Current Economic and Financial Crisis on World Trade Business in Developed and Developing Countries

Dr. Julius B. Bertillo Professor, College of Business Administration Arab Open University-Bahrain Branch Email: jbbertillo@yahoo.com.ph

Dr. Josefina B. Salando, CPA Lecturer, Department of Administrative & Financial Sciences Oman College of Management and Technology Email: johsalando27@yahoo.com

ABSTRACT

This paper aims to highlight the impact of the current economic and financial crisis on world trade business in developed and developing countries, specifically for the global foreign direct investment (FDI) inflows; growth rates of gross domestic product (GDP), trade and employment growth; and FDI prospects in 2014. This academic research would be beneficial not only to the researchers but also to the Academe-industry consultants, economists, businessmen, investors, entrepreneurs, bankers, financial analysts, accountants as well as business professors respectively. Hence, this article was based on published research papers but does not include empirical investigation.

Keywords: Economic Crisis, Financial Crisis, Foreign Direct Investment, FDI Inflows, Gross Domestic Product, World Trade Business

Electronic copy available at: http://ssrn.com/abstract=2292806

Introduction The current economic and financial crisis is the least in the world expects and wishes to happen at this time. Considering the political, social and environmental upheavals happening in nearly every continent around the world, people have to face yet another form of crisis that hits them right in the pocket and through their stomachs. Everyone hopes that the economic and financial crisis ebbs out soon because of the myriad of other problems and issues the world is facing. These problems already wreaking havoc in many parts of the world include climate change and the adverse effects it is slowly creating in many risk areas, the political turmoil in the Middle East towards Western Asia where extremism, the oil crisis and militancy are depriving the people their right to a peaceful life and secured future. In addition, the threat of nuclear proliferation is again showing its ugly head in countries not exactly known for its civil discretion record and democratic adherence to governance. The financial crisis of 20072008, also known as the Global Financial Crisis and 2008 financial crisis, is viewed by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many countries, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key jobs, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the 2008 2012 global recession and contributing to the European sovereign-debt crisis (Wikipedia 2008).1 According to Baily and Elliott (2009)2 There are two ways in which a weak global economy can make it harder for the US to grow and the first is the real economic effect. Telling this part of the story is a bit complicated. The US is a major exporter and importer of goods and services so that net exports (exports minus imports) can provide either a substantial negative drag on aggregate demand and growth in the US or a substantial positive boost to demand. During the early years of this century, net exports were negative and that resulted in a reduction in US aggregate demand. As we know, the US trade deficit expanded very rapidly. Once the economy recovered from the 2001 recession the drag on US aggregate demand coming from trade was not in itself a huge problem. The economy was able to get to full employment anyway.3 Effects of Economic and Financial Crisis. The ECOFIN Council approved production function method, the severe economic crisis has led to a sharp downward revision in potential growth rates in the short run, i.e. the potential growth rate of the euro area and of EU3 (Denmark, Sweden and the UK) will be cut in half in 2009-2010 compared with 2008, i.e. from a growth rate range of 1.3% 1.6% to 0.7% - 0.8%. This weaker short term-term potential growth will give rise to a cumulated output loss of over 3% in the euro region and over 5% in EU3 respectively by 2013, compared with a pre-crisis regime (after correction for crisis-unrelated demographic effects). These estimates of yield loss may be optimistic, at least in the case of the euro area, as the projections broadly assume a return to pre crisis potential growth rates by 2013.4
1

Wikipedia, The Free Encyclopedia (2008). Financial Crisis of 2007 http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308 [Accessed: 6 July 2013].
2

08.

