YEAR IN REVIEW 2001: ECONOMIC-AFFAIRS

Banking Industrywide consolidation, including significant cross-border transactions involving European banks and American securities firms, continued to reshape the global banking and financial services landscape in 2000. At the same time, however, enactment of sweeping financial modernization legislation in the United States did not trigger significant merger activity between banks and insurers-combinations that had previously been prohibited under federal banking law but had become permissible under the Gramm-Leach-Bliley (GLB) Act, which was enacted in November 1999 and became effective in March 2000. The year's most dramatic merger transaction came in mid-September with the announcement that the Chase Manhattan Corp. had agreed to buy J.P. Morgan & Co. through an exchange of shares valued at the time at approximately $36 billion. The merger agreement between the American banking giants followed earlier rumours of a trans-Atlantic combination of Morgan and Germany's Deutsche Bank AG, which had completed the purchase of the Bankers Trust Corp. in 1999. In Germany merger talks between Deutsche Bank and Dresdner Bank AG and later between Dresdner and Commerzbank AG were announced and then called off. In December a proposed government-backed merger of Kookmin Bank and Housing & Commercial Bank in South Korea triggered massive protests and nationwide strikes by unionized bank employees. Though each deal was only a third of the value of the Chase-Morgan merger, the acquisitions of Wall Street securities firms Donaldson, Lufkin & Jenrette (for about $13 billion) and PaineWebber Inc. (for $11.8 billion) by Swiss banking giants Credit Suisse Group and UBS AG, respectively, stood out among the year's cross-border transactions, which further underscored the fact that competitive strategies were being driven by a reach for massive size and global scale. The MeritaNordbanken Group, created in 1997 by the merger of Finland's Merita Bank PLC and Nordbanken AB of Sweden, continued to expand across Scandinavia. Early in 2000 the bank purchased Unidanmark of Denmark, and in October the newly renamed Nordic Baltic Holding Group (NBH) announced the acquisition of Norway's Christiania Bank. The series of cross-border transactions made NBH, to be renamed Nordea AB, the region's largest financial institution. Apart from the ongoing global consolidation, one of the most significant developments in 2000 was also the most anticlimactic-the smooth transition to the new year without any of the feared "Y2K" computer meltdowns. Indeed, there were strong indications that the intensive efforts by banks and other financial institutions around the world to renovate and test their systems and develop contingency plans for the year 2000 "millennium bug" yielded a number of important collateral benefits, including a better understanding and increased enhancement of their information technology systems and improvements in their business continuity planning. Another development with important ramifications for the international financial markets in 2000 was the implementation of the euro, the single currency adopted by the 11 European Union (EU) members that then constituted the Economic and Monetary Union (EMU). Although the euro's trading value had declined since its inception on Jan. 1, 1999, the operational transition to the euro appeared to have been accomplished smoothly. Much work still remained to prepare consumers in EMU countries for the transition to the ultimate disappearance of their local currencies in favour of euro banknotes and coins as legal tender for cash transactions. This final stage was scheduled to occur by Jan. 1, 2002. Meanwhile, a number of countries continued to grapple with the question of how to reform their domestic regulatory systems to enable them to meet the challenges presented by the formation of complex financial groups engaged in a diverse array of activities both at home and abroad. For example, Japan established a new Financial Services Agency, which would assume the responsibilities previously exercised by three agencies: the Financial Supervisory Agency, the Financial System Planning Bureau of the Ministry of Finance, and, when its mandate expired in January 2001, the Financial Reconstruction Commission. Reviews of existing regulatory and supervisory relationships were also under way in South Africa and Switzerland, while Belgium and The Netherlands were striving to strengthen cooperation between existing authorities. Elsewhere, significant changes in the allocation of supervisory responsibilities within the financial sector were legislated in Latvia, where a new Financial and Capital Market Commission was due to assume responsibility for consolidated supervision of the financial system on July 1, 2001; in Turkey, which had vested bank-supervisory authority in a new Banking Regulation and Supervision Agency; and in Venezuela, where a Financial Regulation Board had been