Envy of Capitalism

Most of the countries in the present day economy are working based on Capitalism. Is Capitalism leading the human community on the right track? Is it distributing the world resources equitably among the people? Are we leading towards a real growth in world economy? These are the questions which are popping up after the serial failures of economies, particularly western, in the recent couple of years.

In simple terms Capitalism means private ownership of means of production. It enables creation of goods and services for profit in a competitive environment. There is no doubt that competition always leads to better productivity and efficiency. But, the recent serial failures clearly demonstrate that the profits are encashed by the capitalists and when losses occur governments are bailing out these big corporate giants with public money. It is increasing the burden on the common man and increasing the gap between the rich and poor.

Early economic thinkers objected to capitalism due to exploitation of labor for profit of some limited persons. In simple terms, the capitalists generate the economic output such as goods and services with the use of scarce world resources but, the fruits are enjoyed by these limited capitalists. World scarce resources are for the benefit of whole mankind but, due to the loop holes in the world economic systems these are being reaped by a few persons by exploiting the general labor force. Karl Marx has coined the Communism in mid 19^th century but, it got its momentum during the early 20^th century with the Russian revolution. This theory emphasizes on nationalization of all resources and distribution of the same in the community. It has taken different shades such as Leninism, Maoism etc and spread across various countries. Due to the set backs in this system too, it could not sustain for long. Following the revolutions of 1989 most of the countries have leaned back to capitalism.

In the past few days we are coming across the strong revolution in many countries, such as in USA, Europe and Asia pacific, about the corporate greed. Protesters argue that Capitalism is associated with the unfair distribution of wealth and power. It bestows economic inequality, unemployment and economic instability. Capitalism is working without the concern of exploiting the labor and environment. Inequality in the world has increased; the environment is exploited in the process of making profit. People are asking the relationship between world trade and environment. State policies are biased towards the capitalists.

Nearly one billion people, one out of seven, are deprived from adequate food and nutrition. By 2050, the global population will surpass nine billion, and demand for agricultural products is expected to double. At the same time, the world’s agricultural systems will be increasingly challenged by water scarcity, climate change and volatility, raising the risk of production shortfalls. Agriculture all over the world has a shortfall of investments and production due to a lack of high rich returns to the capitalists as compared to other sectors. What kind of solution does the capitalist economic system provide if it could not provide food security; the basic need and right of human being?

The inequality in the system tends to persuade the deprived towards worlds terrorism. This will hamper growth and demises the existence of human kind on this earth.

Today the world has GDP worth around 63 trillion dollars; all countries are running the race of growth in GDP by ignoring the brutal implications of the system such as food scarcity, inequality and environmental exploitation. The world is leading towards the false growth in mankind.

The world should understand the basic objective of existence of mankind to lead life happily. (Map showing countries shaded by their position in the Happy Planet Index - 2006. The highest-ranked countries are bright green; the lowest are brown.) Happiness should be the yardstick to measure human growth. Happy and long life by safeguarding the mother environment and equal distribution of scarce resources should be the goal of human kind.

Murali Kashyap

Helsinki, Finland

Kasyap.inc@gmail.com

China’s Real Estate Bubble

Is it the turn of China after the recent crack down of USA housing bubble? China is the world’s second largest economy with a $4.909 Trillion or 7.92% of the world economy and realty is contributing a lion’s share of 10% to it. With the USA sub-prime crisis, the world has not yet come out of shocks and now China leading towards the housing boom. China government is supporting the realty with its aggressive policies in making the realty a big boom to contribute toward its GDP. Does the government right enough to loosen the monetary and fiscal policies against realty to reach the double digit growth?

Government is intending the growth in GDP by massive urbanization all around the country and realty sector is playing a vital role in delivering the attentive results. Communist Party's clear expression of this view came in no. 1 document in January, a policy blueprint for 2010. In it, China vowed to reform the hukou system by giving rural citizens the right to the same services as urbanites, but only if they move to small cities within their own province. Chinese law says farmland is collectively owned by villages. In reality, the land is controlled by local governments. They, not the farmers, have the power to decide who can turn fields into real estate. Farmers say land reclamation rules are fixed against them, giving officials and well-connected developers the power to push them off the land without fair compensation. In some cases, local governments, which earned more than $230 billion from land auctions in 2009, are also being accused of demolishing old neighborhoods and unfairly compensating residents. In a recent poll conducted by China Youth Daily, a state-run newspaper, more than 80 percent of the respondents said local governments were a “major driving force” behind the skyrocketing property prices.