Available

at:

Baily, M.N. and Elliott, D.J.(2009). The US Financial and Economic Crisis: Where Does It Stand and Where Do We Go From Here?. Initiative on Business and Public Policy at Brookings. Available at: http://www.brookings.edu/~/media/research/files/papers/2009/6/15%20economic%20crisis%20baily%20elliott/0615_econo mic_crisis_baily_elliott.pdf [Accessed: 6 July 2013].
3

There were economic effects, of course. US manufacturing employment was hurt by the deficit and US inflation was helped by the flow of cheap imports.
4

As discussed extensively at the recent meeting of the EPC's Output Gap Working Group (OGWG), the Commission services consider that the new methodology for projecting medium-term trend TFP should be adopted as soon as possible. If such an approach was implemented, it would result in a much less optimistic medium-term scenario, under an assumption of no policy changes, with the implication being that potential growth rates would be much slower in returning to pre-financial crisis rates and would not do so over the period 2011-2013.

Electronic copy available at: http://ssrn.com/abstract=2292806

The pattern for the "new" Member States (i.e. EU8) is essentially similar, although EU8 potential growth rates remain much higher reflecting their "catching-up" stage of development. The total cumulated loss in levels is estimated to be over 5% of potential output in EU8. The fall in potential growth in a majority of the Member States is driven by large increases in structural unemployment, by substantially reduced contributions from capital and by a subdued pattern for TFP trends. Koopman and Szkely (2009) believed that the crisis has an impact on Gross Domestic Product (GDP). In its economic forecast issued on May 4, the Commission estimated that GDP will shrink by around 4% in 2009 and by 0.1% in 2010 in both the EU27 and the euro area. The long-term repercussions on potential output are however less clear. It is useful to differentiate between the impact of the crisis on potential yield in terms of story and in terms of the long-term growth path. The crisis will possibly have an impact on potential output in level terms over the long-run due to lower potential output growth rates during the immediate crisis period and during the potentially long recovery period when potential growth rates converge towards their long term path. The duration of this recovery period towards the long-term trend is highly uncertain as it depends not just on the size of initial shocks but also on policy responses. It is probable that the short-term loss in potential output in level terms will become permanent (in the absence of strong policy responses) since entirely recouping the loss means concretely that potential growth should overshoot in the medium-term and stay at a higher rate than the pre-crisis period for some time (Koopman and Szkely (2009). Koopman and Szkely (2009) emphasized that there is a risk that long-term post-crisis potential growth rates will be lower than their pre-crisis levels. In other words, a full convergence is not achieved either as a direct result of the crisis (e.g. Shift in risk aversion) or due to inappropriate policy responses.5 Therefore, the analysis of the past financial and economic crises may provide with some tentative insights and indications about the impact of the current crisis on the level and growth rate of potential output. This will lead to some stylized facts that may be useful in identifying possible scenarios and devising policy prescriptions so that the losses in actual and potential output are quickly recovered through more dynamic future growth (Koopman, G.J. and Szkely, I.P., 2009). According to Auboin, (2009) failed to support trade finance during the crisis entails significant costs to the global economy and has drastic implications for exporters and importers around the world, particularly in developing countries. Stepped-up efforts at the national, regional and international levels. Financial and Economic Crisis. The global financial and economic crisis has the potential to usher in a period of a global recession that may seriously undermine all countries process of economic growth and transformation, and also threaten efforts to broaden economic and social opportunities and improve the livelihoods of ordinary people everywhere. In particular, the crisis may put a brake on and also reverse efforts in developing countries and by the international community to assure development gains from trade, promoting achievement of internationally agreed development goals including the Millennium Development Goals (MDGs) by 2015. The crisis has triggered a slowdown in global economic growth that is manifesting itself in a demand-driven fall in international trade exacerbated by the shortage of credit and trade finance; falling commodity prices; declining remittances; contracting foreign direct investment (FDI); and the potential of declining official development assistance (ODA). These effects have been superimposed onto the ongoing global food crisis, volatile energy costs, and climate-change challenges. The aggregate impact is such that most developing countries are being heavily hurt through declining exports, rising unemployment, and thus falling family incomes, bringing millions of people back into poverty or aggravating the conditions of those in extreme poverty. This has given rise to the most important challenge confronting the global community today how to focus on buttressing development and poverty-reduction efforts globally and in developing countries, and on setting in place the conditions that will avert future crises and
5