established to oversee the financial system. The global trend clearly was in the direction of some form of "umbrella" oversight, but there remained as yet no international consensus on what governmental authority or authorities should exercise this responsibility. In the United States the Federal Reserve Board (Fed) was vested with statutory responsibility for oversight of financial holding companies established under the GLB Act. Culminating the 20-year effort to pass comprehensive financial-modernization legislation, the GLB Act repealed provisions of the Glass-Steagall Act that for more than six decades had restricted affiliations between commercial and investment banks. Unlike Glass-Steagall, the GLB Act permitted financial holding companies to own commercial banks and engage-through separate nonbank subsidiaries-in securities underwriting, insurance underwriting, merchant banking, and other types of financial activities. The appropriate primary bank regulators (including the Office of the Comptroller of the Currency in the case of national banks and the state banking agencies in the case of state-chartered banks) and functional regulators (such as the Securities and Exchange Commission in the case of securities broker-dealers and state insurance commissioners in the case of insurance companies) would oversee the component operations of a financial holding company, with umbrella oversight of the consolidated group entrusted to the Fed. The GLB Act provided that international banks might qualify as financial holding companies if, among other conditions, they met a capital standard "comparable" to the "well-capitalized" standard applicable to American bank subsidiaries of domestic financial holding companies, which included both risk-based and leverage measures. The act further directed that this comparable standard be applied by the Fed "giving due regard to the principle of national treatment and equality of competitive opportunity." As originally announced by the Fed in January, the comparable-capital standard for international banks included both risk-based and leverage tests, notwithstanding that a substantial number of international banks operating in the U.S. were not subject to a leverage test under their home country's capital standards. In response to the very strong concerns raised by the international banking community and governmental authorities in other countries regarding the inclusion of a leverage test as part of the comparable-capital standard, the Fed in December removed the leverage test from the numerical criteria applied to international banks. Instead, it added the leverage ratio to the list of other factors it might take into account in assessing an international bank's capital. Other factors included the composition of a bank's capital and the rating of its long-term debt. Under this revised approach, the comparable-capital standard was applied on the basis of numerical criteria limited to an international bank's risk-based capital ratios determined in accordance with the internationally agreed-upon Basel risk-based standards. There were a number of other significant developments occurring in global financial markets during 2000. Deposit insurance schemes were strengthened in several countries, notably France, Ireland, and Japan. A number of countries, including Brazil, China, Panama, and Turkey, instituted changes to enhance their banks' practices regarding classification of assets and loan loss provisions. Measures to improve banks' assessment of their country risks were introduced in Latvia and The Netherlands, while efforts to promote risk-management practices within banks in general were initiated in India and Israel. Corporate governance issues received increasing attention in several jurisdictions, including Australia, Hong Kong, and Singapore. Reforms in accounting and financial-reporting practices to bring them up to the level of international standards were adopted in Bahrain, the Philippines, and South Africa. One theme common to many countries was the extensive effort under way to adapt banking and other financial services to developments in the "new economy"-for example, initiatives to promote Internet payment systems and virtual banking. Although exclusively on-line banks faltered, many traditional brick-and-mortar financial institutions increased their on-line components. The EU issued a directive establishing the legal framework for electronic signatures, while similar legislation was enacted in several countries, notably Australia, Colombia, and the U.S. The EU also took the lead in authorizing nonbanks to issue electronic money through the formation of electronic money institutions. Action was taken, or was under consideration, in a number of countries to combat money laundering. Legislation prohibiting money laundering was introduced in Israel, while in other countries, including Italy and Japan, measures were enacted to expand the list of predicate crimes that could give rise