March 15, 2001
Global capital markets should be left open
Cato study finds IMF should not be expanded, capital flows should not be restricted
WASHINGTONRecent financial problems in emerging market economies have led to calls for a new international financial architecture. Proposals include restricting short-term capital flows and extending the International Monetary Fund's role to that of an international lender of last resort. According to a new study by the Cato Institute, "both 'reforms' would be mistakes."
In "The Case for Open Global Capital Markets," Robert Krol, professor of economics at California State University, Northridge, finds that "calls for a new international financial architecture that would include controls on international capital flows may be politically expedient, but they will be harmful to the global economy. Allowing international capital markets to determine how funds are used is the best way to raise the living standards of the world's poor." According to Krol, policymakers need to understand four key points if they desire to improve the operation of the international financial system:
These points lead Krol to conclude that "without IMF intervention, global investors will increase their scrutiny of the economic policies of emerging market economies. Countries that want access to world capital will face strong incentives to adopt market reforms. As a result, global capital will be used more prudently and efficiently. There will be fewer and less-severe financial problems. An open global capital market can thus serve as an important engine for worldwide economic growth in the 21st century."
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