IMF finds little evidence open markets spur economic growth ---------------------------------------------------------------------
The IMF says there is little evidence countries can count on faster economic growth if they open their markets to foreign investment, casting doubt on years of the IMF`s own advice to poor nations, Bloomberg reported yesterday from Washington. “The impact is, while positive, relatively weak,” said IMF researcher Tamim Bayoumi, who supervises the production of the IMF’s WEO. Opening borders to foreign financial flows without safeguards in place “can lead to severe economic disruption and crises.”
The [latest] WEO suggests the Fund wants to tailor lending conditions to a country`s ability to withstand capital inflows. Crises that ripped through South Korea, Mexico and Turkey all resulted from efforts to drop barriers to investment when the banking industry was weak, badly supervised or both, the IMF said in its report. The lender began reevaluating the benefits of unrestricted capital flows as far back as 1998, when investors yanked money out of East Asian markets. The retreat of investors prompted Malaysia to impose capital controls, sparking criticism from the IMF that the government was taking a “step back.” The Fund later softened that criticism and said those controls helped insulate the country from international financial turbulence.
The IMF now urges countries to strengthen regulation of banks before allowing money to pour in from overseas. Still, opening capital markets “is not by itself sufficient to protect a country from crisis,” the IMF said in the WEO. Foreign direct investments “promise a variety of potential benefits to poor country recipients,” through higher wages, transferred technology and increased domestic investment, the IMF said.
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