Indian Economy Poised for Growth

The Indian economy, for long, had been in a limbo. While many had termed the Indian economy as a sleeping giant, many others had doubted the country’s capability as an emerging economic power. The reasons were myriad. The economy of India was mired in poverty and various other problems that were detrimental to its growth.

For years, the economic growth of India was much subdued. Most of the big companies of the country were owned by the government. This was mostly because of the fact that the country was ruled by the Congress government for most of the years following independence in 1947. Congress was a party that was known for its socialist tilt. As a result it preferred the state to wrest control over most of the manufacturing and production companies. These companies were known as public sector undertakings (PSUs) and usually a bureaucrat was appointed at the helm of all affairs.

All that changed dramatically in 1991 when the economy of India was thrown open to foreign investors and entrepreneurs. This marked the entry of multi-national companies, popularly known as MNCs in the Indian economy. It was the Congress government that ushered in the change, in a marked deviation from its largely socialist policy.

Today, India is one of the four emerging economies of the world, the other three being China, Russia and Brazil. The GDP of the Indian economy is poised to beat all expectations and predictions for 2013. Experts are of the opinion that the economy of India would exceed all expectations in the next year. There are signs that the policymakers of the Indian economy are about to spring some surprises.

The economy of India is still one of the most intricate of the four emerging economies. The country’s demographics lend it the possibility to garner the best GDP growth rate. The experts, at the same time, have cautioned about the country’s inability or reluctance to introduce effective policy changes. This has remained a persistent source of disappointment. But the experts are upbeat about the prospects of the economy of India. The capital markets are something to be really excited about, they have remarked.

Studies by several research groups on Indian economy have revealed that inflation is already showing a downward trend and is expected to reduce in the fourth quarter of the current fiscal i.e. January-March, 2013. As the government announces the mid-quarter policy for the economy later in December, 2012, the growth-inflation trajectory would be factored in and the monetary policy would be calibrated accordingly.

The GDP of the economy of India was 5.5 per cent in April-June quarter of the 2012-12 fiscal as against 6.7 per cent during the July-September in the 2011-12 fiscal. But that’s expected to be bettered in the next quarter, experts have predicted.

The Economy of India: An Overview

India, traditionally, has been a predominantly agrarian economy and gradually embraced an open market economic policy when it opened up to global competition in 1991. The Indian economy has taken a quantum leap from thereon and is today identified by mostly free market exchange, investment by foreign companies and liberalized foreign trade.

A significant shift in the economy of India has been observed since the 1990s regarding external trade regulations and investment strategies. Of late, India has emerged as an economic power not only in South Asia but over the world as well. Several economists have predicted that the Indian economy would be a major force to reckon with in the coming decades.

Over the last three decades, the agro-based economy of India has made the way for a market-driven economy with enough investment opportunities in retail, finance, telecommunications, insurance, infrastructure, information technology, manufacturing and others. Besides, significant improvement has been noticed in the human capital index of the country with more skilled workers finding employment.

The Indian economy is among the top five countries with regard to purchasing power parity (PPP). In the 2010-11 fiscal, the PPP of the economy of India was $4.06 trillion and $1.54 trillion as per the official exchange rate. The GDP of the Indian economy also grew in double digit with the dominance of the tertiary or the service sector. This is evident from the fact that this sector contributes 55.3 per cent of the GDP in the 2010-11 fiscal as against 28.6 per cent of the manufacturing sector and 16.1 per cent of the agricultural sector. However, of the total workforce of the economy of India, the agricultural sector employs 52 per cent of the total labour.

The Indian economy is one of the leading food grains producers of the world. Wheat and rice are the two most important crops of the country. Millets and maize are also produced in enough numbers and oilseeds and lentils also make a substantial contribution to the economy of India. Tea, jute, cotton and sugarcane are the four most important cash crops for the country. India, again, is the forerunner in the production of all these crops.

