Balance of payments

From Wikipedia, the free encyclopedia Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world.[1] These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter-balanced in other ways such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries. While the overall BOP accounts will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account, the capital account excluding the central bank's reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficit nations become increasingly indebted. The term "balance of payments" often refers to this sum: a country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive) by a certain amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter. Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's currency and other currencies. Then the net change per year in the central bank's foreign exchange reserves is sometimes called the balance of payments surplus or deficit. Alternatives to a fixed exchange rate system include a managed float where some changes of exchange rates are allowed, or at the other extreme a purely floating exchange rate (also known as a purely flexible exchange rate). With a pure float the central bank does not intervene at all to protect or devalue its currency, allowing the rate to be set by the market, and the central bank's foreign exchange reserves do not change. Historically there have been different approaches to the question of how or even whether to eliminate current account or trade imbalances. With record trade imbalances held up as one of the contributing factors to the financial crisis of 20072010, plans to address global imbalances have been high on the agenda of policy makers since 2009.

Contents
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1 Composition of the balance of payments sheet o 1.1 Basic analysis o 1.2 Variations in the use of term "balance of payments" o 1.3 The IMF definition 2 Imbalances o 2.1 Causes of BOP imbalances o 2.2 Reserve asset o 2.3 Balance of payments crisis 3 Balancing mechanisms o 3.1 Rebalancing by changing the exchange rate o 3.2 Rebalancing by adjusting internal prices and demand o 3.3 Rules based rebalancing mechanisms 4 History of balance of payments issues o 4.1 Pre-1820: mercantilism o 4.2 18201914: free trade o 4.3 19141945: deglobalisation o 4.4 19451971: Bretton Woods o 4.5 19712009: transition, Washington Consensus, Bretton Woods II o 4.6 2009 and later: post Washington Consensus 4.6.1 Competitive devaluation after 2009 5 See also 6 Notes and citations 7 Further reading 8 External links o 8.1 Data o 8.2 Analysis

[edit] Composition of the balance of payments sheet

[edit] Basic analysis
The two principal parts of the BOP accounts are the current account and the capital account. The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. It is the sum of the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers. It is called the current account as it covers transactions in the "here and now" - those that don't give rise to future claims.[2]

The capital account records the net change in ownership of foreign assets. It includes the reserve account (the foreign exchange market operations of a nation's central bank), along with loans and investments between the country and the rest of world (but not the future regular repayments/dividends that the loans and investments yield; those are earnings and will be recorded in the current account). The term "capital account" is also used in the narrower sense that excludes central bank foreign exchange market operations: Sometimes the reserve account is classified as "below the line" and so not reported as part of the capital account.[3] Expressed with the broader meaning for the capital account, the BOP identity assumes that any current account surplus will be balanced by a capital account deficit of equal size - or alternatively a current account deficit will be balanced by a corresponding capital account surplus:

The balancing item, which may be positive or negative, is simply an amount that accounts for any statistical errors and assures that the current and capital accounts sum to zero. By the principles of double entry accounting, an entry in the current account gives rise to an entry in the capital account, and in aggregate the two accounts automatically balance. A balance isn't always reflected in reported figures for the current and capital accounts, which might, for example, report a surplus for both accounts, but when this happens it always means something has been missedmost commonly, the operations of the country's central bankand what has been missed is recorded in the statistical discrepancy term (the balancing item).[3] An actual balance sheet will typically have numerous sub headings under the principal divisions. For example, entries under Current account might include:

Trade buying and selling of goods and services o Exports a credit entry o Imports a debit entry Trade balance the sum of Exports and Imports Factor income repayments and dividends from loans and investments o Factor earnings a credit entry o Factor payments a debit entry Factor income balance the sum of earnings and payments.

Especially in older balance sheets, a common division was between visible and invisible entries. Visible trade recorded imports and exports of physical goods (entries for trade in physical goods excluding services is now often called the merchandise balance). Invisible trade would record international buying and selling of services, and sometimes would be grouped with transfer and factor income as invisible earnings.[1] The term "balance of payments surplus" (or deficit a deficit is simply a negative surplus) refers to the sum of the surpluses in the current account and the narrowly defined capital account (excluding changes in central bank reserves). Denoting the balance of payments surplus as BOP surplus, the relevant identity is

[edit] Variations in the use of term "balance of payments"

Economics writer J. Orlin Grabbe warns the term balance of payments can be a source of misunderstanding due to divergent expectations about what the term denotes. Grabbe says the term is sometimes misused by people who aren't aware of the accepted meaning, not only in general conversation but in financial publications and the economic literature.[3] A common source of confusion arises from whether or not the reserve account entry, part of the capital account, is included in the BOP accounts. The reserve account records the activity of the nation's central bank. If it is excluded, the BOP can be in surplus (which implies the central bank is building up foreign exchange reserves) or in deficit (which implies the central bank is running down its reserves or borrowing from abroad).[1][3] The term "balance of payments" is sometimes misused by non-economists to mean just relatively narrow parts of the BOP such as the trade deficit,[3] which means excluding parts of the current account and the entire capital account. Another cause of confusion is the different naming conventions in use.[4] Before 1973 there was no standard way to break down the BOP sheet, with the separation into invisible and visible payments sometimes being the principal divisions. The IMF have their own standards for BOP accounting which is equivalent to the standard definition but uses different nomenclature, in particular with respect to the meaning given to the term capital account.

[edit] The IMF definition

The International Monetary Fund (IMF) use a particular set of definitions for the BOP accounts, which is also used by the Organisation for Economic Cooperation and Development (OECD), and the United Nations System of National Accounts (SNA).[5] The main difference in the IMF's terminology is that it uses the term "financial account" to capture transactions that would under alternative definitions be recorded in the capital account. The IMF uses the term capital account to designate a subset of transactions that, according to other usage, form a small part of the overall capital account.[6] The IMF separates these transactions out to form an additional top level division of the BOP accounts. Expressed with the IMF definition, the BOP identity can be written:

The IMF uses the term current account with the same meaning as that used by other organizations, although it has its own names for its three leading sub-divisions, which are:

The goods and services account (the overall trade balance) The primary income account (factor income such as from loans and investments) The secondary income account (transfer payments)

[edit] Imbalances
While the BOP has to balance overall,[7] surpluses or deficits on its individual elements can lead to imbalances between countries. In general there is concern over deficits in the current account.[8] Countries with deficits in their current accounts will build up increasing debt and/or see increased foreign ownership of their assets. The types of deficits that typically raise concern are[1]:

A visible trade deficit where a nation is importing more physical goods than it exports (even if this is balanced by the other components of the current account.) An overall current account deficit. A basic deficit which is the current account plus foreign direct investment (but excluding other elements of the capital account like short terms loans and the reserve account.)

As discussed in the history section below, the Washington Consensus period saw a swing of opinion towards the view that there is no need to worry about imbalances. Opinion swung back in the opposite direction in the wake of financial crisis of 20072009. Mainstream opinion expressed by the leading financial press and economists, international bodies like the IMFas well as leaders of surplus and deficit countrieshas returned to the view that large current account imbalances do matter.[9] Some economists do, however, remain relatively unconcerned about imbalances[10] and there have been assertions, such as by Michael P. Dooley, David Folkerts-Landau and Peter Garber, that nations need to avoid temptation to switch to protectionism as a means to correct imbalances.[11]

[edit] Causes of BOP imbalances

There are conflicting views as to the primary cause of BOP imbalances, with much attention on the US which currently has by far the biggest deficit. The conventional view is that current account factors are the primary cause[12] - these include the exchange rate, the government's fiscal deficit, business competitiveness, and private behaviour such as the willingness of consumers to go into debt to finance extra consumption.[13] An alternative view, argued at length in a 2005 paper by Ben Bernanke, is that the primary driver is the capital account, where a global savings glut caused by savers in surplus countries, runs ahead of the available investment opportunities, and is pushed into the US resulting in excess consumption and asset price inflation.[14]

[edit] Reserve asset

Main article: Reserve currency

The US dollar has been the leading reserve asset since the end of the gold standard. In the context of BOP and international monetary systems, the reserve asset is the currency or other store of value that is primarily used by nations for their foreign reserves.[15] BOP imbalances tend to manifest as hoards of the reserve asset being amassed by surplus countries, with deficit countries building debts denominated in the reserve asset or at least depleting their supply. Under a gold standard, the reserve asset for all members of the standard is gold. In the Bretton Woods system, either gold or the U.S. dollar could serve as the reserve asset, though its smooth operation depended on countries apart from the US choosing to keep most of their holdings in dollars. Following the ending of Bretton Woods, there has been no de jure reserve asset, but the US dollar has remained by far the principal de facto reserve. Global reserves rose sharply in the first decade of the 21st century, partly as a result of the 1997 Asian Financial Crisis, where several nations ran out of foreign currency needed for essential imports and thus had to accept deals on unfavourable terms. The International Monetary Fund (IMF) estimates that between 2000 to mid-2009, official reserves rose from $1,900bn to $6,800bn.[16] Global reserves had peaked at about $7,500bn in mid 2008, then declined by about $430bn as countries without their own reserve currency used them to shield themselves from the worst effects of the financial crisis. From Feb 2009 global reserves began increasing again to reach close to $9,200bn by the end of 2010.[17] [18] As of 2009 approximately 65% of the world's $6,800bn total is held in U.S. dollars and approximately 25% in euros. The UK pound, Japanese yen, IMF Special Drawing Rights (SDRs), and precious metals[19] also play a role. In 2009 Zhou Xiaochuan, governor of the People's Bank of China, proposed a gradual move towards increased use of SDRs, and also for the national currencies backing SDRs to be expanded to include the currencies of all major economies.[20] [21] Dr Zhou's proposal has been described as one of the most significant ideas expressed in 2009.[22] While the current central role of the dollar does give the US some advantages such as lower cost of borrowings, it also contributes to the pressure causing the U.S. to run a current account deficit, due to the Triffin dilemma. In a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Dr Zhou's suggestion or a similar change to the international monetary system would be in the United States' best interests as well as the rest of the world's.[23] Since 2009 there has been a notable increase in the number of new bilateral

agreements which enable international trades to be transacted using a currency that isn't a traditional reserve asset, such as the renminbi, as the Settlement currency. [24]

[edit] Balance of payments crisis

Main article: Currency crisis A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports and/or service its debt repayments. Typically, this is accompanied by a rapid decline in the value of the affected nation's currency. Crises are generally preceded by large capital inflows, which are associated at first with rapid economic growth.[25] However a point is reached where overseas investors become concerned about the level of debt their inbound capital is generating, and decide to pull out their funds.[26] The resulting outbound capital flows are associated with a rapid drop in the value of the affected nation's currency. This causes issues for firms of the affected nation who have received the inbound investments and loans, as the revenue of those firms is typically mostly derived domestically but their debts are often denominated in a reserve currency. Once the nation's government has exhausted its foreign reserves trying to support the value of the domestic currency, its policy options are very limited. It can raise its interest rates to try to prevent further declines in the value of its currency, but while this can help those with debts in denominated in foreign currencies, it generally further depresses the local economy.[25]
[27] [28]

[edit] Balancing mechanisms

One of the three fundamental functions of an international monetary system is to provide mechanisms to correct imbalances.[29][30] Broadly speaking, there are three possible methods to correct BOP imbalances, though in practice a mixture including some degree of at least the first two methods tends to be used. These methods are adjustments of exchange rates; adjustment of a nations internal prices along with its levels of demand; and rules based adjustment.[31] Improving productivity and hence competitiveness can also help, as can increasing the desirability of exports through other means, though it is generally assumed a nation is always trying to develop and sell its products to the best of its abilities.

[edit] Rebalancing by changing the exchange rate

An upwards shift in the value of a nation's currency relative to others will make a nation's exports less competitive and make imports cheaper and so will tend to correct a current account surplus. It also tends to make investment flows into the capital account less attractive so will help with a surplus there too. Conversely a downward shift in the value of a nation's currency makes it more expensive for its citizens to buy imports and increases the competitiveness of their exports, thus helping to correct a deficit (though the solution often doesn't have a positive impact immediately due to the MarshallLerner condition).[32]

Exchange rates can be adjusted by government[33] in a rules based or managed currency regime, and when left to float freely in the market they also tend to change in the direction that will restore balance. When a country is selling more than it imports, the demand for its currency will tend to increase as other countries ultimately[34] need the selling country's currency to make payments for the exports. The extra demand tends to cause a rise of the currency's price relative to others. When a country is importing more than it exports, the supply of its own currency on the international market tends to increase as it tries to exchange it for foreign currency to pay for its imports, and this extra supply tends to cause the price to fall. BOP effects are not the only market influence on exchange rates however, they are also influenced by differences in national interest rates and by speculation.

[edit] Rebalancing by adjusting internal prices and demand

When exchange rates are fixed by a rigid gold standard,[35] or when imbalances exist between members of a currency union such as the Eurozone, the standard approach to correct imbalances is by making changes to the domestic economy. To a large degree, the change is optional for the surplus country, but compulsory for the deficit country. In the case of a gold standard, the mechanism is largely automatic. When a country has a favourable trade balance, as a consequence of selling more than it buys it will experience a net inflow of gold. The natural effect of this will be to increase the money supply, which leads to inflation and an increase in prices, which then tends to make its goods less competitive and so will decrease its trade surplus. However the nation has the option of taking the gold out of economy (sterilising the inflationary effect) thus building up a hoard of gold and retaining its favourable balance of payments. On the other hand, if a country has an adverse BOP its will experience a net loss of gold, which will automatically have a deflationary effect, unless it chooses to leave the gold standard. Prices will be reduced, making its exports more competitive, and thus correcting the imbalance. While the gold standard is generally considered to have been successful[36] up until 1914, correction by deflation to the degree required by the large imbalances that arose after WWI proved painful, with deflationary policies contributing to prolonged unemployment but not re-establishing balance. Apart from the US most former members had left the gold standard by the mid 1930s. A possible method for surplus countries such as Germany to contribute to re-balancing efforts when exchange rate adjustment is not suitable, is to increase its level of internal demand (i.e. its spending on goods). While a current account surplus is commonly understood as the excess of earnings over spending, an alternative expression is that it is the excess of savings over investment.[37] That is:

where CA = current account, NS = national savings (private plus government sector), NI = national investment. If a nation is earning more than it spends the net effect will be to build up savings, except to the extent that those savings are being used for investment. If consumers can be encouraged to spend more instead of saving; or if the government runs a fiscal deficit to offset private savings; or if the corporate sector divert more of their profits to investment, then any current account surplus

will tend to be reduced. However in 2009 Germany amended its constitution to prohibit running a deficit greater than 0.35% of its GDP[38] and calls to reduce its surplus by increasing demand have not been welcome by officials,[39] adding to fears that the 2010s will not be an easy decade for the eurozone.[40] In their April 2010 world economic outlook report, the IMF presented a study showing how with the right choice of policy options governments can transition out of a sustained current account surplus with no negative effect on growth and with a positive impact on unemployment.[41]

[edit] Rules based rebalancing mechanisms

Nations can agree to fix their exchange rates against each other, and then correct any imbalances that arise by rules based and negotiated exchange rate changes and other methods. The Bretton Woods system of fixed but adjustable exchange rates was an example of a rules based system, though it still relied primarily on the two traditional mechanisms. John Maynard Keynes, one of the architects of the Bretton Woods system had wanted additional rules to encourage surplus countries to share the burden of rebalancing, as he argued that they were in a stronger position to do so and as he regarded their surpluses as negative externalities imposed on the global economy.[42] Keynes suggested that traditional balancing mechanisms should be supplemented by the threat of confiscation of a portion of excess revenue if the surplus country did not choose to spend it on additional imports. However his ideas were not accepted by the Americans at the time. In 2008 and 2009, American economist Paul Davidson had been promoting his revamped form of Keynes's plan as a possible solution to global imbalances which in his opinion would expand growth all round with out the downside risk of other rebalancing methods.[32][43]

[edit] History of balance of payments issues

Historically, accurate balance of payments figures were not generally available. However, this did not prevent a number of switches in opinion on questions relating to whether or not a nations government should use policy to encourage a favourable balance.

[edit] Pre-1820: mercantilism

Up until the early 19th century, international trade was generally very small in comparison with national output, and was often heavily regulated. In the Middle Ages, European trade was typically regulated at municipal level in the interests of security for local industry and for established merchants.[44] From about the 16th century, mercantilism became the dominant economic theory influencing European rulers, which saw local regulation replaced by national rules aiming to harness the countries' economic output.[45] Measures to promote a trade surplus such as tariffs were generally favoured. Power was associated with wealth, and with low levels of growth, nations were best able to accumulate funds either by running trade surpluses or by forcefully confiscating the wealth of others. Rulers sometimes strove to have their countries outsell competitors and so build up a "war chest" of gold.[46] This era saw low levels of economic growth; average global per capita income is not considered to have significantly risen in the whole 800 years leading up to 1820, and is estimated to have increased on average by less than 0.1% per year between 1700 and 1820.[25] With very low levels

of financial integration between nations and with international trade generally making up a low proportion of individual nations' GDP, BOP crises were very rare.[25]

[edit] 18201914: free trade

Gold was the primary reserve asset during the gold standard era. From the late 18th century, mercantilism was challenged by the ideas of Adam Smith and other economic thinkers favouring free trade. After victory in the Napoleonic wars Great Britain began promoting free trade, unilaterally reducing her trade tariffs. Hoarding of gold was no longer encouraged, and in fact Britain exported more capital as a percentage of her national income than any other creditor nation has since.[47] Great Britain's capital exports further helped to correct global imbalances as they tended to be counter cyclical, rising when Britain's economy went into recession, thus compensating other states for income lost from export of goods.[25] According to historian Carroll Quigley, Great Britain could afford to act benevolently[48] in the 19th century due to the advantages of her geographical location, her naval power and her economic ascendancy as the first nation to enjoy an industrial revolution.[49] A view advanced by economists such as Barry Eichengreen is that the first age of Globalization began with the laying of transatlantic cables in the 1860s, which facilitated a rapid increase in the already growing trade between Britain and America.[28] Though Current Account controls were still widely used (in fact all industrial nations apart from Great Britain and the Netherlands actually increased their tariffs and quotas in the decades leading up to 1914, though this was motivated more by a desire to protect "infant industries" than to encourage a trade surplus[25]), capital controls were largely absent, and people were generally free to cross international borders without requiring passports. A gold standard enjoyed wide international participation especially from 1870, further contributing to close economic integration between nations. The period saw substantial global growth, in particular for the volume of international trade which grew tenfold between 1820 1870 and then by about 4% annually from 1870 to 1914. BOP crises began to occur, though less frequently than was to be the case for the remainder of the 20th century. From 1880 - 1914, there were approximately [50] 8 BOP crises and 8 twin crises - a twin crises being a BOP crises that coincides with a banking crises.[25]

[edit] 19141945: deglobalisation

The favourable economic conditions that had prevailed up until 1914 were shattered by the first world war, and efforts to re-establish them in the 1920s were not successful. Several countries rejoined the gold standard around 1925. But surplus countries didn't "play by the rules",[25][51] sterilising gold inflows to a much greater degree than had been the case in the pre-war period. Deficit nations such as Great Britain found it harder to adjust by deflation as workers were more enfranchised and unions in particular were able to resist downwards pressure on wages. During the Great Depression most countries abandoned the gold standard, but imbalances remained an issue and international trade declined sharply. There was a return to mercantilist type "beggar thy neighbour" policies, with countries competitively devaluing their exchange rates, thus effectively competing to export unemployment. There were approximately 16 BOP crises and 15 twin crises (and a comparatively very high level of banking crises.)[25]

[edit] 19451971: Bretton Woods

Main article: Bretton Woods system Following World War II, the Bretton Woods institutions (the International Monetary Fund and World Bank) were set up to support an international monetary system designed to encourage free trade while also offering states options to correct imbalances without having to deflate their economies. Fixed but flexible exchange rates were established, with the system anchored by the dollar which alone remained convertible into gold. The Bretton Woods system ushered in a period of high global growth, known as the Golden Age of Capitalism, however it came under pressure due to the inability or unwillingness of governments to maintain effective capital controls [52] and due to instabilities related to the central role of the dollar. Imbalances caused gold to flow out of the US and a loss of confidence in the United States ability to supply gold for all future claims by dollar holders resulted in escalating demands to convert dollars, ultimately causing the US to end the convertibility of the dollar into gold, thus ending the Bretton Woods system.[25] The 1945 - 71 era saw approximately 24 BOP crises and no twin crises for advanced economies, with emerging economies seeing 16 BOP crises and just one twin crises.[25]

[edit] 19712009: transition, Washington Consensus, Bretton Woods II

Main article: Washington Consensus

Manmohan Singh, currently PM of India, showed that the challenges caused by imbalances can be an opportunity when he led his country's successful economic reform programme after the 1991 crisis. The Bretton Woods system came to an end between 1971 and 1973. There were attempts to repair the system of fixed exchanged rates over the next few years, but these were soon abandoned, as were determined efforts for the U.S. to avoid BOP imbalances. Part of the reason was displacement of the previous dominant economic paradigm Keynesianism by the Washington Consensus, with economists and economics writers such as Murray Rothbard and Milton Friedman[53] arguing that there was no great need to be concerned about BOP issues. According to Rothbard: Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on inter-state trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.[54] In the immediate aftermath of the Bretton Woods collapse, countries generally tried to retain some control over their exchange rate by independently managing it, or by intervening in the foreign exchange market as part of a regional bloc, such as the Snake which formed in 1971.[29] The Snake was a group of European countries who tried to retain stable rates at least with each other; the group eventually evolved into the European Exchange Rate Mechanism (ERM) by 1979. From the mid 1970s however, and especially in the 1980s and early 1990s, many other countries followed the US in liberalising controls on both their capital and current accounts, in adopting a somewhat relaxed attitude to their balance of payments and in allowing the value of their currency to float relatively freely with exchange rates determined mostly by the market.[25][29] Developing countries who chose to allow the market to determine their exchange rates would often develop sizeable current account deficits, financed by capital account inflows such as loans and investments,[55] though this often ended in crises when investors lost confidence.[25][56] [57] The frequency of crises was especially high for developing economies in this era - from 1973 1997 emerging economies suffered 57 BOP crises and 21 twin crises. Typically but not always

the panic among foreign creditors and investors that preceded the crises in this period was usually triggered by concerns over excess borrowing by the private sector, rather than by a government deficit. For advanced economies, there were 30 BOP crises and 6 banking crises. A turning point was the 1997 Asian BOP Crisis, where unsympathetic responses by western powers caused policy makers in emerging economies to re-assess the wisdom of relying on the free market; by 1999 the developing world as a whole stopped running current account deficits [27] while the U.S. current account deficit began to rise sharply.[58] [59] This new form of imbalance began to develop in part due to the increasing practice of emerging economies, principally China, in pegging their currency against the dollar, rather than allowing the value to freely float. The resulting state of affairs has been referred to as Bretton Woods II.[11] According to Alaistair Chan, "At the heart of the imbalance is China's desire to keep the value of the yuan stable against the dollar. Usually, a rising trade surplus leads to a rising value of the currency. A rising currency would make exports more expensive, imports less so, and push the trade surplus towards balance. China circumvents the process by intervening in exchange markets and keeping the value of the yuan depressed."[60] According to economics writer Martin Wolf, in the eight years leading up to 2007, "three quarters of the foreign currency reserves accumulated since the beginning of time have been piled up".[61] In contrast to the changed approach within the emerging economies, US policy makers and economists remained relatively unconcerned about BOP imbalances. In the early to mid 1990s, many free market economists and policy makers such as U.S. Treasury secretary Paul O'Neill and Fed Chairman Alan Greenspan went on record suggesting the growing US deficit was not a major concern. While several emerging economies had intervening to boost their reserves and assist their exporters from the late 1980s, they only began running a net current account surplus after 1999. This was mirrored in the faster growth for the US current account deficit from the same year, with surpluses, deficits and the associated build up of reserves by the surplus countries reaching record levels by the early 2000s and growing year by year. Some economists such as Kenneth Rogoff and Maurice Obstfeld began warning that the record imbalances would soon need to be addressed from as early as 2001, joined by Nouriel Roubini in 2004, but it wasn't until about 2007 that their concerns began to be accepted by the majority of economists.[27][62]

[edit] 2009 and later: post Washington Consensus

Speaking after the 2009 G-20 London summit, Gordon Brown announced "the Washington Consensus is over".[63] There is now broad agreement that large imbalances between different countries do matter; for example mainstream U.S. economist C. Fred Bergsten has argued the U.S. deficit and the associated large inbound capital flows into the U.S. was one of the causes of the financial crisis of 20072010.[23] Since the crisis, government intervention in BOP areas such as the imposition of capital controls or foreign exchange market intervention has become more common and in general attracts less disapproval from economists, international institutions like the IMF and other governments.[64] [65] In 2007 when the crises began, the global total of yearly BOP imbalances was $1680 billion. On the credit side, the biggest current account surplus was China with approx. $362 billion, followed by Japan at $213bn and Germany at 185 billion, with oil producing countries such as Saudi Arabia also having large surpluses. On the debit side, the US had the biggest current account

deficit at over 700Bn, with the UK, Spain and Australia together accounting for close to a further $300 billion.[61] While there have been warnings of future cuts in public spending, deficit countries on the whole did not make these in 2009, in fact the opposite happened with increased public spending contributing to recovery as part of global efforts to increase demand.[66] The emphases has instead been on the surplus countries, with the IMF, EU and nations such as the U.S., Brazil and Russia asking them to assist with the adjustments to correct the imbalances. [67] [68] Economists such as Gregor Irwin and Philip R. Lane have suggested that increased use of pooled reserves could help emerging economies not to require such large reserves and thus have less need for current account surpluses. [69] Writing for the FT in Jan 2009, Gillian Tett says she expects to see policy makers becoming increasingly concerned about exchange rates over the coming year.[70] In June 2009, Olivier Blanchard the chief economist of the IMF wrote that rebalancing the world economy by reducing both sizeable surpluses and deficits will be a requirement for sustained recovery.[71] In 2008 and 2009, there was some reduction in imbalances, but early indications towards the end of 2009 were that major imbalances such as the U.S. current account deficit are set to begin increasing again.[10] [72] Japan had allowed her currency to appreciate through 2009, but has only limited scope to contribute to the rebalancing efforts thanks in part to her aging population. The euro used by Germany is allowed to float fairly freely in value, however further appreciation would be problematic for other members of the currency union such as Spain, Greece and Ireland who run large deficits. Therefore Germany has instead been asked to contribute by further promoting internal demand, but this hasn't been welcomed by German officials.[67] China has been requested to allow the renminbi to appreciate but until 2010 had refused, the position expressed by her premier Wen Jiabao being that by keeping the value of the renmimbi stable against the dollar China has been helping the global recovery, and that calls to let her currency rise in value have been motivated by a desire to hold back China's development.[68] After China reported favourable results for her December 2009 exports however, the Financial Times reported that analysts are optimistic that China will allow some appreciation of her currency around mid 2010.[73] In April 2010 a Chinese official signalled the government is considering allowing the renminbi to appreciate, [74] but by May analysts were widely reporting the appreciation would likely be delayed due to the falling value of the Euro following the 2010 European sovereign debt crisis.[75] China announced the end of the renminbi's peg to the dollar in June 2010; the move was widely welcomed by markets and helped defuse tension over imbalances prior to the 2010 G-20 Toronto summit. However the renminbi remains managed and the new flexibility means it can move down as well as up in value; two months after the peg ended the renminbi had only appreciated against the dollar by about 0.8%.[76]

