The International Monetary Fund has admitted that forcing developing countries to open their markets to foreign investors could increase the risk of financial crises.
IMF reports 'sobering' results
"The process of capital account liberalization appears to have been accompanied in some cases by increased
vulnerability to crises," the IMF said in a report.
It also said there was little evidence its policies encouraged economic growth in poor countries.
"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 report said.
The report, which was prepared by the IMF's chief economist Kenneth Rogoff, described the findings as "sobering".
It went on to warn that countries should be cautious about integrating with the global economy and should try to achieve a balance by creating strong domestic financial institutions.
"The evidence presented in this paper suggests that
financial integration should be approached cautiously, with good institutions and macroeconomic frameworks viewed as important," it said.
Policies under fire
Argentina, Brazil, Indonesia and Russia are among the countries that have followed the IMF's advice to open up to foreign investment in exchange for hundreds of billions of dollars in loans.
As soon as there was even a whiff of economic trouble, foreign speculators pulled their capital out, plunging the countries into recession.
The report also said only a small group of developing
countries had attracted the "lion's share" of capital investment.
The US is the largest shareholder in the IMF and has been instrumental in shaping its free market policies.
The IMF has been heavily criticised for its policies, not least by the Nobel Prize winning former chief economist of the World Bank, Joseph Stiglitz.