to money-laundering violations. Actions to enhance the effectiveness of suspicious-activity reporting were instituted in Canada and Colombia. At the international level, the Financial Action Task Force on Money Laundering in June 2000 issued a report identifying 15 jurisdictions where the existing measures to combat money laundering were deemed to be inadequate. The 15 locations-which included such high-profile offshore financial centres as The Bahamas, the Cayman Islands, Dominica, Israel, Liechtenstein, the Philippines, and Russia-were described as "non-cooperative in the fight against money laundering." An additional 14 jurisdictions had been investigated. Just days before the report was released, six jurisdictions (Bermuda, the Caymans, Cyprus, Malta, Mauritius, and San Marino) issued letters offering to eliminate by the end of 2005 practices that had made them offshore tax havens. Privatization of banks continued in a number of countries, including the Czech Republic and Poland. In Brazil the privatization of a list of large-scale government-owned assets was completed when Banco Santander Central Hispano SA, which already owned banks in 12 Latin American countries, won the auction to buy the state-run Banco do Estado de So Paulo SA, or Banespa, for a record price of nearly $3.6 billion. Lawrence R. Uhlick Business Overview The year 2000 was likely to be best remembered for hosting a changing of the guard in the business world. Stumbling was the "new economy" of technology start-ups, Internet sites operating without profits, and media-telecommunications companies; surging were some of the high elders of the "old economy": energy providers and a number of traditional manufacturers. For the American stock market, the ebullience that marked the late 1990s seemed to have dissipated, as evidenced by the volatile stock performances of such New Economy icons as the Intel Corp. and Amazon.com. The cooling off of once red-hot areas such as telecommunications and technology contributed to poor performances in such areas as growth mutual funds and the high-yield corporate bond market. Real gross domestic product growth for the U.S. was projected to be 4.3% for 2000, up slightly from 4.2% in 1999, but a slowdown in the second half of the year portended a reduced rate for 2001. Job growth was vigorous for much of the year, and the unemployment rate hovered at a 4% average, down from 4.2% in 1999. Wage growth was modest, while core inflation remained about 2.5%, and the unadjusted Consumer Price Index rose to 3.4%, partly because of rising oil prices. The most vigorous performances came from some of the most traditional business sectors, especially the energy market. Out of fashion for much of the previous decade, energy companies showed a stunning return to form, in many cases posting record or near-record earnings. One of the most crucial influences was the spike in oil prices throughout 2000, with a year high for crude oil in September of $37.20 per barrel and a high of $1.68 per gallon for gasoline in June. The top global firms in oil and gas-ExxonMobil Corp., BP Amoco PLC, Royal Dutch/Shell Group, Texaco Inc., and Chevron Corp. (the latter two set to merge early in 2001)-controlled a growing majority of the worldwide oil market. Such consolidation was likely to be echoed in the natural gas market in the near future, as analysts expected the current dozen major players to begin merging. Improving efficiencies and, most of all, high oil prices caused all major oil providers to exceed fiscal expectations. ExxonMobil, for example, earned $4,500,000,000 in the third quarter of 2000, up 105% from the third quarter of 1999. Chevron more than doubled its third-quarter net income, increasing to $1,531,000,000 while its proposed acquisition Texaco posted a record income of $798,000,000, up 106% from the same period in 1999. Such influx of new profits allowed the major oil firms to expand their research and exploration-production operations as well as set the stage for further industry consolidation. Investors showed a preference for the top global companies at the expense of those with smaller capitalization; thus, the stock value of ExxonMobil was valued at more than 20 times earnings, while that of second-tier Phillips Petroleum Co. was only 11 times earnings. The lopsided situation gave more buying power to the top companies and seemed likely to provide them with further means to raid their less-valued counterparts in 2001. The situation was muddier in the utilities sector, which continued to undergo a massive reorganization made necessary by the regulatory reforms of the previous few years. States in the U.S. ranging from California to New Jersey had broken up their former utility monopolies in the late 1990s, and this created at times a bewildering array of new utilities contending for market share. In many cases a former monopoly decided to split its businesses; for example, Consolidated Edison Co. moved out of the energy-production