Koopman, G.J. and Szkely, I.P. (2009). Impact of the current economic and financial crisis on potential output. European Commission, Directorate-General for Economic and Financial Affairs. Source: http://ec.europa.eu/economy_finance/publications/publication15479_en.pdf

Electronic copy available at: http://ssrn.com/abstract=2292806

facilitate a sustainable process of economic transformation for all nations. This report by UNCTAD is an effort to contribute to consideration of this major challenge, with a view to identifying policies and strategies that can serve as the bulwark on which to restore confidence, build recovery, and most importantly, promote inclusive development, where gains are shared widely among all nations and all peoples (UNCTAD, 2009).6 The global financial and economic crisis has stimulated consideration and implementation of mitigating policies and measures by countries and the international community. Some of these measures are valid in terms of safeguarding domestic industries and businesses. They can, however, cause the unintended impact of constraining trade growth and thus undermining the economic growth prospects of other countries, in view of the rich interdependence between nations. There is a need to carefully monitor and review such policies with a view to securing that such measures also serve to build up growth prospects in the world economy (UNCTAD, 2009). On the other hand, Maswana (n.d) determine the effects of the global financial crisis on Africas economic and growth prospects. Although it finds that, despite stock market failures in some African nations (e.g., South Africa, Nigeria, and Kenya), the spill overs into Africa of the U.S. subprime crisis and financial meltdown are as yet limited, it also demonstrates that foreign direct investment has dwindled and exports and international trade in general are suffering. Most specifically, the fall in world demand for primary commodities, which has affected the African economy primarily through external accounts, is of great concern for Africa, not merely because its growth turnaround since 1995 has been quite fragile but because this turnaround rested on two foundations: a commodity boom and a related high demand by the Chinese for African goods. Like most developing countries, Africa has been hammered not only by the fall in trade but also by the reduced availability of trade finance and FDI inflows. In addition, government revenues and remittances are dwindling, which, combined with rapidly rising unemployment, results in a more fragile safety net and a deteriorating living standard. Taken together, the above trends suggest that throughout Africa, poverty may well be on the increase, threatening the gains achieved by MDGs, as well as the ongoing institutional changes that are central to the development (Maswana, n.d.).7 The general sentiments in the market were gloomy, further eroding investor confidence stalling the normal flow of credit money to the business sector. Corporate managers, facing the impact of bankruptcy and tight liquidity, sought government interventions and protection from the economic slide. A bit of cunning executives even would create fraudulent transactions to cover up their inability to produce profits. Financial scams were discovered along the way, worsening further the already dampened moods in the marketplace. Globalization, once taunted as a phenomenon carrying a bunch of opportunities for countries which have erased their boundaries to make headway in the borderless economies, started to carry the tentacles of the crisis and carried the waves of defaults, unemployment, depression and recession, slackening demand for consumer goods, investments drying up to other countries faster than ever (Gibley, 2012). Therefore, the impacts created by the financial and economic crisis are the loss of investor confidence in a market haunted by bad debts and slow collections, deteriorating values of properties, liquidity in the market, mergers, consolidations and buyouts, credit squeeze, downsizing of corporate structures, and ultimately bankruptcies for those unable to find workable solutions to the financial mess. Derivative instruments burst creating a market vacuum that dissipated related derivatives. Money stopped flowing into the credit-hungry manufacturing sector threatening more unemployment and job cuts. Credit card defaults started to create more defaults and payment moratorium and debt restructuring, put laid off employees in desperate positions for more defaults. The developed countries were critical, luxury and semi-luxury goods suffered a steep slide in demand caused by dampened market outlook and wait-and-see stance. People saved their money while those without starting to think about more drastic financial solutions that reflected despair and chaos. Industries such as the automotive, electronics and other luxury
6