By 2025, the country will have 221 cities with populations of a million or more, compared to 35 in Europe, according to a report by McKinsey & Co, the consultancy firm. China had 108 of such cities in 2004. The sheer numbers involved in China's urbanization are staggering. To accommodate the on rush of new city dwellers, the country will have to pave 5 billion square meters of road, construct 5 million buildings, including 50,000 skyscrapers, and add up to 170 mass transit systems, all this by 2025. The McKinsey report said.

In the mission of urbanization by transforming dusty towns and villages into aspiring cities that will toll on the economy and society over a time, they are leaving behind the worrisome levels of debt piling. In such haste, quality of the work has got hampered; less thought has been given to energy efficiency and economic requirements of the common man. This has happened so quickly that the cities have not had an opportunity to grow organically. Urbanization is an inevitable trend. It's not whether you want it or not. There's no choice. But this urbanization path is a deformed bubble. As per Mr.Jiao Nanbo, secretary-general of the House Inspector Management Association of China, A large number of villas and townhomes inspected in Beijing have construction defects and some flaws could even endanger lives. Compared with Beijing's apartments, even though all of them had quality problems, villas and townhomes have many more construction defects and their quality is very poor.

One interesting fact is that most of these realty projects are taken up by the state-owned companies, which are ultimately controlled by the central government. These are the companies which are working for the central government to keep the real estate boom in achieving the intended GDP growth. These are bidding up prices on sprawling lands for big real estate projects. Land records show that 82 percent of land auctions in Beijing this year have been won by big state-owned companies outbidding private developers, up from 59 percent in 2008. A recent study by the National Bureau of Economic Research in Cambridge, Mass., found that land prices in Beijing had jumped by about 750 percent since 2003 and that half of that gain came in the last two years. Housing prices have also skyrocketed, doubling in many cities over the last few years.

The report pegged a big part of the increase to state-owned enterprises that have “paid 27 percent more than other bidders for an otherwise equivalent piece of land.” Critics say the central government in Beijing unwittingly propelled the land frenzy by pushing a huge $586 billion economic stimulus package last year and encouraging state-owned banks to lend more aggressively.

Chinese finances are in good health, at least in official terms. The government says its total debt is just 20 percent of gross domestic product, compared with about 80 percent in the United States and nearly 200 percent in Japan. But officials acknowledge the picture is grimmer when local government debt loads are added.

Last year, state banks made a record $1.4 trillion in loans, nearly twice as much as the year before. Analysts now say they believe much of that money was diverted into the property market through off-balance-sheet maneuvers, leading to the record land bids and soaring property prices. That belief is adding to concerns that some of China’s biggest state-owned banks may be sitting on enormous unreported debt.

Though legally barred from borrowing, provinces and cities have found ways around the restrictions, often through government-backed investment firms. These financing vehicles have borrowed a total of 7.7 trillion Yuan ($1.1 trillion) from banks, according to the China Banking Regulatory Commission. That alone would about double the national debt. Realizing the potential scope of the problem, the regulator warned banks at the start of this year to limit their lending to local governments.

This increased investments and government backed policies have lured foreign investors also into the Chinese realty sector. According to international real estate advisor CB Richard Ellis, the value of en bloc property transactions in 15 Chinese cities has hit 49.9 billion Yuan ($7.36 billion) in the first-half of this year, among which 19.4 billion Yuan came from foreign institutional investors, 10.2 billion Yuan from Hong Kong, Taiwan and Macao, and the remaining 20.3 billion Yuan from mainland investors.

The path of urbanization is not good, and it will lead to a social turmoil, by grabbing the lands from farmers with out proper compensation. Any sector runs on the demand supply economics. Since, the government is backing the realty strongly with its much aggressive policies for building huge number of houses; this path will lead to speculative profits by speculators and piles up the housing loans in the financial institutions. Once there is a huge supply in the housing sector with skyrocketed prices; the sector will crack down and will hamper the growth path of China. The global economy will also be propelled to feel the pressure due to high end involvement and investments in the sector.

Now the Chinese government is feeling the heat of speculations and skyrocketed prices by compromising on the quality of houses. Government has started taking actions by implementing tougher policies and tightening the money supply into the system. According to the latest edition of a central bank publication China Finance, Chinese house prices face very large pressure to fall in the second half on weakening demand and increasing supply. Some of the recent policy actions taken by the government are as follows:

ü 78 State-owned enterprises with no core businesses in the real estate industry are asked to withdraw from the industry after completing unfinished land development programs. Regulator: SASAC dated 18^th Mar 2010.

