News Release

March 15, 2001

Global capital markets should be left open
Cato study finds IMF should not be expanded, capital flows should not be restricted

WASHINGTON—Recent 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:

• Open capital markets promote investment, efficiency and economic growth that lead to improved standards of living. Restricting international investment denies a country those benefits.
• Controls on international capital flows harm economic performance and should be avoided. They cause slower growth and reduced standards of living.
• Government and IMF bailouts lead to excessive risk taking by both lenders and borrowers. The result is more frequent and deeper financial crises.
• IMF lending and adjustment programs are ineffective and harmful. Instead of helping to create sustainable economic growth, IMF interventions promote a debilitating dependence on further IMF loans. The United States should stop funding the IMF.

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."

"The Case for Open Global Capital Markets"