Global Economic Crisis: Implications for Trade and Development. Report by UNCTAD Secretariat. Trade and Development Board Trade and Development Commission. First session , Geneva, 1115 May 2009.
7

Maswana, Jeane-Claude (n.d.). Global Financial Crisis & Recession: impact on Africa and development prospects. Available at: http://policydialogue.org/files/events/Maswana_global_financial_crisis-impact.pdf [Accessed: 6 July 2013].

players in the market faced an empty market not many buyers. In the meantime, borrowed funds to sustain the manufacturing sector ballooned to huge levels triggering a rush for bailouts from the government. Liquidity has to go back to the economy, but many corporate investments were earlier brought to the developing countries to take advantage of higher returns and assurance of stability in certain self-contained developing markets like China, Malaysia. Major sources include the Philippines, Indonesia and India. These countries were likewise starting to confront the prospect of huge repatriation of capital investments back to their home countries already facing the brunt of the category five financial storms (Gibley, 2012). These are the listed countries considered emerging markets as of June 2012, MSCI (Morgan Stanley Capital International), the industry standard for measuring foreign market performance: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, and Turkey. However, there are few countries are in transition: South Korea and Taiwan have been under review by MSCI for a couple of years for a potential move to developed status. Morocco is under review for a potential downgrade to frontier market status. MSCI uses the guidelines to categorize emerging vs. developed countries. To move up from emerging to developed status, countries need to meet these criteria: 1) Economic development: The country must have income levels 25% above $12,276 (the World Bank high income threshold) for three consecutive years; 2) Size and liquidity requirements: The local stock exchanges must have at least five companies with market capitalizations of roughly $1.8 billion each and the amount of trading volume must be significant; and 3) Market accessibility: The country must be open to foreign ownership, allow capital to flow freely, and have stable, efficient markets (Gibley, 2012).8 However, the government of the developed countries commenced ballots' and hoped to maintain market demand by creating a gamut of stimulus packages to maintain consumer spending going. This was thought to at least confront the depressed market for imported and even local goods. Importers reviewed their orders with many stopping their buying spree from foreign markets, mostly the developing ones. The effects and impact of the crisis started to seep into the doorsteps of the developing countries. On one hand, the repatriation of capital back to the developed countries failed to materialize in the volume as expected due to restrictions and time to liquidate and repatriate. Bankruptcies in the developed countries resorted to more layoffs and retrenchments. Purchasing power in this sector alone dropped significantly and social security and unemployment benefits helped provide buffer for those who lost their jobs. The luckier ones just suffered pay cuts and pay freezes. The exports from the developing countries trickled to low levels, dampening as well the manufacturing sector in their countries. Job cuts and layoffs similarly plagued the labor market with already low wages and salaries overtaken by inflationary pressures of the economy. In the social front, workers started to troop to foreign markets not so much affected by the crisis with the hope of repatriating dollar remittances to their homes in the developing countries. The scramble for few jobs and the overall depressed employment sector is threatening to spur the rise in criminalities and social unrest. The tourism industry on both sides of the political divide similarly suffered a setback. The maturity of the developed countries focused their efforts on the stimulus packages and bailouts which their governments can very well afford to do so even in the long run crisis that may still affect them. The developing countries, however, already saddled by inflation, poor manufacturing sector, social unrest, insurgencies and the like had to look for new phases of development financing from the International Monetary Fund IMF), World Bank (WB), and the Asian Development Bank (ADB) and even the Euro market for dole outs, grants and soft loans to soften the critical impact of the slowdown. In some nations, corruption aggravated the already depressed government budgets creating more social and political problems and totally compounding the prospect of early solutions to their issues. Barack Obama, the US President assured the market that bailouts and stimulus packages will be deployed by the government despite branding the crisis as the result of the greed and
8