ü Higher down payments and mortgage rates if one of the home-buyer's family members already owns property. Regulators: People’s Bank of China & China Banking Regulatory Commission dated 4^th Jun 2010;

ü Beijing banned all families from buying more than one home; it also bans mortgages for purchases of a third or third-plus home. Regulator: Beijing Government dated 30^th Apr 2010;

ü The central bank announced it will raise the deposit reserve requirement ratio (RRR) for financial institutions by half a percentage point from May 10. Regulator: People’s Bank of China dated 2^nd May 2010;

ü Developers were asked not to take deposits for sales of uncompleted apartments without proper approval and barred from charging "abnormally high" prices. Regulator: MOHURD dated 19^th Apr 2010.

With the recent intervention of Government in curbing the speculations and housing bubble, the markets will see a correction in the housing prices in second half of the year. The government should take a deep dive into the sector and have constant eye on it, to mitigate a bubble in the sector. So far, there has been only a mild correction in the property sector in response to the tightening campaign, and Beijing has indicated that it is determined to keep its foot down until prices drop to a more reasonable level. The issue is of particular concern because economic growth is the Communist Party's main tool for ensuring stability and legitimizing its rule.

Author: Murali Kashyap

Helsinki, Finland

kasyap.inc@gmail.com

Sources of information:

China’s real estate curbs (www.chinadaily.com)

Reuters (uk.reuters.com)

Economic times (economictimes.indiatimes.com)

Phayul (phayul.com)

China-Window (www.china-window.com)

Need of the hour

Well, we are all hearing about global warming these days very frequently. This global warming is the effect of increased concentration of GHG (Green House Gases) due to burning of fossil fuels & deforestation.

The temperature difference between the last Ice Age and now is about 5° Celsius. Average world temperatures rose by 0.7° Celsius in the 20th century, according to the U.N.'s Intergovernmental Panel on Climate Change (IPCC). Global average temperature is forecast to rise 4°C (7.2°F) toward the end of the 21st century, and this is a mere 90 years away. Even if began today, and stopped most of our greenhouse gas emissions overnight, we would still see a temperature rise of around 2°C (3.6°F) by 2090-2100.

Scientists are warning us to take precautionary steps; to keep the average global temperature not more than 2 degree celsius above pre-industrial levels. Otherwise, millions of people would be exposed to increased stress on water supplies, according to the IPCC in its last major report in 2007, based on research by 2,500 experts. It says more people would suffer from malnutrition, some infectious diseases and there would be more deaths from heat waves, floods and droughts. Up to 30 percent of species of animals and plants would be at increasing risk of extinction. Coral reefs would be damaged. Cereals production would decline in tropical areas but, in one benefit, would improve nearer the poles. Coasts would suffer increased damage from floods and storms. Anything more would be "dangerous" for life on the planet. Many environmental groups also have the same target. Small island states, which fear being wiped off the map by rising sea levels, say that dangerous impacts will start at a rise of only 1.5 Celsius.

Now, the global temperature is changing drastically at a rapid pace and we are becoming the victim of it. But, global leaders are just playing the politics which is very much visible by the recent Copenhagen summit. Kyoto Protocol is coming to end in the year 2012 but, no binding agreements have been entered by the global leaders to evade the unforeseen results of global warming.

Developed countries in the west are the clear spoilers of all this effects. They did not take environmental costs into account for their rapid industrial growth and development and now it’s the turn of developing countries like Brazil, Russia, India and China (BRIC) which are following the same foot steps. Both developed and developing countries are not ready to take any financial steps to evade this. If this politics continues we are going to end up lives on this earth.

There is a direct co-relation between the increase in GDP, energy usage and global warming. World GDP is growing at the rate of 2 to 4% p.a. World oil & gas reserves will last for 43 years & 58 years respectively based on the present level of consumption. After that we will end up in wide mis-match of energy supply and demand.

Now, it’s the hour of renewables. Renewables such as solar, wind, hydro etc. are the immediate requirements of the hour to stop the global warming and cope up with the depleting fossil fuels.

We have plenty of renewable energy sources which could supply the whole world energy requirements without any replenishment. It is estimated that MENA (Middle East and North Africa) area itself having solar capacity to supply three times the whole world energy present demand.

Then what is stopping in using these resources is the common question which evolves. The rough estimate of installing a MW of Thermal based power is 4 crores; while wind energy is 6 crores and solar energy is 8 crores (All in INR). This finance economics is what disrupting in putting up solar and wind power stations. It should be remembered that man is the creator of this world and developments. With the increase in usage and research in these fields would make these to compete with the non-renewables as it is evident from the decrease in the wind power cost in the past decade. All that is needed from global leaders is good and encouraging political support for the renewables. At present so, much push has been given by the global governments for the renewables but, this is not enough to keep the global temperature within the ceilings.