Among the industries, chemicals, textiles, ship building, steel and engineering goods are the traditional large-scale industries. Other than these, cement, petrochemicals, pharmaceuticals and automobiles have emerged as the sunrise sectors of the economy of India. Because of the huge buying power of the people, the Indian economy has grown as a major investment destination for both international and domestic entrepreneurs and investors. The country mostly imports crude oil, chemicals, fertilizers etc. Over the years, the imports have decreased and exports have increased. This is an indicator that the economy of India is pursuing a healthy growth trajectory.

Central Banks and Global Crises – Who Really Controls the Global Economy?

The worldwide credit crisis that began with the collapse of the housing market in the United States in 2008 was just one of many crises that central banks and other financial authorities have had to deal with during the first part of the 21st century.

But the enormity of the 2008 financial collapse required government and central bank intervention never before seen in the global economy. After Lehman Brothers, one of America’s biggest investment banks, was allowed to go bankrupt, the Federal Reserve was required to bail out AIG, the world’s largest insurance company. The $85 billion bailout was, until then, the biggest bailout in American economic history.

When banks began failing across the globe- primarily because of bad investments in U.S. subprime securities, but also because of the freeze in interbank lending- it was clear that a full- blown worldwide crisis had arrived. Stock market declines of more than 50% in some countries presaged a global economic meltdown. The concerted action of the world’s central banks, including the U.S. Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan, helped calm things down for a while. But when countries began failing-Iceland and the Ukraine were the first of many national economies that had to be bailed out- it was clear that the fallout of the 2008 crisis would last for years to come.

The key to finding the right solution to economic crises is to somehow solve the immediate problem without making things worse in the future. Some say that the reaction of the Fed to the meltdown of the dot- com sector at the end of the 20th century- increased liquidity and drastically lower interest rates- set the stage for the meltdown of financial markets several years later, with massive defaults of mortgage holders who probably shouldn’t have been given home loans to start with, but were lured in by artificially low interest rates. The result was a recession that was much worse than that which the central bank was trying to avoid.

Just as the speed of an engine is regulated by its fuel supply, a country’s economy is controlled by regulating its money supply- and each country’s monetary policy is the responsibility of its central bank. In Britain, it’s the Bank of England; in Switzerland, it’s The Swiss National Bank; in the United States, it’s the Federal Reserve; in the euro zone countries, it’s the European Central Bank; and in Japan, it’s the Bank of Japan. These quasi- public institutions are set up by governments, but are then given the independence needed to keep an economy under control without undue interference from dabbling politicians. Despite the tendency of the media to concentrate on the latest economic statistic, there is no one single indicator that tells us how fast an economy is growing- or if that growth will lead to inflation down the road. And, unfortunately, there is no way to know how quickly an economy will respond to changes in monetary policy. If a country’s central bank allows the economy to expand too rapidly- by keeping too much money in circulation, for example- it may cause “bubbles” and inflation. If it slows down the economy too much, an economic recession can result, bringing financial turmoil and rampant unemployment.

Central bankers, therefore, need to be prescient- and extremely careful- keeping one eye on inflation, which is the product of an overheating economy, and one eye on unemployment, which is the product of a slowing economy. In the 21st century economy, however, regulating money supply has become a much more difficult task. With the amount of capital flowing around the world dwarfing many countries’ money supplies, it’s almost impossible to know with certainty what the effect of any monetary decision will have on a local economy-let alone on the world.

Inflation and unemployment have become the yin and the yang of the 21st- century economy. When one rises, the other tends to fall. Although neither is perceived as good, in recent years, inflation has become the dominant preoccupation of economic decision makers. It used to be that reports of a surging economy brought euphoria to the markets. If factories and businesses were producing at full capacity and everyone had a job, the markets would greet the news with approval, confident that in a booming economy, everyone would be better off. However, after the severe inflation scares of the past decades, with prices rising out of control in many countries, leaders realized that an economy growing too quickly can be too much of a good thing. Reduced unemployment means that companies are forced to pay higher wages for scarce workers, and prices of goods and services need to be raised to pay for the increased cost.

