The Economy System

The Global World

PREPARE BY: M. Assad Fahim Khan (313001) SUBMITTED TO: SIR RIAZ HUSSAIN SOOMROO SEMESTER: MBA - 1

What is system?System (from Latin systema, in turn from Greek systēma) is a set of interacting or interdependent entities, real or abstract, forming an integrated whole. A group of interdependent items that interact regularly to perform a task.

ORA System is a number of INTERDEPENDENT parts functioning as a whole for some purpose. E.g., to understand the functioning of the human body, the working of its interdependent parts (ears, eyes, brain).

TYPES:

Closed: mostly mechanical; A clock, with its wheels, gears, etc, doing the same predetermined work irrespective of its external environment

Open: a plant. Constant interaction with the external environment is critical to its survival.

Economic System An economic system is a system that involves the production, distribution and consumption of goods and services between the entities in a particular society. The economic system is composed of people and institutions, including their relationships to productive resources, such as through the convention of property. In a given economy, it is the systemic means by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive resources. Examples of contemporary economic systems include capitalist systems, socialist systems, and economic system of Islam. Economic systems are the economics category that includes the study of respective systems.

OREach society gives the three basic questions different answers, but the economic system of an economy is further determined by the resource ownership(who owns the resources and how owners are paid) and the extent to which the government attempts to coordinate the economic activities in that society.

Ranging from the most free to the most regimented type of economy, the market system or the free market is at the opposite end of the spectrum while command system is at the other end. They are the most typical types nowadays, but other mixed and transitional economies also pervade. Practically, no pure market system or pure command system exists today, all countries are at one point of the spectrum that's neither of the extremes. However, for sake of discussion, let's pay more attention to the extreme ones.

Under pure market system, resources are absolutely privately owned and the coordination of economy is ultimately based on the sum total decisions of millions of individuals who pursue their own self-interest without any central direction or regulation. Government is left out, and the market  is the exclusive central institution in which the three basic questions are answered. Buyers and sellers of goods and services, resource owners and bidders interact in no way affected by other force like the government regulation. Their decisions are dependent only on the interest of their own. Consumers dictate what is produced(or the consumer sovereignty) and producers have to produce the goods and services people want, so is the resources allocation process. The distribution of output is also determined in a decentralized way. The amount that any one household gets depends on its income and wealth. The income and wealth are determined by their capabilities and skills as well as the choice whether to go to work or not. In a word, in a pure market system, while non-government members of the society determine their individual actions, they ultimately determine the whole economy.

In a pure command system, resources are directed and production is coordinated based on the command, or central plan, of government rather than by markets. A central authority or agency establishes what will be produced and when, sets production goals, makes rules for distribution and determines how much compensation workers are to receive for their labors. In theory, a pure command system incorporates individual choices into collective ones. In practice, however, it has flaws, most notably are:

1. Since nobody in particular owns resources, people have less incentive to employ them in their highest-valued use; so some resources are wasted.

2. Central plans may reflect more the tastes and preferences of central planners than those of society.

3. Since the central government is responsible for all production, the diversity of products is much more limited than that in a competitive economy.

4. Each individual has less personal freedom in making economic choices.

Because of these limitations, countries have modified the pure command system to allow a role for markets. North Korea is perhaps the most centrally planned economy in the world today.

Economic System of IslamIslamic Economic System implies a mood of satisfying the economics needs of the members of organized society in accordance with is injection of Quran and Sunnah. The mood of spending production, distribution and exchange of wealth is determined by the tenor of these injections. In this system the economic activities of the members of the society are regulative by the certain values of which pity, justice, benevolence, cooperation, brotherhood and equality are especially important. The sources and origin of these values are the Holy Quran and the Sunnah of Allah’s Apostle (PBUH). They are eternal and immutable. Consumers, producers and traders are must abide these values.At one level, the state can also use the its powers to implements and enforce these values, however, Islam mostly ensure their implementations and daily affairs of life through its system of education and training and by creating a general climate of piety in the society.

As a complete way of life, Islam has provided guidelines and rules for every sphere of life and society.  Naturally, a functioning economic system is vital for a healthy society, as the consumption of goods and services, and the facilitation of this by a common medium of exchange, play a major role in allowing people to realize their material and other goals in life.