Forest covers shall be increased and environmental costs shall be levied on the use of fossil fuels to boost up the renewables. India has recently come up in their budget of levying INR 50 per tonne as the clean energy cess on coal produced or imported into India. Of course this is not enough and will not solve all the problems which India is facing now but, it’s the first step in making renewables more usable and competitive.

At present, world electricity production is 19.25 trillion kWh (2007 est.) and its growing at a much pacer rate than the increase in growth rate of world GDP. We shall harness all the renewables to boost up the world economy and to have a better life on this earth by getting rid of the global warming.

We need countries like Abu Dhabi, who are very much committed to renewable energies even if they are pretty much rich with fossil fuel resources. Established in April 2006, Masdar (the Abu Dhabi Future Energy Company) is a multi-faceted company advancing the development, commercialization and deployment of renewable energy solutions and clean technologies. Masdar integrates the full renewable and clean technology lifecycle - from research to commercial deployment – with the aim of creating scalable clean energy solutions. And initiatives like the world’s first zero-carbon city are being built in Abu Dhabi and are designed to be not only free of cars and skyscrapers but also powered by the sun.

Another interesting fact about the consumption of meat and its impact on increased global temperature. The 400 page United Nations report has identified the growing herds of cattle / goats / pigs / sheep / chickens as the greatest threat to the climate.

Methane is one of the green house gases which is causing this global warming. It’s an easy problem to deal with. It is produced from 4 main sources livestock and livestock manure, rice farming, coal mining and landfills. In all the international treaties that have come and are coming like the one in Copenhagen, the developing world has tried its best to keep methane out of the debate. And they have succeeded because the west is justifiably guilt ridden about their carbon dioxide emissions. But the time has come for both the developed and developing world to recognize that reducing methane is the quickest way to stop global warming.

Methane concentrations have doubled in the last century and by now they are 20% of all greenhouse gas emissions. While carbon dioxide emissions have increased by 31% during the past 200 years, methane has increased by 149%. What makes methane so lethal is that it may be less than carbon dioxide but it is 23 times more efficient in trapping heat in the atmosphere than carbon dioxide. Methane has a large effect for a brief period (8.4 years in the atmosphere), whereas carbon dioxide has a small effect for a long period. That means if we stop generating methane today, we will see the effect almost immediately.

The methane emissions for India, China and Brazil have doubled since 1990 and are expected to go up by 40% by 2020. There is only one reason – and it is not an increase in coal mining or in landfills. It is because these countries grow animals for meat and milk.

In developing countries, the number of people eating meat and the amount they are eating every year has risen steadily. Between 1970 and 2002, annual per capita meat consumption in developing countries rose from 11 kilograms to 29 kilograms, according to the FAO. In developed countries, it has risen from 65 kilos to over 100 kilos. The annual global meat production will double from 229 million tons in 2000 to 465 million tons in 2050.

Livestock produce 23% of all methane because the fermentation in their intestines produces methane gas in the animals and their manure. A single dairy cow produces between 550-700L of methane a day

The world’s top destroyer of the atmosphere is not the car or the factory – it is the meat eating human. And this monster is on the rise.

A meat eater contributes 1.5 tonnes more of greenhouse gases per year than a vegetarian. This means that our diet change will make more difference than if we replace our standard petrol car for an efficient hybrid car, which reduces annual greenhouse emissions by roughly one ton a year. India’s livestock of roughly 485 million contributes more to global warming than our vehicles - 11.75 million metric tons per year — up from 9 million metric tons in 1994.

These cattle, pigs and sheep, chicken, goats did not want to be born – we created them. They do not want to be killed but we kill them to eat. In the process, we are killing the planet. Their wind and manure are warming the world 23 times faster than carbon dioxide.

Be aware of the facts about global warming; educate our friends and fellows. Let us save our planet.

Economy of United States of America

The biggest economy of the world; economy of USA with more than 14 trillion dollars of GDP, around 23% of the world GDP. We can think of the effects on the rest of the world on having a plunge in the USA economy with the recent sub-prime crisis. This country is known for its entrepreneurship with huge amounts of investments flowing to rest of the world. The rapid development in industrialization & technology in the past some decades lead it on the forefront of the world.

During 1970s when the Gold system and Bretton woods systems came to an end; fiat system has come into force where the printing of money is not supported by any underlying assets. Still there are some world famous economists who are against the fiat system of money printing where there is no base for money printing and explicitly dependent on the markets and solemnly at the decision of the govt. of the countries.