By January 2011, the renminbi had appreciated against the dollar by 3.7%, which means it's on track to appreciate in nominal terms by 6% per year. As this reflects a real appreciation of 10% when China's higher inflation is accounted for, the U.S. Treasury once again declined to label China a currency manipulator in their February 2011 report to Congress. However Treasury officials did advise the rate of appreciation was still too slow for the best interests of the global economy.[77][78] In February 2011, Moody's analyst Alaistair Chan has predicted that despite a strong case for an upward revaluation, an increased rate of appreciation against the dollar is unlikely in the short term.[79] While some leading surplus countries including China have been taking steps to boost domestic demand, these have not yet been sufficient to rebalance out of their current account surpluses. By June 2010, the U.S. monthly current account deficit had risen back to $50 billion, a level not seen since mid 2008. With the US currently suffering from high unemployment and concerned about taking on additional debt, fears are rising that the US may resort to protectionist measures.[80] [edit] Competitive devaluation after 2009 Main article: Currency war By September 2010, international tensions relating to imbalances had further increased. Brazil's finance minister Guido Mantega declared that an "international currency war" has broken out, with countries competitively trying to devalue their currency so as to boost exports. Brazil has been one of the few major economies lacking a reserve currency to abstain from significant currency intervention, with the real rising by 25% against the dollar since January 2009. Some economists such as Barry Eichengreen have argued that competitive devaluation may be a good thing as the net result will effectively be equivalent to expansionary global monetary policy. Others such as Martin Wolf saw risks of tensions further escalating and advocated that coordinated action for addressing imbalances should be agreed on at the November G20 summit.[17][81][82] Commentators largely agreed that little substantive progress was made on imbalances at the November 2010 G20. An IMF report released after the summit warned that without additional progress there is a risk of imbalances approximately doubling to reach pre-crises levels by 2014.[8
//
Abstract: One of the most dramatic events that have taken place in later part of 20 th century was culmination of GATT 1947 into WTO (The world Trade organization), which came into being on 1st January 2005. This WTO has set expectations high in various member countries (by now 149 including latest addition of Saudi Arabia) regarding spurt in world trade where

India has insignificant share in the pie-Only 0.75% at the most. Even in IT exports the share of Indian exporters is just peanuts in view of overall world market. Since formation of WTO there have been regular meetings of Ministerial Conferences (Highest Policy level body of WTO) religiously every 2 years and 5 such meetings have taken place while world prepares for the Hong Kong meeting to take place shortly, the sixth one. While 5th meet at Cancun, Mexico was more or less failure, the earlier one at Seattle, USA was received with brickbats from environmentalist and Labor union Groups protesting against WTO regime. It is statistical fact that world trade has definitely grown since 1995 thereby giving indicators that international trade reforms do play important role in boosting economic development of various countries. Problems facing India in WTO & its Implementation: But there are several problems facing these Multilateral Trade agreements: - Predominance of developed nations in negotiations extracting more benefits from developing and least developed countries - Resource and skill limitations of smaller countries to understand and negotiate under rules of various agreements under WTO - Incompatibility of developed and developing countries resource sizes thereby causing distortions in implementing various decisions - Questionable effectiveness in implementation of agreements reached in past and sincerity - Non-tariff barriers being created by developed nations. - Regional cooperation groups posing threat to utility of WTO agreement itself, which is multilateral encompassing all member countries - Poor implementation of Doha Development Agenda - Agriculture seems to be bone of contention for all types of countries where France, Japan and some countries are just not willing to budge downwards in matter of domestic support and export assistance to farmers and exporters of agriculture produce. - Dismantling of MFA (Multi Fiber Agreement) and its likely impact on countries like India - Under TRIPS question of high cost of Technology transfer, Bio Diversity protection, protection of Traditional Knowledge and Folk arts, protection of Bio Diversities and geographical Indications of origin, for example Basmati, Mysore Dosa or Champagne. The protection has been given so far in wines and spirits that suit US and European countries. Implications for India

It appears that India does not stand to gain much by shouting for agriculture reforms in developed countries because the overall tariff is lower in those countries. India will have to tart major reforms in agriculture sector in India to make Agriculture globally competitive. Same way it is questionable if India will be major beneficiary in dismantling of quotas, which were available under MFA for market access in US and some EU countries. It is likely that China, Germany, North African countries, Mexico and such others may reap benefit in textiles and Clothing areas unless India embarks upon major reforms in modernization and up gradation of textile sector including apparels. Some of Singapore issues are also important like Government procure, Trade and Investment, Trade facilitation and market access mechanism. In Pharma-sector there is need for major investments in R &D and mergers and restructuring of companies to make them world class to take advantage. India has already amended patent Act and both product and Process are now patented in India. However, the large number of patents going off in USA recently, gives the Indian Drug companies windfall opportunities, if tapped intelligently. Some companies in India have organized themselves for this. Excerpts from Speech of Ramkrishna Hegde, the then Minister, at Geneva in 1998"In order to make WTO an effective multilateral body, which serves the objectives for which it was set up, it is necessary to go back to the basic principles. The Uruguay Round negotiators had stated their intentions quite clearly in the Preamble to the Marrakesh Agreement establishing the WTO. They recognised "that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development. They recognized also "that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development". The Objective of WTO Reiterated: It is very clear that the intention of the negotiators was to use trade as an instrument for development, to raise standards of living, expand production, keeping in view, particularly, the needs of developing countries and least-developed countries. The WTO must never lose sight of this basic principle. Every act of implementation and of negotiation, every legal decision, has to be viewed in this context. Trade, as an instrument for development, should be the cornerstone of all our deliberations, decisions and actions. Besides, the system should be seen to be equitable and fair. It must be used in such a manner that the letter and spirit of the Agreements is fully observed. The WTO Members must mutually support and encourage each other to achieve the final goal. It must be recognized that all Members should assume a negotiating rather than an adversarial posture. It should also be recognized that different economies have different features and structures, different problems, different cultures. The pace of change must be carefully calibrated to take into account such differences. All Members should guard against unilateral action that cuts at the root of multilateral agreement and consensus.

Developing countries have generally been apprehensive in particular about the implementation of special and differential treatment provisions (S&D) in various Uruguay Round Agreements. Full benefits of these provisions have not accrued to the developing countries, as clear guidelines have not been laid down on how these are to be implemented. " The first Ministerial Conference held in 1996 in Singapore saw the commencement of pressures to enlarge the agenda of WTO. Pressures were generated to introduce new Agreements on Investment, Competition Policy, Transparency in Government Procurement and Trade Facilitation. The concept of Core Labor Standards was also taken up for introduction. India and the developing countries, which were already under the burden of fulfilling the commitments undertaken through the Uruguay Round Agreements, and who also perceived many of the new issues to be non-trade issues, resisted the introduction of these new subjects into WTO. They were partly successful. The Singapore Ministerial Conference (SMC) set up open-ended Work Program to study the relationship between Trade and Investment; Trade and Competition Policy; to conduct a study on Transparency in Government Procurement practices; and do analytical work on simplification of trade procedures (Trade Facilitation). Most importantly the SMC clearly declared on the Trade-Labor linkage as follows: " We reject the use of labor standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question. In this regard we note that the WTO and ILO Secretariat will continue their existing collaboration". Not many people in this country are aware that there is a dispute settlement system in the WTO. This is at the heart of the WTO and sets it apart from the earlier GATT. Countries like the USA and the European Union have brought cases against us and won these cases like in pharmaceutical patents. India too has complained against the US and Europe and it too has won its fair share of disputes in areas like textiles. India must effectively use this mechanism to extract fair share in world markets. It would be advantageous for India to give concrete shape to SAARC economic forum or Free market and align itself with ASEAN. What India should do? The most important things for India to address are speed up internal reforms in building up world-class infrastructure like roads, ports and electricity supply. India should also focus on original knowledge generation in important fields like Pharmaceutical molecules, textiles, IT high end products, processed food, installation of cold chain and agricultural logistics to tap opportunities of globalization under WTO regime. India's ranking in recent Global Competitiveness report is not very encouraging due to infrastructure problems, poor governance, poor legal system and poor market access provided by India.

Our tariffs are still high compared to Developed countries and there will be pressure to reduce them further and faster. India has solid strength, at least for mid term (5-7 years) in services sector primarily in IT sector, which should be tapped and further strengthened. India would do well to reorganize its Protective Agricultural policy in name of rural poverty and Food security and try to capitalize on globalization of agriculture markets. It should rather focus on Textile industry modernization and developing international Marketing muscle and expertise, developing of Brand India image, use its traditional arts and designs intelligently to give competitive edge, capitalize on drug sector opportunities, and develop selective engineering sector industries like automobiles & forgings & castings, processed foods industry and the high end outsourcing services. India must improve legal and administrative infrastructure, improve trade facilitation through cutting down bureaucracy and delays and further ease its financial markets. India has to downsize non-plan expenditure in Subsidies (which are highly ineffective and wrongly applied) and Government salaries and perquisites like pensions and administrative expenditures. Corruption will also have to be checked by bringing in fast remedial public grievance system, legal system and information dissemination by using e-governance. The petroleum sector has to be boosted to tap crude oil and gas resources within Indian boundaries and entering into multinational contracts to source oil reserves. It wont be a bad idea if Indian textile and garment Industry go multinational setting their foot in western Europe, North Africa, Mexico and other such strategically located areas for large US and European markets. The performance of India in attracting major FDI has also been poor and certainly needs boost up, if India has to develop globally competitive infrastructure and facilities in its sectors of interest for world trade.

////

EXECUTIVE SUMMARY
1. A CRISIS OF HISTORIC PROPORTIONS

The financial crisis that hit the global economy since the summer of 2007 is without precedent in post-war economic history. Although its size and extent are exceptional, the crisis has many features in common with similar financial-stress driven recession episodes in the past. The crisis was preceded by long period of rapid credit growth, low risk premiums, abundant availability of liquidity, strong leveraging, soaring asset prices and the development of bubbles in the real estate sector. Over-stretched leveraging positions rendered financial institutions extremely

vulnerable to corrections in asset markets. As a result a turn-around in a relatively small corner of the financial system (the US subprime market) was sufficient to topple the whole structure. Such episodes have happened before (e.g. Japan and the Nordic countries in the early 1990s, the Asian crisis in the late-1990s). However, this time is different, with the crisis being global akin to the events that triggered the Great Depression of the 1930s. While it may be appropriate to consider the Great Depression as the best benchmark in terms of its financial triggers, it has also served as a great lesson. At present, governments and central banks are well aware of the need to avoid the policy mistakes that were common at the time, both in the EU and elsewhere. Large-scale bank runs have been avoided, monetary policy has been eased aggressively, and governments have released substantial fiscal stimulus. Unlike the experience during the Great Depression, countries in Europe or elsewhere have not resorted to protectionism at the scale of the 1930s. It demonstrates the importance of EU coordination, even if this crisis provides an opportunity for further progress in this regard. In its early stages, the crisis manifested itself as an acute liquidity shortage among financial institutions as they experienced ever stiffer market conditions for rolling over their (typically shortterm) debt. In this phase, concerns over the solvency of financial institutions were increasing, but a systemic collapse was deemed unlikely. This perception dramatically changed when a major US investment bank (Lehman Brothers) defaulted in September 2008. Confidence collapsed, investors massively liquidated their positions and stock markets went into a tailspin. From then onward the EU economy entered the steepest downturn on record since the 1930s. The transmission of financial distress to the real economy evolved at record speed, with credit restraint and sagging confidence hitting business investment and household demand, notably for consumer durables and housing. The cross-border transmission was also extremely rapid, due to the tight connections within the financial system itself and also the strongly integrated supply chains in global product markets. EU real GDP is projected to shrink by some 4% in 2009, the sharpest contraction in its history. And although signs of an incipient recovery abound, this is expected to be rather sluggish as demand will remain depressed due to deleveraging across the economy as well as painful adjustments in the industrial structure. Unless policies change considerably, potential output

growth will suffer, as parts of the capital stock are obsolete and increased risk aversion will weigh on capital formation and R&D. The ongoing recession is thus likely to leave deep and long-lasting traces on economic performance and entail social hardship of many kinds. Job losses can be contained for some time by flexible unemployment benefit arrangements, but eventually the impact of rapidly rising unemployment will be felt, with downturns in housing markets occurring simultaneously affecting (notably highly-indebted) households. The fiscal positions of governments will continue to deteriorate, not only for cyclical reasons, but also in a structural manner as tax bases shrink on a permanent basis and contingent liabilities of governments stemming from bank rescues may materialise. An open question is whether the crisis will weaken the incentives for structural reform and thereby adversely affect potential growth further, or whether it will provide an opportunity to undertake far-reaching policy actions.
2. VAST POLICY CHALLENGES

The current crisis has demonstrated the importance of a coordinated framework for crisis management. It should contain the following building blocks: Crisis prevention to prevent a repeat in the future. This should be mapped onto a collective
1
European Commission Economic Crisis in Europe: Causes, Consequences and Responses

judgment as to what the principal causes of the crisis were and how changes in macroeconomic, regulatory and supervisory policy frameworks could help prevent their recurrence. Policies to boost potential economic growth and competitiveness could also bolster the resilience to future crises. Crisis control and mitigation to minimise the damage by preventing systemic defaults or by containing the output loss and easing the social hardship stemming from recession. Its main objective is thus to stabilise the financial system and the real economy in the short run. It must be coordinated across the EU in order to strike the right balance between national preoccupations and spillover effects affecting other Member States. Crisis resolution to bring crises to a lasting close, and at the lowest possible cost for the taxpayer while containing systemic risk and securing consumer protection. This requires reversing temporary support measures as well action to restore economies to sustainable growth and fiscal paths. Inter alia, this includes policies to restore banks' balance sheets, the

restructuring of the sector and an orderly policy 'exit'. An orderly exit strategy from expansionary macroeconomic policies is also an essential part of crisis resolution. The beginnings of such a framework are emerging, building on existing institutions and legislation, and complemented by new initiatives. But of course policy makers in Europe have had no choice but to employ the existing mechanisms and procedures. A framework for financial crisis prevention appeared, with hindsight, to be underdeveloped otherwise the crisis would most likely not have happened. The same held true to some extent for the EU framework for crisis control and mitigation, at least at the initial stages of the crisis. Quite naturally, most EU policy efforts to date have been in the pursuit of crisis control and mitigation. But first steps have also been taken to redesign financial regulation and supervision both in Europe and elsewhere with a view to crisis prevention. By contrast, the adoption of crisis resolution policies has not begun in earnest yet. This is now becoming urgent not least because it should underpin the effectiveness of control policies via its impact on confidence.
2.1. Crisis control and mitigation

Aware of the risk of financial and economic meltdown central banks and governments in the European Union embarked on massive and coordinated policy action. Financial rescue policies have focused on restoring liquidity and capital of banks and the provision of guarantees so as to get the financial system functioning again. Deposit guarantees were raised. Central banks cut policy interest rates to unprecedented lows and gave financial institutions access to lender-of-last-resort facilities. Governments provided liquidity facilities to financial institutions in distress as well, along with state guarantees on their liabilities, soon followed by capital injections and impaired asset relief. Based on the coordinated European Economy recovery Plan (EERP), a discretionary fiscal stimulus of some 2% of GDP was released of which two-thirds to be implemented in 2009 and the remainder in 2010 so as to hold up demand and ease social hardship. These measures largely respected agreed principles of being timely and targeted, although there are concerns that in some cases measures were not of a temporary nature and therefore not easily reversed. In addition, the Stability and Growth Pact was applied in a flexible and supportive manner, so that in most Member States the automatic fiscal stabilisers were allowed to operate unfettered. The dispersion of fiscal stimulus across Member States has been

substantial, but this is generally and appropriately in line with differences in terms of their needs and their fiscal room for manoeuvre. In addition, to avoid unnecessary and irreversible destruction of (human and entrepreneurial) capital, support has been provided to hard-hit but viable industries while part-time unemployment claims were allowed on a temporary basis, with the EU taking the lead in developing guidelines on the design of labour market policies during the crisis. The EU has played an important role to provide guidance as to how state aid policies including to the financial sector could be shaped so as to pay respect to competition rules. Moreover, the EU has provided balance-of payments assistance jointly with the IMF and World Bank to Member States in Central and Eastern Europe, as these have been exposed to reversals of international capital flows.
2
Executive Summary

Finally, direct EU support to economic activity was provided through substantially increased loan support from the European Investment Bank and the accelerated disbursal of structural funds. These crisis control policies are largely achieving their objectives. Although banks' balance sheets are still vulnerable to higher mortgage and credit default risk, there have been no defaults of major financial institutions in Europe and stock markets have been recovering. With short-term interest rates near the zero mark and 'non-conventional' monetary policies boosting liquidity, stress in interbank credit markets has receded. Fiscal stimulus proves relatively effective owing to the liquidity and credit constraints facing households and businesses in the current environment. Economic contraction has been stemmed and the number of job losses contained relative to the size of the economic contraction.
2.2. Crisis resolution

While there is still major uncertainty surrounding the pace of economic recovery, it is now essential that exit strategies of crisis control policies be designed, and committed to. This is necessary both to ensure that current actions have the desired effects and to secure macroeconomic stability. Having an exit strategy does not involve announcing a fixed calendar for the next moves, but rather defines those moves, including their direction and the conditions that must be satisfied for making them. Exit strategies need to be in place for financial, macroeconomic and structural policies alike: Financial policies. An immediate priority is to restore the viability of the banking sector. Otherwise a vicious circle of weak growth,

more financial sector distress and ever stiffer credit constraints would inhibit economic recovery. Clear commitments to restructure and consolidate the banking sector should be put in place now if a Japan-like lost decade is to be avoided in Europe. Governments may hope that the financial system will grow out of its problems and that the exit from banking support would be relatively smooth. But as long as there remains a lack of transparency as to the value of banks' assets and their vulnerability to economic and financial developments, uncertainty remains. In this context, the reluctance of many banks to reveal the true state of their balance sheets or to exploit the extremely favourable earning conditions induced by the policy support to repair their balance sheets is of concern. It is important as well that financial repair be done at the lowest possible long-term cost for the tax payer, not only to win political support, but also to secure the sustainability of public finances and avoid a long-lasting increase in the tax burden. Financial repair is thus essential to secure a satisfactory rate of potential growth not least also because innovation depends on the availability of risk financing. Macroeconomic policies. Macroeconomic stimulus both monetary and fiscal has been employed extensively. The challenge for central banks and governments now is to continue to provide support to the economy and the financial sector without compromising their stability-oriented objectives in the medium term. While withdrawal of monetary stimulus still looks some way off, central banks in the EU are determined to unwind the supportive stance of monetary policies once inflation pressure begins to emerge. At that point a credible exit strategy for fiscal policy must be firmly in place in order to pre-empt pressure on governments to postpone or call off the consolidation of public finances. The fiscal exit strategy should spell out the conditions for stimulus withdrawal and must be credible, i.e. based on pre-committed reforms of entitlements programmes and anchored in national fiscal frameworks. The withdrawal of fiscal stimulus under the EERP will be quasi automatic in 2010-11, but needs to be followed up by very substantial though differentiated across Member States fiscal consolidation to reverse the adverse trends in public debt. An appropriate mix of expenditure restraint and tax increases must be pursued, even if this is challenging in an environment where

distributional conflicts are likely to arise. The quality of public finances, including its impact on work incentives and economic efficiency at large, is an overarching concern. Structural policies. Even prior to the financial crisis, potential output growth was expected to roughly halve to as little as around 1% by the//////

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Home About the IMF Research Country Info News Videos Data and Statistics Publications Key Issues Financial Crisis

IMF Develops Framework to Manage Capital Inflows

The IMF is developing a framework to help countries manage large capital inflows as part of its ongoing work to assess the risks facing economies as they recover from the global crisis.

Agreed EU Support Model Boosts Confidence, Says IMF

IMF Approves 30 Billion Loan for Greece on Fast Track

Europe and IMF Agree 110 Billion Financing Plan With Greece

IMF Approves 22.5 Billion Loan For Ireland

Crisis Central

IMF Says Dubai Debt Fallout Contained, Events Still Unfolding

Dubai Worlds aim for constructive engagement with its creditors has helped to reduce market uncertainty

Agreement with Banks Limits Crisis in Emerging Europe

Meetings to stop foreign-owned banks pulling out of emerging Europe help avert systemic crisis

Peace, Economic Stability Interconnected, Says Strauss-Kahn

Collective efforts to fight crisis can't be separated from efforts to guard social stability, secure peace

'Istanbul Decisions' to Guide IMF as Countries Shape Post-Crisis World

Global cooperation has prevented worse crisis and offered chance to shape post-crisis world

Problem-Solving Ideas

Policy Changes Urgently Needed to Address Global Imbalances

World economy could get stuck 'in midstream' with threat to recovery's sustainability

Clear Communication Key to Smooth Return from Exceptional Policies

Central banks acted nimbly--now focus is on exiting from large-scale interventions

Comparing Recessions in Germany, Spain, United Kingdom

Institutions, policies, unusual shocks are possible explanations for differences

Fiscal Rules Can Help Improve Fiscal Performance

Fiscal rules can be vital for stronger public finances, fiscal consolidation, and debt sustainability

Need to Know

Tax Compliance a Problem During Economic Crisis

Noncompliance is distortionary and inequitable and hampers medium-term tax base rebuilding

Initial Lessons of the Crisis

Focus on prevention, rather than on near-term resolution or long-term consequences

Financial Crises and Emerging Market Trade

Initial withdrawal of financing eases relatively quickly as alternative sources of financing are discovered

The Case for Global Fiscal Stimulus

Model shows that worldwide fiscal expansion plus easy monetary policy can have big multiplier effects

Who Said That?

Building a Post-Crisis Global Economy

IMF's John Lipsky says it is too early for general withdrawal of macroeconomic policy support

Modern Macroeconomics Is on the Wrong Track

OECD's William White argues that today's crisis requires a new macroeconomic paradigm

Leadership Role for Asia in Reshaping Post-Crisis Global Economy

IMF's Dominique Strauss-Kahn says Asia should lead global economy to more sustainable path for growth

Experts Warn Financial System Risks Still High

Conference told that governments must rethink how financial sector intersects with broader economy

IMF's Advice, Money Help Combat Global Crisis

The IMF is working on several fronts to help its members combat the worldwide economic and financial crisis. The Fund is tracking economic and financial developments worldwide so that it can help policymakers with the latest forecasts and analysis of developments in financial markets. It is giving policy advice to countries and regions, and money to assist emerging market and lowincome economies that have been hit by the crisis. And it is assisting the Group of 20 industrialized and emerging economies with recommendations to reshape the system of international regulation and governance. This page pulls together the IMF's work on the financial crisis and includes links to key articles, documents, and background information.

Related Links

To help countries face crisis, IMF revamps its lending Video: IMF lending Finance & Development magazine on the crisis IMF outlines dire effects of failing to act on banks

Research & Publications

Market Response to Policy Initiatives during the Global Financial Crisis The State of Public Finances

The Debate on the International Monetary System What Caused the Global Financial Crisis: Evidence on the Drivers of Financial Imbalances 1999 2007

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European Union
From Wikipedia, the free encyclopedia "EU" redirects here. For other uses, see EU (disambiguation).

European Union [show]

Flag

Motto: United in diversity[1][2][3] Anthem: Ode to Joy

Anthem of the European Union Ode to Joy[2] (orchestral)

Political centres

Official languages Demonym Member States Leaders European Council Herman Van Rompuy European Commission European Parliament Jos Manuel Barroso Jerzy Buzek

Brussels Luxembourg Strasbourg 23[show] European[4] 27[show]

Council of the European Union Donald Tusk (Poland) Legislature Legislature Council Parliament Establishment

Upper House Lower House

Paris Treaty Rome Treaty Maastricht Treaty Lisbon Treaty Area

23 July 1952 1 January 1958 1 November 1993 1 December 2009 4,324,782 km2 1,669,807 sq mi 3.08

Total

- Water (%)

Population 2011 estimate Density 502,486,499 [5] 116.2/km2 300.9/sq mi 2010 (IMF) estimate $15,203 trillion $30,455 2010 (IMF) estimate $16,242 trillion $32,537 30.7 (EU25)[6] (low) 0.835 (very high) Currency Time zone Summer (DST) Internet TLD Website europa.eu See list Calling code This box: view talk edit

GDP (PPP) Total Per capita

GDP (nominal) Total Per capita

Gini (2009) HDI (2010)

euro () (EUR)[show] (UTC+0 to +2)

(UTC+1 to +3[nb 1]) .eu[nb 2]

The European Union (EU) is an economic and political union of 27 independent member states which are located primarily in Europe.[7] The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), formed by six countries in 1958. In the intervening years the EU has grown in size by the accession of new member states, and in power by the addition of policy areas to its remit. The Maastricht Treaty established the European Union under its current name in 1993.[8] The latest amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009. The EU operates through a hybrid system of supranational independent institutions and intergovernmentally made decisions negotiated by the member states.[9][10][11] Important institutions of the EU include the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central Bank. The European Parliament is elected every five years by EU citizens. The EU has developed a single market through a standardised system of laws which apply in all member states. Within the Schengen Area (which includes EU and non-EU states) passport controls have been abolished.[12] EU policies aim to ensure the free movement of people, goods, services, and capital,[13] enacts legislation in justice and home affairs, and maintains common

policies on trade,[14] agriculture,[15] fisheries and regional development.[16] A monetary union, the eurozone, was established in 1999 and is currently composed of 17 member states. Through the Common Foreign and Security Policy the EU has developed a limited role in external relations and defence. Permanent diplomatic missions have been established around the world and the EU is represented at the United Nations, the WTO, the G8 and the G-20. With a combined population of over 500 million inhabitants,[17] or 7.3% of the world population,[18] the EU generated a nominal GDP of 16,242 billion US dollars in 2010, which represents an estimated 20% of global GDP when measured in terms of purchasing power parity.[19]

Contents
[hide]

1 History o 1.1 19451958 o 1.2 19581972 o 1.3 19731993 o 1.4 1993present 2 Treaties 3 Geography o 3.1 Member states o 3.2 Environment 4 Politics o 4.1 Governance o 4.2 Budget o 4.3 Competences 5 Legal system o 5.1 Courts of Justice o 5.2 Fundamental rights o 5.3 Acts 6 Justice and home affairs 7 Foreign relations o 7.1 Military o 7.2 Humanitarian aid 8 Economy o 8.1 Internal market o 8.2 Competition o 8.3 Monetary union o 8.4 Financial supervision o 8.5 Energy o 8.6 Infrastructure o 8.7 Agriculture 9 Education and science 10 Health care

11 Demographics o 11.1 Languages o 11.2 Religion 12 Culture and sport 13 See also 14 References 15 External links

[edit] History
Main article: History of the European Union

[edit] 19451958
Main article: History of the European Coal and Steel Community (19451957)

Robert Schuman proposing the Coal and Steel Community on 9 May 1950. After World War II, moves towards European integration were seen by many as an escape from the extreme forms of nationalism which had devastated the continent.[20] One such attempt to unite Europeans was the European Coal and Steel Community, which was declared to be "a first step in the federation of Europe", starting with the aim of eliminating the possibility of further wars between its member states by means of pooling the national heavy industries.[21] The founding members of the Community were Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany. The originators and supporters of the Community include Jean Monnet, Robert Schuman, Paul Henri Spaak, and Alcide De Gasperi.[22] In 1957, the six countries signed the Treaties of Rome, which extended the earlier cooperation within the European Coal and Steel Community (ECSC) and created the European Economic Community, (EEC) establishing a customs union and the European Atomic Energy Community (Euratom) for cooperation in developing nuclear energy. The treaty came into force in 1958.[22]

[edit] 19581972
Main article: History of the European Communities (19581972)

The Rome Treaty was signed in 1957 and came into force in 1958. It created the European Economic Community. The EEC and Euratom were created separately from ECSC, although they shared the same courts and the Common Assembly. The executives of the new communities were called Commissions, as opposed to the "High Authority". The EEC was headed by Walter Hallstein (Hallstein Commission) and Euratom was headed by Louis Armand (Armand Commission) and then Etienne Hirsch. Euratom would integrate sectors in nuclear energy while the EEC would develop a customs union between members.[23][24][25] Throughout the 1960s tensions began to show with France seeking to limit supranational power. However, in 1965 an agreement was reached and hence in 1967 the Merger Treaty was signed in Brussels. It came into force on 1 July 1967 and created a single set of institutions for the three communities, which were collectively referred to as the European Communities (EC), although commonly just as the European Community.[26][27] Jean Rey presided over the first merged Commission (Rey Commission).[28]

The Iron Curtain's fall in 1989 enabled eastward enlargement. (Berlin Wall)

[edit] 19731993
Main article: History of the European Communities (19731993) In 1973 the Communities enlarged to include Denmark (including Greenland, which later left the Community in 1985), Ireland, and the United Kingdom.[29] Norway had negotiated to join at the same time but Norwegian voters rejected membership in a referendum and so Norway remained outside. In 1979, the first direct, democratic elections to the European Parliament were held.[30]

Greece joined in 1981, Portugal and Spain in 1986.[31] In 1985, the Schengen Agreement led the way toward the creation of open borders without passport controls between most member states and some non-member states.[32] In 1986, the European flag began to be used by the Community[33] and the Single European Act was signed. In 1990, after the fall of the Iron Curtain, the former East Germany became part of the Community as part of a newly united Germany.[34] With enlargement towards European formerly communist countries as well as Cyprus (Greek part) and Malta on the agenda, the Copenhagen criteria for candidate members to join the European Union were agreed.