In a booming economy, inflation can grow quickly as consumers and businesses begin to compete for increasingly scarce goods and services- and scarcity leads to higher prices. The result is usually a vicious circle of wage and price increases that end up hurting almost everyone- especially those on fixed incomes, who see their buying power decline when prices rise.

The international markets watch each country’s inflation rate carefully- always on the lookout for signs that an economy is stalling or overheating. International investors, including gigantic pension funds, hedge funds, and international banks, move billions and sometime trillions of dollars, pounds, euros, and yen around the world on any given day, looking for the best return on their investment. When a country’s economy looks like it is growing too strongly, and inflation is about to rear its ugly head, international investors can move their money out of an economy at a moment’s notice, preferring to invest their funds in countries with more stable economic growth and low inflation.

Just as a prudent driver keeps an eye on the road ahead, a country’s central bank tries to keep the economy on a steady course. Central bankers need to look at all the economic data, such as factory orders, housing starts, consumer credit, retail sales, manufacturing, construction and employment figures-some of which are leading and some of which are lagging indicators-in an ongoing effort to keep the economy from overheating or sliding into recession.

The Basics of Any Economy

In a traditional economy, how the resources are distributed is predicted by the habits and traditions practised by the society. Here, the Basics of Economy is guided by a pre-determined force and everyone automatically knows where they fit in. Occupations are distributed according to heritage and there is little room for growth and innovation as new ideas are usually scorned and perceived as a threat to a way of life.

In the traditional economy, there is stability and predictability and entrepreneurs are rare thus, the standard of living is significantly low. The government plays a lot of role in the command economy. Instead of allowing tradition and habits to dictate the economy, a central government is elected or appointed to dictate the Basics of Economy. Everybody is then obliged to follow the economic decisions made by the government or their interest groups regardless of their differing or preferred stands.

The Market economy on the other hand is controlled by the forces of demand and supply. What to produce, for whom and needed quantity is all left in the hands of the market, the people. This economy permits growth and change based on the various needs of the consumers. The distribution of wealth in a market economy is often not balanced since it is tallied to the wavering needs of the market forces.

Communism captures the command economy. A central unit owns all and attempts to redistribute the wealth equally to all. The advantages and disadvantages of this approach weigh each other out. Capitalism works well with the market economy, the direction and growth is left to the consumers and business owners. By promoting competitive living, it takes the resources of any society and puts it to good use thereby promoting efficiency and flexibility. A major setback however could be the insensitivity of this type of economy to a balanced distribution of needs.

The Basics of Economy is similar in today’s major economies, most practicing socialism attempt to mix the command and market economies. In this arrangement, a central unit controls essential public demands while non-essential demands are left to compete with the harsh forces of demand and supply. Mixed economies takes the best of all the other economies, combines them in order to meet the demands of any society on a much larger scale.

What People Buy in a Bad Economy

As a sales trainer, I understand a salesperson’s quest for low hanging fruit especially in this economy. That’s why they want to know what people buy in a bad economy. I know they are searching for a list of products but my answer is much more useful.

What do people buy in a bad economy? They buy protection from loss. Our first instinct in a down economy is to preserve and maintain what we already possess. The key is knowing how to structure this message in a sales presentation.

During the sales process, products are presented as a solution to a prospect’s problem. It may be that the product allows a prospect to become more productive or to spend less money. During a strong economy, everyone is looking to do more and to do it faster. However, everything changes in a difficult economy and salespeople need to react to those changes if the expect to succeed in their sales careers.

In a strong economy, salespeople sell the positive side of benefits. They justify a purchasing decision with elaborate Return On Investment calculations. When the economy is growing, companies want to grow along with it. What people buy in a bad economy is quite different.

Understanding What People Buy In A Bad Economy

The fear of further loss is a strong motivator and that’s what people buy in a bad economy. To succeed, a sales message must appeal to that motivator. The sales message must expand from “saving money” to include “stop losing your money”. The sales message must expand from “becoming more productive” to “stop wasting your productivity”. In a troubled economy, the salesperson must “sell” both the negative and positive sides of the benefits. The fear of loss is what people buy in a bad economy. Reacting to this economy, I now include this point in my sales training programs.

