Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘IMF’

• International Monetary Fund Blasts ‘Trickle-Down’ Economics

Posted by Ron Robins on June 25, 2015

“A new report from the International Monetary Fund suggests that the widely popular ‘trickle-down’ economics just increases the gap of income inequality, creating injustices in almost every country. The study written by five IMF economists said that if governments want to increase growth, they should focus on helping the poorest 20 percent of citizens… The report analyzed 159 developed and developing economies from 1980 to 2012, searching to see how income is distributed differently in each system. It found that when the income share of the top 20 percent increased by 1 percent, economic growth slows down 0.08 percent in the following five years. Meanwhile, a 1 percent increase for the bottom 20 percent leads to a 0.38 percent increase in the country’s GDP in the following years.”
International Monetary Fund Blasts ‘Trickle-Down’ Economics, by Grant Whittington, June 23, 2015, TriplePundit, USA.

Commentary: Ron Robins
The clear implication from this report is mostly for income redistribution. However, as I’ve previously argued, I believe that though some form of income redistribution could be effected to help close the immediate income gap, but by far the better way — though longer to effect — is for the lower-income groups to benefit financially from corporate stock ownership.

How can this be done? Well, on February 25  I wrote that, “I believe an enlightened approach would be for the wealthy — and for corporations themselves — in each country to entrust a certain percentage of their profits in the form of company stock to a ‘sovereign wealth fund.’ Over time, some of the dividends and stock gains could be cashed and used to directly increase the incomes of the poor. Higher taxes for the rich (which is becoming popular)… could be introduced now but would probably have to be quite onerous to significantly improve the income of the poor.

Furthermore, as it’s proving in France which imposed very high taxes on high incomes, the wealthy become very adept in finding ways to avoid the higher taxes — and many even moving themselves to other jurisdictions!”

The IMF and others have demonstrated in various studies that societies with growing and grossly uneven income and wealth distributions tend to eventually financially self-destruct. However, before they self-destruct, there’s broad recognition of this possibility. Recognition of this offers everyone the chance to expand their awareness and consciousness to develop greater insights into the solutions. And this is what has to happen to all nations facing this issue.

What the wealthy must realize for their own self-preservation — and for even greater financial gain — is that they should take a proactive, optimal approach to solving the income and wealth distribution quagmire such as the solutions proposed here. These, though not new, are the best way forward to an enlightened, sustainable, and affluent future.

Posted in Consciousness/Psychology, Economics, Labour Issues, News, Commentary | Tagged: , , , , , , , , , , | 5 Comments »

• India, Ancient Economic Behemoth, to Overtake China

Posted by Ron Robins on April 12, 2011

By Ron Robins. First published March 20, 2011, in his weekly economics and finance column at alrroya.com

When Europe was going through its murderous medieval period, India was an economic behemoth controlling from one-fourth to one-third of the world’s wealth. After the death of the Indian Mughal Emperor Aurangzeb in 1707, India descended into fractious internal wars. This gave the British with their East India Company the opportunity to seize and control vast Indian assets, eventually assuming supremacy over all India.

In 1700, India’s economic output—its gross domestic product (GDP)—was almost 9 times that of Britain’s. By 1947, just before Indian independence from Britain, the tables had turned dramatically with British GDP about 1.2 times that of India, according to data by Angus Maddison in his study, The World Economy.

Now, the International Monetary Fund (IMF) believes the Indian economy has grown to be the world’s fourth largest on a purchasing power parity (PPP) basis, that is, equalising exchange rates given the purchase of a set basket of goods. A Citi study reviewed in The Times of India on February 23 said that based on PPP, India will have the largest economy in the world by 2050. And the World Bank suggests that India’s economic growth rate could surpass that of China this year. The Indian government is projecting 2011 GDP growth of near 9 per cent.

Furthermore, the US Census Bureau projects India’s population becoming the world’s largest and surpassing China in 2025. And by 2050, the Bureau sees India’s population at 1.66 billion compared to China’s 1.3 billion.

Population demographics are crucial in another sense. In Ed Dolan’s, India’s Secret Weapon in its Economic Race With China: Demographics, November 11, 2010, he writes that, “rich countries with slow population growth have high dependency ratios because they have many retirees. Low-income countries with fast population growth have high dependency ratios because they have lots of children. In between these two states, countries go through a Goldilocks period when the working age population has neither too many children nor too many parents to support… India is just entering its Goldilocks period while China, like the United States, is already leaving.”