[edit] 1993present
Main articles: History of the European Union (19932004) and History of the European Union (2004 onwards)

The introduction of the euro in 2002 replaced several national currencies. The European Union was formally established when the Maastricht Treaty came into force on 1 November 1993,[8] and in 1995 Austria, Finland and Sweden joined the newly established EU. In 2002, euro notes and coins replaced national currencies in 12 of the member states. Since then, the eurozone has increased to encompass 17 countries. In 2004, the EU saw its biggest enlargement to date when Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the Union.[35] On 1 January 2007, Romania and Bulgaria became the EU's newest members. In the same year Slovenia adopted the euro,[35] followed in 2008 by Cyprus and Malta, by Slovakia in 2009 and by Estonia in 2011. In June 2009, the 2009 Parliament elections were held leading to a renewal of Barroso's Commission Presidency, and in July 2009 Iceland formally applied for EU membership. On 1 December 2009, the Lisbon Treaty entered into force and reformed many aspects of the EU. In particular it changed the legal structure of the European Union, merging the EU three pillars system into a single legal entity provisioned with legal personality, and it created a permanent President of the European
Lagarde, 55

///

Ministerial Conferences
The topmost decision-making body of the WTO is the Ministerial Conference, which usually meets every two years. It brings together all members of the WTO, all of which are countries or customs unions. The Ministerial Conference can take decisions on all matters under any of the multilateral trade agreements.

Introduction back to top Basic information on the Ministerial Conference Links to the Ministerial Conference section of the WTO guide Understanding the WTO.

The mandate back to top The Ministerial Conference is the topmost body of the WTO under the governance structure set up by the Agreement establishing the WTO. > Summary of the Agreement establishing the WTO > Browse or download the text of the Agreement Establishing the WTO from the legal texts gateway

Ministerial Conferences back to top > Geneva, 15-17 December 2011 > Geneva, 30 November - 2 December 2009 > Hong Kong, 13-18 December 2005 > Cancn, 10-14 September 2003 > Doha, 9-13 November 2001 > Seattle, November 30 December 3, 1999 > Geneva, 18-20 May 1998 > Singapore, 9-13 December 1996 The WTO General Council The General Council is the WTOs highest-level decision-making body in Geneva, meeting regularly to carry out the functions of the WTO. It has representatives (usually ambassadors or equivalent) from all member governments and has the authority to act on behalf of the ministerial conference which only meets about every two years. The current chairman is H.E.

Mr. Yonov Frederick AGAH (Nigeria). The General Council also meets, under different rules, as the Dispute Settlement Body and as the Trade Policy Review Body.

See also: News back to top

> Negotiations, implementation and development: the Doha agenda > Ministerial conferences

24 November 2011: Chair reports convergence in Ministerial preparations 26 October 2011: Lamy outlines benefits of changes to Basel framework for trade finance > Report by the Chairman of the Trade Negotiations Committee Audio: Statement by Pascal Lamy > Summary of the General Council meeting > Proposed agenda 21 October 2011: Chair reports on preparations for December Ministerial > News item Chairmans Remarks

Doha Development Round

From Wikipedia, the free encyclopedia

The Doha Development Round started in 2001 and continues today. The Doha Development Round or Doha Development Agenda (DDA) is the current tradenegotiation round of the World Trade Organization (WTO) which commenced in November 2001. Its objective is to lower trade barriers around the world, which will help facilitate the increase of global trade. As of 2008, talks have stalled over a divide on major issues, such as agriculture, industrial tariffs and non-tariff barriers, services, and trade remedies.[1] The most significant differences are between developed nations led by the European Union (EU), the United States (USA), and Japan and the major developing countries led and represented mainly

by Brazil, China, India, South Korea, and South Africa. There is also considerable contention against and between the EU and the USA over their maintenance of agricultural subsidiesseen to operate effectively as trade barriers.[2] The Doha Round began with a ministerial-level meeting in Doha, Qatar in 2001. Subsequent ministerial meetings took place in Cancn, Mexico (2003), and Hong Kong (2005). Related negotiations took place in Geneva, Switzerland (2004, 2006, 2008); Paris, France (2005); and Potsdam, Germany (2007). The most recent round of negotiations, 2329 July 2008, broke down after failing to reach a compromise on agricultural import rules.[3] After the breakdown, major negotiations were not expected to resume until 2009.[4] Nevertheless, intense negotiations, mostly between the USA, China, and India, were held in the end of 2008 in order to agree on negotiation modalities. However, these negotiations did not result in any progress.

Contents
[hide]

1 Negotiations o 1.1 Before Doha o 1.2 Doha, 2001 1.2.1 Importance of US presidential 'fast-track' authority o 1.3 Cancn, 2003 1.3.1 Collapse of negotiations o 1.4 Geneva, 2004 o 1.5 Paris, 2005 o 1.6 Hong Kong, 2005 o 1.7 Geneva, 2006 o 1.8 Potsdam, 2007 o 1.9 Geneva, 2008 1.9.1 Collapse of negotiations 2 Current progress 3 Issues o 3.1 Agriculture o 3.2 Access to patented medicines o 3.3 Special and differential treatment o 3.4 Implementation issues 4 Benefits 5 See also 6 References 7 Further reading 8 External links

[edit] Negotiations
Doha Round talks are overseen by the Trade Negotiations Committee (TNC), whose chair is the WTOs director-general, currently Pascal Lamy. The negotiations are being held in five working groups and in other existing bodies of the WTO. Selected topics under negotiation are discussed below in five groups: market access, development issues, WTO rules, trade facilitation and other issues.[1]

[edit] Before Doha

Before the Doha ministerial, negotiations had already been under way on trade in agriculture and trade in services. These ongoing negotiations had been required under the last round of multilateral trade negotiations (the Uruguay Round, 19861994). However, some countries, including the United States, wanted to expand the agriculture and services talks to allow tradeoffs and thus achieve greater trade liberalization.[1] The first WTO ministerial conference, which was held in Singapore in 1996, established permanent working groups on four issues: transparency in government procurement, trade facilitation (customs issues), trade and investment, and trade and competition. These became known as the Singapore issues. These issues were pushed at successive ministerials by the European Union, Japan and Korea, and opposed by most developing countries.[1] Since no agreement was reached, the developed nations pushed that any new trade negotiations must include these issues.[5] The negotiations were intended to start at the ministerial conference of 1999 in Seattle, USA, and be called the Millennium Round but, due to several different events including protest activity outside the conference (the so-called "Battle of Seattle"), the negotiations were never started.[6] Due to the failure of the Millennium Round, it was decided that negotiations would not start again until the next ministerial conference in 2001 in Doha, Qatar. Just months before the Doha ministerial, the United States had been attacked by terrorists on 11 September 2001. Some government officials called for greater political cohesion and saw the trade negotiations as a means toward that end. Some officials thought that a new round of multilateral trade negotiations could help a world economy weakened by recession and terrorism-related uncertainty. According to the WTO, the year 2001 showed "...the lowest growth in output in more than two decades,"[7] and world trade contracted that year.[1]

[edit] Doha, 2001

Main article: WTO Ministerial Conference of 2001 Began in November 2001, committing all countries to negotiations opening agricultural and manufacturing markets, as well as trade-in-services (GATS) negotiations and expanded intellectual property regulation (TRIPS). The intent of the round, according to its proponents, was to make trade rules fairer for developing countries.[8] However, by 2008, critics were

charging that the round would expand a system of trade rules that were bad for development and interfered excessively with countries' domestic "policy space".[9] [edit] Importance of US presidential 'fast-track' authority The round had been planned for conclusion in December 2005 after two more ministerial conferences had produced a final draft declaration. The WTO pushed back its self-imposed deadline to slightly precede the expiration of the U.S. President's Congressional Fast Track Trade Promotion Authority. Any declaration of the WTO must be ratified by the U.S. Congress to take effect in the United States. Trade Promotion Authority prevents Congress from amending the draft. It expired on 30 June 2007,[10] and congressional leaders decided not to renew this authority for President George W Bush.[11]

[edit] Cancn, 2003

Main article: WTO Ministerial Conference of 2003 The 2003 Cancn talksintended to forge concrete agreement on the Doha round objectives collapsed after four days during which the members could not agree on a framework to continue negotiations. Low key talks continued since the ministerial meeting in Doha but progress was almost non-existent.[12] This meeting was intended to create a framework for further negotiations. [edit] Collapse of negotiations The Cancn ministerial collapsed for several reasons. First, differences over the Singapore issues seemed incapable of resolution. The EU had retreated on some of its demands, but several developing countries refused any consideration of these issues at all. Second, it was questioned whether some countries had come to Cancn with a serious intention to negotiate. In the view of some observers, a few countries showed no flexibility in their positions and only repeated their demands rather than talk about trade-offs. Third, the wide difference between developing and developed countries across virtually all topics was a major obstacle. The U.S.-EU agricultural proposal and that of the G20 developing nations, for example, show strikingly different approaches to special and differential treatment. Fourth, there was some criticism of procedure. Some claimed the agenda was too complicated. Also, Cancn ministerial chairman, Mexicos Foreign Minister Luis Ernesto Derbez, was faulted for ending the meeting when he did, instead of trying to move the talks into areas where some progress could have been made.[1] The collapse seemed like a victory for the developing countries.[13] The failure to advance the round resulted in a serious loss of momentum and brought into question whether the 1 January 2005 deadline would be met.[1] The North-South divide was most prominent on issues of agriculture. Developed countries farm subsidies (both the EUs Common Agricultural Policy and the U.S. government agro-subsidies) became a major sticking point. The developing countries were seen as finally having the confidence to reject a deal that they viewed as unfavorable. This is reflected by the new trade bloc of developing and industrialized nations: the G20. Since its creation, the G20 has had fluctuating membership, but is spearheaded by the G4 (the People's Republic of China, India, Brazil, and South Africa). While the G20 presumes to

negotiate on behalf of all of the developing world, many of the poorest nations continue to have little influence over the emerging WTO proposals.

[edit] Geneva, 2004

The aftermath of Cancn was one of standstill and stocktaking. Negotiations were suspended for the remainder of 2003. Starting in early 2004, U.S. Trade Representative Robert Zoellick pushed for the resumption of negotiations by offering a proposal that would focus on market access, including an elimination of agricultural export subsidies.[1] He also said that the Singapore issues could progress by negotiating on trade facilitation, considering further action on government procurement, and possibly dropping investment and competition.[14] This intervention was credited at the time with reviving interest in the negotiations, and negotiations resumed in March 2004.[1] In the months leading up to the talks in Geneva, the EU accepted the elimination of agricultural export subsidies by date certain. The Singapore issues were moved off the Doha agenda. Compromise was also achieved over the negotiation of the Singapore issues as the EU and others decided. Developing countries too played an active part in negotiations this year, first by India and Brazil negotiating directly with the developed countries (as the so-called non-party of five) on agriculture, and second by working toward acceptance of trade facilitation as a subject for negotiation.[15] With these issues pushed aside, the negotiators in Geneva were able to concentrate on moving forward with the Doha Round. After intense negotiations in late July 2004, WTO members reached what has become known as the Framework Agreement(sometimes called the July Package), which provides broad guidelines for completing the Doha round negotiations. The agreement contains a 4-page declaration, with four annexes (A-D) covering agriculture, nonagricultural market access, services, and trade facilitation, respectively. In addition, the agreement acknowledges the activities of other negotiating groups (such as those on rules, dispute settlement, and intellectual property) and exhorts them to fulfill their Doha round negotiating objectives. The agreement also abandoned the 1 January 2005 deadline for the negotiations and set December 2005 as the date for the 6th ministerial to be held in Hong Kong.[15]

[edit] Paris, 2005

Trade negotiators wanted to make tangible progress before the December 2005 WTO meeting in Hong Kong, and held a session of negotiations in Paris in May 2005.[16] Paris talks were hanging over a few issues: France protested moves to cut subsidies to farmers, while the U.S., Australia, the EU, Brazil and India failed to agree on issues relating to chicken, beef and rice.[16] Most of the sticking points were small technical issues, making trade negotiators fear that agreement on large politically risky issues will be substantially harder.[16]

[edit] Hong Kong, 2005

The Hong Kong Convention Center, which was the site of the Sixth WTO Ministerial Conference Main article: WTO Ministerial Conference of 2005 The Sixth WTO Ministerial Conference took place in Hong Kong, 13 to 18 December 2005. Although a flurry of negotiations took place in the fall of 2005, WTO director-general Pascal Lamy announced in November 2005 that a comprehensive agreement on modalities would not be forthcoming in Hong Kong, and that the talks would take stock of the negotiations and would try to reach agreements in negotiating sectors where convergence was reported.[1] Trade ministers representing most of the world's governments reached a deal that sets a deadline for eliminating subsidies of agricultural exports by 2013. The final declaration from the talks, which resolved several issues that have stood in the way of a global trade agreement, also requires industrialized countries to open their markets to goods from the world's poorest nations, a goal of the United Nations for many years. The declaration gave fresh impetus for negotiators to try to finish a comprehensive set of global free trade rules by the end of 2006. Director-general Pascal Lamy said, "I now believe it is possible, which I did not a month ago."[17] The conference pushed back the expected completion of the round until the end of 2006.[1]

[edit] Geneva, 2006

The July 2006 talks in Geneva failed to reach an agreement about reducing farming subsidies and lowering import taxes, and negotiations took months to resume. A successful outcome of the Doha round became increasingly unlikely, because the broad trade authority granted under the Trade Act of 2002 to U.S. president George W. Bush was due to expire in 2007. Any trade pact would then have to be approved by the U.S. Congress with the possibility of amendments, which would hinder the U.S. negotiators and decrease the willingness of other countries to participate.[2] Hong Kong offered to mediate the collapsed trade liberalisation talks. Director-general of Trade and Industry, Raymond Young, says the territory, which hosted the last round of Doha negotiations, has a "moral high-ground" on free trade that allows it to play the role of "honest broker".[citation needed]

[edit] Potsdam, 2007

In June 2007, negotiations within the Doha round broke down at a conference in Potsdam, as a major impasse occurred between the USA, the EU, India and Brazil. The main disagreement was over opening up agricultural and industrial markets in various countries and how to cut rich nation farm subsidies.[18]

[edit] Geneva, 2008

On 21 July 2008, negotiations started again at the WTO's HQ in Geneva on the Doha round but stalled after nine days of negotiations over the refusal to compromise over the special safeguard mechanism. "Developing country Members receive special and differential treatment with respect to other Members' safeguard measures, in the form of a de minimis import volume exemption. As users of safeguards, developing country Members receive special and differential treatment with respect to applying their own such measures, with regard to permitted duration of extensions, and with respect to re-application of measures. Technical Information on Safeguard Measures WTO official site Negotiations had continued since the last conference in June 2007.[19] Director-general Pascal Lamy said before the start of the conference that the odds of success were over 50%.[20] Around 40 ministers attended the negotiations, which were only expected to last five days but instead lasted nine days. Kamal Nath, India's Commerce Minister, was absent from the first few days of the conference due to a vote of confidence being conducted in India's Parliament.[21] On the second day of the conference, U.S. Trade Representative Susan Schwab announced that the U.S. would cap its farm subsidies at $15 billion a year,[22] from $18.2 billion in 2006.[23] The proposal was on the condition that countries such as Brazil and India drop their objections to various aspects of the round.[22] The U.S. and the EU also offered an increase in the number of temporary work visas for professional workers.[24] After one week of negotiations, many considered agreement to be 'within reach'. However, there were disagreements on issues including special protection for Chinese and Indian farmers and African and Caribbean banana imports to the EU.[25] India and China's hard stance regarding tariffs and subsidies was severely criticized by the United States.[26] In response, India's Commerce Minister said "I'm not risking the livelihood of millions of farmers."[27] [edit] Collapse of negotiations The negotiations collapsed on 29 July over issues of agricultural trade between the United States, India, and China.[28] In particular, there was insoluble disagreement between India and the United States over the special safeguard mechanism (SSM), a measure designed to protect poor farmers by allowing countries to impose a special tariff on certain agricultural goods in the event of an import surge or price fall.[29] Pascal Lamy said, "Members have simply not been able to bridge their differences."[3] He also said that out of a to-do list of 20 topics, 18 had seen positions converge but the gaps could not narrow on the 19th the special safeguard mechanism for developing countries. However, the United States, China and India could not agree on the threshold that would allow the mechanism to be used, with the United States arguing that the threshold had been set too low. The European Union Trade Commissioner Peter Mandelson characterized the collapse as a "collective

failure".[30] On a more optimistic note, India's Commerce Minister, Kamal Nath, said "I would only urge the director-general to treat this [failure of talks] as a pause, not a breakdown, to keep on the table what is there."[29] Several countries blamed each other for the breakdown of the negotiations.[31] The United States and some European Union members blamed India for the failure of the talks.[32] India claimed that its position (i.e. that the U.S. was sacrificing the world's poor for U.S./European commercial interests) was supported by over 100 countries.[33] Brazil, one of the founding members of the G20, broke away from the position held by India.[34] Then-European Commissioner for Trade Peter Mandelson said that India and China should not be blamed for the failure of the Doha round.[35] In his view, the agriculture talks had been harmed by the five-year program of agricultural subsidies recently passed by the U.S. Congress, which he said was "one of the most reactionary farm bills in the history of the U.S.".[28]

[edit] Current progress

Several countries have called for negotiations to start again. Brazil and Pascal Lamy have led this process. Luiz Incio Lula da Silva, former president of Brazil, called several countries leaders to urge them to renew negotiations.[36] Lamy visited India to discuss possible solutions to the impasse.[37] A mini-ministerial meeting held in India on September 3 and 4 pledged to complete the round by the end of 2010.[38] The declaration at the end of the G20 summit of world leaders in London in 2009 included a pledge to complete the Doha round. Although a WTO ministerial conference scheduled in November 2009 would not be a negotiating session,[39] there would be several opportunities over the year 2009 to discuss the progress.[40] The WTO is involved in several events every year that provide opportunities to discuss and advance, at a conceptual level, trade negotiations. In early 2010, Brazil and Lamy have focused on the role of the United States in overcoming the deadlock. Lula has urged Barack Obama to end the trade dispute between Brazil and the US over cotton subsidies following Brazil's increase in tariffs on over 100 US goods.[41] Lamy has highlighted the difficulty of obtaining agreement from the US without the Presidential fast track authority and biennial elections.[42] One of the consequences of the economic crisis of 2008 2009 is the desire of political leaders to shelter their constituents from the increasingly competitive market experienced during market contractions. Lamy hopes that the drop in trade of 12% in 2009, quoted as the largest annual drop since the Second World War, could be countered by successful conclusion of the Doha round.[43] At the 2011 annual conference of the World Economic Forum in Davos British Prime Minister David Cameron called for the Doha talks to conclude by the end of the year, saying that "We've been at this Doha round for far too long. It's frankly ridiculous that it has taken 10 years to do this deal." [44] Similar comments were made by German Chancellor Angela Merkel and former WTO director-general Peter Sutherland.[citation needed]

[edit] Issues

Agriculture has become the lynchpin of the agenda for both developing and developed countries. Three other issues have been important. The first, now resolved, pertained to compulsory licensing of medicines and patent protection. A second deals with a review of provisions giving special and differential treatment to developing countries; a third addresses problems that developing countries are having in implementing current trade obligations.[1]

[edit] Agriculture
Agriculture has become the most important and controversial issue. Agriculture is particularly important for developing countries, because around 75% of the population in developing countries live in rural areas, and the vast majority are dependent on agriculture for their livelihoods.[45] The first proposal in Qatar, in 2001, called for the end agreement to commit to substantial improvements in market access; reductions (and ultimate elimination) of all forms of export subsidies; and substantial reductions in trade-distorting support.[1][46] The United States is being asked by the European Union (EU) and the developing countries, led by Brazil and India, to make a more generous offer for reducing trade-distorting domestic support for agriculture. The United States is insisting that the EU and the developing countries agree to make more substantial reductions in tariffs and to limit the number of import-sensitive and special products that would be exempt from cuts. Import-sensitive products are of most concern to developed countries like the European Union, while developing countries are concerned with special products those exempt from both tariff cuts and subsidy reductions because of development, food security, or livelihood considerations.[47] Brazil has emphasized reductions in trade-distorting domestic subsidies, especially by the United States (some of which it successfully challenged in the WTO U.S.-Brazil cotton dispute), while India has insisted on a large number of special products that would not be exposed to wider market opening.[2]

[edit] Access to patented medicines

A major topic at the Doha ministerial regarded the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The issue involves the balance of interests between the pharmaceutical companies in developed countries that held patents on medicines and the public health needs in developing countries. Before the Doha meeting, the United States claimed that the current language in TRIPS was flexible enough to address health emergencies, but other countries insisted on new language.[1] On 30 August 2003, WTO members reached agreement on the TRIPS and medicines issue. Voting in the General Council, member governments approved a decision that offered an interim waiver under the TRIPS Agreement allowing a member country to export pharmaceutical products made under compulsory licenses to least-developed and certain other members.[1]

[edit] Special and differential treatment

In the Doha Ministerial Declaration, the trade ministers reaffirmed special and differential (S&D) treatment for developing countries and agreed that all S&D treatment provisions ...be

reviewed with a view to strengthening them and making them more precise, effective and operational.[1][46] The negotiations have been split along a developing-country/developed-country divide. Developing countries wanted to negotiate on changes to S&D provisions, keep proposals together in the Committee on Trade and Development, and set shorter deadlines. Developed countries wanted to study S&D provisions, send some proposals to negotiating groups, and leave deadlines open. Developing countries claimed that the developed countries were not negotiating in good faith, while developed countries argued that the developing countries were unreasonable in their proposals. At the December 2005 Hong Kong ministerial, members agreed to five S&D provisions for LDCs, including the duty-free and quota-free access.[1] Research by the ODI sheds light on the priorities of the LDCs during the Doha round. It is argued that subsidies to agriculture, especially to cotton, unite developing countries in opposition more than SDT provisions and therefore have a greater consenus.[48] Duty-free and quota-free access (DFQFA) currently discussed covers 97% of tariff lines and if the USA alone were to implement the initiative, it would potentially increase Least Developed Countries (LDCs) exports by 10% (or $1bn).[49] Many major trading powers already provide preferential access to LDCs through initiatives such as the Everything but Arms (EBA) initiative and the African Growth and Opportunities Act. However, due to LDCs narrow export-base, 100% of tariff lines must be covered for real impact.[49]

[edit] Implementation issues

Developing countries claim that they have had problems with the implementation of the agreements reached in the earlier Uruguay Round because of limited capacity or lack of technical assistance. They also claim that they have not realized certain benefits that they expected from the Round, such as increased access for their textiles and apparel in developed-country markets. They seek a clarification of language relating to their interests in existing agreements.[1] Before the Doha ministerial, WTO Members resolved a small number of these implementation issues. At the Doha meeting, the Ministerial Declaration directed a two-path approach for the large number of remaining issues: (a) where a specific negotiating mandate is provided, the relevant implementation issues will be addressed under that mandate; and (b) the other outstanding implementation issues will be addressed as a matter of priority by the relevant WTO bodies. Outstanding implementation issues are found in the area of market access, investment measures, safeguards, rules of origin, and subsidies and countervailing measures, among others.[1]

[edit] Benefits
All countries participating in the negotiations believe that there is some economic benefit in adopting the agreement; however, there is considerable disagreement of how much benefit the agreement would actually produce. A study by the University of Michigan found that if all trade barriers in agriculture, services, and manufactures were reduced by 33% as a result of the Doha

Development Agenda, there would be an increase in global welfare of $574.0 billion.[50] A 2008 study by World Bank Lead Economist Kym Anderson[51] found that global income could increase by more than $3000 billion per year, $2500 billion of which would go to the developing world.[52] Others had been predicting more modest outcomes, e.g. world net welfare gains ranging from $84 billion to $287 billion by the year 2015.[1][53] Pascal Lamy has conservatively estimated that the deal will bring an increase of $130 billion.[54] Several think tanks and public organizations assess that the conclusion of the trade round will result in a net gain . However, the restructuring and adjustment costs required to prevent the collapse of local industries, particularly in developing countries, is a global concern. For example, a late 2009 study by the Carnegie Endowment for International Peace, the United Nations Economic Commission for Africa (UNECA), the United Nations Development Programme and the Kenyan Institute for Research and Policy Analysis found that Kenya would see gains in its exports of flowers, tea, coffee and oil seeds. It would concurrently lose in the tobacco and grains markets, as well as manufacturing of textiles and footwear, machinery and equipment.[55] The Copenhagen Consensus, which evaluates solutions for global problems regarding the costbenefit ratio, in 2008 ranked the DDA as the second-best investment for global welfare, after the provision of vitamin supplements to the world's 140 million malnourished children.[56][57]

[edit] See also

The 2011 G-20 Cannes Summit is the sixth meeting of the G-20 heads of government in a series of on-going discussions about financial markets and the world economy.[1] The G-20 forum is the avenue for the G20 economies to discuss, plan and monitor international economic cooperation.[2] The summit resulted in little progress on the issues under discussion.[3]

Contents
[hide]

1 Agenda 2 Attendance 3 Protests 4 See also 5 References 6 External links

[edit] Agenda

Nicolas Sarkozy welcomes Barack Obama to the G20 meeting in Cannes, France, on 3 November. Host Nicolas Sarkozy considers his plans and expectations for the upcoming summit to be ambitious, but realistic. He expects that international monetary system reform will involve working closely with the IMF Managing Director.[4] The summit leaders are expected to tackle several mid- and long-term policy issues, many of which remained unresolved at the end of the previous summits in Toronto and Seoul. The agenda has evolved over time:

2010 Projected summit goals:[5] Ensuring global economic recovery Framework for strong, sustainable, and balanced global growth Strengthening the international financial regulatory system Modernising the international financial institutions Global financial safety nets Development issues

2011: Priorities of the French presidency:[6] Coordinating economic policies and reducing global macroeconomic imbalances Strengthening financial regulation Reforming the International Monetary System Combating commodity price volatility Improving global governance Working on behalf of development

Though the summit has intended to discuss reforms to the global monetary system and to rein in financial speculation and capital flows, a surprising decision by Greece to hold a referendum caused a new change to the discussions[7][8] as the Eurozone Financial Stability Facility took precedence over other issues.[9] The final agenda for the summit has not been determined, but each leader of the G-20 could bring his or her own agenda to the summit.[10] Brazil, led by President Dilma Rousseff and Finance Minister Guido Mantega, was expected to call on the eurozone countries to stop ditherting amid concerns of a global economic slowdown that would hurt emerging economies. Mantega said that: "The Europeans always take too long to find solutions. And when they come they come late."[11] British Prime Minister David Cameron was expected to urge a stronger outline for the bailout package that led to the Greek referendum, but also refused to offer more

direct funds for the Greek bailout. His comments were somewhat controverisal as the U.K. is not a part of the eurozone.[12]

Purchasing power parity

From Wikipedia, the free encyclopedia

GDP per capita adjusted for Purchasing Power Parity (PPP) in the world, 2009

Purchasing Power Parity adjustment for the world (2003). The economy of the United States is used as a reference, and is set at 100. Bermuda has the highest index value at 154; this means that goods sold there are more expensive than in the US. In economics, purchasing power parity (PPP) is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of the goods between the countries would only reflect the exchange rates. The idea originated with the School of Salamanca in the 16th century and was developed in its modern form by Gustav Cassel in 1918.[1][2] The concept is based on the law of one price, where in the absence of transaction costs and official trade barriers, identical goods will have the same price in different markets when the prices are expressed in the same currency.[3] Another interpretation is that the difference in the rate of change in prices at home and abroad the difference in the inflation ratesis equal to the percentage depreciation or appreciation of the exchange rate. Deviations from parity imply differences in purchasing power of a "basket of goods" across countries, which means that for the purposes of many international comparisons, countries'

GDPs or other national income statistics need to be "PPP adjusted" and converted into common units. The best-known purchasing power adjustment is the GearyKhamis dollar (the "international dollar"). The real exchange rate is then equal to the nominal exchange rate, adjusted for differences in price levels. If purchasing power parity held exactly, then the real exchange rate would always equal one. However, in practice the real exchange rates exhibit both short run and long run deviations from this value, for example due to reasons illuminated in the BalassaSamuelson theorem. There can be marked differences between purchasing power adjusted incomes and those converted via market exchange rates.[4] For example, the World Bank's World Development Indicators 2005 estimated that in 2003, one Geary-Khamis dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity[5]considerably different from the nominal exchange rate. This discrepancy has large implications; for instance, when converted via the nominal exchange rates GDP per capita in India is about US$1,704.063[6] while on a PPP basis it is about US$3,608.196.[7] This means that if calculated at nominal exchange rates, India has the tenth largest economy, while at PPP-adjusted rates, it has the fourth largest economy in the world. At the other extreme, Denmark's nominal GDP per capita is around US$62,100, but its PPP figure is only US$37,304.