business, selling its power plants to new companies, in favour of the merchant power distribution market, in which utilities sell bulk power to buyers located across the U.S. Some deregulation agreements eventually hindered the performances of the former monopolies. California utilities such as Pacific Gas & Electric and Edison International were caught in a fiscal bind, as their deregulation agreements had frozen the rates at which the companies could charge consumers, which caused considerable financial problems when the utilities were confronted with increases in oil and gas prices. The U.S. Federal Energy Regulation Commission in November ruled that the utilities could expand their methods of buying bulk power as a way to keep the companies solvent. The confusion and volatility of the U.S. utility market also presented an opportunity for international power companies to begin incursions into North America. Such former national monopolies as Scottish Power and Italy's ENEL SpA, which had limited customer bases in Europe, saw the potential to win market shares in the U.S. and Latin America as a significant way to expand their growth. The American auto industry experienced a mixed year during which most major car manufacturers posted healthy growth rates while at times being hobbled by negative outside influences. The industry's light vehicle sales totaled about 18 million shipped for the year, said to be a new industry record. The growth of imports of new car and noncommercial light trucks was, however, just as impressive. While American manufacturers exported $40.2 billion of road vehicles in the first nine months of 2000, imports for the same period totaled about $106.4 billion. During the first nine months, imports from Germany increased 15.2%, those from Japan rose 15.9%, and, most notably, Korean imports increased 48.5%. The surge in imports helped the Toyota Motor Corp., the Nissan Motor Co., and the Honda Motor Co., Inc., to post their best production rates in three years. Toyota, for example, increased its North American exports by 15.7% at mid-2000 but believed that increase would lessen to about 8% by the end of its fiscal year in March 2001. The heightened presence of foreign competitors caused difficulties for American auto manufacturers. The Ford Motor Co. increased its total revenues by 9% to $127.5 billion for the first nine months of 2000, but its net income declined. Ford was also hurt by being tarred with public relations damage from its association with Bridgestone/Firestone, Inc., which in August recalled 6.5 million tires after defective tires were blamed for a number of fatalities. The great majority of the tires in question had been equipped on the automaker's popular Ford Explorers. Even worse was the lot of DaimlerChrysler AG. The merged company, which was considered in 1998 a herald of future North American-European supermergers, posted a $512 million operating loss for the third quarter of 2000 and saw its stock lose $60 billion in value from a $108 per share high in January 1999. DaimlerChrysler's production in North America declined by about 100,000 vehicles in the first three quarters of 2000, and the company began idling plants and considering layoffs in late 2000. General Motors Corp. also had a slight decline in earnings in the first nine months of 2000, dropping 5% to $829,000,000 in consolidated net income. Aerospace companies had a successful year overall. The American aerospace industry booked $32.4 billion in firm orders in June, shattering the previous record of $20.7 billion set in November 1997. Orders for the first half of 2000 totaled $85.4 billion, up from $62.6 billion in the first half of 1999. The recovery of the Asian markets helped increase export orders, although a strike at the Boeing Co. in early 2000 depressed exports in the first quarter. Manufacturers were also heartened by NASA's announcement in October of a long-term strategy for the exploration of Mars, which would result in expenditures of $500 million per year for the next five years. The improved health of the industry generated a number of mergers, perhaps the most significant being the General Electric Co.'s $45 billion acquisition of Honeywell International Inc. Honeywell's space avionics division gives GE a foothold in space transportation, an area in which it had previously had no direct involvement. The Northwest Airlines Corp. and Continental Airlines, Inc., also explored a merger, but it was contested by the U.S. government in late 2000. The metals industries contended with surging imports, a drawdown of inventories by spot purchasers, and a spike in natural gas prices. Steel companies were faced with the difficult equation of rising energy costs cutting into whatever increases in demand they received, although most top manufacturers still posted gains. For example, the U.S. Steel Group, the largest U.S. steelmaker, had third-quarter revenues of $1,430,000,000, up from $1,340,000,000 in the same