While considering demographics, Mckinsey & Co expects India’s middle class population to grow from 50 million in 2007 to 583 million by 2025, while over 291 million will move away from desperate poverty to a more sustainable livelihood. Mckinsey also sees India’s consumer market becoming the world’s fifth largest by 2025, up from twelfth place in 2007.

Such consumption growth implies enormous economic investment. And in fact, in the next three years, a massive $500 billion is being spent on Indian infrastructure says Chris Devonshire-Ellis in his post, China Demographics Dictate India as Global Manufacturing Hub, last September 27. Citing data from Asian Comparator, he says that Indian wage rates and associated costs are highly favourable when compared to China and other Asian nations.

However, for now it is India’s service sector that is its real star. Relative to China, and given its state of development, India’s service sector is much larger too and is thus offering a different growth path to that of China. In fact, Ejaz Ghani, Economic Advisor at the World Bank, says in The Service Revolution, March 23, 2010, that the growth in services has India and other South Asian countries exhibiting the growth patterns of middle to high income countries.

Mr Ghani also says, “productivity growth in India’s service sector matches productivity growth in China’s manufacturing sector… that the effect of services growth on aggregate economic growth appears to be as strong, if not stronger, than the effect of manufacturing growth on overall growth… India’s growth experience suggests that a global service revolution—rapid growth and poverty reduction led by services—is now possible.” Incidentally, services represent about 70 per cent of global GDP, whereas manufacturing is much lower at 17 per cent. Thus services represent potentially, a much higher order of growth for India than does manufacturing.

And services continue to grow rapidly. In a February 21 article in India’s Express Computer, it says that IT-BPO (information technology-business process outsourcing) is estimated to be up 19 per cent this year with revenues of $76 billion. Exports are expected to be $59 billion of that. For fiscal year 2012 the publication says that software and services growth is expected to increase 16 to 18 per cent.

India may have yet another advantage over China: it might be more attractive to foreign executives says Mr Devonshire-Ellis. He quizzed a number of western executives who had worked in China and India and asked them where they prefer to work. He said that, “the surprising conclusion was that India was preferable. Several executives expressed a desire never to return to China.”

Also, the world’s business language, English, is used by 350 million Indians, while about 100 million speak and write the language fluently. Moreover, unlike China, much of India’s legal, political, financial and commercial framework is more familiar to developed countries’ businesses that would like to do business with or invest in India.

India has traditionally been a land of great entrepreneurial activity and wealth. The past three centuries of poverty have been an anomaly. Now its economic growth could soon surpass that of China and its economy become the biggest in the world by 2050. Its population is projected to be the largest of any country by 2025. As it grows to have the world’s biggest pool of working age individuals, its forthcoming massive investments in infrastructure, its comparative wage cost advantages, widespread use of English and globally compatible financial and legal structures, India could soon become a major world centre for both manufacturing and services.

India is rising again to become a global economic behemoth.

Copyright alrroya.com

Posted in Economics | Tagged: , , , , , , , , , , | 3 Comments »

• Gold and Silver Rise Again as History’s Chosen Currencies

Posted by Ron Robins on March 13, 2011

By Ron Robins. First published February 25, 2011, in his weekly economics and finance column at alrroya.com

Gold, “the ancient metal of kings,” is reasserting itself as the currency of choice as it has done again and again since the earliest of human times. In our modern era, as central banks and governments fight to devalue their currencies to gain purported trade advantages, gold rises in value against them all. And central banks are buying gold again amidst serious doubts as to the size of some of their real physical gold holdings. Silver too is experiencing a similar re-emergence. The reasons for gold and, to a lesser extent, silver acting as currencies, are easy to understand.

Gold’s history as a currency extends back thousands of years. The western world’s first known standardised minting of gold currency took place in 564 BCE by King Croesus of western Asia Minor. However, it is also believed that China in the fifth and sixth century BCE, minted the Ying yuan gold coin as well. In the great Gupta Empire of India, from 320 to 550 CE, gold coins were used throughout its domain. And in the early Islamic world around the time of the Prophet Muhammad, the gold dinar coin led as its currency. In Europe, gold coins became an important or central monetary unit for the Greeks, Romans, Venetians, Dutch, Spanish and British.