Even after this system collapse, all the rest of the countries started backing USD as a reserve currency and a tiny part in gold to back up the printing of their currencies. All the international transactions were mostly in the USD. This lead to more than half of the world forex reserves in the form of USD currency and government bonds.

Is United States of America strong enough to cover the money i.e. currency whatever it is printing and the quasi money i.e. government bonds it is issuing? What would happen if rest of the world starts dumping the USD reserves in the global markets? Is the American economy strong enough to control or capture all this reserve currency?

Apart from this, USA has got huge short fall in the trade balance which led to a massive amount of forex liabilities. Let us have a small calculation of USA’s liabilities in foreign exchange. USA has got external liabilities of around 13.4 tn dollars, the amount of Foreign Direct Investments at home is 2.4 tn dollars and the total amounts to 15.8 tn dollars (Liabilities side of Balance Sheet). The amount of forex reserves it has around 78 bn dollars, the amount of foreign direct investment by USA in rest of the world is 3.3 tn dollars and the total amounts to around 3.4 tn dollars (Assets side of Balance Sheet). Net amount of forex liabilities on head is 12.5 tn dollars which is about 87% of the GDP.

Even the domestic growth and markets also hindered with huge amounts of domestic credits about 15 tn dollars more than the GDP. Let us have a small calculation of the different components of the GDP value of 14 tn dollars. Agriculture, Industry & Services forms 1.2%, 21.9% & 76.9% of the GDP respectively. The labour cost or service cost of the west like USA & Europe is highly inflated as compared to the Asian countries. The same level of service can be rendered in India or China at 1/3^rd cost with same level of expertise due to huge surplus manpower. If we calculate these services in the GDP, it comes to around 10.8 tn dollars. If we compare with the Asian cost of services it would equivalent to 3.6 tn dollars roughly. So as per the basic workings the total GDP comes to around 6.8 tn dollars.

With this level of GDP can it sustain the external debts and can it make justice to the overseas countries which are holding USD as reserves? The same story goes for Europe too. By ignoring these fundamental things we are leading towards the false globalization and growth. It forms a huge bubble in the world economic systems and the global financial systems going to change entirely in the coming decade.

Let us not forget the fundamentals.

Economics of Labour Cost

Are the corporates really using their human force as a scarce resource? What if not the corporates use the human force as effective to achieve its ultimate goal of earnings?

In today’s global arena it is immense important to have its labour force as effective and efficient to lead the cutting edge of competition. Before starting to know how this labour force is being used in the present corporate world to achieve its goals let us start with the olden days of doing business where a marwari or dhukandar handles his business with a limited number of employees. Here, two aspects need to be concentrated. One the owner keeps as minimum number of employees as possible to keep his labour cost minimal and keep a direct repo with the business operations such as customer contacts etc so that the information of business operation is not vitiated. Here, the number of layers between the owner and end business operations is one or in some cases zero. Two the labour force does only those work which are indeed required for the business or which adds value to the business. The basic economics of the scarce labour force. In this case the labour force is really used as a scarce factor.

Of course, when the size of the business increases indeed the number of layers between the end business operations and the ultimate management increases but, the basics of using the scarce labour force does not change. Is this keep in mind by the present corporates for doing their business?

There should not be any work or task done by the labour force, which in turn does not add value to the business. The number of layers between the top management and end business operations should be kept bare minimum to keep the information as accurate as possible so, that better decisions can be arrived by the management.

Does every worker & management understand the objective and use of each task performed by each worker? Does the management check the labour redundancy? Does the management keep track of the organization structure with as many thin links as possible to get the accurate information for decision making? The answer for many of the cases is no. This kind of attitude of management is normally seen in the middle class emerging corporations where the management does not bother to consider all these. But, this could lead to un predictable worsen performance at the end. This not only increases the labour cost but, also decreases the efficiency or effectiveness with which the operations are done.

In today’s corporate world the basics are being forgotten and carry operations in a very hype manner. If you observe carefully there are lots of corporates which have their labour force doing work which is not in any way useful or adds value to the business. There is lots of information which is being processed as a basic procedure or to comply with the organization policies without understanding the ultimate use or objective of it both in operative and strategic management. In some cases, the management information is being done with some stupid data, assumptions and estimates which will lead to wrong decision making with the knowledge of the middle or operative level management just to comply with the procedures and processes or to keep up the performance of their divisions. So many number of labour hours is spent on such kind of works without achieving any thing.

Does the top management ready to see the unpredicted worst performances by forgetting the basic economics of their labour cost?

Let us not forget the basics of doing business.

Business is simple don’t make it complicated.

Murali Kashyap

Kasyap.inc@gmail.com