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To: Alex who wrote (23563)	11/29/1998 11:56:00 AM
From: goldsnow	Read Replies (2) \| Respond to of 116753

So much for "New Paradigm" for IMF IMF starts to query its own ideology By Michael Dwyer Stung by the hostility surrounding its role in Asia's financial crisis, the International Monetary Fund has begun to seriously question its neoclassical economic heritage. In recent months, the IMF has released a series of often provocative research papers striking at the very heart of the economic theories that have governed its actions since it was set up in 1946. The latest subversive missive to emerge from the IMF's Washington headquarters attacks the standard neoclassical model as an explanation for foreign investment flows across developing countries. The managing director of the IMF, Mr Michel Camdessus, has also acknowledged in recent months that the free flow of capital can potentially be damaging for emerging economies. In a speech to the Federation of Latin American Banks in Panama earlier this month, Mr Camdessus said recent developments had revealed two basic "flaws" in the liberalisation and expansion of international capital flows. He said the regulation, supervision and monitoring of financial institutions around the world had not kept pace with the evolution of financial markets. "Second, as far as their development is concerned, too few countries can yet benefit sufficiently -- or at all -- from the enormous potential that globalisation offers," he said. His comments, as well as the spate of recent IMF papers on issues like capital controls and current account convertibility, point to a major reassessment by the fund of its role in the international financial system. Its latest working paper on capital flows tries to make some sense of neoclassical economic models and their application to foreign direct investment. If the neoclassical model is taken literally -- with only capital and labour as inputs and with identical technologies across economies -- then the poorest countries should have the highest rates of return to capital and therefore attract the most foreign capital. The IMF paper quickly concludes that the neoclassical model cannot explain foreign direct investment flows but, after examining a series of modified models, also finds that these do not apply. "Although the modified versions of the neoclassical model are somewhat better in explaining the distribution of foreign direct investment flows across developing countries than the strictest version, none of the specifications pass a significance test," the IMF paper said. "For understanding the distribution of foreign direct investment flows across developing countries, the standard neoclassical model, either with or without exogenous differences in technologies across countries, is not very helpful," it said. Private capital flows to emerging economies rose 15-fold from the mid-1980s to the mid-1990s, accounting for about $US200 billion in 1996. afr.com.au