Gibley, M. (2012). Emerging Markets: What You Should Know. Available at: http://www.schwab.com/public/schwab/resource_center/expert_insight/investing_strategies/international/emergi ng_markets_what_you_should_know.html [Accessed 6 July 2013].

irresponsibility in the market, his remark given substance by the discovery of huge compensation packages paid to Wall Street executives of firms that benefited from the bailout packages. This infuriated the president who continues to crack the whip to impose discipline and order in the market. While this is being done in the United States, other developed and developing countries have started to come up with certain cultural solutions to prepare their people on the long-term effects of the scenario. Barack Obama was forced to grapple with the deepest economic crisis since the Great Depression of the 1930s. Shocking unemployment figures released in January revealed a precipitous decline in the US economy and the onset of a deep and most likely prolonged recession. A million jobs disappeared in November and December, bringing total losses from 2008 to 2.6 million (Walsh, n.d.)9 How and to what extent the crisis has resulted in adverse consequences to the trade and business is staggering and difficult to quantify at this stage considering the different impacts and the magnitude that these impacts have on the other aspects of the social-political and environmental issues. According to Walsh (n.d.), the effects and impacts enumerated are being felt and its end not seen in the immediate future. Economists and everyone else are looking for the signs of recovery that will more or less mitigate the apprehension over the uncertainties looming ahead. Solutions such as the bailouts and stimulus packages are valid concerns but have limited utility to address the big problem. Even trade liberalization can begin to help smoothen the flow of recovery through the abolition of restriction and protectionism. But these are not enough. Trade blocks and protectionism might only worsen the situation. Certain solutions to the economic and financial sectors might not help much. The cause of the crisis; but definitely, the holistic approach to the measures that will prevent and control the resurgence of another crisis should come from a value-based approach that will address all the impacts created from the perspective of those impacts as well which means a social approach can solve the economic outcome. Nevertheless, those in control and deliver the power and influence to do so should move and talk their way out of the crisis. The average citizen of the world can only do as much at his own level. The gravity of the crisis requires an equally big solution and the willpower to implement it. Global Foreign Direct Investment (FDI) Inflows. In Table 1, shows that the foreign direct investment, net inflows (BoP, current S$). It could be noted that foreign direct investment is the net inflows of investment to acquire a lasting management interest (10% or more of the voting stock) in an enterprise operating in an economy other than that of the investor. It is the amount of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as recorded in the balance of payments.
Table 1. Foreign Direct Investment, Net Inflows (BoP, current US$)

Source: World Development Indicators, 2013.10

9

Walsh, L. (n.d.). Obamas stimulus package Stopping the slump?. Socialism Today, Socialist Party Magazine. Issue 125 February 08. Available at: http://www.socialismtoday.org/125/obama.html [Accessed: 6 July 2013].
10

World DataBank (2013). World Development Indicators. http://databank.worldbank.org/data/views/reports/tableview.aspx [Accessed: 5 July 2013].

Available

at:

This series shows net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors. The data are expressed in current U.S. dollars). (The World Bank, 2013).11 As shown in Figure 1, is the global foreign direct investment (FDI) inflows declined by 18% in 2012, to an estimated US$1. 3 trillion a level close to the trough reached in 2009 due mainly to macroeconomic fragility and policy uncertainty for investors. This further revealed that the FDI recovery that had started in 2010 and 2011 will take longer than anticipated. The FDI flows could rise moderately over 2013-2014, although significant risks to this scenario persist (UNCTAD, 2013).12 Figure 1. Global FDI inflows, average 20052007, 20072014 (Trillions of US dollars)

Legend: * Revised, ** Estimates, *** Forecast.

Source: UNCTAD, 2013.