I know when sales reps ask me what people buy in a bad economy, they are looking for a new product to sell. I remind to always sell what they know and enjoy. Sales success isn’t product dependent. Sales success depends on delivering the proper message. In this difficult economy, that message must appeal to the fear of further loss. That’s why “stop losing your money” and “stop wasting your productivity” are more effective sales message during this economic period.

What People Buy In A Bad Economy Is Not About A Product

When you want to know what people buy in a bad economy, stop thinking about a product or industry. In a difficult economy, people are searching for protection against further losses.

The fear of loss becomes a much stronger motivator than the desire for gain when the economy is down. Appeal to that motivator and you’ll enjoy great sales success selling any product.

Economic Stimulus Package For Your Personal Economy and Mental Mind Set!

Economy, Weak Economy, Recession, Economic Stimulus Plan, Stimulus Package, Obama’s Stimulus Package, Government Stimulus, Government Bail Out, Bank Bailout, and Auto Industry Bailout! Wait! Stop! Enough! My brain is being overwhelmed by these terms… Are any of these words or phrases the focus of your daily conversations? This is just about all I hear from the moment I wake up until I go to bed and it’s still ringing in my head while I sleep… I turn on the TV and what do you think I see and hear? I turn on the radio; chances are they are talking about the economy. Whenever I am engaged in a conversation it seems something about the economy usually comes up. GEEEEEZ already! Well I guess these are the times we are living in. It’s likely that most of you reading this article have been directly or indirectly affected by the Economic Meltdown, some more than others… And yes, there are always Vultures out there taking advantage of other people’s misfortune.

What can you do about this overabundant mind numbing negative information about our economy? Well you can start by training your mind on the positives. First off, you need to stop talking about the economy in your daily conversations. Yes, the issues are real and you do have to deal with the reality of the effects. I will get into more on that later. Second, how is all this really affecting you and your family? Third, what are you doing to stimulate your own Personal Economy because waiting for the Governments helping hand is not the answer?

First let’s deal with the mind set we are in. You can’t help but feel the world you live in is crumbling around you, that is of course if you’re constantly tuned into, listening or reading the national media channels. Basically, most of what is broadcast they talk about is negative any-ways. That’s what they call News, so there is a big problem! You may already be having a difficult time with life’s issues as it stands, without the need to exacerbate your problems by having to hear about how bad the economy is morning, noon, night, and for some of us while we sleep(economic nightmares). For me personally this indication was very troubling until I came across an article: Economic Stimulus Hypnosis? by Wendy N. Lapidus-Saltz. She gives about ten quality practical things you can do today to improve your personal economy and ease your mind.

You can start by: “What to Tell Yourself in a Weak Economy?”

“Start by getting rid of the words “weak economy.” Replace them with: new economy, modern economy, or an economy that’s re-building, re-starting, re-surging, re-growing, refreshing, refocusing, and recharging itself.” Read more on how to make economizing fun! Stimulate your economics by tickling your mind! Create more for your unique life by recharging your economy and mind.

In addition share this practice with your family, friends and people you associate with. They undoubtedly need a recharge of their personal economy and mind set too. Because the reality of the economy is there, that is, the stock market down day after day, foreclosures are mounting driving housing values down more and more each month, more business’s are closing and reports of more job cuts are frequent. Another thing you can do is don’t listen to any news for a few days or try to limit your current exposure dramatically. Give yourself a break from the news and see what this does for your frame of mind.

Once you have your mental state back in order, you can focus clearly on more practical ways to stimulate your Economy in a pure monetary fashion. That’s what you ultimately want to do right? Remember, you are the one in control of your ultimate financial destiny, not the government! So, continue to exercise with these suggestions and you will be ready for the next step in no time.