Contents
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1 PPP measurement o 1.1 The Relationship Between PPP and the Law of One Price o 1.2 Big Mac Index o 1.3 Starbucks tall latte index o 1.4 OECD Comparative Price Levels o 1.5 Measurement Issues o 1.6 2005 ICP 2 Need for PPP adjustments to GDP 3 Difficulties o 3.1 Range and quality of goods o 3.2 Trade Barriers and Nontradables o 3.3 Departures from Free Competition o 3.4 Differences in Consumption Patterns and Price Level Measurement 4 PPP and Global Poverty Lines 5 See also 6 Notes 7 External links

[edit] PPP measurement

The PPP exchange-rate calculation is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries. Estimation of purchasing power parity is complicated by the fact that countries do not simply differ in a uniform price level; rather, the difference in food prices may be greater than the difference in housing prices, while also less than the difference in entertainment prices. People in different countries typically consume different baskets of goods. It is necessary to compare the cost of baskets of goods and services using a price index. This is a difficult task because purchasing patterns and even the goods available to purchase differ across countries. Thus, it is necessary to make adjustments for differences in the quality of goods and services. Additional statistical difficulties arise with multilateral comparisons when (as is usually the case) more than two countries are to be compared. For example, in 2005 the price of a gallon of gasoline in Saudi Arabia was $0.91 USD, and in Norway the price was $6.27 USD.[8] The significant differences in price wouldn't contribute to accuracy in a PPP analysis, despite all of the variables that contribute to the significant differences in price. Further comparisons have to be made and utilized as variables in the overall formulation of the PPP. When PPP comparisons are to be made over some interval of time, proper account needs to be made of inflationary effects.

[edit] The Relationship Between PPP and the Law of One Price
Although it may seem as if PPP and the law of one price are the same, there is in fact a difference: the law of one price applies to individual commodities whereas PPP applies to the general price level. If the law of one price is true for all commodities then PPP is also therefore true; however, when discussing the validity of PPP, some argue that the law of one price does not need to be true exactly for PPP to be valid. If the law of one price is not true for a certain commodity, the price levels will not differ enough from the level predicted by PPP.[3] The purchasing power parity theory states that the exchange rate between one currency and another currency is in equlibirium when their domestic purchasing powers at that rate of exchange are equivalent.
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A STRATEGY FOR ATTRACTING FOREIGN DIRECT INVESTMENT

PENELOPE HAWKINS AND KEITH LOCKWOOD PRESENTED TO THE ECONOMIC SOCIETY OF SOUTH AFRICAS BIENNAL CONFERENCE, GLENBURN LODGE 13 SEPTEMBER 2001

1. INTRODUCTION Foreign Direct Investment [FDI] comprises one, often small, element of Gross Capital Formation of a country. This begs the question why FDI remains a preoccupation of

researchers and investment agencies. As will be seen below, we argue that the importance of FDI to South Africa extends beyond the quantum of capital flows to other qualitative factors that may enhance development. In addition, the prerequisites of foreign investors put those factors that inhibit investment into relief against those that facilitate it. To the extent that the negative factors are addressed, domestic investment will also be encouraged. The point of entry of the paper is the decision-making process of investors, based on the results of the National Enterprise Survey of South Africa and interviews conducted with existing and prospective investors. The paper examines the motivation to invest and some of the primary inhibitors to the process of investment. A strategy to attracting investment is developed based on different levels of investor prerequisites within the Southern African context, with the aim of moving beyond ignorance and expressions of interest to committed investment decisions. Section two sets the scene for the rest of the paper, providing a description of the benefits of FDI and an examination of comparative inflows of FDI into a number of emerging markets. The section concludes with an overview of the South African Financial Account on the Balance of Payments over recent years. The third section briefly introduces the National Enterprise Survey and examines the results of the survey, as it presents a profile of foreign investors. Section four provides a classification of motivations for foreign investment and examines the South African experience in this regard. Section five examines the obstacles to entry, as highlighted by new foreign-owned firms, and to ongoing investment, as highlighted by existing foreign-owned firms. Based on the previous sections, Section six presents a scheme of the prerequisites of foreign investors and explains the suggested strategy to attracting FDI. Section seven concludes. 2. FOREIGN DIRECT INVESTMENT IN THE SA CONTEXT FDI is but one element of foreign capital flows. Foreign private capital flows also encompass foreign portfolio investment, foreign purchases of domestic bonds, and bank lending. Private flows may be supplemented by official flows which include sovereign grants, aid, and financial assistance from multilateral agencies such as the World Bank and the International Monetary Fund. While the focus of this study is on foreign direct investment, it is important to note that although the various elements of capital - or net resource - flows are qualitatively different,
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they are substitutable. Some countries such as South Africa may attract relatively small proportions of international FDI and official flows, but more significant shares of foreign portfolio investment. In many other African countries, FDI and portfolio investment may be negligible, but official flows are relatively high. Foreign direct investment refers to net inflows of investment to acquire a lasting management interest (10 per cent or more of voting stock) in an enterprise operating in an economy other than that of the investor. FDI has three components: equity investment, reinvested earnings and short and long term inter-company loans between parents and foreign affiliates. However, unless there is an explicit transaction related to the reinvestment of earnings, official data relating to FDI flows tends to ignore this component. Figure 1 shows South Africas performance in terms of attracting foreign direct investment relative to other emerging economies both prior to, and after the Asian Crisis. The country fares relatively poorly in terms of the average contribution of net foreign direct investment to gross capital formation. If South Africa had achieved a similar ratio of FDI to gross capital formation to that of Chile in the post-Asian crisis period, then the country would have enjoyed average net inflows in the 1998-99 period of R36 856 million [US$6.3 billion] compared with actual net inflows [according to World Bank figures] of only US$168 million. While explanations for a countrys success in attracting high levels of FDI involve the particular characteristics and location of the country concerned, there are also regional aspects

that contribute to its attractiveness as an investment destination. Between 1980 and 1989, worldwide growth in foreign direct investment amounted to 30 per cent. Eighty per cent of these direct investment flows took place within the regional blocks of North America, Europe and Asia. It seems that investors within a region may be the principal source of FDI for that region. This may, in part, account for the strong performance of FDI in East Asia and Latin America, relative to Africa. Crucially, FDI supplements domestic investment, and so facilitates higher domestic growth while accommodating increased imports. Currently, FDI flows make up some 10 per cent of gross fixed capital formation in developing countries world-wide (UNCTAD, 1999). For South Africa, the ratio of net FDI flows to gross capital formation reached a peak of 6,2% in 1997 (SARB, 2001). However, the importance of FDI to developing countries, including South Africa, extends beyond the quantum of capital flows to other qualitative factors that may enhance development. These include: The transfer of technology which may enhance domestic innovation; The transfer of management know-how and skills leading to the development of human capital; Access to markets otherwise denied the country; The stimulation of competition in the domestic economy, thereby enhancing productivity and reducing inflationary pressures; The integration of the domestic economy with international supply chains thereby offering benefits of reduced costs of both wage and non-wage goods, improved economies of scale, and increased exports; and Opportunity to take advantage of complementarities between profitable FDI and domestic investment. From this perspective, multinational corporations (MNCs) can be important agents in building and shifting a countrys comparative advantages and should be considered part of the solution
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to development, rather than the problem. Indeed, governments have generally changed their hostile attitude of twenty years ago towards MNCs to one of actively wooing MNC participation (UNCTC, 1992). The balance of payments data for South Africa in Table 1 shows that since 1994, there have in the aggregate - been positive net inflows of both direct and portfolio investment. A substantial part of the direct investment flows into South Africa during the 1990s that were not linked to privatization initiatives may have been re-investments arising from the re-entry of multinationals that had disinvested during the sanctions era. Some outward investment by South African-owned firms during the period may also have been based on re-investments into operations from which they had been displaced by sanctions. Figure 2 reveals a fair amount of volatility from year to year. For example, net FDI inflows amounted to 6 per cent of gross capital formation in South Africa in 1997, and 5.3 per cent of GCF in 1998, recovering to 1.6 per cent of GCF in 2000. The high levels of FDI in 1997 were achieved with the partial privatisation of state assets: Telkom and the Airports Company among them. One of the problems associated with the data on the financial account of the balance of payments is that the labels can be misleading. For example, FDI is associated with relatively longer term, committed capital, and with patient investors (Maxfield, 1998). However, the IMF definition of FDI as the acquisition of ten percent or more of the shares or voting rights of the company, does not provide information regarding the long-term intention of investors. It has been suggested that the degree of persistence attributed to the FDI flows has been exaggerated, and that capital flows are fungible and highly substitutable. This is something

repeatedly encountered in the literature with MNCs generally being seen as footloose(Kozul-Wright and Rowthorn, 1998). Hence an investor buying more than ten per cent of the equity of a company may hedge his/her longer-term risk exposure through some compensating financial transaction (Maxfield, 1998). When viewing the balance of payments data it is worth bearing in mind that a range of motives may have stimulated the investment, hence simple assumptions about the longevity of capital flows based on balance of payments classifications should be avoided. Portfolio flows, for example, are not necessarily hot, and they may contribute to the expansion of investor horizons (Claasens, Dooley and Warner, 1995). Indeed, interviews with fund managers in London suggested that institutional investors generally take a long view with regards a particular country, and in the case of the recent turbulence in the markets, used the opportunity to increase their purchases of South African equities and bonds. The equity flows into South Africa in 1997 represented close to 5 per cent of all equity flows into low and middle-income countries in that year. In 1999 South Africas share was in excess of 11 per cent. This suggests that the return to shares on the JSE in recent years were considered competitive and that the country was seen to provide an opportunity for risk diversification by institutional investors. However, the increase in portfolio investment also reflects the global trend towards private capital flows becoming increasingly dominated by portfolio flows (World Bank 1997). Prior to the current global economic slowdown, international organisations such as the World Bank expected a continuing increase in global portfolio flows into equities (World Bank, 1997:22). In early 2000, some market analysts contended that the neutral weighting of South African equities in most emerging market funds was around 8 per cent, and that most funds were invested to these levels. However, these weights of the emerging market funds provide a
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broad indication of intent, at best, rather than an actual share of global portfolio funds. Global market conditions may lead to funds being under-weight in the shares of a particular country. For example, although the neutral weight of South African shares may be 8 per cent, this could fall by a significant proportion depending of market perceptions of the country (SG Cowen, 2000:2). It is also worth drawing attention to the fact that international investors tend to place great importance on liquidity, focusing principally on shares with a large market capitalization and high turnover. As a result, trading tends to be limited almost exclusively to the top forty and more often the top 5 to 10 - South African shares in terms of market capitalization. The anticipated growth of portfolio investment, and the potential negative consequences of portfolio flow reversal for the exchange rate and the economy, suggests that the strategic approach to foreign direct investment needs to be cognizant of the impact of portfolio flows. This will also have to take account of the possible impact on portfolio inflows into South Africa after the liberalisation of Chinas stock markets. 3. A PROFILE OF FOREIGN INVESTMENT IN SOUTH AFRICA Based on the results of the National Enterprise Survey1 the typical foreign investor is profiled. Because of the radically different environments that may have existed at the time of the original investment, a distinction has been drawn between the results of those firms that invested prior to 1990, and those foreign firms that invested during the past decade. A distinction has also been drawn between investors in the manufacturing sector and those in the services sector. These profiles are shown in Tables 3 and 4. While a number of private consultancies and public agencies are actively trying to identify and nurture partnerships between South African and foreign firms, of the 54 foreign-owned operations surveyed which were established in South Africa over the past decade, 33 are 100 per cent foreign-owned. Amongst those firms with more than 10 per cent foreign ownership, the degree of foreign ownership is also above 75 per cent in most sectors surveyed. This

suggests that a high proportion of foreign investments in South Africa have taken the form of acquisitions, rather than mergers or other partnership arrangements. More recent investments in both the manufacturing and services sectors tend to be much smaller in scale in terms of sales, employment and the fixed asset base. On the basis of the limited sample, it would appear that recent investors in the services sector are more likely to be invested in producer services than their more established counterparts. Recent investors in manufacturing appear to export a significantly greater proportion of their production than those firms that invested prior to 1990. By contrast, recent foreign investors in the services sectors while quick to begin exporting earn relatively less of their revenues from exports, although this may be a function of their limited period of operation in the country. More recent investors were, on average, significantly quicker to commence
1 The

National Enterprise Survey was conducted throughout South Africa by the Investment Study Team brought together by the Policy Co-ordination and Advisory Service Unit of the Office of the President. This was done on behalf of the Cabinets Investment and Employment Cluster at the beginning of 2000. The survey focused on the determinants of investment into plant and equipment but also questioned firms on business activity and outlook, financing investment, and broader socio-political issues. The survey captured the responses of some 1439 firms in South Africa of which 165 could be classified as totally or partially foreign-owned by virtue of the IMF definition (foreign interest in the company must be equal to or exceed 10 per cent of shares). The results of these firms provide the source of information for existing foreign investors. Permission from the Investment Study Teams co-ordinator, Dr. Stephen Gelb, to use this data is gratefully acknowledged.

exporting than the foreign-owned firms that invested during the era of import-replacement. Exports per employee for foreign-owned manufacturing firms that were established during the past decade are more than double those of earlier investors. Africa is the most important export destination for firms investing over the past decade, whereas exports to industrialized economies are higher in the case of older firms. Capital expenditure figures for the past two years also suggest that recent investors are more inclined to maintain and increase their fixed capital stock than their more-established counterparts. The scale of operations amongst manufacturers that commenced operations before 1990 varies greatly with significant differences between the mean and median value of fixed assets. More-recent investors in both the manufacturing and services sectors have fewer plants or service outlets than their longer-established counterparts, with the former tending to be single plant or outlet operations. This may simply be a function of the period that firms have been operating, but it could also provide some indication of the impact of new technologies on firm structure. While the mean capital cost per employee [a rough measure of the investment required to create a job] is higher for more recent investors, the fact that the corresponding median capital costs per employee are less than for operations established before 1990 suggests a high degree of variability in this measure. For most recent foreign investors, the capital cost per job created has been lower than for pre-1990 investors. While longer-established foreign manufacturers have, on average, invested significantly more than later investors, their ratio of total capital expenditure to fixed assets is less. Whereas longer-established manufacturers spent 28 per cent of their total investment on vehicles, recent investors only spent one tenth of that proportion focusing instead on investments in other machinery and equipment, and the purchase of land, buildings and physical facilities, where average investments were higher. Recent manufacturing investors spent comparatively less on computers and software, and on other investments. In general terms, however, total investment spending was low with median capital expenditure for foreign-owned manufacturing operations that commenced operations before 1990 less than R1 million per annum and after 1990 around R60 000 per annum. Amongst foreign investors in the services sectors, median annual capital expenditure was around R860 000 for pre-1990 investors and about R165 000 for service firms that

commenced operations in the past decade. Average investment spending by more established service firms was focused to a greater extent on purchases of computers and vehicles than those service operations that were established in the past decade. By contrast, recent investors spent a higher proportion of their capital expenditure on land and buildings, and other machinery and equipment. Table 5 indicates the source of finance for investment. The survey reveals that all firms tend to rely on retained earnings or internal funds for investment expenditures, with foreigners more reliant on internal funds. In both foreign and locally owned firms, loans from South African banks were rated as the second most important source for finance for capital expenditure, after retained earnings. 4. THE MOTIVATION TO INVEST Any attempt to design policy prescriptions that result in an increase in foreign direct investment into South Africa needs to be based on an understanding of what motivates
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investors to make investments in foreign countries. Rational investors are likely to base decisions on where to invest on the quality of the investment opportunity, the anticipated returns and the ease with which the investment can take place, adjusted for the foreseeable and unforeseeable risks that will prevent such returns from being realized. Policies aimed at increasing the level of foreign direct investment need to attempt to market opportunities and raise the potential returns, while reducing obstacles and risks associated with such investments. The assessment of the potential returns to the investment opportunity is likely to take into account a range of factors, including the size of the market; expectations of growth in aggregate demand; strategic gains in market share (on a national/regional basis); expected changes/ volatility in interest rates and exchange rates; which may affect financial costs and export earning; the cost and availability of inputs; and the level of protection from foreign competition. It is generally accepted that analysis of FDI should begin with the theory of industrial organisation. Firms begin by serving a local market, and export to other regions and countries from their local base. Firm size and market penetration appears to be important for expansion of production facilities in new areas. It appears that generally, when sufficient sales have been achieved in the new market, it becomes feasible to set up production facilities large enough to exploit economies of scale. While this description is of an ideal type it does underscore the importance of growth and size of market in contributing to the motivation for direct investment. Indeed, this motivation alone in many cases proved to be decisive in leading to wide-scale investment in China, even where other market research was inadequate (Economist, 1999). The FDI decision is undertaken to generate profit by creating or defending a market or gaining control of inputs (Kenworthy, 1997). One possible classification scheme of such motives is that of Dunning (1997) who classifies motives for direct investment as primarily resource-seeking; market-seeking; efficiency-seeking; or strategic-asset-seeking. These motives are further outlined below: Resource-seeking investment is usually directly tied to the presence of natural resources or their processing. This is generally seen as locationally-fixed investment, although processing activities may be more mobile than extraction activities. Governments are generally seen to have significant bargaining power over MNCs where this type of investment applies. Policy approaches to mineral rights and licenses are likely to be significant issues in this kind of investment. The investment by the Canadian firm Placer Dome in South Africas mining sector may be seen as falling under this motive. Market-seeking investment seeks to access individual or regional markets. South Africas manufacturing base is widely diversified which suggests that there may be more limited

opportunities for market capture. The disparities in income between the SADC countries may also work against the regional market motive. Historically low growth, off a low base, in SADC countries, may also militate against the significance of this factor, unless higher growth levels can be achieved and sustained. Interviews conducted in London revealed the perception that while association with regions such as the European Union enhanced other emerging markets prospects, South Africa did not necessarily benefit from its association with SADC. The FDI Confidence Audit conducted early in 2000 by management consulting firm A.T. Kearney reinforced this perception. It concluded South Africas first challenge is to define its identity as an investment destination distinct from the rest of Africa (A.T. Kearney, 2000). This suggests an important potential role for South Africa, both in terms of its leadership role in SADC and in the marketing of the region.
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Efficiency-seeking or cost-reducing investment is undertaken by MNCs to provide more favourable cost bases for their operations. For example, source factories may provide specific components in globally rationalised plants. Efficiency-seeking FDI tends to be located in countries with skilled, disciplined workforces and good technological and physical infrastructure. The recent expansion of the Mercedes Benz plant in Port Elizabeth by the foreign parent Daimler Chrysler appears to fall into this latter category. Incentives can make the difference at the margin between otherwise similar locations for this kind of investment. Countries attempting to outbid other competitors in this way may find themselves subject to incentive inflation. Strategic-asset and capability-seeking investment aims at protecting or advancing the global competitive advantages of the MNC. These kinds of investments tend to be locationally specific. For example, the recent acquisition of Safmarine by the Danish company, A P Moller, can be seen as falling into this category, earning them access to a Southern shipping line. This category of investment also suggests the need to expand investor horizons to the African continent, by providing reliable information. While this scheme may provide a useful means of catgorising investment, knowledge of the country appears to be crucial to the location decision made by MNCs. For this reason, MNCs often appear to expand first to neighbouring countries (Kozul-Wright and Rowthorn, 1998). Countries about which there is little first-hand knowledge remain at the periphery of the evaluation of location decisions and peripheral regions are subject to the ignorance and prejudice (Morgan, 1973: 21) that accompanies remoteness. Investors are likely to overestimate risks or underestimate opportunities in the periphery; which may contribute to the volatility of income in the periphery, as well as the larger amplitude of the business cycle associated with it. Various interviews with foreign investors suggest that a favourable disposition of the decision-makers toward South Africa, and some (limited) first-hand knowledge of the market, were crucial to locating the investment in South Africa. A subjective preference for the country was necessary to ensure willingness and desire to identify business opportunities in the country, and to persist with the search process. However, this did not obviate the need to deliver shareholders an acceptable return on their investment which from interviews appears to fall within the range of a 16 to 20 per cent return on capital employed. It is worth noting that while these hurdle rate returns are lower than that applied by many local firms in their investment decisions over the past decade (often around 30 per cent), the percentage returns required would have to be significantly higher in local currency terms in periods of Randweakness. The necessity of a subjective preference for South Africa suggests that an important element of any investment promotion effort should be the exposure of decision-makers to South Africa through holiday and business tourism, and highlights the importance of such efforts as the 2006 Soccer World Cup-bid. The broadcast effects associated with investments by

large, recognized multinational corporations should also not be ignored. In this regard, the appointments to the International Investment Council are a positive development, and could go some way towards reassuring smaller foreign investors, provided that the personalities involved, and the corporations that they represent, are seen to be actively investing in South Africa themselves. Given the consolidation happening in the global economy at this time, the short-term outlook for significant, non-privatisation foreign investment inflows is not necessarily encouraging. This links to the issue of investor perceptions of South Africa. Even if investor perceptions are not accurate, they drive or inhibit the decision to invest (Fine, 1996). Hence ways in
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which inaccurate or incomplete perceptions may be addressed or supplemented by more accurate information need to be considered. Foreign observers repeatedly raised the issue of South Africas bad press, suggesting the need for better management of information to important players in the media. Kindleberger (1987) suggests that the information horizons of investors expand and contract in response to world events. Accessible information regarding the country and its opportunities may be a way of expanding investor horizons to include South Africa. Analysis of the National Enterprise Survey provides some broad indication of the primary motivation of foreign investors for investing in South Africa. This is shown in Table 6. Firms whose regional turnover [domestic sales and exports to Africa] accounts for 90% or more of their total turnover are assumed to have been motivated to invest by market-seeking considerations. Firms that either export 70% or more of their turnover to non-African destinations, or whose annual turnover is more than R1000 million are assumed to have been motivated primarily by considerations of efficiency or cost reduction. The firms that are clearly motivated primarily by a desire to access the local and regional market account for 67 of the 165 firms surveyed, while those that are probably motivated by efficiency or cost-reduction objectives make up 12 firms. Remaining foreign-owned firms are likely to be motivated by a combination of factors. The market-seeking motive could be ascribed to about 58% of firms interviewed separately from the survey process, with efficiency or cost reduction motives accounting for around 24% of firms, and resourceseeking and strategic asset-seeking motives each accounting for about 9% of firms interviewed. It is clear from Table 6 that there are significant differences in the scale of the operations, and level of investment of firms depending on their primary motivation for establishing operations in South Africa. The investment behaviour of market-seeking firms is likely to be dependent on growth in the regional economy to a greater extent than firms that are established primarily to supply the world market. Given the predominance of market-seeking firms, policies that give rise to more rapid economic growth within the regional market could prove to be more effective in increasing aggregate fixed capital formation than other initiatives. Conversely, this points to the negative effect of developments in Zimbabwe on direct investment flows to South Africa. To the extent that market seeking continues to be the primary motivation for the entry of new foreign-owned firms, this also has implications for investment incentives. Incentives granted to firms motivated by considerations of market access are likely to be wasted, because they will not be a significant factor in the investment decision. The further lowering of average tariff levels is also likely to impact on the scale of this type of investment in the future, as there may be a greater incentive for multinational corporations to invest in distribution operations rather than production facilities. Attempts to shift the balance of new FDI away from projects motivated primarily by market seeking towards ones that have efficiency or cost-reducing objectives will need to incorporate measures that reduce production and/or distribution costs to levels that are competitive

internationally. This approach may have to rely on incentives that effectively reduce costs and/or raise returns. Although there was relatively greater awareness and use by foreign investors of the Tax Holiday Scheme that was in place until September 1999, discussions with investors suggest that a more extensive package of incentives such as the Motor Industry Development Programme - will be required to attract more foreign investments that are motivated by efficiency-seeking objectives.
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Where FDI decisions are motivated by considerations of market access rather than efficiency or cost reduction, South Africas comparatively diversified industrial base and the relatively small national and regional market size places certain constraints on the entry of foreign firms. As a result, risk-averse foreigners with limited knowledge of local market conditions tend to favour partnership arrangements with established local firms, and to undertake fairly limited initial investments in order to establish a market presence. A significant proportion of the recent FDI inflows have involved the acquisition of equity stakes in privatized parastatals. From a qualitative point of view, the direct economic impact of such flows on aspects such as employment creation is likely to be different to other investments in greenfield operations. To the extent that the sale of state assets is expected to accelerate in coming years, the impact of associated direct investment flows on employment creation and foreign exchange earnings will be muted. Much will therefore depend on how the earnings from the sale or partial sale are used, and over the longer term, what efficiency gains are made by the privatized parastatal as a result of the investment by the foreign corporation. The most important reason cited by foreign-owned firms for the increase in capital expenditure over the two years prior to the survey was to raise efficiency. An improvement in efficiency may lead to strategic gains in market share, which is supported by the second most important reason, to improve product quality. Local firms seem primarily motivated by expected sales growth and product improvement to increase their capital expenditure. It has been suggested that the expansion of the operations of foreign firms in the country is important for the manifestation of the benefits of direct investment. While foreign firms may not continually supplement their initial investments with additional capital inflows, the extent of their direct investments may increase substantially as a result of retained earnings, local borrowings, or the sale of equity. 5. OBSTACLES TO FOREIGN DIRECT INVESTMENT IN SOUTH AFRICA The focus of the National Enterprise Survey is on the investment behaviour of firms that are already established in South Africa, rather than on new entrants. As such it identifies obstacles to the expansion of existing investments, but does not provide much insight into the difficulties encountered by foreign investors making direct investments in South Africa for the first time. For this reason, the Survey was supplemented by a series of interviews with investors that have either made initial investments recently, or who are in the process of considering investing in this country for the first time. We review these responses and those of the firms surveyed by the NES below. 5.1 Obstacles to the entry of new foreign-owned firms Generally, all of the companies interviewed had already been exposed to South Africa as an investment possibility, and had identified some investment opportunity here. The obstacles discussed in this section were therefore encountered in the process of making the investment, and were usually less of a constraint in cases where the company either had an experienced private consultancy, or one of the provincial investment promotion agencies to assist it. Interestingly, outside of investments into the motor industry, where the Motor Industry Development Programme was viewed as a crucial factor in the investment decision, few of
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the investments were motivated by the incentives available at the time. While a number of

recent investors did make partial use of the Tax Holiday Scheme, none of them qualified for the labour component, and few of them believed that the benefits derived were significant. For the most part, the difficulties encountered by new entrants stem from a lack of knowledge and understanding of the prevailing regulatory, administrative and business culture, and a feeling of being unwelcome outsiders. This is one of the reasons why mergers and acquisitions are the favoured method of entry. While larger MNCs usually have extensive experience of establishing new operations in other countries, and are prepared to contract consulting firms to assist them, smaller investors are often unwilling to pay the high costs that may be associated with such assistance. Some form of subsidized hand-holding may be appropriate in these circumstances. The largest category of obstacles relates to navigation through the array of regulatory and administrative requirements - from company registration, to the development of Workplace Equity plans, to the identification of appropriate premises. Because recruitment of appropriately-skilled and qualified local personnel emerges as a significant obstacle to getting projects up and running, the difficulties in obtaining work permits for expatriate employees from the Department of Home Affairs was viewed with frustration by most investors interviewed, and some of the firms interviewed stated that problems had almost led to their withdrawal. Since new foreign entrants invariably feel less secure than their local counterparts, uncertainty arising from different interpretations of the provisions of new legislation acts as a greater disincentive to investment. Fears that the newly established firm would fall foul of the Competition Act, and delays in getting Competition Board approval, were identified by a number of investors. Similarly, while there was little opposition to the concept of economic empowerment of previously disadvantaged segments of the population, uncertainty over what constitutes empowerment was identified as an area of concern. There is a perception that different interpretations of empowerment are used in a subjective manner to exclude certain foreign firms and consortia from state and provincial government, and parastatal, tenders. 5.2 Obstacles to ongoing investment by foreign-owned firms The NES surveyed firms on a wide range of possible obstacles to investment, including crime, labour relations, interest rates, tax rates and uncertainty. Although there is some variation, the survey results reveal largely similar concerns by locally and foreign owned firms alike. Table 7 summarises the results, indicating the level of response for the most important factors (the percentage refers to those respondents rating the factor as an insurmountable or severe obstacle). The data seem to suggest that local firms rate more obstacles as insurmountable than foreign firms. While it is difficult to establish the reasons, two possibilities are that foreigners have a comparative basis against which to rate these obstacles. In addition, it may be that they are pleasantly surprised with the reality here, given the bad press coverage of the country. Crime and related social problems are identified as the most important obstacle to capital expenditure. While political instability may be a concern for foreigners outside the country, crime is the most pressing concern for investors within the country. Generally smaller firms, irrespective of ownership, registered greater concern regarding crime.
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High and fluctuating interest rates are rated the second and fourth most important problems by locally owned firms. Fluctuating interest rates appear to be less important to foreignowned firms than the level and the variability of the exchange rate. The significance of the exchange rate could be due to the imported inputs required by foreign owned firms and may also reflect the currency effect on repatriated profits. Repatriated profits tend to be undermined by declining Rand-values. Labour regulations particularly as they relate to the implementation of new labour laws seem to be of equivalent universal concern to all the respondents. This is one of the areas

where clearer information would be useful. Foreign investors indicated a high degree of uncertainty regarding the extent to which they might be affected by the labour equity legislation, for example. The lack of clarity regarding the implementation of such legislation is of concern, as is the uncertainty associated with such legislation. See Table 8. While the new labour regulations did not appear to be a primary reason for reduction in existing employment levels, the effect of the labour regulations can be seen in their impact on the hiring decisions of firms. The labour regulations appertaining to firing or dismissal procedures are rated as a significant inhibitor of hiring new employees by all firms. Foreign firms rate inadequate tax incentives above the company tax rate as an obstacle to investment. By contrast local firms indicated that a lower company tax rate would be the most encouraging tax change for increased investment. Foreign firms rated a tax exemption on profits based on capital expenditure and higher depreciation allowances on machinery and equipment as more encouraging for capital expenditure than a lower company tax rate. Foreign firms seemed to have better knowledge of the DTI Tax Holiday Scheme, with just over 50 per cent of them indicating they were aware of the incentives, compared to 23 per cent of local firms. However, only a quarter of the foreign firms who knew of the incentives made use of them. Part of the attitude of firms towards regulation involves their perceptions of government and their understanding of business problems. In the survey a range of questions regarding the firms perceptions of government, in terms of understanding the problems of business and policy consistency were asked. The responses of foreign and domestic firms are captured in Table 9. The generally negative perceptions that firms have of government suggest that there is room for better communication between the government and the business sector. In particular, striving for greater transparency and ensuring that there is clear, unambiguous information available can address the perception that there is a lack of predictability of policy. Another area where institutional practices and regulation may inhibit business activities, and in the long term - affect decisions regarding investment, is in the area of trade laws and regulations, and customs practices. These are shown in Table 10. Delays of clearing imports through customs appears to be a concern of some of the foreign firms, as is the improper application of tariff and custom rules by South African officials. Where goods are misallocated in terms of tariff classifications, this can imply additional costs to the firm. Imposition of tariffs by other countries is also rated as a concern of some foreign firms. On the other hand, SA antidumping action to stop sale of foreign goods below cost price is seen as a major benefit by some foreign owned firms
12