Islam has set some standards, based on justice and practicality, for such economic systems to be established.  These standards aim to prevent the enmity that often occurs between different socioeconomic sections.  Of course, it is true that the gathering of money concerns almost every human being who participates in transactions with others.  Yet, while these standards recognize money as being among the most important elements in society, they do not lose sight of the fact that its position is secondary to the real purpose of human existence, which is the worship of God.

An Islamic economic system is not necessarily concerned with the precise amount of financial income and expenditure, imports and exports, and other economic statistics.  While such matters are no doubt important, Islam is more concerned with the spirit of the economic system.

A society that implements Islamic laws and promotes Islamic manners will find that it bring together all the systems – social, economic, and so forth – that it deals with.  Islam teaches that God has created provision for every person who He has brought to life.  Therefore, the competition for natural resources that is presumed to exist among the nations of the world is an illusion.  While the earth has sufficient bounty to satisfy the needs of mankind, the challenge for humans lies in discovering, extracting, processing, and distributing these resources to those who need them.

Islam consists of a set of beliefs which organizes the relationship between the individual and his Creator; between the person and other human beings; between the person and universe; and even the relationship of the person to himself.  In that sense, Islam regulates human behavior, and one type of human behavior is economic behavior.  Economic behavior is dealt by Muslims as a means of production, distribution, and consumption of goods and services.  In Islam, human behavior -whether in the economic area or others - is not value free; nor is it value neutral.  It is connected with the ideological foundation of the faith.

The Sources of Islamic Economics

The fundamental sources of Islam - the Quran and the Sunnah of the Prophet- provide guidelines for economic behavior and a blueprint of how the economic system of a society should be organized.  Therefore, the values and objectives of all “Islamic” economic systems must necessarily conform to, and comply with, the principles derived from these fundamental sources.  The purpose of these articles is to outline the most salient characteristics of an economic system based on the fundamental sources of Islam.  The focus here is on the principal features of the Islamic system.

The Islamic economic system is defined by a network of rules called the Shariah.  The rules which are contained in the Shariah are both constitutive and regulative, meaning that they either lay the rules for the creation of economic entities and systems, as well the rules which regulate existing one. As an integral part of the revelation, the Shariah is the guide for human action which encompasses every aspect of life – spiritual, individual, social, political, cultural, and economic.  It provides a scale by which all actions, whether on the part of the individual agents, society, and the state, are classified in regards to their legality.  Thus there are five types of actions recognized, namely: obligatory; recommended; permissible; discouraged; and forbidden.  This classification is also inclusive of economic behavior.

The basic source of the Shariah in Islam is the Quran and the Sunnah, which include all the necessary rules of the Shariah as guidance for mankind.  The Sunnah further explains these rules by the practical application of Prophet Muhammad, may the mercy and blessings of God be upon him.  The expansion of the regulative rules of the Shariah and their extensions to new situations in later times was accomplished with the aid of consensus of the scholars, analogical reasoning - which derived rules by discerning an analogy between new problems and those existing in the primary sources - and finally, through textual reasoning of scholars specialized in the Shariah.  These five sources - the Quran, the Sunnah, consensus of the scholars, analogical reasoning, and textual reasoning - constitute the components of the Shariah, and these components are also used as a basis for governing economic affairs.

Justice

In summary, we can say that the Islamic Economic system is based upon the notion of justice  It is through justice that the existence of the rules governing the economic behavior of the individual and economic institutions in Islam can be understood.  Justice in Islam is a multifaceted concept, and there several words exist to define it.  The most common word in usage which refers to the overall concept of justice is the Arabic word “adl”.  This word and its many synonyms imply the concepts of “right”, as equivalent to fairness, “putting things in their proper place”, “equality”, “equalizing”, “balance”, “temperance” and “moderation.” In practice, justice is defined as acting in accordance with the Shariah, which, in turn, contains both substantive and procedural justice[2] covering economic issues.  Substantive justice consists of those elements of justice contained in the substance of the Shariah, while procedural justice consists of rules of procedure assuring the attainment of justice contained in the substance of the Law.  The notion of economic justice, and its attendant concept of distributive justice,[3]  is particularly important as an identifying characteristic of the Islamic economic system.  The rules governing permissible and forbidden economic behavior on the part of consumers, producers and government, as well as questions of property rights, and of the production and distribution of wealth, are all based on the Islamic view of justice.