In my next article, I will discuss ways you can start to improve your financial situation no matter how bleak it may seem. And no, I will not be talking about some get rich quick scheme. I am sure you have already come across hundred’s of those that just wasted your time and actually ended up costing you money when they were supposed to make you money. So, until next time you have a Great Day and may your Personal Economy be prosperous for you and your family.

The Effects Of Balance Of Trade Surplus And Deficit On A Country’s Economy

INTRODUCTION

It is in no doubt that balance of trade which is sometimes symbolized as (NX) is described as the Difference between the monetary value of export and import of output in an economy over a certain period. It could also been seen as the relationship between the nation’s import and exports. When the balance has a positive indication, it is termed a trade surplus, i.e. if it consists of exporting more than is imported and a trade deficit or a trade gap if the reverse is the case. The Balance of trade is sometimes divided into a goods and a service balance. It encompasses the activity of exports and imports. It is expected that a country who does more of exports than imports stands a big chance of enjoying a balance of trade surplus in its economy more than its counterpart who does the opposite.

Economists and Government bureaus attempt to track trade deficits and surpluses by recording as many transactions with foreign entities as possible. Economists and Statisticians collect receipts from custom offices and routinely total imports, exports and financial transactions. The full accounting is called the ‘Balance of Payments’- this is used to calculate the balance of trade which almost always result in a trade surplus or deficit.

Pre-Contemporary understanding of the functioning of the balance of trade informed the economic policies of early modern Europe that are grouped under the heading ‘mercantilism’.

Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and military security of the state. In particular, it demands a positive balance of trade. Its main purpose was to increase a nation’s wealth by imposing government regulation concerning all of the nation’s commercial interest. It was believed that national strength could be maximized by limiting imports via tariffs and maximizing export. It encouraged more exports and discouraged imports so as to gain trade balance advantage that would eventually culminate into trade surplus for the nation. In fact, this has been the common practice of the western world in which they were able to gain trade superiority over their colonies and third world countries such as Australia, Nigeria, Ghana, South Africa, and other countries in Africa and some parts of the world. This is still the main reason why they still enjoy a lot of trade surplus benefit with these countries up till date. This has been made constantly predominant due to the lack of technical-know how and capacity to produce sufficient and durable up to standard goods by these countries, a situation where they solely rely on foreign goods to run their economy and most times, their moribund industries are seen relying on foreign import to survive.

What is Trade Surplus?

Trade Surplus can be defined as an Economic measure of a positive balance of trade where a country’s export exceeds its imports. A trade surplus represents a net inflow of domestic currency from foreign markets and is the opposite of a trade deficit, which would represent a net outflow.

Investopedia further explained the concept of trade surplus as when a nation has a trade surplus; it has control over the majority of its currency. This causes a reduction of risk for another nation selling this currency, which causes a drop in its value, when the currency loses value, it makes it more expensive to purchase imports, causing an even a greater imbalance.

A Trade surplus usually creates a situation where the surplus only grows (due to the rise in the value of the nation’s currency making imports cheaper). There are many arguments against Milton Freidman’s belief that trade imbalance will correct themselves naturally.

What is Trade Deficit?

Trade Deficit can be seen as an economic measure of negative balance of trade in which a country’s imports exceeds its export. It is simply the excess of imports over exports. As usual in Economics, there are several different views of trade deficit, depending on who you talk to. They could be perceived as either good or bad or both immaterial depending on the situation. However, few economists argue that trade deficits are always good.

Economists who consider trade deficit to be bad believes that a nation that consistently runs a current account deficit is borrowing from abroad or selling off capital assets -long term assets-to finance current purchases of goods and services. They believe that continual borrowing is not a viable long term strategy, and that selling long term assets to finance current consumption undermines future production.

Economists who consider trade deficit good associates them with positive economic development, specifically, higher levels of income, consumer confidence, and investment. They argue that trade deficit enables the United States to import capital to finance investment in productive capacity. Far from hurting employment as may be earlier perceived. They also hold the view that trade deficit financed by foreign investment in the United States help to boost U.S employment.