Sound and reliable infrastructure is often mentioned as an attraction of the South African economy. The survey asked firms their impression of the reliability and cost of infrastructure services. Their ratings are shown in Table 11. The data suggest that while the reliability of electrical power has a beneficial impact on the operation of foreign and local firms alike, the cost of power is seen as generally more beneficial by foreign than local firms. However, both the cost and the reliability of postal services are seen as a having a negative effect on both foreign and local firms alike. In the same way, while neither the cost nor the reliability of the telephone services is seen as beneficial to firms operations, the reliability of the internet, which presumably uses these telephone services are rated quite positively. 6. TOWARDS A STRATEGY FOR ATTRACTING FOREIGN DIRECT INVESTMENT Based on the literature survey, the national survey of enterprises and a number of interviews with recent investors, the study has provided insights into the processes and motivations of new and continuing foreign investment in South Africa. This section highlights some of these

insights. The study supports the general perception that South Africa needs to be marketed to foreign investors. We suggest that the approach needs to be twofold. Firstly, foreign investors are more likely to consider South Africa as a destination if they have had some prior exposure to the country. This raises the importance of attracting tourists and global events, in order to facilitate the development of a preference for South Africa. While broad, general promotion activities are to be encouraged for this reason, they are unlikely to be sufficient to secure foreign direct investment. In addition, foreign investors need to be courted with targeted investment opportunities. Exposure to specific opportunities is more likely to encourage commitment on the part of those foreign investors positively exposed to South Africa. This suggests the need to encourage the process of identification of joint investment opportunities, involving foreign and local investors alike. The study reveals that the quality of investment currently being attracted to the country is disappointing. This suggests that a new strategy needs to be adopted to attract investment. We suggest that the policy strategy should be molded by a better understanding of what motivates investors to make investments in different locations, as set out in section 4 above. While it is accepted that foreign direct investment is not necessarily superior to domestic investment, the study points to the need to encourage joint ventures between domestic and foreign firms and investors, so as to enable South African products entry into global supply chains. The type of foreign investment currently taking place appears to be motivated primarily by access to the South and Southern African markets. While this is encouraging to some extent, given that the regional market remains relatively small and disrupted by conflict, it also suggests that left unmanaged, this motivation may be limited. This underlines the need for a strategic approach that aims to encourage investment through the identification of opportunities and facilitation of matchmaking between South African and foreign entrepreneurs. This has implications for the incentive-based approach to attracting foreign investment:
13

i. While incentives may sweeten the deal, if the primary motivation for investment is market-seeking then the investment is likely to take place regardless of incentives. This suggests that the resources used for incentives could be better employed elsewhere. While some countries appear to have had success with the use of incentives, the economic and structural circumstances have been different to those of South Africa, and the causal links are therefore not nearly as clear as the proponents of incentives make out. ii. While the market-seeking motivation may currently dominate foreign investment, identification of specific opportunities may encourage efficiency-seeking as well as further market-seeking investment. Identification of specific opportunities is likely to require match-making between domestic and foreign firms and investors. In order to encourage the identification of such opportunities, incentives for the entrepreneur, who identifies, facilitates and brings investment to fruition, may be required. iii. Encouragement of scale investment by means of an incentive package is likely to only be successful if it is undertaken on a scale similar to that of the Motor Investment Development Programme. In some cases, tariff-protection may also be required. Given current international trends determined by the World Trade Organisation, such a move may not be politically expedient. In addition, encouragement of investment through incentives may lead to incentive-competition with other countries. Figure 3: Elements of a Strategy for Attracting Foreign Direct Investment Figure 3 is discussed below in some detail. Briefly, at the first and broadest level, there is a need for marketing the country, so that a subjective preference for South Africa is nurtured

among investors. At the regulatory and institutional level, reduction of perceived risks is required. Above all, this requires widespread and accessible dissemination of information concerning regulations. The third important - and in our view neglected - requirement of would-be foreign investors is the identification of specific investment opportunities.

Strategy Element Associated Function Responsible Agencies Anticipated Invested Response

Development of subjective preference for South Africa Marketing of South Africa Investment promotion agencies, Communications agencies From ignorance to awareness Reduction of risks associated with investment in South Africa Regulatory, institutional Policy-makers and administrators Expressions of interest Investment opportunity identification Entrepreneurial Partnerships between private sector and public sector Committed investment 14

Each level encompasses different types of support and assistance, and requires different skills. The most appropriate provider of support should therefore be determined accordingly. 6.1 Level 1: Developing a preference for South Africa The base requirement of awareness of, and a subjective preference for, South Africa requires a coordinated marketing and communication strategy that seeks, first and foremost, to ensure that potential investors are enticed to visit South Africa. This would include elements such as: -

i) The provision of basic information about South Africa and its economy; ii) A proactive communication strategy targeted at the most influential foreign financial print and electronic media that aims to correct misperceptions of South Africa, and to develop a positive image of the country; iii) Expanded marketing of South Africa as a business and holiday tourism destination; and iv) Enhanced efforts aimed at securing major international sporting and cultural events that attract large numbers of foreign visitors and which showcase South Africa. Incentives to attract investment can play a role in indicating that the country is open for business and that it welcomes foreign entrants. However, with the exception of the Motor Industry Development Programme which appears to have played a crucial role in the locational choices of foreign firms in the motor and components industries, the incentives that have been available do not appear to have played a significant role in most of the investment decisions of the firms interviewed. At best they were viewed as providing some compensation for the risks associated with investment in South Africa. Incentives tend to be viewed with greater importance by those involved in marketing South Africa in part because it provides them with something tangible to sell. However, a projects-based focus that identifies specific opportunities and then seeks to match local firms with foreign ones is likely to prove more effective than broad country marketing based on incentives. If the incentive approach is to be followed, it cannot be the only element of a strategy to attract FDI to South Africa. 6.2 Level 2: Reducing the risks of investing in South Africa Responsibility for the risk reduction category rests largely with government, and encompasses aspects such as: i) A high degree of policy consistency and predictability especially as it relates to government procurement, black economic empowerment, competition, and affirmative action policies; ii) Relatively equal treatment of foreign and local firms; iii) Access to, and high-level service from, specially identified and trained officials in relevant government departments; and iv) The commissioning and provision of market information on narrowly defined sectors. A number of new pieces of legislation that impact directly on the business sector have been promulgated in South Africa in recent years. Because foreign investors in South Africa generally feel more insecure than their local counterparts, subjective elements in such
15

legislation increase the risks associated with investment, and give rise to perceptions amongst them of being unwelcome and discriminated against. A reduction in the scope for subjective rulings and interpretations in such legislation would reduce the risks faced by foreign investors. Risks would be further reduced if foreign investors had improved access to officials in key government departments. Such officials should be trained to provide consistent guidance and appropriate and prompt support to potential investors. It may be necessary to designate personnel, who are sensitized to the need for South Africa to attract foreign investors, and who are appropriately trained to deal with potential foreign investors. The Department of Home Affairs in particular should be at the forefront of projecting a professional and positive image to potential investors. Almost all of the foreign firms interviewed had had a negative experience in trying to obtain work permits for expatriate employees that were deemed necessary for the operation. While the concerns over illegal immigrants is understood, the unwillingness to grant foreign

investors work permits on the grounds that the skills should be available locally is both insensitive to the needs of foreign investors and counterproductive. Given the costs that are usually associated with employing expatriate skills, there is, in most cases, a built-in incentive for such imported skills to be substituted with local skills once the operation is up and running and skills transfer has taken place. It makes little sense to put foreign investment projects at risk by refusing to grant work permits to key personnel. The procedures by which permits are obtained also need to be reviewed to eliminate lengthy delays. Some form of pre-approval by foreign embassies and/or other appropriate organizations should be considered. The role of the Department of Trade and Industry in this process should be to develop and manage the strategic approach to investment in South Africa, from both local and foreign sources, by establishing the grounds rules for and administration of the proposed commission/incentive package and providing sectoral information to the market at reasonable cost. Information such as the size of an industry, the description of the supply chain, etc. is information that could reduce costs of entry and could also enable identification of opportunities. While the Department of Trade and Industry could commission these kinds of sectoral reports as and when deemed necessary, the cluster reports could provide a very useful starting point. 6.3 Level 3: Targeting specific projects for foreign and local investment Expressions of interest are often wrongly taken to mean that there will be investment. In order to take the decision beyond awareness and interest to committed investment, it may be necessary to assist with the identification of niche investment opportunities. This will require an entrepreneurial approach that combines sectoral and technical knowledge with an awareness of business decision-making processes, and an ability to identify and bring together potential partners. The nature of this activity is not suited to an administrative and regulatory approach. Instead, what is required are entrepreneurial matchmakers who actively seek out investment opportunities, and who bring together appropriate partners in new ventures. Where joint venture opportunities are identified, both local and foreign interest is likely to be engendered. This approach has several advantages as it involves supporting local investors in joint ventures with foreigners by exposing local initiative to the global market. This approach is likely to harness the beneficial aspects of foreign direct investment such as transferal of skills, etc. most effectively. While any one project may not meet the highest criteria in job
16

creation, for instance, it does have the advantage of allowing South African producers access to global supply chains, which is likely to enable expansion of market share. The identification of investment opportunities is generally seen as an entrepreneurial skill, and the matchmaking process is time consuming and resource intensive. This suggests an opportunity to utilise private sector expertise to encourage the identification of new projects designed to harness foreign direct investment. Both the provincial investment promotion agencies and independent consultants could be offered a commission based on various criteria, such as perhaps the size of the investment, or the number of jobs created. Commission payments could be in tranches - subject to investment being undertaken and sustained. This approach has the advantages of allowing entrepreneurs, in conjunction with consultants, to identify investment opportunities in the fields in which they have expertise and in which they perceive opportunities It is likely that different sized foreign firms may require different levels of support and encouragement to invest in South Africa. While large international firms are likely to rely on their own consultants or in-house expertise to assess the viability of investment, they may require access to individuals at the Department of Trade and Industry to provide reassurance and answers to particular questions. Medium and small sized firms are likely to require more information regarding the scope of the investment and help regarding regulatory and institutional regulations. However, it is suggested that regardless of the size of the firms, a

certain key effort in terms of the marketing of the country and provision of sectoral information is likely to be required, as suggested by the pyramid illustration above. Provision of these kinds of services should hence be the focus of government input into the process of encouraging foreign direct investment. 7 CONCLUSION Aside from the privatization of states assets, which will no doubt attract some foreign interest, FDI is unlikely to increase substantially in the future if the trends of the past and present continue. Some of the factors contributing towards the relatively low levels of FDI inflows include the poor growth performance and political instability in SADC; the small size of local and regional markets for many products and services; and the relatively limited apparent investment opportunities, given that South Africa is industrially diversified, with generally good provision of infrastructure. Attempts to address the present, unfavourable situation need to be based on an understanding of the motives underlying the location decisions of foreign investors. At present, foreign investors who invest in South Africa are motivated predominantly by market-seeking objectives. As is the case with most domestic investment, FDI motivated by a desire to expand markets will benefit from stronger growth of the South African and regional markets, but is likely to be relatively insensitive to fiscal incentives. A multi-tiered strategy that seeks to move more foreign investors from their present position, which is largely characterized by ignorance, through expressions of interest, to committed investment in South Africa is therefore proposed. This requires that we not only develop a more effective communication strategy, and expand attempts to develop a subjective preference for South Africa, but that we also reduce the risks associated with investment through more coherent and consistent policies. We also need to recognize that it is projects, rather than countries, into which investment is ultimately made.
17

It is in the identification, and communication, of such potential projects that current inward investment promotion efforts are in our view least effective. An important element of this strategy is therefore the greater involvement of entrepreneurial match-makers from the South African business sector in identifying projects that have the potential to attract foreigner investors. References A.T. Kearney, 2000. FDI Confidence Index, Global Business Policy Council, January 2000, Vol.3, Issue 1. Claessens, S, Dooley, M. & Warner, A. 1995. Portfolio flows: Hot or cold? World Bank economic review, 9 (1): 153-174. Dunning, J. H. 1997. Re-evaluating the benefits of foreign direct investment, in Alliance capitalism and global business, J. H. Dunning. London: Routledge. Economist, 1999. Infatuations end. 25 Sept 1999, 352:71. Fine, J. 1996. Private Investment and the development of the SADC region. Johannesburg: FISCU. Kenworthy, J. L. 1997. Foreign Direct Investment in Egypt: Problems and Prospects, as part of the Development Economic Policy Reform Analysis Project for USAID and the Minister of Economy and International Cooperation. Cairo: Egypt. Kindleberger, C.P. 1987. International capital movements. Cambridge: Cambridge University Press. Kozul-Wright, R and Rowthorn, R. 1998. Spoilt for choice: multinational corporations and the geography of international production. Oxford Review of Economic Policy, 14(2):74-93. Maxfield, S. 1998. Effects of international portfolio flows on government policy choice in Capital flows and financial crises, edited by M Kahler. Manchester: Manchester University Press.

Morgan, E. V. 1973. Regional problems and common currencies. Lloyds Bank Review October: 19-30. SG Cowen. 2000. Global emerging markets week ahead. 18 February 2000. Number 7 South African Reserve Bank. 2001. Quarterly Bulletin. Various. Pretoria: SARB. United Nations Centre on Transnational corporations (UNCTC). 1992. The determinants of Foreign direct investment. New York: United Nations. United Nations Council on Trade and Development (UNCTAD). 1999. World Investment Report 1999: Foreign direct investment and the challenge of development. New York: United Nations.
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World Bank. 1997. Private capital flows to developing countries. Washington DC: Oxford University Press. World Bank. 2000. World Development Indicators. Washington DC: Oxford University Press.////

How to Attract Foreign Direct Investment

International competition to attract foreign direct investment (FDI) has increasingly intensified, particularly after China joined the World Trade Organization (WTO). The overall picture of investment is that FDI flows into Asia more than to other developing countries in other regions, with the highest proportion of money flowing into China compared to other developing economies. However, FDI into Thailand has been on the decline. In 2001, the proportion of Thailands FDI inflow against the gross fixed capital formation stood at 14.4 % and later decreased to 3.7, 5.4, 3.4, and 7.2 % from 2002 to 2005 respectively. The current state of Thailands FDI suggests that the countrys competitiveness in attracting FDI is on a downward trend. When the competition regarding investment promotion incentives, both tax-related and non-tax related, is taken into account, it is found that Thailands incentive measures have a number of disadvantages to those of rival countries like Singapore and Malaysia in terms of both tax and financial incentives for exports and R&Dmaking Thailand less attractive as destination

for investment than its competitors. Nonetheless, the Board of Investment (BOI) has recently adjusted its investment promotion strategies, from attracting across-the-board investment through broad-based incentives to focusing on investment that enhances and develops the workforce with special expertise, placing more emphasis on the development and transfer of skills among different levels of the workforce, supporting R&D and technology transfer, and fostering innovation to attract quality investment. Therefore, the question is as to what would be the best investment promotion policy for Thailandbetween reducing investment obstacles and handing out incentives to all investors on the one hand, and setting up conditions to selectively promote strategic investment on the other, given the present context where FDI is in decline. If we consider the short-term needs, setting up investment conditions is likely to aggravate the slowdown of FDI because Thailand still does not have enough advantages to attract quality investment. Setting up conditions that investors must transfer technology or establish R&D facilities in Thailand therefore would not possibly attract many investors. On the contrary, when long-term sustainability is taken into account, the use of investment promotion policies such as tax incentives or other complimentary giveaways is usually effective in the short-run, but not sustainable in the long term. This is because rival countries can always offer similar tax cuts and investment promotion incentives, to the point that in the end no country may genuinely benefits from this zero-sum game competition. I am of the view that the present investment promotion strategy should aim to meet both short-term and long-term targets. Thailand may need to use broad-based policies to FDI without posing too many obstacles or restrictions in order to stimulate the decelerating economy. At the same time, more specific measures aimed at attracting quality investment should be applied to meet the nations long-term strategic needs. However, attracting quality investment requires that Thailand deliver enough satisfactory rewards to make investors agree to transfer technology to Thai businesses and entrepreneurs. Those rewards cannot be generated by giveaways or simple incentives, but from the readiness of economic infrastructure, the quality of manufacturing factors, and the environments that are conducive to quality investment. Increasing the incentives to attract foreign investment in R&D and technology transfer in Thailand must be accompanied by market development and healthy competition. This can be done by adjusting the economic structure towards the target economic sectors and speeding up trade

liberalization with neighboring countries to expand market size and hence increase the payback for R&D investment. Existing laws should also be improved and better enforced to protect the rights and intellectual properties of investors. In parallel, the government should aim to reduce investment costs in target economic sectors by addressing investment problems and obstacles, which are the tacit costs shouldered by the private sector, by developing human resource and basic infrastructure to accommodate the expansion of those target sectors, and by creating a conducive environment for quality investment. Efforts should also be made to attract pro-active investment by designating target industries and countries, as well as developing and fostering investment networks. Efforts to attract FDI must dovetail with the countrys specific situations and needs at particular times. Attracting quality investment would not be successful if superficial investment promotion incentives are used, but only through compelling factors that lead the investors to believe that they will be rewarded with lasting benefits.
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Kriengsak 2550

Multinational companies in India whether Bane or boon

G.D.Topic ( Multinational Companies role in India) Important points to be consider : favourable : MNC's has made entire world a Global Village. Inter connectivity increased amongest nations. New technology invent ( bio-friendly, ecological) quality products at nominal rates Monopoly reduction Employment generation Healthy compitition generation of Foreign direct Investment transpareny in governance ( brought down corruption) Outsourcing generation, Technology transfer Good H.R. Practices. invent of new dimensions of technology and broadcasting best work culture diversified portfolio in Infrastructure, Engg, R&D, Finance, insurance, telecommunication, Pharma sectors.

generation of income ( taxation apart of forex) brain gain instead of brain drain. drawbacks indigenous product & small organisations suffer. Native Co's crumbled under the competition of MNCs security threat no profit except taxes remain in home country affect economy (inflation, export import) global warming evolved due to MNC's Political influence unethical practices H.R. practices are not good ( cheap labour, extra hrs working, hire and fire policy) exploit resources creates inbalance in employment create ecological inbalance caused to restless life style few suggestations Government side threat of nationalization Strict laws and their compliance which favors the home country economic conditions more concentration of Govt. on indegenous industries and offering financial support, incentives, tax concession. No compromise on the cost of growth of home economic conditions. ownership strategies with MNC's having major share holdings mandatory Joint venture with small scale organisations as a part of growth of both org. Strict compliance of various laws on MNC's /////A multi national corporation (MNC) or enterprise (MNE),[1] is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation. The International Labour Organization (ILO) has defined[citation needed] an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries. The Dutch East India Company was the second multinational corporation in the world (the first, the British East India Company, was founded two years earlier) and the first company to issue stock, and it was the largest of the early multinational companies.[2] It was also arguably the world's first megacorporation, possessing quasi-governmental powers, including the ability to wage war, negotiate treaties, coin money, and establish colonies.[3] Some multi national corporations are very big, with budgets that exceed some nations' GDPs. Multinational corporations can have a powerful influence in local economies, and even the world economy, and play an important role in international relations and globalization.

Contents

[hide]

1 Market imperfections 2 International power o 2.1 Tax competition o 2.2 Market withdrawal o 2.3 Lobbying o 2.4 Patents 3 Culture 4 Different methods of communication across different cultures 5 Seven Methods of managing across cultures 6 Advertisement in different countries 7 Companies that adapted to foreign market successfully 8 Companies that failed to adapt to foreign culture 9 Transnational Corporations 10 Micro-multinationals 11 Criticism of multinationals 12 See also 13 References 14 External links

[edit] Market imperfections

It may seem strange that a corporation can decide to do business in a different country, where it does not know the laws, local customs or business practices.[1] Why is it not more efficient to combine assets of value overseas with local factors of production at lower costs by renting or selling them to local investors?[1] One reason is that the use of the market for coordinating the behaviour of agents located in different countries is less efficient than coordinating them by a multinational enterprise as an institution.[1] The additional costs caused by the entrance in foreign markets are of less interest for the local enterprise.[1] According to Hymer, Kindleberger and Caves, the existence of MNCs is reasoned by structural market imperfections for final products.[4] In Hymer's example, there are considered two firms as monopolists in their own market and isolated from competition by transportation costs and other tariff and non-tariff barriers. If these costs decrease, both are forced to competition; which will reduce their profits.[4] The firms can maximize their joint income by a merger or acquisition, which will lower the competition in the shared market.[4] Due to the transformation of two separated companies into one MNc the pecuniary externalities are going to be internalized.[4] However, this does not mean that there is an improvement for the society.[4] This could also be the case if there are few substitutes or limited licenses in a foreign market.[5] The consolidation is often established by acquisition, merger or the vertical integration of the potential licensee into overseas manufacturing.[5] This makes it easy for the MNE to enforce price discrimination schemes in various countries.[5] Therefore Hymer considered the emergence

of multinational firms as "an (negative) instrument for restraining competition between firms of different nations".[6] Market imperfections had been considered by Hymer as structural and caused by the deviations from perfect competition in the final product markets.[7] Further reasons are originated from the control of proprietary technology and distribution systems, scale economies, privileged access to inputs and product differentiation.[7] In the absence of these factors, market are fully efficient.[1] The transaction costs theories of MNEs had been developed simultaneously and independently by McManus (1972), Buckley & Casson (1976) Brown (1976) and Hennart (1977, 1982).[1] All these authors claimed that market imperfections are inherent conditions in markets and MNEs are institutions that try to bypass these imperfections.[1] The imperfections in markets are natural as the neoclassical assumptions like full knowledge and enforcement do not exist in real markets.[8]

[edit] International power

[edit] Tax competition
Multinational corporations are important factors in processes of globalization. National and local governments often compete against one another to attract MNC facilities, with the expectation of increased tax revenue, employment, and economic activity. To compete, political entities may offer MNCs incentives such as tax breaks, pledges of governmental assistance or subsidized infrastructure, or lax environmental and labor regulations. These ways of attracting foreign investment may be criticized as a race to the bottom, a push towards greater autonomy for corporations, or both. On the other hand, economist Jagdish Bhagwati has argued that in countries with comparatively low labor costs and weak environmental and social protection, multinationals actually bring about a 'race to the top.' While multinationals will certainly see a low tax burden or low labor costs as an element of comparative advantage, Bhagwati disputes the existence of evidence suggesting that MNCs deliberately avail themselves of lax environmental regulation or poor labor standards. As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to adapt production processes in many of their operations to conform to the standards of the most rigorous jurisdiction in which they operate (this tends to be either the USA, Japan, or the EU). As for labor costs, while MNCs clearly pay workers in developing countries far below levels in countries where labor productivity is high (and accordingly, will adopt more labor-intensive production processes), they also tend to pay a premium over local labor rates of 10 to 100 percent.[9] Finally, depending on the nature of the MNC, investment in any country reflects a desire for a medium- to long-term return, as establishing plant, training workers, etc., can be costly. Once established in a jurisdiction, therefore, MNCs are potentially vulnerable to arbitrary government intervention such as expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of licenses, etc. Thus, both the negotiating power of MNCs and the 'race to the bottom' critique may be overstated, while understating the benefits (besides tax revenue) of MNCs becoming established in a jurisdiction.

[edit] Market withdrawal

Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal.[10] For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force MNCs to make their intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil[citation needed], which have viable indigenous market competitors.

[edit] Lobbying
Multinational corporate lobbying is directed at a range of issues of interest to businesses, from tariff structures to environmental regulations. There is no unified MNC perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries. For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones. Multinational corporations such as Wal-mart and McDonald's benefit from government zoning laws, to create barriers to entry. Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly.[11]

[edit] Patents
Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefits from software patents.[12] The pharmaceutical companies lobby international agreements to enforce patent laws on others.

[edit] Culture
Culture is the set of values and beliefs shared by a group. This includes groups as small as social groups, and as large as a whole country. Since multinational companies operate in more than one country, they are exposed to many different cultures. Each culture has its own beliefs and values.

To be successful in these foreign countries, multinational companies must have a global mindset, and be able to recognize and adapt to the differences.

[edit] Different methods of communication across different cultures

Communication is the process of conveying messages. Successful communication in the international business environment requires not only an understanding of language, but also the nonverbal aspects of communication that are part of any community[13] (Ferraro, pg 73). Different countries are going to have different ways of communicating. If certain executives of a company want to do business with people from different countries, they need to understand how to communicate clearly with them, without mistakenly doing something wrong. The most obvious way of communicating with different people is with words, and therefore, some executives learn how to speak the language spoken in the foreign country. This act can show that the executive is truly dedicated to the work, and that he is willing to do anything to complete the deal. Greeting rituals are sometimes overlooked, but they shouldnt be because they are more important in some parts of the world than others. In Japan, failure to show respect by exchanging business cards can get negotiations off to a very bad start(Schneider and Barsoux, pg 26) .[14] While in France, greetings are highly personal and individualas workers expect to be greeted individually(Schneider and Barsoux, pg 26)[14] Another form of communicating is through hand gestures. Often goes unnoticed, hand gestures are as important as words themselves because they too have meaning behind them. Cultures located in southern Europe and the Middle East employ a wide variety of gestures frequently with purposefulness(Ferraro, pg 79).[13] Some hand gestures have different meanings in different countries. For example, the hand gesture where the index finger and thumb touch and create a zero can mean different things in different places. In the US and UK, it means ok. In Russia it means zero. In Japan it refers to money. While in Brazil, it is viewed as an insult.lllll [15] Time is another communication system. In western cultures, people like to get to the point of the matter in business meetings and conversations. However, in other countries like Saudi Arabia and Russia, it is customary to converse first about unrelated matters before starting the business discussions for which the meeting was arranged. Barging straight into the business issue, without informal small talk at the beginning, may make them very uncomfortable and may ruin the negotiations.(Miroshnik pg 12)[16]

[edit] Seven Methods of managing across cultures

(1) Hierarchy: "This refers to the way people view how much they defer to people in authority, whether they feel entitled to express themselves and how empowered they feel to take the initiative on matters before them. For example, Canada believes in egalitarianism, while nations like India, Japan, China, Germany, Mexico are highly hierarchical." (Schachter, pg b15)[17] (2) Group focus: This refers to whether people consider that accomplishment and responsibility are achieved through individual or group effort, and whether they tend to identify themselves as individuals or members of a group. Canadians are individualists while Brazilians, Chinese, Mexicans and Japanese are group-focused.(Schachter, pg b15)[17]

(3) Relationships: This is about whether trust and relationships are viewed as a prerequisite for working with someone. Canadians focus primarily on the transaction, rushing to deal, while the Chinese, Italians, and Spaniards, for example, focus on nurturing relationships first.(Schachter, pg b15)[17] (4) Communication styles: This covers matters like verbal and non-verbal expression, how directly or indirectly people speak, and whether brevity or detail is valued in communication. Israel, Denmark, Germany and Sweden use a direct style, while indirect communication styles are the norm in China, United Arab Emirates, and Japan (Schachter, pg b15)[17] (5) Time orientation: This refers to the degree to which people believe adhere to schedules. United States, Germany, Denmark and Switzerland follow schedules while countries like Saudi Arabia, Spain, Thailand, and the United Arab Emirates are unconcerned about schedules and deadlines. (Schachter, pg b15)[17] (6) Change tolerance: How people are comfortable with change, risk-taking and innovation. Along with Australians, Canadians are the most tolerant of change, while Saudi Arabia, Indonesia, Mexico and Russia are change-averse. (Schachter, pg b15)[17] (7) Motivation: work/life balance: This characteristic examines whether people work to live or live to work. Canadians are driven by work and the status it provides although not as much as people in China, Japan, and the U.S. while in Norway, Saudi Arabia, United Arab Emirates, India and Mexico, family-work balance is treasured. (Schachter, pg b15) [17]

[edit] Advertisement in different countries

Another way for multinational companies to prove that they understand the specific market is through advertisement. Advertising products in different countries requires the companies to use specific methods of advertisement that is allowed by the tradition and culture of the country. For example, in western countries, sex appeal is used a lot in advertising many different products. It is used to grab attention of customers and is used to boost sales. This strategy however wont be successful in countries that are very religious like most Arabic countries where the dominant religion is Islam. In those countries people, especially girls, are mostly covered and so wont be wearing very revealing clothes. Therefore, ads that use sex appeal, like girls in bikinis for example, wont be used. One company that used proper advertisement was Procter and Gamble. Companies adjust advertisements to the nationality of their clients. The Japanese prefers to buy shampoo which uses Japanese girls in its advertisements. Russian housewives prefer washing powder that uses Russian housewives instead of American housewives in its advertisements.(Miroshnik, pg 8)[18]

[edit] Companies that adapted to foreign market successfully

Just because a large company is very successful in one country, it doesnt mean that it will be successful in another country, especially if that country has a completely different culture. McDonalds is one of the largest companies in the world. However, it has adapted to the different

cultures to make sure it is successful. In France, McDonald's added tablecloths and candles to improve the ambience at some eateries and introduced waiter service at certain outlets because they found that most Europeans prefer leisurely rather than fast food dining (Stern, pg A07).[19] In addition to space, McDonalds has changed its menus from one country to another, offering food that locals usually eat: in France, a burger has mustard and ciabatta rolls instead of regular buns. In Japan, fried egg burgers were offered.

[edit] Companies that failed to adapt to foreign culture

In many occasions, a lot of the larger companies think that because they are a large corporation, they can succeed anywhere without changing anything. This tactic proved wrong, as many companies have failed and were forced to shutdown foreign branches. The biggest example was When Wal-Mart expanded in Germany in 1997, it hoped that Germans, like Americans, would scoop up its low-priced items. By July 2006, Wal-Mart had closed its German operations and absorbed $1 billion in losses. This was because they didnt adjust to the German culture where people preferred frequently specialty stores, not one-stop shops (Stern pg A07) .[19] Another example is Daimler AG, it failed in its acquisition of Chrysler because its disciplined, buttoneddown executives could never meld with their more freewheeling American counterparts. (Schachter, pg b15) .[17]

[edit] Transnational Corporations

A Transnational Corporation (TNC) differs from a traditional MNC in that it does not identify itself with one national home. Whilst traditional MNCs are national companies with foreign subsidiaries,[20] TNCs spread out their operations in many countries sustaining high levels of local responsiveness.[21] An example of a TNC is Nestl who employ senior executives from many countries and try to make decisions from a global perspective rather than from one centralised headquarters.[22] However, the terms TNC and MNC are often used interchangeably. A study of Dutch multi-national corporations showed that foreign expansions best unfold sequentionally, consistent with the notions of organizational learning. Firms ought to diversify first into culturally (and less so geographically) nearby countries before they venture farther away. They do so more successfully if they also follow a learning process by mode ( e.g, greenfield based expansion versus acquisitions or equity joint ventures) or by level of ownership.[23]

[edit] Micro-multinationals
Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers.[24] These multinationals start operating in different countries from the very early stages. These companies are being called micro-multinationals. [25] What differentiates micro-multinationals from the large MNCs is the fact that they are small businesses. Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various

countries. Internet tools like Google, Yahoo, MSN, Ebay and Amazon make it easier for the micro-multinationals to reach potential customers in other countries. Service sector micro-multinationals, like Facebook, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities. Low cost SaaS (Software As A Service) suites make it easier for these companies to operate without a physical office. Hal Varian, Chief Economist at Google and a professor of information economics at U.C. Berkeley, said in April 2010, "Immigration today, thanks to the Web, means something very different than it used to mean. There's no longer a brain drain but brain circulation. People now doing startups understand what opportunities are available to them around the world and work to harness it from a distance rather than move people from one place to another."

[edit] Criticism of multinationals

Main article: Anti-corporate activism The rapid rise of multinational corporations has been a topic of concern among intellectuals, activists and laymen who have seen it as a threat of such basic civil rights as privacy. They have pointed out that multinationals create false needs in consumers and have had a long history of interference in the policies of sovereign nation states. Evidence supporting this belief includes invasive advertising (such as billboards, television ads, adware, spam, telemarketing, childtargeted advertising, guerrilla marketing), massive corporate campaign contributions in democratic elections, and endless global news stories about corporate corruption (Martha Stewart and Enron, for example). Anti-corporate protesters suggest that corporations answer only to shareholders, giving human rights and other issues almost no consideration.[26] Films and books critical of multinationals include Surplus: Terrorized into Being Consumers, The Corporation, The Shock Doctrine, Downsize This, Zeitgeist: The Movie and others. Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[1]. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.[2] FDI is one example of international factor movement.

Contents
[hide]

1 History 2 Types 3 Methods 4 Global foreign direct investment 5 Foreign direct investment in the United States 6 Foreign direct investment in China 7 Foreign direct investment in India 8 Foreign direct investment and the developing world 9 See also 10 References 11 External links

[edit] History
FDI is a measure of ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The figure below shows net inflows of foreign direct investment in the United States. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply. US International Direct Investment Flows:[3] Period FDI Inflow FDI Outflow Net Inflow $ 5.13 bn + $ 37.04 bn 1960-69 $ 42.18 bn + $ 81.93 bn 1970-79 $ 122.72 bn $ 40.79 bn 1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn 1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn 2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

[edit] Types
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:[citation needed]

an individual; a group of related individuals; an incorporated or unincorporated entity;

a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other social institution; or any combination of the above.

[edit] Methods
The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:[citation needed]

low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones EPZ - Export Processing Zones Bonded Warehouses Maquiladoras investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects)

[edit] Global foreign direct investment

The United Nations Conference on Trade and Development said that there was no significant growth of Global FDI in 2010. In 2010 was $1,122 billion and in 2009 was $1.114 billion. The figure was 25 percent below the pre-crisis average between 2005 to 2007.[4]

[edit] Foreign direct investment in the United States

This section does not cite any references or sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. (June 2011) The United States is the worlds largest recipient of FDI. More than $228 billion in FDI flowed into the United States in 2010, with Europe contributing 75% of the total.[5] The $2.1 trillion stock of FDI in the United States at the end of 2008 is the equivalent of approximately 16 percent of U.S. gross domestic product (GDP). Benefits of FDI in America: In the last 6 years, over 4000 new projects and 630,000 new jobs have been created by foreign companies, resulting in close to $314 billion in investment.[citation needed] US affiliates of foreign companies have a history of paying higher wages than US corporations.[citation needed] Foreign companies have in the past supported an annual US payroll of $364 billion with an average annual compensation of $68,000 per employee.[citation needed] Increased US exports through the use of multinational distribution networks. FDI has resulted in 30% of jobs for Americans in the manufacturing sector, which accounts for 12% of all manufacturing jobs in the US. Affiliates of foreign corporations spent more than $34 billion on research and development in 2006 and continue to support many national projects. Inward FDI has led to higher productivity through increased capital, which in turn has led to high living standards.[6][dead link]

[edit] Foreign direct investment in China

FDI in China has increased considerably in the last decade reaching $185 billion in 2010.[7] China is the second largest recipient of FDI globally. FDI into China fell by over one-third in 2009 due the Global Financial Crisis (global macroeconomic factors) but rebounded in 2010.[8]

[edit] Foreign direct investment in India

Starting from a baseline of less than USD 1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. FDI in 2010 was $24.2 billion, a significant decrease from both 2008 and 2009.[9] Foreign direct investment in August dipped by about 60 per cent to aprox. USD 34 billion, the lowest in 2010 fiscal, industry department data released showed. [10]In the first two months of 2010-11 fiscal,FDI inflow into India was at an all-time high of $7.78 billion up 77% from $4.4 billion during the corresponding period in the previous year.

[edit] Foreign direct investment and the developing world

FDI provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities.[citation needed] Many of the Four Asian Tigers benefited from investment abroad.[citation needed] A recent meta-analysis of the effects of foreign direct investment on local firms in developing and transition countries suggest that foreign investment robustly increases local productivity growth.[11] The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies. On 24th November 2011 government allowed 51 per cent foreign investment in the multi-brand retail, paving way for global chains like WalMart, Carrefour and Tesco to open mega stores in 53 major cities. On same day cabinet also decided to remove the 51 % cap on FDI in single band format under which companies in food, lifestyle and sports business run stores. Owners of brands like Adida, Gucci, Hermes, LVMH and Costa Coffee can have full ownership of business in India. Globalization refers to the increasing unification of the world's economic order through reduction of such barriers to international trade as tariffs, export fees, and import quotas. The goal is to increase material wealth, goods, and services through an international division of labor by efficiencies catalyzed by international relations, specialization and competition. It describes the process by which regional economies, societies, and cultures have become integrated through communication, transportation, and trade. The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence.[1] However, globalization is usually recognized as being driven by a combination of economic, technological, sociocultural, political, and biological factors.[2] The term can also refer to the transnational circulation of ideas, languages, or popular culture through acculturation. An aspect of the world which has gone through the process can be said to be globalized. Against this view, an alternative approach stresses how globalization has actually decreased inter-cultural contacts while increasing the possibility of international and intranational conflict.[3]

Contents
[hide]

1 Definitions 2 History 3 Measurement 4 Effects o 4.1 Industrial o 4.2 Financial o 4.3 Economic o 4.4 Political o 4.5 Informational o 4.6 Language o 4.7 Ecological o 4.8 Cultural o 4.9 Technical o 4.10 Religious

4.11 Cultural effects 4.12 Democratizing effect of communications 5 Economic liberalization o 5.1 Jobs 5.1.1 Income inequality 5.1.2 Brain drains 5.1.3 Sweatshops o 5.2 Business process outsourcing o 5.3 Natural resources 5.3.1 Air 5.3.2 Forests 5.3.3 Minerals 5.3.4 Effects of population growth on food supplies o 5.4 Health o 5.5 Global market 5.5.1 Expansion 5.5.2 Financial interdependency 5.5.3 Drug and illicit goods trade 6 Debate o 6.1 Politicization in the United States o 6.2 Other industrialized countries o 6.3 Developing world 7 Alternative interpretations o 7.1 Advocates o 7.2 Practical approach o 7.3 Critics o 7.4 Common ground 8 Anti-globalization movement 9 See also 10 References 11 Further reading 12 External links o 12.1 Multimedia

o o

[edit] Definitions
According to the Oxford English Dictionary, the word "globalisation" was first employed in a publication entitled Towards New Education in 1930, to denote a holistic view of human experience in education.[4] An early description of globalization was penned by the founder of the Bible Student movement Charles Taze Russell who coined the term 'corporate giants' in 1897,[5] although it was not until the 1960s that the term began to be widely used by economists and other social scientists. The term has since then achieved widespread use in the mainstream press by the later half of the 1980s. Since its inception, the concept of globalization has inspired numerous competing definitions and interpretations, with antecedents dating back to the great

movements of trade and empire across Asia and the Indian Ocean from the 15th century onwards.[6] The United Nations ESCWA says globalization "is a widely-used term that can be defined in a number of different ways. When used in an economic context, it refers to the reduction and removal of barriers between national borders in order to facilitate the flow of goods, capital, services and labour... although considerable barriers remain to the flow of labor... Globalization is not a new phenomenon. It began towards the end of the nineteenth century, but it slowed down during the period from the start of the First World War until the third quarter of the twentieth century. This slowdown can be attributed to the inward-looking policies pursued by a number of countries in order to protect their respective industries... however, the pace of globalization picked up rapidly during the fourth quarter of the twentieth century..."[7]

HSBC, one of the world's largest banks, operates across the globe.[8][9] Shown here is the HSBC Global Technology Centre in Pune, India which develops software for the entire HSBC group.[10] Tom G. Palmer of the Cato Institute defines globalization as "the diminution or elimination of state-enforced restrictions on exchanges across borders and the increasingly integrated and complex global system of production and exchange that has emerged as a result."[11] Thomas L. Friedman has examined the impact of the "flattening" of the world, and argues that globalized trade, outsourcing, supply-chaining, and political forces have changed the world permanently, for both better and worse. He also argues that the pace of globalization is quickening and will continue to have a growing impact on business organization and practice.[12] Finally, Takis Fotopoulos argues that globalization is the result of systemic trends manifesting the market economy's grow-or-die dynamic, following the rapid expansion of transnational corporations. Because these trends have not been offset effectively by counter-tendencies that could have emanated from trade-union action and other forms of political activity, the outcome has been globalization. This is a multi-faceted and irreversible phenomenon within the system of the market economy and it is expressed as: economic globalization, namely, the opening and deregulation of commodity, capital and labour markets which led to the present form of neoliberal globalization; political globalization, i.e., the emergence of a transnational elite and the phasing out of the all-powerful nation-state of the statist period; cultural globalization, i.e., the worldwide homogenization of culture; ideological globalization; technological globalization; social globalization.[13]

[edit] History
Main article: History of globalization

Extent of the Silk Road and Spice trade routes blocked by the Ottoman Empire in 1453 spurring exploration The historical origins of globalization are the subject of on-going debate. Though several scholars situate the origins of globalization in the modern era, others regard it as a phenomenon with a long history.[14] Perhaps the most extreme proponent of a deep historical origin for globalization was Andre Gunder Frank, an economist associated with dependency theory. Frank argued that a form of globalization has been in existence since the rise of trade links between Sumer and the Indus Valley Civilization in the third millennium B.C.[15] Critics of this idea contend that it rests upon an over-broad definition of globalization. An early form of globalized economics and culture, known as archaic globalization, existed during the Hellenistic Age, when commercialized urban centers were focused around the axis of Greek culture over a wide range that stretched from India to Spain, with such cities as Alexandria, Athens, and Antioch at its center. Others have perceived an early form of globalization in the trade links between the Roman Empire, the Parthian Empire, and the Han Dynasty. The increasing articulation of commercial links between these powers inspired the development of the Silk Road, which started in western China, reached the boundaries of the Parthian empire, and continued onwards towards Rome.[16] With 300 Greek ships a year sailing between the Greco-Roman world and India, the annual trade may have reached 300,000 tons.[17] The Islamic Golden Age was also an important early stage of globalization, when Jewish and Muslim traders and explorers established a sustained economy across the Old World resulting in a globalization of crops, trade, knowledge and technology. Globally significant crops such as sugar and cotton became widely cultivated across the Muslim world in this period, while the necessity of learning Arabic and completing the Hajj created a cosmopolitan culture.[18]

Portuguese carrack in Nagasaki, 17th century Japanese Nanban art

Native New World crops exchanged globally: Maize, tomato, potato, vanilla,rubber, cacao, tobacco The advent of the Mongol Empire, though destabilizing to the commercial centers of the Middle East and China, greatly facilitated travel along the Silk Road. The Pax Mongolica of the thirteenth century had several other notable globalizing effects. It witnessed the creation of the first international postal service, as well as the rapid transmission of epidemic diseases such as bubonic plague across the newly unified regions of Central Asia.[19] These pre-modern phases of global or hemispheric exchange are sometimes known as archaic globalization. Up to the sixteenth century, however, even the largest systems of international exchange were limited to the Old World. The next phase, known as proto-globalization, was characterized by the rise of maritime European empires, in the 16th and 17th centuries, first the Portuguese and Spanish Empires, and later the Dutch and British Empires. In the 17th century, globalization became also a private business phenomenon when chartered companies like British East India Company (founded in 1600), often described as the first multinational corporation, as well as the Dutch East India Company (founded in 1602) were established. The Age of Discovery brought a broad change in globalization, being the first period in which Eurasia and Africa engaged in substantial cultural, material and biologic exchange with the New World.[20] It began in the late 15th century, when the two Kingdoms of the Iberian Peninsula Portugal and Castile sent the first exploratory voyages[21] around the Horn of Africa and to the Americas, "discovered" in 1492 by Christopher Columbus. Global integration continued with the European colonization of the Americas initiating the Columbian Exchange,[22] the enormous widespread exchange of plants, animals, foods, human populations (including slaves), communicable diseases, and culture between the Eastern and Western hemispheres. New crops

that had come from the Americas via the European seafarers in the 16th century significantly contributed to the world's population growth.[23]

Animated map showing Colonial empires evolution from 1492 to present

19th century Great Britain become the first global economic superpower, because of superior manufacturing technology and improved global communications such as steamships and railroads. The 19th century witnessed the advent of globalization approaching its modern form. Industrialization allowed cheap production of household items using economies of scale,[citation needed] while rapid population growth created sustained demand for commodities. Globalization in this period was decisively shaped by nineteenth-century imperialism. After the First and Second Opium Wars and the completion of British conquest of India, vast populations of these regions became ready consumers of European exports. It was in this period that areas of sub-Saharan Africa and the Pacific islands were incorporated into the world system. Meanwhile, the conquest of new parts of the globe, notably sub-Saharan Africa, by Europeans yielded valuable natural resources such as rubber, diamonds and coal and helped fuel trade and investment between the European imperial powers, their colonies, and the United States.[24] The first phase of "modern globalization" began to break down at the beginning of the 20th century, with World War I, but resurfaced after World War II. This resurgence was partly the result of planning by politicians to break down borders hampering trade. Their work led to the Bretton Woods conference, an agreement by the world's leading politicians to lay down the framework for international commerce and finance, and the founding of several international institutions intended to oversee the processes of globalization. Globalization was also driven by the global expansion of multinational corporations based in the United States and Europe, and worldwide exchange of new developments in science, technology and products, with most significant inventions of this time having their origins in the Western world according to Encyclopedia Britannica.[25] Worldwide export of western culture went through the new mass

media: film, radio and television and recorded music. Development and growth of international transport and telecommunication played a decisive role in modern globalization. These institutions include the International Bank for Reconstruction and Development (the World Bank), and the International Monetary Fund. Globalization has been facilitated by advances in technology which have reduced the costs of trade, and trade negotiation rounds, originally under the auspices of the General Agreement on Tariffs and Trade (GATT), which led to a series of agreements to remove restrictions on free trade. Since World War II, barriers to international trade have been considerably lowered through international agreements GATT and its successor, the World Trade Organization (WTO). World exports rose from 8.5% in 1970, to 16.2% of total gross world product in 2001.[26] In the 1990s, the growth of low cost communication networks allowed work done using a computer to be moved to low wage locations for many job types. This included accounting, software development, and engineering design. In late 2000s, much of the industrialized world entered into a deep recession.[27] Some analysts say the world is going through a period of deglobalization after years of increasing economic integration.[28][29] China has recently[when?] become the world's largest exporter surpassing Germany.[30]

[edit] Measurement

Heathrow Terminal 5 building. London Heathrow Airport has the most international passenger traffic of any airport in the world.[31][32] Economic globalization can be measured in different ways. These center around the four main economic flows that characterize globalization:

Goods and services, e.g., exports plus imports as a proportion of national income or per capita of population Labor/people, e.g., net migration rates; inward or outward migration flows, weighted by population Capital, e.g., inward or outward direct investment as a proportion of national income or per head of population Technology, e.g., international research & development flows; proportion of populations (and rates of change thereof) using particular inventions (especially 'factor-neutral' technological advances such as the telephone, motorcar, broadband)

As globalization is not only an economic phenomenon, a multivariate approach to measuring globalization is the recent index calculated by the Swiss think tank KOF. The index measures the

three main dimensions of globalization: economic, social, and political. In addition to three indices measuring these dimensions, an overall index of globalization and sub-indices referring to actual economic flows, economic restrictions, data on personal contact, data on information flows, and data on cultural proximity is calculated. Data is available on a yearly basis for 122 countries, as detailed in Dreher, Gaston and Martens (2008).[33] According to the index, the world's most globalized country is Belgium, followed by Austria, Sweden, the United Kingdom and the Netherlands. The least globalized countries according to the KOF-index are Haiti, Myanmar, the Central African Republic and Burundi.[34] A.T. Kearney and Foreign Policy Magazine jointly publish another Globalization Index. According to the 2006 index, Singapore, Ireland, Switzerland, the Netherlands, Canada and Denmark are the most globalized, while Indonesia, India and Iran are the least globalized among countries listed.

[edit] Effects

As of 20052007, the Port of Shanghai holds the title as the World's busiest port.[35][36][37] Globalization has various aspects which affect the world in several different ways

[edit] Industrial
Emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies, particularly movement of material and goods between and within national boundaries. International trade in manufactured goods has increased more than 100 times (from $95 billion to $12 trillion) since 1955.[38] China's trade with Africa rose sevenfold during 200007 alone.[39][40]

[edit] Financial
Emergence of worldwide financial markets and better access to external financing for borrowers. By the early part of the 21st century more than $1.5 trillion in national currencies were traded daily to support the expanded levels of trade and investment.[41]

[edit] Economic

Realization of a global common market, based on the freedom of exchange of goods and capital.[42] Survival in the new global business market calls for improved productivity and increased competition. Due to the market becoming worldwide, companies in various industries have to upgrade their products and use technology skilfully in order to face increased competition.[43]

[edit] Political

The United Nations Headquarters in New York City. The development of globalization has wide-ranging impacts on political developments, which particularly go along with the decrease of the importance of the state. Through the creation of sub-state and supra-state institutions such as the EU, the WTO, the G8 or the International Criminal Court, the state loses power of policy making and thus sovereignty.[44] However, many see the relative decline in US power as being based in globalization, particularly due to its high trade imbalance. The consequence of this is a global power shift towards Asian states, particularly China, that has seen tremendous growth rates. In fact, current estimates claim that China's economy will overtake that of the United States by 2025.[45]

[edit] Informational
Increase in information flows between geographically remote locations. Arguably this is a technological change with the advent of fibre optic communications, satellites, and increased availability of telephone and Internet.

[edit] Language
The most spoken first language is Mandarin (845 million speakers) followed by Spanish (329 million speakers) and English (328 million speakers).[46] However the most popular second language is undoubtedly English, the "lingua franca" of globalization:

About 35% of the world's mail, telexes, and cables are in English.

Approximately 40% of the world's radio programs are in English. English is the dominant language on the Internet.[47]

[edit] Ecological
The advent of global environmental challenges that might be solved with international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the ocean, and the spread of invasive species. Since many factories are built in developing countries with less environmental regulation, globalism and free trade may increase pollution and impact on precious fresh water resources(Hoekstra and Chapagain 2008).[48] On the other hand, economic development historically required a "dirty" industrial stage, and it is argued that developing countries should not, via regulation, be prohibited from increasing their standard of living.

[edit] Cultural

Globalization has influenced the use of language across the world. This street in Hong Kong, a former British colony, shows various signs, a few of which incorporate both Chinese and British English. Growth of cross-cultural contacts; advent of new categories of consciousness and identities which embodies cultural diffusion, the desire to increase one's standard of living and enjoy foreign products and ideas, adopt new technology and practices, and participate in a "world culture".[49] Some bemoan the resulting consumerism and loss of languages. Also see Transformation of culture. This might also affect the spreading of multiculturalism, and better individual access to cultural diversity (e.g. through the export of Hollywood)[50]. Some consider such "imported" culture a danger, since it may supplant the local culture, causing reduction in diversity or even assimilation. Others consider multiculturalism to promote peace and understanding between people. A third position that gained popularity is the notion of multiculturalism forming a new monoculture, that in which no distinctions exist and everyone shifts between various lifestyles in terms of music, cloth and other aspects once more firmly attached to a single culture. Thus not mere cultural assimilation as mentioned above but the obliteration of culture as we know it today.[51][52] Greater international travel and tourism. WHO estimates that up to 500,000 people are on planes at any one time.[citation needed][53] In 2008, there were over 922 million international tourist arrivals, with a growth of 1.9% as compared to 2007.[54]

Greater immigration,[55] including illegal immigration.[56] The IOM estimates there are more than 200 million migrants around the world today.[57] Newly available data show that remittance flows to developing countries reached $328 billion in 2008.[58] Spread of local consumer products (e.g., food) to other countries (often adapted to their culture). Worldwide fads and pop culture such as Pokmon, Sudoku, Numa Numa, Origami, Idol series, YouTube, Orkut, Facebook, and Myspace; accessible only to those who have Internet or Television, leaving out a substantial portion of the Earth's population.

The construction of continental hotels is a major consequence of globalization process in affiliation with tourism and travel industry, Dariush Grand Hotel, Kish, Iran Worldwide sporting events such as FIFA World Cup and the Olympic Games. Incorporation of multinational corporations into new media. As the sponsors of the All-Blacks rugby team, Adidas had created a parallel website with a downloadable interactive rugby game for its fans to play and compete.[59]

Social development of the system of non-governmental organizations as main agents of global public policy, including humanitarian aid and developmental efforts.[60]

[edit] Technical
Central aspect of globalisation has been the development of a Global Information System, and greater transborder data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable, and wireless telephones, which increased the number of standards applied globally (e.g., copyright laws, patents and world trade agreements) but also affects Legal/Ethical norms such as the creation of the international criminal court and international justice movements, crime importation and raising awareness of global crime-fighting efforts and cooperation, the emergence of Global administrative law.

[edit] Religious
The spread and increased interrelations of various religious groups, ideas, and practices and their ideas of the meanings and values of particular spaces.[61]

[edit] Cultural effects

Japanese McDonald's fast food as evidence of corporate globalization and the integration of the same into different cultures. "Culture" is defined as patterns of human activity and the symbols that give these activities significance. According to prevailing notions, globalization has 'joined' different cultures and turned them into something different.[62] The dominant view stresses that globalization should be distinguished from Americanization. This approach has been used since the late 1980s to conceal the unidirectional, top-down character of US-led globalization as it was being relentlessly imposed on the rest of the world. Recently, this view has been challenged by highlighting globalization's irradiating pattern as largely derived from decisions originally taken in Washington, D.C., particularly in the economic and cultural fields.[63] Culinary culture has become extensively globalized. For example, Japanese noodles, Swedish meatballs, Indian curry and French cheese have become popular outside their countries of origin. Two American companies, McDonald's and Starbucks, are often cited as examples of globalization, with over 31,000 and 18,000 locations operating worldwide, respectively. Another common practice brought about by globalization is the usage of Chinese characters in tattoos. These tattoos are popular with today's youth despite the lack of social acceptance of tattoos in China.[64] Also, there is a lack of comprehension in the meaning of Chinese characters that people get,[65] making this an example of cultural appropriation. The internet breaks down cultural boundaries across the world by enabling easy, nearinstantaneous communication between people anywhere in a variety of digital forms and media. The Internet is associated with the process of cultural globalization because it allows interaction and communication between people with very different lifestyles and from very different cultures. Photo sharing websites allow interaction even where language would otherwise be a barrier.