The following topics will be discussed in the following articles:

(a)   individual obligations, rights, and self-interest;

(b)  property rights;

(c)   importance of contracts;

(d)  work and wealth;

(e)   the concept of barakah;

(f)   economic justice;

(g)   prohibition of interest (riba);

(h)  competition and cooperation; and

(i)   the role of the state.

US ECONOMY SYSTEMThe United States of America (US or USA) is the largest and most important economy in the world. In 2010, The US economy was responsible for 20.218 percent of the world’s total GDP (PPP) or US$ 14.624 trillion.

Yet despite leading the world’s economy for more than a hundred years, The US economy is now facing its greatest ever challenge since World War II. This challenge has been a result of both domestic and international factors.

US Economic Structure

Ever since the 1960s, the US economy has been primarily responsible for absorbing global savings. Despite the challenge from emerging economies, the US remains the most heavily invested-into country in the world, with foreign direct investments at home worth $2.398 trillion in 2010. The US is also the largest investor in the world, investing $3.259 trillion abroad in 2010.

The US is a market-oriented economy, where private individuals and business firms make most of the decisions, and the federal and state governments purchase goods and services predominantly from the private marketplace.

US business firms have more flexibility than their counterparts in Western Europe and Japan in decision making when it comes to expanding the capital plant, lay off surplus workers, and develop new products. At the same time, they face higher barriers to entry in competeing overseas markets than foreign firms do in the US.

US firms are at or near the vanguard in technological advances, especially in computers and in medical, aerospace, and military equipment. This advantage has narrowed since the end of World War II. The onrush of technology in the US can also explain the gradual development of a two-tier labor market where those at the bottom receive less training and benefits than those at the top.

Although the US strongly advocates free market principles, the government still plays a major role in dictating the US economy. The US still relies on the government to address matters that the private sector overlooks, from education to protecting the environment. From time to time, the US government has also been tasked with nurturing new industries, and also protect American companies from foreign competition. This is clearly visible from the highly subsidized agriculture industry in the US

As such, the US economy is best described as a mixed economy where the economic structure is upheld through the interactions between the private, public and international sector. As the leading economy in the world, fluctuations in the US economy have had far reaching impact on other economies throughout the globe.

US Export, Import and Trade

US foreign trade and global economic policies have changed drastically since the days of its founding fathers. Prior to the Great Depression and World War II, government and businesses mostly concentrated on developing the domestic economy irrespective of what went on abroad. Since then however, the US has generally sought to reduce trade barriers and coordinate the world economic system.

Today, the US is the world’s largest trading nation – simultaneously leading the world in imports and being among the top three exporting nations in the world. As the top export market for almost 60 trading nations, the US has had a certain degree of economic and political leverage throughout the world, which allows it to shape global policies towards its own.

One such policy is its commitment to global free trade. The US has had a major role in the formation of global trade agencies such as GATT, as well as its future incarnation as the WTO. Apart from the guidelines set by these agencies, the US also has numerous Free Trade Agreements (FTAs) with individual nations.

Current FTAs

US-Israel FTA - since 1985 North American FTA (NAFTA) – since 1994, including Canada and Mexico US-Jordan FTA – since 2001 Australia-US FTA – since 2004 US-Chile FTA – since 2004 US-Singapore FTA – since 2004 Dominican Republic-Central America FTA (DR-CAFTA) – since 2005, including Costa

Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic US-Bahrain FTA – since 2006 US-Morocco FTA – since 2006 US-Oman FTA – since 2006 US-Peru Trade Promotion Agreement – since 2007

FTAs waiting approval

Panama-US Trade Promotion Agreement Colombia-US Trade Promotion Agreement Republic of Korea-US FTA

Proposed FTAs

Free Trade Area of the Americas (FTAA) – to include all countries in Western Hemisphere except Cuba

US-Middle East Free Trade Area (USMEFTA) – to include most countries in the Middle East

Transatlantic Free Trade Area (TAFTA) – European Union

US-Thailand FTA US-New Zealand FTA US-Ghana FTA US-Indonesia FTA US-Kenya FTA US-Kuwait FTA US-Malaysia FTA US-Mauritius FTA US-Mozambique FTA US-Taiwan FTA US-United Arab Emirates FTA US-Southern African Customs FTA – to include South Africa, Botswana, Lesotho,

Swaziland and Namibia US-Ecuador FTA US-Qatar FTA

US Recovery From the Financial Crisis

In the near future, the US is likely to rely on its services industry in its recovery attempts. Since the 1970s, the US economy has gradually shifted from producing goods to providing services. The large majority of service-providing jobs are found in the group of trade, transportation, and utilities occupations. Other key service industries for the US include finance, tourism and information technology.