period of 1999 despite a decline in steel shipments to 2.6 million tons for the quarter from 2.8 million a year earlier. Steel production in the U.S. through late October totaled 94.8 million tons at a capability utilization rate of 88.3%, a 12% increase from the 85 million tons produced during the same period of 1999, when the capability utilization rate was 80.5%. Much of the industry's growth came from increased shipments to service centres, construction enterprises, and oil and gas manufacturers, while shipments to the automotive, industrial equipment, and appliance industries were down for the year. For aluminum a strong first half was followed by slower third and fourth quarters, with declines in construction, forging, and fastener businesses caused by weakening demand. The leading worldwide aluminum producer, Alcoa Inc., posted net income of $1.1 billion for the first nine months of 2000, up 53% from the same period in 1999, but said that continued high energy costs seemed likely to be a constraint on future growth. Gold-mining producers continued to be disappointed by poor prices. Although the price of gold had risen to $340 per ounce in late 1999 owing to an accord by 15 European central banks to limit gold sales and trading, prices sank back to the $260-$270-per-ounce range for much of 2000. The strength of the U.S. dollar throughout the year made dollar-denominated precious metals such as gold more expensive to international gold buyers, and there was also a decline in gold investments from traditional buyers in such nations as India and China. The forest products industry experienced a dichotomy in 2000. Pulp prices soared, while lumber prices greatly deteriorated, and this created a situation in which companies increased their lumber production for the sole purpose of creating pulp. Prices for northern bleached softwood kraft-the benchmark grade of pulp-were $710 per ton in October, up from $600-per-ton average prices earlier in the year. Meanwhile, lumber prices fell roughly 31% compared with 1999, reaching $270 per 1,000 bd ft, while production at Western sawmills rose 2.6% to 22.1 billion bd ft in the first seven months of 2000. The situation created a good fiscal climate for such leading firms as the Georgia-Pacific Corp., Weyerhaeuser, and International Paper, which had contracts to supply lumber to construction shops such as Home Depot. International Paper, for example, registered a 21% increase in revenue during the first nine months of 2000. The strong economy and overall low mortgage rates helped home builders experience one of their healthiest years of the last decade. Economists expected 2000 to post a near-record 5,970,000 homes sold during the year. The construction market experienced some cooling, however. Spending on residential construction fell at an annual rate of 9.2% in the third quarter, the first decline in a year, and, while housing starts began robustly with 1.7 million in January, they fell to a rough average of 1.5 million in the latter months. The manufactured housing industry was not as solid, as many of the top lenders of subprime mortgages and manufactured housing loans came under scrutiny. Conseco, Inc., a leader in mobile home lending, suffered a $489 million net loss in the third quarter alone. There were a number of industries, however, that encountered trouble in 2000. The textile industry had a grim year, with many of the top American textile manufacturers, including Burlington Industries, Guilford Mills, Inc., and Galey & Lord, experiencing declines in revenues and thus being forced to undertake major personnel layoffs. The woes were in part due to a continued emphasis on business casual clothing in the American workplace at the expense of suits, as even such Wall Street firms as Goldman Sachs and J.P. Morgan had moved to a business casual dress code. The trade deficit continued to worsen for American textiles; apparel imports rose 14% to $37.9 billion, and textile imports were up 15% to $9.8 billion during the first eight months of 2000. Meanwhile, American apparel exports increased only 2.2% although textile mill product exports rose dramatically by 16%. Many companies in the imaging/copying business suffered, in part owing to softening demand as well as to the growing use of digital alternatives to their products; this trend gave the edge to such Asian companies as Canon Inc. The traditional business of such manufacturers as the Polaroid Corp., the Eastman Kodak Co., Lexmark International, Inc., and Pitney Bowes Inc. suffered, but one of the most adversely affected was the Xerox Corp. Xerox, which experienced a net loss of $167 million in the third quarter alone and did not expect to recover until mid-2001, planned to hold a fire sale for its operations, including ventures in Japan and China and its highly regarded research center in Palo Alto, Calif. The increase in oil and gas prices was felt yet again in the chemicals industry, where many major firms experienced