IMF - no clear proof globalization helps the poor

Reuters, 03.17.03, 6:15 PM ET

By Anna Willard

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.

To read the actual IMF report:

http://www.imf.org/external/np/res/docs/2003/031703.htm

Copyright 2003, Reuters News Service