Another instrument for the US is its natural resources. Apart from having the world’s largest proven reserves of coal, 22.6 percent of the world’s total, the US also possesses the 14th largest proven oil reserves and the 6th largest proven natural gas reserves. Other natural resources include copper, lead, molybdenum, phosphates, uranium, bauxite, gold, iron, mercury, nickel, potash, silver, tungsten, zinc, and timber.

However, the most important factor for the US is its population of 310.282 million. Although this number pales in comparison to India’s and China’s billion-plus population, the US has the world’s best labour force participation rate with 139.396 million workers.

The majority (35.5 percent) of the labour force’s occupations are managerial, professional or technical in nature. A further 24.8 percent hold sales or office jobs, 22.6 percent are in either manufacturing, extraction, transportation and crafts, 0.6 percent are in arming, forestry or fishing, and 16.5 percent have jobs in other services.

The government has also recently introduced policies aimed at supporting economic growth and increasing American consumers’ confidence. Unfortunately, while the Congressional Budget Office (CBO) expects economic growth to remain moderate in 2011 and 2012, productivity and employment are likely to stay well below the economy’s potential for a number of years at least.

Economic System of PakistanIn Pakistan, we have neither of the two extreme systems but our economic system is a via media compromise of both the systems of capitalistic and socialistic patterns. It can safely be said that it is a mixed economy.

Concept of Mixed Economy

Mixed Economy is an economic system, which combines in itself the elements of socialism as well as of capitalism. It is an economic system, which is planned and directed partly by the state and by private enterprise. Under the “Mixed Capitalist System” or “Mixed Enterprise System”, both State and private institutions exercise economic control.

Panacea of the Defects of Capitalism and Socialism

A privately owned capitalist system cannot guarantee full employment and elimination of poverty. It may lead to unequal distribution of wealth and air and water pollution. It produces trade cycles. i.e. sometimes depression and at other times an inflationary situation. On the other hand, a government owned business system might stifle innovation and invention. It may not be quickly responsive to public desired for products and services and may even limit the freedom of the people. It is so realized that economic development cannot be achieved at the desired rate of growth without any active government help and guidance. That is why most of the capitalistic and socialistic economics of world have become mixed economics in order to minimize the evils of unadulterated capitalism and socialism to accelerate economic growth.

Salient Features of Economic System of Pakistan

1. Co-Existence of the Public and Private SectorsIn the economy both public sector and the private sector function together. In one part are those industries, the responsibility for the development of which is entrusted to the state and they are owned and managed by the state. Other industries are left under the authority and control of the private entrepreneurs. The private sector is free to develop them and start new enterprises in this sector.

2. Role of Price System And Government DirectivesSo far as the public sector is concerned, economic decisions relating to production, prices and investment are made by the government or authorities appointed by the government. In industries in the private sector, the decisions regarding investment, production, prices, etc, are made by private entrepreneurs with the object of making maximum profit on the basis of the price system.

3. Government Regulation and Control of Private SectorIn a mixed economy, the government adopts necessary measures to regulate and influence the private sector, so that it may function in the interests of the nation rather than exclusively in the interests of the private entrepreneurs.

4. consumer’s Sovereignty ProtectedThe consumers are free to buy commodities of their choice and the private entrepreneurs produce commodities according to consumer’s demand or preferences, although the government can control their prices in public interest so that they can be prevented from rising unduly high. Besides, the government can also ration the commodities in short supply so that the limited available quantities can be fairly distributed.

5. Government Protection of LabourIn a mixed economy, Government saves labour from exploitation by the exploitation by the capitalists. Several factory acts have been passed to regulate the working conditions of labour. The government also takes necessary steps to prevent industrial disputes.

6. Reduction of Economic InequalitiesThe governments in mixed economics take necessary steps for the reduction of inequalities of income and wealth for promoting social justice and social stability and social welfare, increasing production and for providing equal opportunities for all.

7. Control of MonopolyA charge against monopolies is that they reduce output and raise prices in order to get maximum profit leading to miss-allocation of productive resources of the community, economic inequalities, and unemployment and hampering of industrial development.

The government tries to control and regulate monopolies in order to remove the above evils and make them function in public interest. Also, when the government considers it necessary in public interest, it takes over monopolies and operates them in public interest.

8. Government Provision of Public ServicesThe government provides certain indispensable public services without which community life would be unthinkable and which by their nature cannot appropriately be left to private enterprises. Examples are the maintenance of national defence, of internal law and order and the administration of justice etc.

Types of Economic System

There are two economic systems

•    Capitalism

•    Socialism

CapitalismCapitalism is the economic system in which the means of production are distributed to openly competing profit-seeking. Capitalism is not merely an economics system but a peculiar attitude of mind and behavior. Basically it springs out of the notion of the capitalist that he has earned his wealth by his own ability, skills, knowledge and wisdom.Some of the features of capitalism are written below.

1. Private persons and where investments, distribution, income, production and pricing of goods and services are predominantly determined through the operation of a market economy

2. Capitalism is originally defined as a mode of production, where it is characterized by the predominant private ownership of the means of production, distribution and exchange in a mainly market economy

3. Capitalism is usually considered to involve the right of individuals and businesses to trade, incorporate, and employ workers, in goods, services (including finance), labor and land.

4. In Capitalism, state action is confined to defining and enforcing the basic rules of the market though the state may provide a few basic public goods and infrastructure.

5. The most laissez-faire capitalist economies, as measured by indices of economic freedom, include countries like Hong Kong and Canada .

SocialismSocialism or communism means an economics system in which the mean of production are owned by the state. A central directorate controls the production of goods and services. The directorate decides the nature, quantity, and mood of production of goods. This distribution of goods is also directed by the central body. Socialism refers to a broad set of economic theories of social organization advocating state or collective ownership and administration of the means of production and distribution of goods, and the creation of an egalitarian society.Modern socialism originated in the late nineteenth-century working class political movement.

Karl Marx posited that socialism would be achieved via class struggle and a proletarian revolution which represents the transitional stage between capitalism and communism.Socialists mainly share the belief that capitalism unfairly concentrates power and wealth among a small segment of society that controls capital and creates an unequal society. All socialists advocate the creation of an egalitarian society, in which wealth and power are distributed more evenly, although there is considerable disagreement among socialists over how, and to what extent this could be achievedSome features of socialism are written below

1. Socialism is not a discrete philosophy of fixed doctrine and program2. its branches advocate a degree of social interventionism and economic rationalization,

sometimes opposing each other.3. Another dividing feature of the socialist movement is the split on how a socialist

economy should be established between the reformists and the revolutionaries. 4. Some socialists advocate complete nationalization of the means of production,

distribution, and exchange; 5. While others advocate state control of capital within the framework of a market economy.

Social democrats propose selective nationalization of key national industries in mixed economies combined with tax-funded welfare programs.

6. In the 1970s and the 1980s, Yugoslavian, Hungarian, Polish and Chinese Communists instituted various forms of market socialism combining co-operative and State ownership models with the free market exchange.

7. This is unlike the earlier theoretical market socialist proposal put forth by Oscar Lange in that it allows market forces, rather than central planners to guide production and exchange.

Difference between Islamic economic System and others (Capitalism and Socialism)

Comparison of Capitalism with Islam:

1.   Right to ownership:

The existence of right of private ownership of property is the hallmark of capitalism. The system believes in the private ownership of the means of production, distribution and exchange which are managed and controlled by individuals or groups of individuals for private profit. The unrestricted right to own property and earn profits leads to concentration of wealth in few hands. This necessarily disturbs the balance of distribution of wealth and income in society. The economic disparities and the ever-increasing gulf between the rich and the poor sows the seeds of discord and destruction in the capitalist society.