During approximately 1870 to 1910 all major countries linked their currencies to gold, thereby adopting the gold standard. However, China was the exception preferring a silver-based standard. The first silver coins are reported as being minted by King Pheidon of Argos around 700 BCE.

Gold and silver have historically asserted themselves as monetary mediums due to their intrinsic value. They are consistent, divisible, durable and convenient, and they are nobody’s liability.

Unlike paper money, gold, particularly, has proven itself in maintaining its value over many centuries. The World Gold Council (WGC) says that, “since the 14th Century, gold’s purchasing power has maintained a broadly constant level… an ounce of gold has repeatedly bought a mid-range outfit of clothing… in the fourteenth century… in the late 18th century and… at the beginning of this century (2000 to 2008)… On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. While inflation and other forces have ravaged the value of the world’s currencies, gold has emerged with its capacity for wealth preservation firmly intact… [whether] in the face of financial turmoil… [as] a crisis hedge… [or] as an inflation hedge.”

Since their origins, central banks have realised the importance of gold, and sometimes silver, as a strategic part of their reserves. Commenting on the rapidly rising price of gold, Alan Greenspan, former chairman of the US Federal Reserve, said in a Bloomberg report on September 9, 2009, that, “[the rising gold price is] an indication of a very early stage of an endeavor to move away from paper currencies… What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.”

And this is also because, “[the central banks] no longer trust each other… [and] there’s this perception that different countries are trying to weaken their currency in order to get a competitive advantage,” said Francisco Blanch, head of global commodity research at Bank of America Merrill Lynch at a New York City November 2010 conference, reports Fastmarkets. Among the countries whose central banks are increasing their gold reserves are China, India, and Russia—all countries with mammoth trade surpluses and foreign exchange reserves.

However, as throughout history, he who owns gold and how much he owns is often shrouded in secrecy. For a central bank, covertly selling and buying of gold and its currency can be used to secretly manipulate the value of its currency. Some indirect proof of this comes again from Mr Greenspan during testimony to a US Congressional committee in 1998. He remarked that, “central banks stand ready to lease gold in increasing quantities should the price rise.” Therefore, declaring the precise gold holdings of a central bank might be akin to giving away ‘trade secrets.’

Central banks worldwide supposedly hold around 30,000 tonnes of gold, perhaps 20 to 25 per cent of all the gold ever mined. But true independent verification of their holdings is not available. The US based Gold Anti Trust Committee (Gata) has compiled extensive and critical information concerning western central bank gold holdings. Their information and that from other sources suggests the actual physical gold holdings of some western central banks could be 30 to 50 per cent lower than publicly reported.

As an example, the US boasts official gold holdings of 8,133.5 tonnes. However, it is known that some, perhaps a significant portion of these holdings, have been leased out to various financial entities and might not be returned without huge financial losses. Ron Paul, the chairman of the influential US Congress’s Domestic Monetary Policy Subcommittee of the House Financial Services Committee, is so concerned about such activities that he is calling for a full public audit of US gold holdings.

Additionally, gold is possibly set to play a reinvigorated role in the international monetary system. The International Monetary Fund (IMF) as well as most members of the G20 are seeking alternatives to the US dollar as the world’s principal reserve asset. And in this regard, gold—perhaps silver too—could be included in a basket of currencies and commodities that create the basis for a new international unit of exchange (currency).

Moreover, an RBC survey of global financial executives and business leaders reported on Yahoo! Finance on February 3 that “just 52 per cent of respondents expect the dollar to be the world’s currency in five years,” and that “gold is coming back as a reserve currency ‘of sorts,’” says Marc Harris, head of global research at RBC Capital Markets.

Probably since the beginning of civilisation, gold especially, but silver as well, have served as monetary vehicles. Gold has demonstrated itself to hold its value over centuries and in many diverse cultures. And despite today’s sophistication with paper money, gold is still seen by central banks as the ultimate source of payment. Concerns are growing that the real physical gold holdings of some major central banks might be substantially lower than they have reported, and as they unabashedly devalue their paper money, gold and silver rise once again as history’s chosen currencies.

Copyright alrroya.com

Posted in Banking, Economics, Finance & Investing, Gold & Precious Metals, Monetary Policy | Tagged: , , , , , , , , , , , , , , , , | Leave a Comment »

 
%d bloggers like this: