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This study is qualitative in nature. Data has been collected through qualitative methods and descriptive studies to attain some sort of result and conclusion.
Selection of Characteristics
Four characteristics were identified in the first part of the thesis namely; Import and Export, Remittances, Foreign Direct Investment and Foreign Portfolio Investment. An economy is linked with the outside influences from all around the world mainly through these four characteristics. Normally these four characteristics are analyzed when gauging the impact of what is happening in the rest of the world and its effects on an economy. Another reason for the selection was the availability of data. We were able to attain sufficient data to proceed with the analysis part. A brief description of what these characteristics are and represent has been given below in detail.
Import and Export
The bilateral trade with the rest of the world has grown significantly during the last 10 years and is now a significant component of the GDP. The volume of trade in goods and services across the world was significantly affected by the crisis. It was growing at a rate of 9.1 percent in 2006. It fell to 2.95 percent in 2008, and shrank by 12.30 percent in 2009. Contraction in trade volume across countries can exacerbate global imbalances and cause financial distress in firms that depend on international trade for selling their output and for sourcing their resources. Specifically, export oriented sectors, such as textiles, gems and jewelry, leather and chemicals, experienced declines in export growth which resulted in larger current account deficit. In the domestic market, the liquidity crisis in the financial sector, along with rising inflation rates, resulted in lowering the demand for goods and services. The rising current account deficit and the declining demand in the domestic market contributed to labor retrenchment in the affected industries (Viswanathan 2010).
Remittances are emerging as an important source of external development finance. They have been growing in both absolute volume as well as relative to other sources of external finance. Perhaps even more important, they are the most stable source of external finance and are providing crucial social insurance in many countries afflicted by economic and political crises (Kapur 2004). One of the distinguishing features of the global financial crisis of 2007 ââ‚¬" 2009 is its effect on remittances. Until the financial crisis, remittances had proven to be a remarkably dependable source of income for households in developing economies, growing robustly regardless of the state of the business cycle. But because real-sector spillovers from the recent financial crisis were quite severe, and fell most heavily on developed and energy-exporting countries, the main sources of immigrant remittances, the total quantity of remittances is expected to fall (Barajas et al. 2010).
Foreign Direct Investment
Following the 1980s debt crisis and the 1997 turmoil in the emerging economies, the emphasis among policymakers in developing countries has shifted towards attracting more Foreign Direct Investment (FDI). The rationale for such increased efforts to attract more FDI stems from the belief that FDI has several positive effects which include productivity gains, technology transfers, the introduction of new processes to the domestic market, managerial skills and know-how, employee training, international production networks, and access to markets. In addition to these real benefits, its relative stability has also increased the emphasis on FDI among all capital flows. Either by learning-by-observing or learning-by-doing, foreign production may increase domestic productivity and the overall economic growth in the domestic economy. Domestic firms may benefit from accelerated diffusion of new technology if foreign firms introduce new products or processes to the domestic market. In some cases, domestic firms might benefit just from observing these foreign firms (Blomstrom and Kokko 1997).
In other cases, technology diffusion might occur from labor turnover as domestic employees move from foreign to domestic firms. These benefits together with the direct capital financing it provides, suggest that FDI can play an important role in modernizing the national economy and promote growth (Alfaro et al. 2002). While FDI to developing countries grew tremendously over the past seven years to a record high of over US$ 500 billion by 2007, it is expected that FDI flows to these countries will decrease by 10 percent in 2008 (UNCTAD 2008), greatly adding to their balance-of-payments constraints (Naude 2009).
Foreign Portfolio Investment
As Foreign Portfolio Investment (FPI) essentially interacts with the real economy via the stock market, they are often deemed as unstable ââ‚¬Ëœhotââ‚¬â„¢ money, which are triggered by short term considerations of the foreign investors and these inflows are deemed to be volatile and tend to be withdrawn during the liquidity crisis (Goldstein and Razin 2002). The financial risk that was assessed by the foreign investors was found to be higher. Investors felt that the governments of developing countries were more likely to default on their debt because of the worsening economic situation (Park 2009).