In Table 2 shows the growth rates of global GDP, GFCF, trade, employment and FDI, 2008 2014. Global FDI flows fell by 18% to an estimated US$1. 3 trillion, down from a revised US$1. 6 trillion in 2011, as significant investor uncertainty continues to hamper the FDI recovery. This uncertainty is driven by a weakening macroeconomic environment with lower growth rates for GDP, trade, capital formation and employment, and by a number of perceived risk factors in the policy environment, related to the Eurozone crisis, the United States fiscal cliff, changes of government in a number of major economies in 2012, and broad-based policy changes with implications for FDI (UNCTAD, 2013).13 Table 2 Growth Rates of Global GDP, GFCF, Trade, Employment and FDI, 20082014 (Percent)

Legend: An Estimation. b Projections ; GFCF=gross fixed capital formation. Source : UNCTAD based on the World Bank for GDP, IMF for GFCF and Trade and ILO for employment.

11

Foreign direct investment, net inflows (BoP, current US$) http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD [Accessed: 5 July 2013].
12

(2013).

Available

at:

UNCTAD, 2013, Global Investment Trends Monitor. Number 11, 23 January http://unctad.org/en/PublicationsLibrary/webdiaeia2013d1_en.pdf [Accessed: 5 July 2013].
13

2013.

Available

at:

UNCTAD, 2013. Available at: http://unctad.org/en/PublicationsLibrary/webdiaeia2013d1_en.pdf.

The table revealed that the global FDI flows fell by 18 % to an estimated US$1.3 trillion, down from a revised US$1.6 trillion in 2011, as significant investor uncertainty continues to hamper the FDI recovery. This uncertainty is driven by a weakening macroeconomic environment with more modest growth rates of GDP, trade, capital formation and utilization. The perceived risk factors in the policy environment, related to the Eurozone crisis, the United States fiscal cliff, changes of government in a number of major economies in 2012, and broad-based policy changes with implications for FDI. So therefore, there is a strong decline of FDI flows presents a stark contrast to other macroeconomic variables, including GDP, trade and employment growth which remain in positive territory as indicated in the table. In developed countries FDI flows fell drastically to values last seen about ten years ago. The majority of EU countries saw significant drops in FDI flows with the total fall amounting to some US$150 billion. The Unites States FDI flows also fell by US$80 billion. FDI flows to developing economies, for the first time ever, exceeded those in developed countries, by some US$130 billion. FDI flows to developing economies remained resilient, declining only 3%. Flows to developing Asia lost some momentum, although they remained at historically high levels. The Latin America and Africa saw a small increase (UNCTAD, 2013). Finally, the FDI prospects for 2013 and 2014 might it delay recovery. The FDI flows could rise moderately to US$1. 4 trillion in 2013 and US$1. 6 trillion in 2014 as the global economy is expected to make a hesitant and uneven recovery over the coming two years. GDP growth, gross fixed capital formation and trade are projected to grow gradually, both at the global level and, especially, in developing countries. Such a slight improvement in macroeconomic conditions could prompt TNCs to transform their record levels of cash holdings into new investments. If investor confidence returns, TNCs may also be induced to make strategic investments to cement their business plans for the postcrisis period. In addition, possible further sales of publicly owned assets to restructure sovereign debt may also provide FDI opportunities (UNCTAD, 2013).14 Significant risks to this scenario persist, including the structural weaknesses in major developed economies and in the global financial system, the possible further deterioration in the macroeconomic environment, and significant policy uncertainty in areas crucial for investor confidence, including fiscal policy and investment rules and restrictions. Should these risks prevail, FDI recovery could be further delayed (UNCTAD, 2013).
Figure 2. FDI Inflows to Developing and Transition Economies, 20082012 (Billions of US dollars)

Source: UNCTAD. *Asia includes East Asia, South-East Asia, South Asia and West Asia

In Figure 2 shows the FDI inflows to developing Asia fell by 9.5% as a result of declines across most sub-regions and major economies, including China, Hong Kong (China), India, the Republic of Korea, Singapore and Turkey. However, 2012 inflows to Asia were still at the second highest level recorded, accounting for 59% of FDI flows to developing countries. FDI flows to China
14