business declines owing to higher operating expenses. E.I. du Pont de Nemours and Co., the largest worldwide chemical company, served as a case in point. The firm's decision to sell its oil subsidiary, Conoco, in 1999 may have hurt it in 2000, as one of DuPont's major problems was contending with ballooning operating expenses caused by high oil and gas costs. DuPont's operating earnings fell by 14% in the third quarter of 2000 alone. DuPont was not alone in its woes. The Union Carbide Corp., the Rohm and Haas Co., and the PolyOne Corp., among others, struggled in 2000 as energy costs rose and the weak euro caused export sales to Europe to slow. The Dow Chemical Co. during the year mounted a challenge to DuPont's supremacy through its proposed takeover of Union Carbide, as well as by going against the industry grain by posting record sales increases. Raising its sales prices helped Dow avoid being submerged by energy cost increases. Two industries-pharmaceuticals and tobacco-were perhaps the most affected by government actions in 2000, though with vastly different results. The large pharmaceutical companies became one of the cornerstones of Vice Pres. Al Gore's presidential campaign when Gore charged the manufacturers with spending too much on advertising and overcharging consumers. Sentiment in the U.S. Congress also ran against the interests of pharmaceutical manufacturers. In July legislation was passed to reduce restrictions on imported drugs, considered a loss for American pharmaceuticals' lobbying interests. Legislation was also considered that would greatly expand Medicare coverage for seniors, in some cases putting one-half of prescriptions under price controls. Both Gore and rival presidential candidate Texas Gov. George W. Bush supported some measure of prescription drug relief. The top pharmaceutical companies, however, continued to prosper despite the political attacks. Pfizer Inc., the American Home Products Corp., and the Schering-Plough Corp. posted solid increases in earnings on the strength of their prescription drug businesses. Pfizer, for example, had a 31% earnings increase in the third quarter, helped by the popularity of such products as Viagra and cholesterol fighter Lipitor. Along with threats of government action, however, was a rising threat by generic pharmaceuticals. Generics worked to whittle away at drug monopolies held by the large companies, often beating their rival's legal challenges. For example, a federal district court in August approved Barr Laboratories' plan to market a generic alternative to Eli Lilly and Co.'s Prozac, starting in 2001. The decision gave generics the green light to go after such popular drugs as AstraZeneca International's Prilosec and the Bristol-Meyers Squibb Co.'s Glucophage. Generic pharmaceutical manufacturers also received a boost via Congress, as legislation introduced in September was designed to streamline the federal approval process for generics. Ironically, perhaps the most reviled industry of the previous decade experienced a healthy year overall. Tobacco companies, especially industry leaders R.J. Reynolds Tobacco Co. and Phillip Morris Co., began a recovery in 2000 after a decade in which the once-invulnerable industry endured a series of legal challenges that culminated in the $206 billion settlement in November 1998 between tobacco manufacturers and 46 states. As the year progressed, it became clear that the major tobacco companies had been able to stem the tide against further legal action as well as increase their revenues. The U.S. Supreme Court ruled in March that Congress had not empowered the Food and Drug Administration to regulate tobacco, and legislation introduced subsequently to give the FDA such powers stalled in Congress. In addition, tobacco companies won several significant consumer lawsuits throughout the year in which states had tried to gain punitive damages. The companies also were in better fiscal shape, as R.J. Reynolds posted an 8% increase in income from continuing operations for the first nine months and Phillip Morris's profits were up 15% at the end of the third quarter. The cigarette companies were not home free, however. The impact of tax-influenced price increases was felt, as manufacturers had to raise prices by 13 cents per pack in January and again by 6 cents in July. There was also a growing discomfort about the long-term potential for tobacco companies, which resulted in their stocks' becoming less favoured by a number of investors. For example, the U.S.'s largest pension fund, the California Public Employees' Retirement System, voted in October to divest its $560 million of tobacco stock holdings. Consequently, it appeared that even the healthiest of industries had an inevitable downside during 2000, influenced by such factors as rising energy costs and general market uncertainty about Internet technology. Market analysts and investors concluded, however, that the return to form by such disparate industries as