[edit] Democratizing effect of communications

Exchange of information via the internet is playing a major role in the democratization of many countries.[66] Virtualization of industries since the dawn of ecommerce has transferred the power to the buyer, and the same effect has transitioned into voting systems by the groupin effect of social media.

[edit] Economic liberalization

Further information: Neoliberalism

Shanghai becomes a symbol of the recent economic boom of China. In 2011, China had 960,000 millionaires.[67] According to Jagdish Bhagwati, a former adviser to the U.N. on globalization, although there are obvious problems with overly rapid development, globalization is a very positive force that lifts countries out of poverty. According to him, it causes a virtual economic cycle associated with faster economic growth.[68] Workers in developing countries now have more occupational choices than ever before. Educated workers in developing countries are able to compete on the global job market for high paying jobs. Production workers in developing countries are not only able to compete, they have a strong advantage over their counterparts in the industrialized world.[69] This translates into increased opportunity. Workers have the choice of emigrating and taking jobs in industrial countries or staying at home to work in outsourced industries. In addition, the global economy provides a market for the products of cottage industry, providing more opportunities.[68] Globalization has generated significant international opposition over concerns that it has increased inequality and environmental degradation.[70] In the Midwestern United States, globalization has eaten away at its competitive edge in industry and agriculture, lowering the quality of life.[71] Some also view the effect of globalization on culture as a rising concern. Along with globalization of economies and trade, culture is being imported and exported as well. The concern is that the stronger, bigger countries such as the United States, may overrun the other, smaller countries' cultures, leading to those customs and values fading away. This process is also sometimes referred to as Americanization or McDonaldization. [72]

[edit] Jobs
[edit] Income inequality The globalization of the job market has had negative consequences in developed countries. Mind workers (engineers, attorneys, scientists, professors, executives, journalists, consultants) are able to compete successfully in the world market and command high wages. Conversely,

production workers and service workers in industrialized nations are unable to compete directly with workers in third world countries.[73] Workflow changes so that poor countries gain the lowvalue-added element of work formerly done in rich countries, while higher-value work is retained; for instance, the total number of people employed in manufacturing in the USA declined, but there were great increases in value added per worker.[74] This has resulted in a growing gap between the incomes of the rich and poor. This trend seems to be greater in the United States than other industrial countries. Income inequality in the United States started to rise in the late 1970s, however the rate of increase rose sharply in the 21st century; it has now reached a level comparable with that found in developing countries.[75] (Cf. The impact of the information age on the workforce) [edit] Brain drains Opportunities in rich countries drive talent away from poor countries, leading to brain drains. Brain drain has cost the African continent over $4.1 billion in the employment of 150,000 expatriate professionals annually.[76] The Associated Chambers of Commerce and Industry (Assocham) estimates that the brain drain of Indian students cost India $10 billion per year.[77]

A maquila in Mexico [edit] Sweatshops In many poorer nations, globalization is the result of foreign businesses utilizing workers in a country to take advantage of the lower wage rates. One example used by anti-globalization protestors is the use of sweatshops by manufacturers. According to Global Exchange these "Sweat Shops" are widely used by sports shoe manufacturers and mentions one company in particular Nike.[78] There are factories set up in the poor countries where employees agree to work for lower wages than would be required in richer countries. Several agencies have been set up worldwide specifically designed to focus on anti-sweatshop campaigns and education of such. In the USA, the National Labor Committee has proposed a number of bills as part of Decent Working Conditions and Fair Competition Act, which have

thus far failed in Congress. The legislation would legally require companies to respect human and worker rights by prohibiting the import, sale, or export of sweatshop goods.[79] Specifically, these core standards include no child labor, no forced labor, freedom of association, right to organize and bargain collectively, as well as the right to decent working conditions.[80]

[edit] Business process outsourcing

Main article: Business process outsourcing In the rich world, business process outsourcing has, like most other arms of globalisation, been a double-edged sword; it enables cheaper services but displaces some service-sector jobs. However, in poorer countries to which service jobs are outsourced, the benefits have been unambiguous; in India, the outsourcing industry is the "primary engine of the countrys development over the next few decades, contributing broadly to GDP growth, employment growth, and poverty alleviation".[81][82]

[edit] Natural resources

[edit] Air In 2007, China surpassed the United States as the top emitter of CO2.[83] Only 1 percent of the countrys 560 million city inhabitants (2007) breathe air deemed safe by the European Union.

Burning forest in Brazil. The removal of forest to make way for cattle ranching was the leading cause of deforestation in the Brazilian Amazon from the mid 1960s. Soybeans have become one of the most important contributors to deforestation in the Brazilian Amazon.[84] [edit] Forests A major source of deforestation is the logging industry, driven spectacularly by China and Japan.[85] China and India are quickly becoming large oil consumers.[86][87] China has seen oil consumption grow by 8% yearly since 2002, doubling from 19962006.[88] State of the World 2006 report said the two countries' high economic growth hid a reality of severe pollution. The report states:

The world's ecological capacity is simply insufficient to satisfy the ambitions of China, India, Japan, Europe and the United States as well as the aspirations of the rest of the world in a sustainable way[89] At present rates, tropical rainforests in Indonesia would be logged out in 10 years, Papua New Guinea in 13 to 16 years.[90] [edit] Minerals Without more recycling, zinc could be used up by 2037, both indium and hafnium could run out by 2017, and terbium could be gone before 2012.[91] In a 2006 news story, BBC reported, "...if China and India were to consume as much resources per capita as United States or Japan in 2030 together they would require a full planet Earth to meet their needs.[89] In the longterm these effects can lead to increased conflict over dwindling resources[92] and in the worst case a Malthusian catastrophe. [edit] Effects of population growth on food supplies The head of the International Food Policy Research Institute, stated in 2008 that the gradual change in diet among newly prosperous populations is the most important factor underpinning the rise in global food prices.[93] From 1950 to 1984, as the Green Revolution transformed agriculture around the world, grain production increased by over 250%.[94] The world population has grown by about 4 billion since the beginning of the Green Revolution and most believe that, without the Revolution, there would be greater famine and malnutrition than the UN presently documents (approximately 850 million people suffering from chronic malnutrition in 2005).[95][96] It is becoming increasingly difficult to maintain food security in a world beset by a confluence of "peak" phenomena, namely peak oil, peak water, peak phosphorus, peak grain and peak fish. Growing populations, falling energy sources and food shortages will create the "perfect storm" by 2030, according to the UK government chief scientist. He said food reserves are at a 50-year low but the world requires 50% more energy, food and water by 2030.[97][98] The world will have to produce 70% more food by 2050 to feed a projected extra 2.3 billion people and as incomes rise, the United Nations' Food and Agriculture Organisation (FAO) warned.[99] Social scientists have warned of the possibility that global civilization is due for a period of contraction and economic re-localization, due to the decline in fossil fuels and resulting crisis in transportation and food production.[100][101][102] One paper even suggested that the future might even bring about a restoration of sustainable local economic activities based on hunting and gathering, shifting horticulture, and pastoralism.[103] In 2003, 29% of open sea fisheries were in a state of collapse.[104] The journal Science published a four-year study in November 2006, which predicted that, at prevailing trends, the world would run out of wild-caught seafood in 2048.[105]

[edit] Health

Further information: Globalization and disease Globalization has also helped to spread some of the deadliest infectious diseases known to humans.[106] Starting in Asia, the Black Death killed at least one-third of Europe's population in the 14th century.[107] Even worse devastation was inflicted on the American supercontinent by European arrivals. 90% of the populations of the civilizations of the "New World" such as the Aztec, Maya, and Inca were killed by small pox brought by European colonization. Modern modes of transportation allow more people and products to travel around the world at a faster pace, but they also open the airways to the transcontinental movement of infectious disease vectors.[108] One example of this occurring is AIDS/HIV.[109] Due to immigration, approximately 500,000 people in the United States are believed to be infected with Chagas disease.[110] In 2006, the tuberculosis (TB) rate among foreign-born persons in the United States was 9.5 times that of U.S.-born persons.[111]

[edit] Global market

[edit] Expansion A flood of consumer goods such as televisions, radios, bicycles, and textiles into the United States, Europe, and Japan has helped fuel the economic expansion of Asian tiger economies in recent decades.[112] However, Chinese textile and clothing exports have recently[when?] encountered criticism from Europe. This criticism has been settling after Beijing and Brussels reached a compromise. Still in 2004, EU China sold textiles worth about 514 million euros, while the value of Chinese apparel exports to the EU amounted to 16 billion euros and these mighty exports from China results job losses. In France, ceased to exist about 7 thousand. Positions in Spain 70 thousand, about 200 thousand in Italy.[113] the United States and some African countries.[114][115] As of 26 April 2005 Asia Times article notes that, "In regional giant South Africa, some 300,000 textile workers have lost their jobs in the past two years due to the influx of Chinese goods".[116] The increasing U.S. trade deficit with China has cost 2.4 million American jobs between 2001 and 2008, according to a study by the Economic Policy Institute (EPI).[117] From 2000 to 2007, the United States had lost a total of 3.2 million manufacturing jobs.[118] A report issued in 2007 by PricewaterhouseCoopers LLP predicted that by 2050 the economies of the E7 emerging economies (the BRIC countries: China, India, Brazil, and Russia, plus Mexico, Indonesia and Turkey) will be around 50% larger than the current G7 (US, Japan, Germany, UK, France, Italy and Canada). China is expected to overtake the US as the largest economy around 2025, while India will overtake the US in 2050.[119] A more recent report issued by Goldman Sachs that was compiled after China released their GDP growth figures for 2009 predicted that China is about to overtake Japan and may become the world's largest economy by 2020.[120] (See the entry on BRIC for more details) [edit] Financial interdependency The world today is so interconnected that the collapse of the subprime mortgage market in the U.S. led to a global financial crisis and recession on a scale not seen since the Great

Depression.[121] According to critics, government deregulation and failed regulation of Wall Street's investment banks were important contributors to the subprime mortgage crisis.[122][123] [edit] Drug and illicit goods trade The United Nations Office on Drugs and Crime (UNODC) issued a report that the global drug trade generates more than $320 billion a year in revenues.[124] Worldwide, the UN estimates there are more than 50 million regular users of heroin, cocaine and synthetic drugs.[125] The international trade of endangered species is second only to drug trafficking.[126] Traditional Chinese medicine often incorporates ingredients from all parts of plants, the leaf, stem, flower, root, and also ingredients from animals and minerals. The use of parts of endangered species (such as seahorses, rhinoceros horns, saiga antelope horns, and tiger bones and claws) has created controversy and resulted in a black market of poachers who hunt restricted animals.[127][128]

[edit] Debate
See also: Alter-globalization, Participatory economics, and Global Justice Movement In recent years, debates about globalization have tended to descend into polemics and confusion as opinions have become increasingly politicized. There is little common ground between proponents and opponents of globalization.[129]

[edit] Politicization in the United States

The study by Peer Foiimkomjlss and Paul Hirsch suggests that the politicization of this discourse has emerged largely in response to greater US involvement with the international economy. For example, their survey shows that in 1993 more than 40% of respondents were unfamiliar with the concept of globalization. When the survey was repeated in 1998, 89% of the respondents had a polarized view of globalization as being either good or bad.[130] At the same time, discourse on globalization, which was at first confined largely to the financial community, started to focus instead on an increasingly heated debate between proponents of globalization and a dipartite group of disenchanted students and workers. Polarization increased dramatically after the establishment of the WTO in 1995; this event and subsequent protests led to a large-scale antiglobalization movement.[131] Their study shows that, the neutral frame was the dominant frame in newspapers articles and corporate press releases prior to 1989. Both media depicted globalization as a natural development that related to technological advancement. In 1986, for example, nearly 90% of newspaper articles exhibited neutral framing. The situation started to change after the collapse of the stock market in Oct.19, 1987 and the subsequent recession. Newspapers began to voice concerns about the trend toward globalization and the interconnectedness of international financial markets. By 1989, the number of positively and negatively framed articles had eclipsed the number of neutrally framed articles. By 1998, neutrally framed articles had been reduced to 25% of the total.

The study also shows an especially large increase in the number of negatively framed articles. Prior to 1995, positively framed articles were more common than negatively framed articles, however, by 1998, the number of negatively framed articles was double that of positively framed articles.[132] A recent article in the Wall Street Journal[133] suggests that this rise in opposition to globalization can be explained, at least in part, by economic self-interest. Initially, college educated workers were the most likely to support globalization. Less educated workers, who were more likely to compete with immigrants and workers in developing countries, tended to oppose globalization. The situation changed radically when white collar workers started to blame immigration and globalization for their own increased economic insecurity. According to a poll conducted for the Wall Street Journal and NBC News, in 1997, 58% of college graduates said globalization had been good for the U.S. while 30% said it had been bad. When the poll asked a similar question in 2008 (after the financial crisis of 2007), 47% of graduates thought globalization was bad and only 33% thought it was good. Respondents with high school education, who were always opposed to globalization, became more opposed.[134]

[edit] Other industrialized countries

Philip Gordon, in a recent article in Yale Global, states that (as of 2004) a clear majority of Europeans believe that globalization can enrich their lives, while believing the European Union can help them take advantage of globalizations benefits while shielding them from its negative effects.[135] The main opposition consists of left-wing socialists, environmental groups, and right-wing nationalists. Part of the reason for the difference in response to globalization in US and EU lies in the fact that workers in the US have been more strongly impacted by factors like automation and outsourcing than their European counterparts. Income Inequality in the US, for example, is now much higher than in the EU.[136] Gordon points out that workers in the EU feel less threatened by globalization. First, the job market in the EU is more stable than that of the US, and workers in the EU are less likely to accept wage cuts or loss of benefits. Second, social spending by governments in the EU is much higher than in the US. The situation is very different in the US, where there is a strong sense of individualism.[137] In Japan, the debate takes a different form. According to Takenaka Heizo and Chida Ryokichi, there is a perception that the economy is Small and Frail, which seems ironic in a country that accounts for one-quarter of all production. However Japan is resource poor and must promote exports in order to import the raw materials it needs. Anxiety over their position has caused terms like internationalization and globalization to become part of everyday language in Japan. The Japanese accept that internationalization and globalization cannot be avoided. However, their resource dependency requires them to be as self-sufficient as possible in sectors like agriculture. Most discourse, therefore, centers on the notion of self-sufficiency.[138] The situation may have changed after the financial crisis of 2007. A recent BBC World Public Poll taken between 31 October 2007 and 25 January 2008, suggests that opposition to globalization in industrialized countries may be increasing. Unfortunately, it is difficult to compare the results with the polls mentioned above; those polls asked whether the overall effect

of globalization was good or bad, whereas the BBC poll asked whether globalization was growing too rapidly. The countries where people are most likely to say that globalization is growing too fast are France, Spain, Japan, South Korea, and Germany. There is even the suggestion that the trend in these countries is even stronger than in the United States.[139] The poll also correlates the tendency to view globalization as proceeding too rapidly with a perception of growing economic insecurity and social inequality.

[edit] Developing world

A number of international polls have shown that residents of developing countries tend to view globalization more favorably than residents of the US or the EU.[140] However, a recent poll undertaken by the BBC indicates that there is a growing feeling in the Third World that globalization is proceeding too rapidly. There are only a few countries, including Mexico, the countries of Central America, Indonesia, Brazil and Kenya, where a majority felt that globalization is growing too slowly.[141] Many in the Third World see globalization is a positive force that lifts countries out of poverty.[142] The opposition often combines environmental concerns with nationalism. Governments are often seen as agents of neo-colonialism that open the doors to an invasion of multinational corporations.[143] Much of this criticism comes from the established middle class; a report from the Brookings Institute suggests this is because the middle class perceive upwardly mobile low-income groups to be a threat to their economic security.[144] Although many critics blame globalization for a decline of the middle class in industrialized countries, a recent report in The Economist suggests that the middle class is growing rapidly in the Third World.[145] Unfortunately, this growth, coupled with growing urbanization, has led to increasing disparities in wealth between urban and rural areas.[146] This leads to a situation where those who have gained the least economically have the most to lose from the negative environmental impact of globalization. For example, in India 70% of the population lives in rural areas and depend directly on access to natural resources for their livelihood.[143] As a result, anti-globalization often takes the form of mass movements in the countryside.[147] The situation is critical in China, where rapid growth has led to a situation where 0.4% of the population possess 70% of the nations wealth.[148] An 2007 article in The Economist blamed increasing unrest in rural China on the growing gap in wealth between rural and urban areas.[149] This, plus growing worker discontent in industrialized areas,[150] has caused a great deal of concern among the nation's leadership

[edit] Alternative interpretations

The analysis presented above focuses on the politicization of discourse and the way politically motivated actors represent globalization to the public; it is more interested in the process of politicization than in the meanings of globalization. It is also possible to examine discourse on globalization in terms of these meanings and their implications for the understanding issues like national autonomy and sovereignty.

For example, David Held and Anthony McGrew, in an article in The Oxford Companion to Politics of the World, have suggested that this discourse can be separated into three frames. 1) Hyperglobalists hold that autonomy and sovereignty of nation-states have been eclipsed by contemporary processes of economic globalization. 2) Sceptics hold that intensity of contemporary global interdependence is considerably exaggerated and that the hyperglobalists ignore the continued primacy of national power and sovereignty. 3) Transformationalists emphasize the way in which globalization has brought about the spatial re-organization and rearticulation of economic, political, military and cultural power.[151] Peer Fiss and Paul Hirsch, in an article on the discourse of globalization, suggested using the notion of framing as a way to study this polarization. By framing, they mean the way interested actors and entrepreneurs articulate particular versions of reality to potential supporters[152] They identified three main frames: 1) The positive frame points to the potential gains and benefits of globalization. 2) The neutral frame portrays globalization as a natural, evolutionary, and largely inevitable development. This discourse, which is associated with the financial community, avoids making moral judgments. 3) The negative frame points out the increasing potential for economic crisis, the threat to the livelihoods of workers, and the growing income inequality caused by globalization. This frame also includes discourse which is primarily concerned with the negative impact of globalization in the Third World. To which we should add a fourth, newly emergent frame: 4) The constructive frame is an emerging frame that is more positive and constructive than the negative frame. This discourse supports global cooperation and interaction while opposing some of the negative effects of globalization.[citation needed]

[edit] Advocates
1) Neo-Liberalism The majority of books, newspaper articles and press releases in this frame represent the neoliberal view of globalization. Supporters of free trade claim that it increases economic prosperity as well as opportunity, especially among developing nations, enhances civil liberties and leads to a more efficient allocation of resources. Economic theories of comparative advantage suggest that free trade leads to a more efficient allocation of resources, with all countries involved in the trade benefiting. In general, this leads to lower prices, more employment, higher output and a higher standard of living for those in developing countries.[153][154] Proponents of laissez-faire capitalism, and some libertarians, say that higher degrees of political and economic freedom in the form of perceived democracy and capitalism in the developed

world are ends in themselves and also produce higher levels of material wealth. They see globalization as the beneficial spread of liberty and capitalism.[153] Supporters of democratic globalization are sometimes called pro-globalists. They believe that the first phase of globalization, which was market-oriented, should be followed by a phase of building global political institutions representing the will of world citizens. 2) Global Village An optimistic view of globalism is suggested by Marshall McLuhan's of the Global Village[155] This view suggests that globalization will lead to a world where people from all countries will become more integrated and aware of common interests and shared humanity.[156] 3) Importance of international cooperation A third body of literature points out the value of international cooperation in solving problems of mutual concern ranging from human-rights issues to environmental concerns such as global warming. This view is similar to that represented by the constructive frame. 4) World government Dr. Francesco Stipo, Director of the United States Association of the Club of Rome, writes in favor of political globalization in the form of a world government, suggests that it "should reflect the political and economic balances of world nations. A world confederation would not supersede the authority of the State governments but rather complement it, as both the States and the world authority would have power within their sphere of competence".[157] Some, such as former Canadian Senator Douglas Roche, O.C., simply view globalization as inevitable and advocate creating institutions such as a directly elected United Nations Parliamentary Assembly to exercise oversight over unelected international bodies.

[edit] Practical approach

This involves a form of discourse that portrays globalization as a natural, evolutionary, and largely inevitable development. This type of discourse, which is characteristic of the financial community, has become less prominent as the issue of globalization has become increasingly politicized. For example, a study of newspaper articles has shown that the percentage of articles exhibiting neutral framing decreased from nearly 90% in 1986 to around 25% in 1998.[152] It should be noted, however, that the number of newspaper articles dealing with globalization increased almost tenfold during that period.[158] Therefore, the total number of neutral articles has probably increased. Examples of literature associated with this frame would include textbooks, books on international finance, and articles on globalization found in financial journals like the Wall Street Journal.

[edit] Critics
Since 1991, this discourse has been increasing rapidly in importance in the United states; the number of newspaper articles showing negative framing rose from about 10% of the total in 1991 to 55% of the total in 1999. This increase occurred during a period when the total number of articles concerning globalization nearly doubled. [132] This discourse takes two very different forms: 1) Concern over economic well being in developed countries In industrialized countries discourse about globalization centers on economic self-interest. Newspaper articles about globalization typically express concerns involve the interconnectedness of international financial markets and the potential for economic crisis, as well as threats to the livelihood of workers.[152] 2) Concern over the impact of globalization in developing countries The establishment of the WTO in 1995 and subsequent protests led to a large-scale antiglobalization movement that is primarily concerned with the negative impact of globalization in developing countries. Their concerns range from environmental issues to issues like democracy, national sovereignty and the exploitation of workers. (See the following discussion on the antiglobalization movement). Individuals who associate themselves with the anti-globalization movement in industrialized countries comprise a relatively small but vocal minority. They are disproportionately middleclass and college-educated. This contrasts sharply with the situation in developing countries, where the anti-globalization movement has been more successful in achieving a broader, more balanced social class composition, with millions of workers and farmers getting actively involved.[159]

[edit] Common ground

This discourse involves a synthesis combining elements of all three of the above forms. It is practical, insofar as it accepts the reality of international integration and attempts to work within it. It is positive in that it believes that international cooperation can provide solutions to important problems. At the same time, it recognizes the negative aspects of globalization and proposes ways to mitigate their impact. Beginning in 2001 with the World Social Forum (WSF), there has been a movement consisting of individuals trying to bring about this type of synthesis. It is associated with the term Alterglobalization (or altermondialization), a positive spin on the term anti-globalization. Members of this movement support the international integration of globalization, but demand that values of democracy, economic justice, environmental protection, and human rights be put ahead of purely economic concerns. This movement is discussed at length in the section Alter-globalization.

[edit] Anti-globalization movement

Main article: Anti-globalization movement See also: Alter-globalization, Participatory economics, and Global Justice Movement "Anti-globalization" can involve the process or actions taken by a state or its people in order to demonstrate its sovereignty and practice democratic decision-making. Anti-globalization may occur in order to maintain barriers to the international transfer of people, goods and beliefs, particularly free market deregulation, encouraged by business organizations and organizations such as the International Monetary Fund or the World Trade Organization. Moreover, as Naomi Klein argues in her book No Logo, anti-globalism can denote either a single social movement or an umbrella term that encompasses a number of separate social movements[160] such as nationalists and socialists. Some people who are labeled "anti-globalist" or "sceptics" (Hirst and Thompson)[161] consider the term to be too vague and inaccurate.[162][163] Podobnik states that "the vast majority of groups that participate in these protests draw on international networks of support, and they generally call for forms of globalization that enhance democratic representation, human rights, and egalitarianism." Joseph Stiglitz and Andrew Charlton write:[164]

The anti-globalization movement developed in opposition to the perceived negative aspects of globalization. The term 'anti-globalization' is in many ways a misnomer, since the group represents a wide range of interests and issues and many of the people involved in the anti-globalization movement do support closer ties between the various peoples and cultures of the world through, for example, aid, assistance for refugees, and global environmental issues.

Some members aligned with this viewpoint prefer instead to describe themselves as the "Global Justice Movement", the "Anti-Corporate-Globalization Movement", the "Movement of Movements" (a popular term in Italy), the "Alter-globalization" movement (popular in France), the "Counter-Globalization" movement, and a number of other terms. Critiques of the current wave of economic globalization typically look at both the damage to the planet, in terms of the unsustainable harm done to the biosphere, as well as the human costs, such as poverty, inequality, miscegenation, injustice and the erosion of traditional culture which, the critics contend, all occur as a result of the economic transformations related to globalization. They challenge directly the metrics, such as GDP, used to measure progress promulgated by institutions such as the World Bank, and look to other measures, such as the Happy Planet Index,[165] created by the New Economics Foundation.[166] They point to a "multitude of interconnected fatal consequencessocial disintegration, a breakdown of democracy, more rapid and extensive deterioration of the environment, the spread of new diseases, increasing poverty and alienation"[167] which they claim are the unintended but very real consequences of globalization. The terms globalization and anti-globalization are used in various ways. Noam Chomsky believes that[168][169]

The term "globalization" has been appropriated by the powerful to refer to a specific form of international economic integration, one based on investor rights, with the interests of people incidental. That is why the business press, in its more honest moments, refers to the "free trade agreements" as "free investment agreements" (Wall St. Journal). Accordingly, advocates of other forms of globalization are described as "antiglobalization"; and some, unfortunately, even accept this term, though it is a term of propaganda that should be dismissed with ridicule. No sane person is opposed to globalization, that is, international integration. Surely not the left and the workers movements, which were founded on the principle of international solidarity that is, globalization in a form that attends to the rights of people, not private power systems. The dominant propaganda systems have appropriated the term "globalization" to refer to the specific version of international economic integration that they favor, which privileges the rights of investors and lenders, those of people being incidental. In accord with this usage, those who favor a different form of international integration, which privileges the rights of human beings, become "anti-globalist." This is simply vulgar propaganda, like the term "anti-Soviet" used by the most disgusting commissars to refer to dissidents. It is not only vulgar, but idiotic. Take the World Social Forum, called "anti-globalization" in the propaganda system which happens to include the media, the educated classes, etc., with rare exceptions. The WSF is a paradigm example of globalization. It is a gathering of huge numbers of people from all over the world, from just about every corner of life one can think of, apart from the extremely narrow highly privileged elites who meet at the competing World Economic Forum, and are called "pro-globalization" by the propaganda system. An observer watching this farce from Mars would collapse in hysterical laughter at the antics of the educated classes.

