countries to reduce
economic volatility, the study said, but in reality this has not happened.
"Indeed, the process of capital account liberalization appears to have been
accompanied in some cases by increased vulnerability to crises," the report
said.
"Globalization has heightened these risks since cross-country financial
linkages amplify the effects of various shocks and transmit them more
quickly across national borders."
In the last 10 years, developing countries from Thailand and Russia to
Argentina, have seen their economies collapse, even though many of them
were trying to follow IMF-prescribed open market policies.
CAUTION NEEDED
The paper concludes that countries must carefully balance integration in
the world economy with strong economic policies and the building of strong
institutions, including banks and regulatory systems.
"The evidence presented in this paper suggests that financial integration
should be approached cautiously, with good institutions and macroeconomic
frameworks viewed as important," the IMF said.
But the report was unable to come up with a "clear road map" for how this
should be done. Such questions should be tackled on a case-by-case basis,
the IMF concluded.