oil drillers and tobacco manufacturers showed that traditional industries may not be as appealing as those in high-tech enterprises, but they often are more rewarding. Christopher O'Leary Economic Affairs The year 2000 got off to a good start and ended on a positive note. Overall, the world economy experienced its fastest growth for more than a decade, and the prospects were for only a modest slowdown in 2001. As the year began, widespread predictions of disruption or even chaos being caused by Y2K problems, or the "Millennium Bug," proved ill-founded. In the first few months of 2000, it was evident that the economic momentum, largely driven by American consumer demand, was building up. In much of the world, including the U.S., the growth rate had peaked by midyear, after which there was a slowdown. (For Standardized Unemployment Rates in Selected Developed Countries, see Table II.) The International Monetary Fund (IMF) projected that real output would rise 4.7% in the year 2000, compared with an actual increase of 3.4% in 1999. The rate was by far the fastest since 1988 (4.6%) and took place against a background of volatile oil and stock markets. Despite inflationary pressures in some parts of the world, consumer prices were kept under control, helped by tight monetary policies. Consumer prices in the transition countries rose by 18.3%, well down from the 43.8% rate in 1999. In the economically advanced countries, consumer prices rose a modest 2.3%, up from 1.4% in 1999, when there were fears of deflation. (For changes in the Inflation Rate of selected developed countries, see Graph I.) These fears were realized in Japan, where there was a fractional fall. Inflation in less-developed countries (LDCs) moderated slightly to an average 6.2%, which was inflated by more excessive rates in a few countries. (For Changes in Consumer Prices in Less-Developed Countries, see Table IV.) As usual, growth in the LDCs was faster (5.6%) than in the advanced countries (4.2%). Although the difference between the two rates widened from 1999 (0.6 percentage point), it was modest compared with the early 1990s. In those years the LDCs were expanding at between two and four times the rate of the advanced countries, a reflection of the dynamic expansion in many Asian economies. The U.S. continued to provide a strong market for world exports and output growth, as it had done since the Asian financial crisis began in July 1997. (For changes in Industrial Production of selected developed countries, see Graph II.) In 2000, however, there was also buoyant demand from Europe and the transition countries. Japan's modest recovery, too, made a contribution. The slowdown in the U.S. economy was a growing cause of concern. The country had been spending beyond its capacity and means. To meet the shortfall, it was relying on credit and a huge flow of imports. Despite the slowdown, there were no signs of an easing in the burgeoning U.S. current-account deficit, which ended the year at around $450 billion, well above that of the year before. In November, imports unexpectedly rose sharply, which caused a record one-month deficit of $34 billion. The fear was that a sudden change in sentiment, such as one that might be prompted by a further escalation of oil prices, would cause a hard landing with a sharp slowdown in inflows of foreign direct investment (FDI) and foreign share buying with turbulence in world financial markets. The close and contested finish to the U.S. presidential election was not perceived as threatening a negative effect in the coming year. Any fiscal stimulus carried little risk of the economy's overheating. Given a parallel weakening in the euro-zone economies, the dollar was not expected to fall dramatically. (For changes in the Exchange Rates of Major Currencies to the U.S. dollar, see Graph V.) An increasing influence on international production was FDI. The strong desire of many nations and companies to participate in and benefit from globalization was reflected in changes in the regulatory environments of most countries to smooth the path for foreign investors. In 1999, of the 140 regulatory changes in investment conditions made by 60 countries, only 9 were less favourable to FDI. Global FDI outflows were expected to exceed $1 trillion in 2000, 20% more than in 1999. The number of transnational companies rose to 63,000, with 690,000 foreign affiliates whose sales, at $14 billion, were nearly twice global exports. The number of workers employed by affiliates was growing rapidly and by the year 2000 had reached 41 million. Cross-border mergers and acquisitions (M&As) continued to account for a high proportion of FDI, reaching $720 billion in 1999. Most of these were acquisitions between firms in the same industry. Where a corporate objective was to build a strong position in a new market, it was often considered quicker and simpler to buy an established company and with it acquire instant local knowledge and contacts. Because these deals