Islamic concept of ownership is unique one. Ownership, in reality, belongs to God while some rights only vest in man so that he may fulfill the purpose of God, that is the purpose of

community by acting as a trustee for those in need. In other words, what Allah has created for benefit of and service to man belongs collectively to the whole humanity. Legal ownership by the individual is recognized in Islam but it is subject to the moral obligation that in all wealth all sections of society have the right to share. Thus private or individual ownership in Islam is not unlimited or unrestricted. All the means of production are not placed under private ownership as public ownership of certain things of common utility exists side by side with it in an Islamic state. Islamic state has also the right to nationalize certain things which are under private ownership for the benefit of the community. In this way the limited right of private ownership with law of inheritance which distributes the estate of the deceased among fairly large number of heirs averts concentration of wealth in few hands and thus prevents class-conflict.

2. Monopoly:

Competition, which is another feature of capitalism, leads to the destruction of minor enterprises and firms. This encourages merger of smaller business organizations into major ones and thus monopolies or cartels are established. Monopolies kill free competition, cause inflation in prices and ultimately result into unemployment. Thus labor and consumer are both exploited in such a situation. Moreover, trade-cycles, unplanned production, over-competition, increasing accumulation of capital upsets the balance between production and consumption which sometimes leads to economic depressions.

Islam forbids unhealthy competition and bans all the ways which lead to it. Islam also disallows establishment of monopolies. The Prophet of Islam is reported to have said Whoever monopolies is a sinner. Especially monopolies over food-stuffs or articles of daily use are forbidden by Islam. Commodities and services which are of the common interest of the community are never allowed to be monopolized.

3. Institutions of Interest:

The Institution of banking and interest is the life-blood of capitalistic form of economy. For business, trade and industry especially for big projects and economic ventures, huge funds are required which no individual or firm can arrange. This leads to establishment of banks who borrow capital from depositors and investors on lower rate of interest and lend it to business enterprises on higher rate of interest. Thus the institution of interest has become part and parcel of capitalism.

Islam considers interest as the most exploitive institution for humanity and has abolished it root and branch in its every form and manifestation. According to al-Quran taking of interest tantamount to war against God and His Apostle, while according to Prophet Muhammad (PBUH) interest is worse than adultery. Islam builds its economy on interest free basis and promotes profit and partnership as incentive for saving and investment.

Comparison of Socialism with Islam

1. Materialism:

Socialism, especially scientific socialism rests on a purely materialistic basis. Dialectic materialism or materialistic interpretation of history is the most vital element of Marxism. Marx has sought to explain every event in history on economic grounds. According to him, origin of every activity of man lies in economic factors. Marx does not believe in religion which, in his view, is a bourgeois invention to keep the proletariat under their perpetual control. Engels said : Matter is the only real thing in the world. The communists believe that human reason is just a manifestation of matter and soul has no independent existence of its own but is a product of matter. They hold that all the different stages of human progress are determined by the interplay of conflicting economic forces alone, thus leaving no place for God’s will. Islam is the perfect and final religion revealed by Lord of the universe for the guidance of mankind. Its foremost aim is to ensure ‘falah’ or well-being of humanity in this world and in the Hereafter. It does not give importance to matter only at the cost of spirit as does a secular ideology like socialism. Islam believes in the material as well as moral and spiritual welfare of its followers at micro and macro level. Followers of Islam believe in one God, in all the Prophets and Holy Scriptures, in the Hereafter, in the moral code and in the universal brotherhood of mankind.

2.Economic Equality:

Economic equality is another claim of communism although it has never been realized so far. In theory at least it is claimed that the rights of the individuals in the economic sphere are governed by the principles of equality. Every individual is provided with the necessaries of life according to his needs.

Islam, unlike communism, recognizes that there is no equality among human beings as regards the economic means and possession of worldly wealth. The Quran considers these inequalities and disparities in the distribution of wealth as part of Divine economic order and, therefore, does not try to eliminate them by unnatural and artificial means. Islam does not tolerate the existence of unbridgeable gulf between the rich and the poor, but unlike socialism it does not believe in equal distribution of wealth. Actually Islam believes in fair, just and equitable distribution of wealth and in social justice. For ensuring equitable distribution, Islam has taken many steps such as institution of Zakat and Sadaqat, laws of inheritance and bequest, voluntary alms and levy of compulsory contributions in the form of taxes and duties

Factors affecting world economy in 2012Global economic growth slowed sharply in 2011 partly due to the European sovereign debt crisis. Although a global double-dip recession is unlikely, the world economy will face more uncertainties in 2012 as the debt crisis is still spreading in developed countries.