UNCTAD, 2013. Available at: http://unctad.org/en/PublicationsLibrary/webdiaeia2013d1_en.pdf.

declined slightly but the region continues to be a major FDI recipient the second largest in the world (UNCTAD, 2013). FDI inflows to China declined by only 3.4% to $120 billion in 2012, despite a strong downward pressure on FDI in manufacturing caused by rising production costs and weakening export markets. The 7.8% growth of the Chinese economy helped maintain investor confidence. FDI to India declined by 14%, although it remained at higher levels achieved in recent years. The countrys prospects in attracting FDI are improving thanks to ongoing efforts to open up key economic sectors (UNCTAD, 2013). Despite an overall 7% decline in FDI inflows to the Association of Southeast Asian Nations (ASEAN), some countries in this group of economies appear to be a bright spot: preliminary data show that inflows to Cambodia, Myanmar, the Philippines, Thailand and Vietnam grew in 2012 (UNCTAD, 2013). FDI flows to West Asia did not turn around their negative trend in 2012, declining for the fourth consecutive year. With continuing political uncertainty at the regional level, and subdued economic prospects at the global level, foreign investors are still holding back. FDI to Saudi Arabia the regions main recipient did register an increase. Turkey, the regions second main recipient, experienced a decline in FDI flows due to a fall in cross-border M&As sales in 2012. Latin America and the Caribbean registered positive growth in FDI in 2012. The rise was strongest in South America due to the sub-region's economic buoyancy, leading to a significant number of market seeking investments, and persistent strength of commodity prices, which continue to encourage investments in the extractive industries, particularly in Chile, Peru and Colombia. Inflows registered also strong growth in Argentina. FDI to Brazil slowed but remained robust, confirming the countrys primacy as the leading investment destination in the region, accounting for 28% of the total. FDI flows to Central America decreased mainly as the result of a decline in Mexico (MENA, 2011). Transition economies experienced a decline in FDI flows of 13%, reaching US$81 billion. FDI flows to South-East Europe fell 52%, as a result of sluggishness of investment from EU countries, the main investors in the region. Flows to the Commonwealth of Independent States (CIS) declined, as the rise of FDI to Kazakhstan and Ukraine were not enough to compensate the 17% fall of FDI flows in the Russian Federation (UNCTAD, 2013). Similarly, the World Investment Report 2011 forecasts that, barring any economic shocks, FDI flows will recover to pre-crisis levels over the next two years. The challenge for the development community is to make this anticipated investment have greater impact on our efforts to achieve the Millennium Development Goals. In 2010 for the first time developing economies absorbed close to half of global FDI inflows. They also generated record levels of FDI outflows, much of it directed to other countries in the South. This further demonstrates the growing importance of developing economies to the world economy, and of SouthSouth cooperation and investment for sustainable development (MENA, 2011).15 Trade in the Global Economy. As depicted in Figure 2.3 is the share of foreign value of exports, by region. It could be noted that developed countries, as a whole, at 31% have a higher percentage of foreign value added in exports than the global average. In other words, their import dependence of exports appears higher. However, this image is distorted by the weight in the global patterns of internal trade within the highly integrated EU economy, which accounts for about 70% of EU originated exports. Japan and the United States show significantly lower percentages of double counting. Consequently, while developing countries bear a smaller percentage of foreign value added (25%) than the world average (28%) their foreign value added share is significantly higher than in the United States and Japan or than in the European Union, if only external trade is taken into account (UNCTAD, 2013).16

15

World Investment Report 2011. Available at: http://www.menacentre.org/news.php?&newsid=17 [Accessed: 6 July 2013].