involved a transfer of ownership and assets into foreign hands, however, acquisitions were often the targets for local opposition from nationalistic groups and the press, whether in advanced or less-developed countries. The alternative to an M&A was to set up a new operation in a little-known location, which might take too long in the current highly competitive environment. In the manufacturing sector, the focus of most worldwide M&A activity was automobiles, pharmaceuticals and chemicals, and food, beverages, and tobacco. In these industries economies of scale could be achieved and synergies exploited. There also were numerous cross-border bank mergers. (See Banking.) Most acquisitions continued to be in the advanced countries, although the share of M&A activity in the LDCs was steadily rising. The U.S. was the most attractive single FDI destination, and in 1999 acquisitions in the U.S. by foreign investors reached $233 billion. In the European Union (EU) the rate of takeover activity accelerated to $344 billion, much of it intra-European deals driven by the introduction of the euro in January 1999. Latin America, mainly attracted by privatizations in Argentina and Brazil, led activity in LDCs. Asian firms, notably those in Singapore, were actively buying companies in the less-developed world. While still recovering from the earlier financial crisis, South Korea saw foreign acquisitions that exceeded $9 billion in 1999. In Central and Eastern Europe, where cross-border sales reached $10 billion, Poland, the Czech Republic, and Hungary were the main locations for M&A activity because of their many privatizations. The largest buyers of foreign enterprises were from the U.K., followed by Germany and France. Stock Exchanges The year 2000 opened to one anticlimax-the failure of the "Millennium Bug" to attend the party-and ended with another-the failure of the American electorate to be unequivocal in its choice of president. Throughout the intervening months, stock markets worldwide were highly volatile, dominated by speculation on the economic outlook for the United States and the tensions between "old economy" and "new economy" businesses. The vast disparity of price-earnings (p/e) ratios in the information technology (IT) sector compared with all other sectors was the single most influential factor in world market sentiment. According to the International Monetary Fund (IMF), this marked divergence, or bifurcation, of the stock prices of IT and non-IT sectors had been developing since the mid-1990s. What was newer was the growing market capitalization of the IT sector worldwide and the greater internationalization of capital markets. Those led to closer cross-border correlation of stock prices, particularly IT stock prices. The increased weight of IT stocks in national indexes amplified any general market volatility and left markets around the world highly sensitive to events, particularly in the U.S., the home country of most IT companies that operated internationally. Macroeconomic expectations exerted greater influence on the markets than before. Investors' nervousness was heightened by rising oil prices, a falling euro, and, from late summer, the threat of war in the Middle East. The main victim of bearish sentiment had been the technology media and telecommunications subsector, the star of 1999, tarnished in the first quarter of 2000 by the high-profile collapse of some Internet, or "dot-com," companies. The aftershock of these collapses reverberated through the year, compounded by fears that many telecommunications companies might have paid too much for third-generation mobile telephony licenses. The technology-dominated National Association of Securities Dealers automated quotations (Nasdaq) composite index peaked on March 10 and by late November had fallen by 45.4%-more than the Dow Jones Industrial Average (DJIA) fell in the crash of 1987 but still leaving many high-tech companies at exceptionally high valuations unjustified by their profits. As early as June some of the tech stocks that had entered the U.K.'s Financial Times Stock Exchange 100 (FTSE 100) index in March were out again because their valuations no longer met index criteria and old economy stocks had returned to favour. Against this background came moves, led in September by the U.S. company Dow Jones, to recalculate the weightings of stocks in global indexes to reflect the real number of "free float" shares that investors could buy and sell. Shares tied up in corporate cross holdings, privately or government held, would no longer count in the company's market capitalization. The likely effect was that investors would seek to avoid companies with low free floats, many of them high-grade blue-chip firms, particularly in Europe and Asia but also in the U.S. The main concern of investors, however, was the long steady fall in share prices across sectors and regions. By year's end the Morgan Stanley Capital International World Index had lost some 14%.