Whether the European debt crisis can be completely resolved depends on the political will for European integration. The recent changes of governments in Greece and Italy as well as the European Union’s breakthrough in fiscal integration have shown their will to resolve the crisis. Only with a strong political will can the European Union completely resolve the debt crisis and eliminate the possibility of a euro area break-up.

The United States has a better economic outlook than Europe. The U.S. government is reasonably confident about solving its debt problems, and the U.S. property market has shown signs of bottoming out. In addition, the Japanese economy will grow faster this year due to post-disaster reconstruction.

Emerging economies will continue to maintain relatively rapid growth and drive global economic growth. However, due to the weak economic growth in developed countries, emerging economies face a difficult dilemma between economic growth and inflation.

Since the global financial crisis, emerging economies have been leading world recovery through massive government intervention, and have suffered heavily from inflation and overheating. Due to the sovereign debt crisis plaguing developed countries, emerging economies have to loosen their economic policy again before bringing inflation under complete control. The overheated domestic economy and sluggish external demand have put emerging economies in a dilemma between maintaining rapid growth and controlling inflation.

International capital flows may reverse and return from emerging economies to developed countries. In the second half of 2011, international capitals started flowing from emerging economies to developed countries, especially the United States. On the one hand, this backflow probably reflects the hedging character of international capitals. On the other hand, two middle and long-term factors should be noticed.

First, in order to deal with the sovereign debt crisis, financial organizations of developed countries have adopted “deleveraging” measures, which lead to sustaining demands for capital backflows.

Second, the risk from bubbles of emerging countries' capital markets has increased significantly. Once the international capital backflow turns into a trend, emerging economies' financial systems may face new impacts.

The bulk commodity prices may continue fluctuating at a high level. Emerging economies will stimulate their economic developments and serve as engines for the global economy. It will

offset the economic slowdown of developed countries and the world. Meanwhile, quite a few countries are implementing new stimulus policies. Under the condition of currencies keeping increasing, it is unpractical to expect that bulk commodity prices will decline significantly.

In 2012, the short-term risk of the sovereign debt crisis will not be a big problem, but the middle and long-term risk of the crisis indeed needs our close attention.

Impact of Terrorism On Pakistan’s EconomyTerrorism has greatly affected the foreign investment in Pakistan. Foreign investment is decline to $ 910.20 Million from $1.4 Billion in Fy 08-09. Dye to decline in investment poverty and unemployment rises. Poverty have reached to 41.4% from 37.5% in 2008-09. Due to unstoppable terrorism acts in Pakistan world bank has blocked two lending key loans of worth $820 Million till the conditions ameliorate to the paradigm.

Similarly, Terrorism increases the expensive of the forces to meet their needs to fight against terrorism. Pakistan has received total disbursement of $11,998 Million from US under Coalition Support Fund (CSF), out of this amount $3,129 Million were economic related aid and security related aid amounted to $8,869 Million.

In addition, risk of the investors and more troops in Afghanistan deployment by US rise the rish of investors to invest in Pakistan that cause serious downfall of deposits of banking sector that shows deposits fell from Rs.3.77 Trillion to Rs3.17 trillion on September 2009.

In 2002, Karachi stock exchange (KSE) was awarded “The best performing stock market of the world for the year 2002”. Similarly, On December 2007, KSE closed at index of 14,127 points with capitalization of Rs.4.57 trillion. But after war declared by government within Pakistan dropped its index to 4,675 points with a market capitalization of Rs.1.58 trillion, a loss of over 65% from its capitalization in 2007.

Furthermore, terrorism also promoted smuggling in Pakistan, due to porous border between Pakistan and Afghanistan smuggling becomes the source of culprits and expedients for terrorists to wash their hands from it to meet their financial needs. According to US-Pak business council report (2009), Pakistan is prime victim of Afghanistan’s instability and due to which Pakistan economy has so far suffered directly or indirectly huge loss of $35 Billion.

It becomes necessary for the Pakistan to bottle the gene, before it becomes bigger tin size to unable to fit in it.