16

United Nations Conference on Trade and Development. UNCTAD, 2013. Global Value Chains and Development. Investment and Value Added Trade in the Global Economy. Available at: http://unctad.org/en/PublicationsLibrary/diae2013d1_en.pdf [Accessed: 5 July 2013].

Figure 3. Share of Foreign Value Added in Exports, by Region, 2010

Source: UNCTAD-Eora GVC Database17

Among developing economies, the highest shares of foreign value added in a trade are found in East and South-East Asia and in Central America (including Mexico) where processing industries account for a significant portion of exports. Foreign value added in exports is much lower in Africa, West Asia, South America and in the transition economies, where natural resources and commodities exports with little foreign inputs tend to play an important role. The lowest percentage of foreign value added in exports is found in South Asia, mainly due to the weight of services exports, which also use relatively less foreign inputs (UNCTAD, 2013).

Conclusions The economic and financial crisis continuing to create and alter the social, political, technological and environmental configuration of the entire world, the civilized world has the responsibility to stabilize the harmful effects and consequences of these events. The craft and business sector has borne the brunt of the crisis both at the local and international fronts. A portion of the responsibility to mitigate and reverse the disastrous effects of the crisis rests on the heads of nations, their budget experts, the businessmen the private sectors and the general structure of the bureaucracy in response to the distinct kind of measures the market needs to bring discipline, order and sanity to the economy. Capitalism is at the core of this crisis; henceforth, all components that make capitalism work must revisit their strategies, social values and responsibilities, their investment priorities, personal motivations and corporate group think syndrome that took this crisis all along. The solutions will not be easy because decisions will come from most people who helped instigate the crisis at the outset. At this juncture, capitalism will have to reengineer itself, to protect itself from its own malevolence as well as help create a mechanism that will bring the positive and beneficial aspects of its sustainability. Otherwise, capitalisms and the captains of the industrys inability to reconfigure and redeem themselves and reverse the adverse consequences that it failed to solve and the factors that were ignored to implement everywhere might just be the key to its own irrelevance in a novel kind of economy that might emerge from the ashes of its own demise.

17

Honorable Speaker, Mr. Astrit Sulstarova (OIC Trends and Data Section, UNCTAD, Geneva) presented and discussed in the World Investment Report 2013 organized by the MENA Centre for Investment in coordination with the United Nations Conference on Trade and Development (UNCTAD) on June 26, 2013 at the Al Fanar Hall, Diplomat Radisson Blu, Manama, Kingdom Of Bahrain.

REFFERENCES

Notes 1. As discussed extensively at the recent meeting of the EPC's Output Gap Working Group (OGWG), the Commission services consider that the new methodology for projecting medium-term trend TFP should be adopted as soon as possible. If such an approach was implemented, it would result in a much less optimistic medium-term scenario, under an assumption of no policy changes, with the implication being that potential growth rate would be much slower in returning to pre-financial crisis rates and would not do so over the period 2011-2013. 2. Honorable Speaker, Mr. Astrit Sulstarova (OIC Trends and Data Section, UNCTAD, Geneva) presented and discussed in the World Investment Report 2013 organized by the MENA Centre for Investment in coordination with the United Nations Conference on Trade and Development (UNCTAD) on June 26, 2013 at the Al Fanar Hall, Diplomat Radisson Blu, Manama, Kingdom Of Bahrain. 3. There were economic effects, of course. US manufacturing employment was hurt by the deficit and US inflation was helped with the flow of cheap imports.

Baily, M.N. and Elliott, D.J.(2009). The US Financial and Economic Crisis: Where Does It Stand and Where Do We Go From Here?. Initiative on Business and Public Policy at Brookings. Available at: http://www.brookings.edu/~/media/research/files/papers/2009/6/15%20economic%20crisis%20baily %20elliott/0615_economic_crisis_baily_elliott.pdf [Accessed: 6 July 2013]. Foreign direct investment, net inflows (BoP, current US$) (2013). Available http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD [Accessed: 5 July 2013]. at:

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