Critics argue that globalization results in:

Poorer countries suffering disadvantages: While it is true that globalization encourages free trade among countries, there are also negative consequences because some countries try to save their national markets. The main export of poorer countries is usually agricultural goods. Larger countries often subsidise their farmers (like the EU Common Agricultural Policy), which lowers the market price for the poor farmer's crops compared to what it would be under free trade.[170] (See Agricultural subsidy for more information.) The shift to outsourcing: Globalization has allowed corporations to move manufacturing and service jobs from high cost locations to locations with the lowest wages and worker benefits. This results in loss of jobs in the high cost locations while creating great economic opportunities in poorer countries.[81] Weak labor unions: The surplus in cheap labor coupled with an ever growing number of companies in transition has caused a weakening of labor unions in the United States. Unions lose their effectiveness when their membership begins to decline. As a result unions hold less power over corporations that are able to easily replace workers, often for lower wages, and have the option to not offer unionized jobs anymore.[170] An increase in exploitation of child labor: for example, a country that experiencing increases in labor demand because of globalization and an increase the demand for goods produced by children, will experience greater a demand for child labor. This can be

"hazardous" or "exploitive", e.g., quarrying, salvage, cash cropping but also includes the trafficking of children, children in bondage or forced labor, prostitution, pornography and other illicit activities.[171] In December 2007, World Bank economist Branko Milanovic has called much previous empirical research on global poverty and inequality into question because, according to him, improved estimates of purchasing power parity indicate that developing countries are worse off than previously believed. Milanovic remarks that "literally hundreds of scholarly papers on convergence or divergence of countries incomes have been published in the last decade based on what we know now were faulty numbers." With the new data, possibly economists will revise calculations, and he also believed that there are considerable implications estimates of global inequality and poverty levels. Global inequality was estimated at around 65 Gini points, whereas the new numbers indicate global inequality to be at 70 on the Gini scale.[172] The critics of globalization typically emphasize that globalization is a process that is mediated according to corporate interests, and typically raise the possibility of alternative global institutions and policies, which they believe address the moral claims of poor and working classes throughout the globe, as well as environmental concerns in a more equitable way.[173] The movement includes church groups, national liberation factions, peasant unionists, intellectuals, artists, protectionists, anarchists, those in support of relocalization and others. Some are reformist, (arguing for a more moderate form of capitalism) while others are more revolutionary (arguing for what they believe is a more humane system than capitalism) and others are reactionary, believing globalization destroys national industry and jobs. One of the key points made by critics of recent economic globalization is that income inequality, both between and within nations, is increasing as a result of these processes. One article from 2001 found that significantly, in 7 out of 8 metrics, income inequality has increased in the twenty years ending 2001. Also, "incomes in the lower deciles of world income distribution have probably fallen absolutely since the 1980s". Furthermore, the World Bank's figures on absolute poverty were challenged. The article was skeptical of the World Bank's claim that the number of people living on less than $1 a day has held steady at 1.2 billion from 1987 to 1998, because of biased methodology.[174] A chart that gave the inequality a very visible and comprehensible form, the so-called 'champagne glass' effect,[175] was contained in the 1992 United Nations Development Program Report, which showed the distribution of global income to be very uneven, with the richest 20% of the world's population controlling 82.7% of the world's income.[176] Distribution of world GDP, 1989 Quintile of Population Income Richest 20% 82.7% Second 20% 11.7% Third 20% 2.3% Fourth 20% 2.4%

Poorest 20%

0.2%

Source: United Nations Development Program. 1992 Human Development Report[177] Economic arguments by fair trade theorists claim that unrestricted free trade benefits those with more financial leverage (i.e. the rich) at the expense of the poor.[178] Americanization related to a period of high political American clout and of significant growth of America's shops, markets and object being brought into other countries. So globalization, a much more diversified phenomenon, relates to a multilateral political world and to the increase of objects, markets and so on into each others countries. Critics of globalization talk of Westernization. A 2005 UNESCO report[179] showed that cultural exchange is becoming more frequent from Eastern Asia but Western countries are still the main exporters of cultural goods. In 2002, China was the third largest exporter of cultural goods, after the UK and US. Between 1994 and 2002, both North America's and the European Union's shares of cultural exports declined, while Asia's cultural exports grew to surpass North America. Related factors are the fact that Asia's population and area are several times that of North America. Some opponents of globalization see the phenomenon as the promotion of corporatist interests.[180] They also claim that the increasing autonomy and strength of corporate entities shapes the political policy of countries.[181][182]

The Impacts of Globalization on Music The term globalization implies the idea of change and social transformation. This is a phenomenon that weakens the nation-state and endorses the idea of capitalism as a global economy. Due to this, cultural practices and musical identities can be lost and/or turned into a fusion of traditions. Hence, through globalization there is a reigning musical hegemony over local traditions. For the ethnomusicologist, globalization can be a tragic phenomenon and it sets in motion a state of emergency for the preservation of the local musical heritage. Through fieldwork, the researcher must attempt to collect, record or transcribe the greatest amount of repertoire before these melodies are assimilated or modified due to the various impacts of globalization. For the informant and/or local musician, there will be a struggle for authenticity in the quest to preserve local musical traditions. Moreover, globalization can lead to the loss of use of traditional instruments in favor of more mainstream instruments. However, the creation of these new fusion genres can become new and interesting fields of analysis for the ethnomusicologist. Globalization, locality, musical identity, immigration, diaspora and cosmopolitan formations all have a direct impact on the research of the ethnomusicologist. World-Music as a phenomenon can be derived from globalization as it emerged as a group of local record-labels recording non-Western Music and making it available to the West which is in

search of Other music (Orientalism, Exoticism)(Clayton). However, music moguls of modern music genres are tapping into these resources and using/copying these melodies into their own repertoire. However, globalization can also be understood as "colonization or "westernalisation" when considering the propaganda of ideas, values. One can observe the spread of Anglo-American pop music across the world through MTV where it can be accessed readily in most regions. This can be perceived as Americanization of Culture (Clayton). Moreover, the Dependency Theory (1960) explains that the world is not a collection of independent, boundaried nations, but instead an integrated, international system: a World System. Musically, this translates into the loss of local musical identity. Finally, for Bourdieu the perception of consumption can be seen as self-identification and the formation of identity. Musically, this translates into each being having his/her own musical identity based on likes and tastes. These likes and tastes are greatly influenced by culture as this is the most basic cause for a persons wants and behavior. The concept of ones own culture is now in a period of change due to globalization. Also, globalization has had an impact on the various structures in todays society. There is now interdependency between the political, personal, cultural and economic factors. This leaves its mark on musical practices within a society. NAFTA" redirects here. For other uses of the acronym, see Nafta (disambiguation).

North American Free Trade Agreement Tratado de Libre Comercio de Amrica del Norte (Spanish) Accord de Libre-change Nord-Amricain (French)

Mexico City, Ottawa, and Washington, D.C. Languages 3[show] Canada Membership Mexico United States Establishment - Formation January 1, 1994 Area 21,783,850 km2 (1st) - Total 8,410,792 sq mi - Water (%) 7.4 Population - 2010 estimate 457,284,932 (3rd) 25.1/km2 (195th) - Density 54.3/sq mi GDP (PPP) 2010 (IMF) estimate - Total $17,617,989 trillion (1st) - Per capita $38,527 (14th) GDP (nominal) 2010 (IMF) estimate - Total $17,271,000 trillion (1st) - Per capita $37,769 (21st) Website www.nafta-sec-alena.org Administrative center

The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada United States Free Trade Agreement between the U.S. and Canada. In terms of combined GDP of its members, as of 2010 the trade bloc is the largest in the world.

The North American Free Trade Agreement (NAFTA) has two supplements, the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).

Contents
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1 Negotiation and U.S. ratification 2 Provisions 3 Mechanisms o 3.1 Trade o 3.2 Industry o 3.3 Environment o 3.4 Agriculture o 3.5 Mobility of persons 4 Criticism and controversies o 4.1 Canadian disputes 4.1.1 Change in income trust taxation 4.1.2 Further criticism in Canada o 4.2 U.S. deindustrialization o 4.3 Impact on Mexican farmers o 4.4 Zapatista Uprising in response to NAFTA in Chiapas, Mexico o 4.5 Impact of NAFTA on Canada o 4.6 Chapter 11 o 4.7 Chapter 19 5 See also 6 References 7 Further reading 8 External links

[edit] Negotiation and U.S. ratification

Following diplomatic negotiations dating back to 1986 among the three nations, the leaders met in San Antonio, Texas, on December 17, 1992, to sign NAFTA. U.S. President George H. W. Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas, each responsible for spearheading and promoting the agreement, ceremonially signed it. The agreement then needed to be ratified by each nation's legislative or parliamentary branch. Before the negotiations were finalized, Bill Clinton came into office in the U.S. and Kim Campbell in Canada, and before the agreement became law, Jean Chrtien had taken office in Canada.

Remarks on the Signing of NAFTA (December 8, 1993)

Bill Clinton's December 8, 1993 remarks on the signing of the North American Free Trade Agreement Remarks on the Signing of NAFTA (December 8, 1993) audio only version
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The proposed Canada-U.S.trade agreement had been extremely controversial and divisive in Canada, and the 1988 Canadian election was fought almost exclusively on that issue. In that election more Canadians voted for anti-free trade parties (the Liberals and the New Democrats) but more seats in parliament were won by the pro-free trade Progressive Conservatives (PCs). Mulroney and the PCs had a parliamentary majority and were able to easily pass the CanadaU.S. FTA and NAFTA bills. However, Mulroney himself had become deeply unpopular and resigned on June 25, 1993. He was replaced as Conservative leader and prime minister by Kim Campbell, who then led the PC party into the 1993 election where they were decimated by the Liberal party under Jean Chrtien. Chrtien had campaigned on a promise to renegotiate or abrogate NAFTA, but instead negotiated the two supplemental agreements with the new U.S. president. In the U.S., Bush, who had worked to "fast track" the signing prior to the end of his term, ran out of time and had to pass the required ratification and signing into law to incoming president Bill Clinton. Prior to sending it to the United States Senate, Clinton introduced clauses to protect American workers and allay the concerns of many House members. It also required U.S. partners to adhere to environmental practices and regulations similar to its own. With much consideration and emotional discussion, the House of Representatives approved NAFTA on November 17, 1993, by a vote of 234 to 200. The agreement's supporters included 132 Republicans and 102 Democrats. NAFTA passed the Senate 61-38. Senate supporters were 34 Republicans and 27 Democrats. Clinton signed it into law on December 8, 1993; it went into effect on January 1, 1994.[1][2] Clinton while signing the NAFTA bill stated: "...NAFTA means jobs. American jobs, and good-paying American jobs. If I didn't believe that, I wouldn't support this agreement."[3] This section requires expansion.

[edit] Provisions

The goal of NAFTA was to eliminate barriers to trade and investment between the US, Canada and Mexico. The implementation of NAFTA on January 1, 1994 brought the immediate elimination of tariffs on more than one-half of U.S. imports from Mexico and more than onethird of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all USMexico tariffs would be eliminated except for some U.S. agricultural exports to Mexico that were to be phased out within 15 years. Most U.S.-Canada trade was already duty free. NAFTA also seeks to eliminate non-tariff trade barriers.

[edit] Mechanisms
Chapter 20 provides a procedure for the interstate resolution of disputes over the application and interpretation of the NAFTA. It was modeled after Chapter 18 of the Canada-United States Free Trade Agreement.[4] NAFTA's effects, both positive and negative, have been quantified by several economists, whose findings have been reported in publications such as the World Bank's Lessons from NAFTA for Latin America and the Caribbean,[5] NAFTA's Impact on North America,[6] and NAFTA Revisited by the Institute for International Economics.[7] Some[who?] argue that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise (in the form of lower prices, especially food), even after accounting for the 199495 economic crisis.[8] Others argue that NAFTA has been beneficial to business owners and elites in all three countries, but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from US agribusiness, and negative impacts on US workers in manufacturing and assembly industries who lost jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the US and Mexico. Some economists believe that NAFTA has not been enough (or worked fast enough) to produce an economic convergence,[9] nor to substantially reduce poverty rates. Some have suggested that in order to fully benefit from the agreement, Mexico must invest more in education and promote innovation in infrastructure and agriculture.

[edit] Trade
According to Isaac Cohen (1995), overall, NAFTA has not caused trade diversion, aside from a few industries such as textiles and apparel, in which rules of origin negotiated in the agreement were specifically designed to make US firms prefer Mexican manufacturers. The World Bank also showed that the combined percentage growth of NAFTA imports was accompanied by an almost similar increase of non-NAFTA exports.

[edit] Industry
Maquiladoras (Mexican factories that take in imported raw materials and produce goods for export) have become the landmark of trade in Mexico. These are plants that moved to this region from the United States, hence the debate over the loss of American jobs. Hufbauer's (2005) book shows that income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994. Other sectors now benefit from the free trade agreement, and the share of exports from non-border states has increased in the last five years while the share of exports from maquiladora-border states has decreased. This has allowed for the rapid growth of non-border

metropolitan areas, such as Toluca, Len and Puebla; all three larger in population than Tijuana, Ciudad Jurez, and Reynosa.

[edit] Environment
For more details on this topic, see NAFTA's Impact on the Environment. Securing U.S. congressional approval for NAFTA would have been impossible without addressing public concerns about NAFTAs environmental impact. The Clinton administration negotiated a side agreement on the environment with Canada and Mexico, the North American Agreement on Environmental Cooperation (NAAEC), which led to the creation of the Commission for Environmental Cooperation (CEC) in 1994. To alleviate concerns that NAFTA, the first regional trade agreement between a developing country and two developed countries, would have negative environmental impacts, the CEC was given a mandate to conduct ongoing ex post environmental assessment of NAFTA.[10] In response to this mandate, the CEC created a framework for conducting environmental analysis of NAFTA, one of the first ex post frameworks for the environmental assessment of trade liberalization. The framework was designed to produce a focused and systematic body of evidence with respect to the initial hypotheses about NAFTA and the environment, such as the concern that NAFTA would create a "race to the bottom" in environmental regulation among the three countries, or the hope that NAFTA would pressure governments to increase their environmental protection mechanisms.[11] The CEC has held four symposia using this framework to evaluate the environmental impacts of NAFTA and has commissioned 47 papers on this subject. In keeping with the CECs overall strategy of transparency and public involvement, the CEC commissioned these papers from leading independent experts.[12] Overall, none of the initial hypotheses were confirmed.[citation needed] NAFTA did not inherently present a systemic threat to the North American environment, as was originally feared, apart from potentially the ISDS provisions of Ch 11. NAFTA-related environmental threats instead occurred in specific areas where government environmental policy, infrastructure, or mechanisms, were unprepared for the increasing scale of production under trade liberalization.[citation needed] In some cases, environmental policy was neglected in the wake of trade liberalization; in other cases, NAFTA's measures for investment protection, such as Chapter 11, and measures against non-tariff trade barriers, threatened to discourage more vigorous environmental policy.[13] The most serious overall increases in pollution due to NAFTA were found in the base metals sector, the Mexican petroleum sector, and the transportation equipment sector in the United States and Mexico, but not in Canada.[14]

[edit] Agriculture
From the earliest negotiation, agriculture was (and still remains) a controversial topic within NAFTA, as it has been with almost all free trade agreements that have been signed within the WTO framework. Agriculture is the only section that was not negotiated trilaterally; instead, three separate agreements were signed between each pair of parties. The CanadaU.S. agreement contains significant restrictions and tariff quotas on agricultural products (mainly sugar, dairy,

and poultry products), whereas the MexicoU.S. pact allows for a wider liberalization within a framework of phase-out periods (it was the first NorthSouth FTA on agriculture to be signed). The overall effect of the MexicoU.S. agricultural agreement is a matter of dispute. Mexico did not invest in the infrastructure necessary for competition, such as efficient railroads and highways, creating more difficult living conditions for the country's poor. Still, the causes of rural poverty cannot be directly attributed to NAFTA[citation needed]; in fact, Mexico's agricultural exports increased 9.4 percent annually between 1994 and 2001, while imports increased by only 6.9 percent a year during the same period.[15] One of the most affected agricultural sectors is the meat industry. Mexico has gone from a smallkey player in the pre-1994 U.S. export market to the 2nd largest importer of U.S. agricultural products in 2004, and NAFTA may be credited as a major catalyst for this change. The allowance of free trade removed the hurdles that impeded business between the two countries. As a result, Mexico has provided a growing meat market for the U.S., leading to an increase in sales and profits for the U.S. meat industry. This coincides with a noticeable increase in Mexican per capita GDP that has created large changes in meat consumption patterns, implying that Mexicans can now afford to buy more meat and thus per capita meat consumption has grown.[16] Production of corn in Mexico has increased since NAFTA's implementation. However, internal corn demand has increased beyond Mexico's sufficiency, and imports have become necessary, far beyond the quotas Mexico had originally negotiated.[17] Zahniser & Coyle have also pointed out that corn prices in Mexico, adjusted for international prices, have drastically decreased, yet through a program of subsidies expanded by former president Vicente Fox, production has remained stable since 2000.[18] The logical result of a lower commodity price is that more use of it is made downstream. Unfortunately, many of the same rural people who would have been likely to produce highermargin value-added products in Mexico have instead emigrated. The rise in corn prices due to increased ethanol demand may improve the situation of corn farmers in Mexico.[citation needed] In a study published in the August 2008 issue of the American Journal of Agricultural Economics, NAFTA has increased U.S. agricultural exports to Mexico and Canada even though most of this increase occurred a decade after its ratification. The study focused on the effects that gradual "phase-in" periods in regional trade agreements, including NAFTA, have on trade flows. Most of the increase in members agricultural trade, which was only recently brought under the purview of the World Trade Organization, was due to very high trade barriers before NAFTA or other regional trade agreements.[19]

[edit] Mobility of persons

According to the Department of Homeland Security Yearbook of Immigration Statistics, during fiscal year 2006 (i.e., October 2005 through September 2006), 73,880 foreign professionals (64,633 Canadians and 9,247 Mexicans) were admitted into the United States for temporary employment under NAFTA (i.e., in the TN status). Additionally, 17,321 of their family members (13,136 Canadians, 2,904 Mexicans, as well as a number of third-country nationals married to

Canadians and Mexicans) entered the U.S. in the treaty national's dependent (TD) status.[20] Because DHS counts the number of the new I-94 arrival records filled at the border, and the TN1 admission is valid for three years, the number of non-immigrants in TN status present in the U.S. at the end of the fiscal year is approximately equal to the number of admissions during the year. (A discrepancy may be caused by some TN entrants leaving the country or changing status before their three-year admission period has expired, while other immigrants admitted earlier may change their status to TN or TD, or extend TN status granted earlier). Canadian authorities estimated that, as of December 1, 2006, a total of 24,830 U.S. citizens and 15,219 Mexican citizens were present in Canada as "foreign workers". These numbers include both entrants under the NAFTA agreement and those who have entered under other provisions of the Canadian immigration law.[21] New entries of foreign workers in 2006 were 16,841 (U.S. citizens) and 13,933 (Mexicans).[22]

[edit] Criticism and controversies

[edit] Canadian disputes
This article is outdated. Please update this article to reflect recent events or newly available information. Please see the talk page for more information. (August 2009)

Garment workers assemble suits in a Toronto factory in 1901 There is much concern in Canada over the provision that if something is sold even once as a commodity, the government cannot stop its sale in the future.[23] This applies to the water from Canada's lakes and rivers, fueling fears over the possible destruction of Canadian ecosystems and water supply. In 1999, Sun Belt Water Inc., a company out of Santa Barbara, California, filed an Arbitration Claim under Chapter 11 of the NAFTA claiming $105 million as a result of Canada's prohibition on the export of bulk water by marine tanker, a move that destroyed the Sun Belt business venture. The claim sent shock waves through Canadian governments that scrambled to update water legislation and remains unresolved. Other fears come from the effects NAFTA has had on Canadian lawmaking. In 1996, the gasoline additive MMT was brought into Canada by an American company. At the time, the

Canadian federal government banned the importation of the additive. The American company brought a claim under NAFTA Chapter 11 seeking US$201 million,[24] from the Canadian government and the Canadian provinces under the Agreement on Internal Trade ("AIT"). The American company argued that their additive had not been conclusively linked to any health dangers, and that the prohibition was damaging to their company. Following a finding that the ban was a violation of the AIT,[25] the Canadian federal government repealed the ban and settled with the American company for US$13 million.[26] Studies by Health and Welfare Canada (now Health Canada) on the health effects of MMT in fuel found no significant health effects associated with exposure to these exhaust emissions. Other Canadian researchers and the U.S. Environmental Protection Agency disagree with Health Canada, and cite studies that include possible nerve damage.[27]

Ponderosa Pine logs taken from Malheur National Forest, Grant County, Oregon. The United States and Canada had been arguing for years over the United States' decision to impose a 27 percent duty on Canadian softwood lumber imports, until new Canadian Prime Minister Stephen Harper compromised with the United States and reached a settlement on July 1, 2006.[28] The settlement has not yet been ratified by either country, in part due to domestic opposition in Canada. Canada had filed numerous motions to have the duty eliminated and the collected duties returned to Canada.[29] After the United States lost an appeal from a NAFTA panel, it responded by saying "We are, of course, disappointed with the [NAFTA panel's] decision, but it will have no impact on the anti-dumping and countervailing duty orders." (Nick Lifton, spokesman for U.S. Trade Representative Rob Portman)[30] On July 21, 2006, the United States Court of International Trade found that imposition of the duties was contrary to U.S. law.[31][32] [edit] Change in income trust taxation On October 30, 2007, American citizens Marvin and Elaine Gottlieb filed a Notice of Intent to Submit a Claim to Arbitration under NAFTA. The couple claims thousands of U.S. investors lost a total of $5 billion dollars in the fall-out from the Conservative Government's decision the previous year to change the tax rate on income trusts in the energy sector. On April 29, 2009, a determination was made that this change in tax law was not expropriation.[33] [edit] Further criticism in Canada A book written by Mel Hurtig published in 2002 called The Vanishing Country charged that since NAFTA's ratification more than 10,000 Canadian companies had been taken over by foreigners, and that 98% of all foreign direct investments in Canada were for foreign takeovers.[34] The term "the Double Yu(c)k Alliance aka NAFTA from Yukon to Yucatn" was first used in 1994 by Miodrag Kojadinovi in his article "Friends and Neighbours: Dear Prime Minister of Canada, Kindly Join the EU Next Thursday".[35]

[edit] U.S. deindustrialization

For more details on this topic, see NAFTA's effect on United States employment.

Studies done by Kate Bronfenbrenner at Cornell University showed the adverse effect of plants threatening to move to Mexico because of NAFTA.[36] An increase in domestic manufacturing output and a proportionally greater domestic investment in manufacturing does not necessarily mean an increase in domestic manufacturing jobs; this increase may simply reflect greater automation and higher productivity. Although the U.S. total civilian employment may have grown by almost 15 million in between 1993 and 2001, manufacturing jobs only increased by 476,000 in the same time period.[37] Furthermore from 1994 to 2007, net manufacturing employment has declined by 3,654,000, and during this period several other free trade agreements have been concluded or expanded.[37]

[edit] Impact on Mexican farmers

In 2000, U.S. government subsidies to the corn sector totaled $10.1 billion. These subsidies have led to charges of dumping, which jeopardizes Mexican farms and the country's food selfsufficiency. Other studies reject NAFTA as the force responsible for depressing the incomes of poor corn farmers, citing the trend's existence more than a decade before NAFTA's existence, an increase in maize production after NAFTA went into effect in 1994, and the lack of a measurable impact on the price of Mexican corn due to subsidized corn coming into Mexico from the United States, though they agree that the abolition of U.S. agricultural subsidies would benefit Mexican farmers.[38] According to Graham Purchase in Anarchism and Environmental Survival, NAFTA could cause "the destruction of the ejidos (peasant cooperative village holdings) by corporate interests, and threatens to completely reverse the gains made by rural peoples in the Mexican Revolution."[39]

[edit] Zapatista Uprising in response to NAFTA in Chiapas, Mexico

The preparations for NAFTA included cancellation of Article 27 of Mexico's constitution, the cornerstone of Emiliano Zapata's revolution of 19101919. Under the historic Article 27, Indian communal landholdings were protected from sale or privatization. But under NAFTA this guarantee was defined as a barrier to investment. With the removal of Article 27, Indian farmers

would be threatened with loss of their remaining lands, and also flooded with cheap imports (substitutes) from the US. Thus, the Zapatistas labeled NAFTA as a "death sentence" to Indian communities all over Mexico. Then EZLN declared war on the Mexican state on January 1, 1994 the day NAFTA came into force.[40]

[edit] Impact of NAFTA on Canada

Canada gained the most from NAFTA with Canada's GDP rate at 3.6%, growing faster than the United States at 3.3% and Mexico at 2.7%. Canadian employment levels have also shown steady gains in recent years, with overall employment rising from 14.9 million to 15.7 million in the early 2000s. Even Canadian manufacturing employment held steady. One of NAFTA's biggest economic effects on U.S.-Canada trade has been to boost bilateral agricultural flows.[41] In the year 2008 alone, Canada exports to the United States and Mexico was at CAN$381.3 Billion Dollars and imports from NAFTA was at CAN$245.1 Billion Dollars.[42] The Canadian mainstream has been so unanimous in its recognition of NAFTA's advantages despite a few odd detractors that even former NDP Gary Doer of Manitoba openly praises the benefits of NAFTA.[43]

[edit] Chapter 11
Another contentious issue is the impact of the Investor state dispute settlement obligations contained in Chapter 11 of the NAFTA.[44] Chapter 11 allows corporations or individuals to sue Mexico, Canada or the United States for compensation when actions taken by those governments (or by those for whom they are responsible at international law, such as provincial, state, or municipal governments) have adversely affected their investments. This chapter has been invoked in cases where governments have passed laws or regulations with intent to protect their constituents and their resident businesses' profits. Language in the chapter defining its scope states that it cannot be used to "prevent a Party from providing a service or performing a function such as law enforcement, correctional services, income security or insurance, social security or insurance, social welfare, public education, public training, health, and child care, in a manner that is not inconsistent with this Chapter."[45] This chapter has been criticized by groups in the U.S.,[46] Mexico,[47] and Canada[48] for a variety of reasons, including not taking into account important social and environmental[49] considerations. In Canada, several groups, including the Council of Canadians, challenged the constitutionality of Chapter 11. They lost at the trial level,[50] and have subsequently appealed. Methanex Corporation, a Canadian corporation, filed a US$970 million suit against the United States, claiming that a California ban on Methyl tert-butyl ether (MTBE), a substance that had found its way into many wells in the state, was hurtful to the corporation's sales of methanol. However, the claim was rejected, and the company was ordered to pay US$3 million to the U.S. government in costs.[51] In another case, Metalclad, an American corporation, was awarded US$15.6 million from Mexico after a Mexican municipality refused a construction permit for the hazardous waste

landfill it intended to construct in Guadalczar, San Luis Potos. The construction had already been approved by the federal government with various environmental requirements imposed (see paragraph 48 of the tribunal decision). The NAFTA panel found that the municipality did not have the authority to ban construction on the basis of the environmental concerns.[52]

[edit] Chapter 19
Also contended is NAFTA's Chapter 19, which subjects antidumping and countervailing duty (AD/CVD) determinations with binational panel review instead of, or in addition to, conventional judicial review. For example, in the United States, review of agency decisions imposing antidumping and countervailing duties are normally heard before the U.S. Court of International Trade, an Article III court. NAFTA parties, however, have the option of appealing the decisions to binational panels composed of five citizens from the two relevant NAFTA countries. The panelists are generally lawyers experienced in international trade law. Since the NAFTA does not include substantive provisions concerning AD/CVD, the panel is charged with determining whether final agency determinations involving AD/CVD conform with the country's domestic law. Chapter 19 can be considered as somewhat of an anomaly in international dispute settlement since it does not apply international law, but requires a panel composed of individuals from many countries to reexamine the application of one country's domestic law. A Chapter 19 panel is expected to examine whether the agency's determination is supported by "substantial evidence." This standard assumes significant deference to the domestic agency. Some of the most controversial trade disputes in recent years, such as the U.S.-Canada softwood lumber dispute, have been litigated before Chapter 19 panels. Decisions by Chapter 19 panels can be challenged before a NAFTA extraordinary challenge committee. However, an extraordinary challenge committee does not function as an ordinary appeal. Under the NAFTA, it will only vacate or remand a decision if the decision involves a significant and material error that threatens the integrity of the NAFTA dispute settlement system. Since January 2006, no NAFTA party has successfully challenged a Chapter 19 panel's decision before an extraordinary challenge committee.

Country risk refers to the risk of investing in a country, dependent on changes in the business environment that may adversely affect operating profits or the value of assets in a specific country. For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies' operational risks. This term is also sometimes referred to as political risk; however, country risk is a more general term that generally refers only to risks affecting all companies operating within a particular country. Political risk analysis providers and credit rating agencies use different methodologies to assess and rate countries' comparative risk exposure. Credit rating agencies tend to use quantitative econometric models and focus on financial analysis, whereas political risk providers tend to use

qualitative methods, focusing on political analysis. However, there is no consensus on methodology in assessing credit and political risks.

Contents
[hide]

1 Country risk ratings 2 Partial list of country risk premium 3 Partial list of credit risk rating agencies 4 Partial list of political risk analysis organizations 5 Downloadable Country Analysis and Reports 6 References

[edit] Country risk ratings

Source: Euromoney Country risk March 2010[1] Country risk rankings Least risky countries, Score out of 100 Previous Country Overall score Rank 1 Norway 94.05 1 2 Luxembourg 92.35 2 3 Switzerland 90.65 3 4 Denmark 88.55 4 6 Finland 87.81 5 5 Sweden 86.81 6 7 Austria 86.50 7 11 Canada 86.09 8 8 Netherlands 84.86 9 9 Australia 84.16 10 The least-risky countries for investment. Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index "Country risk survey" monitors the political and economic stability of 185 sovereign countries. Results focus foremost on economics, specifically sovereign default risk and/or payment default risk for exporters (a.k.a. "trade credit" risk).