Some Economists view the concept of trade deficit as a mere expression of consumer preferences and as immaterial. These economists typically equate economic well being with rising consumption. If consumers want imported food, clothing and cars, why shouldn’t they buy them? That ranging of Choices is seen as them as symptoms of a successful and dynamic economy.

Perhaps the best and most suitable view about Trade deficit is the balanced view. If a trade deficit represents borrowing to finance current consumption rather than long term investment, or results from inflationary pressure, or erodes U.S employment, then it’s bad. If a trade deficit fosters borrowing to finance long term investment or reflects rising incomes, confidence and investment-and doesn’t hurt employment-then it’s good. If trade deficit merely expresses consumer preference rather than these phenomena, then it should be treated as immaterial.

How does a Trade surplus and Deficit Arise?

A trade surplus arises when countries sell more goods than they import. Conversely, trade deficits arise when countries import more than they export. The value of goods and services imported more exported is recorded on the country’s version of a ledger known as the ‘current account’. A positive account balance means the nation carries a surplus. According to the Central Intelligence Agency Work fact book, China, Germany, Japan, Russia, And Iran are net Creditors Nations. Examples of countries with a deficit or ‘net debtor’ nations are United States, Spain, the United Kingdom and India.

Difference between Trade Surplus and Trade Deficit

A country is said to have trade surplus when it exports more than it imports. Conversely, a country has a trade deficit when it imports more than it exports. A country can have an overall trade deficit or surplus. Or simply have with a specific country. Either Situation presents problems at high levels over long periods of time, but a surplus is generally a positive development, while a deficit is seen as negative. Economists recognize that trade imbalances of either sort are common and necessary in international trade.

Competitive Advantage of Trade Surplus and Trade Deficit

From the 16th and 18th Century, Western European Countries believed that the only way to engage in trade were through the exporting of as many goods and services as possible. Using this method, Countries always carried a surplus and maintained large pile of gold. Under this system called the ‘Mercantilism’, the concise encyclopedia of Economics explains that nations had a competitive advantage by having enough money in the event a war broke out so as to be able to Self-sustain its citizenry. The interconnected Economies of the 21st century due to the rise of Globalization means Countries have new priorities and trade concerns than war. Both Surpluses and deficits have their advantages.

Trade Surplus Advantage

Nations with trade surplus have several competitive advantage s by having excess reserves in its Current Account; the nation has the money to buy the assets of other countries. For Instance, China and Japan use their Surpluses to buy U.S bonds. Purchasing the debt of other nations allows the buyer a degree of political influence. An October 2010 New York Times article explains how President Obama must consistently engage in discussions with China about its $28 Billion deficit with the country. Similarly, the United States hinges its ability to consume on China’s continuing purchase of U.S assets and cheap goods. Carrying a surplus also provides a cash flow with which to reinvest in its machinery, labour force and economy. In this regard, carrying a surplus is akin to a business making a profit-the excess reserves create opportunities and choices that nations with debts necessarily have by virtue of debts and obligations to repay considerations.

Trade Deficits Advantage

George Alessandria, Senior Economist for the Philadelphia Federal Reserve explains trade deficits also indicate an efficient allocation of Resources: Shifting the production of goods and services to China allows U.S businesses to allocate more money towards its core competences, such as research and development. Debt also allows countries to take on more ambitious undertakings and take greater risks. Though the U.S no longer produces and export as many goods and services, the nations remains one of the most innovative. For Example, Apple can pay its workers more money to develop the Best Selling, Cutting Edge Products because it outsources the production of goods to countries overseas.

LITERATURE REVIEW

In this chapter, efforts were made to explain some of the issues concerning balance of trade and trying to X-ray some of the arguments in favour of trade balances and imbalances with a view to finding answers to some salient questions and making for proper understanding of the concept of trade balances surplus and deficit which is fast becoming a major problem in the world’s economy today which scholars like John Maynard Keynes earlier predicted.

In a bid to finding a solution to this, we shall be discussing from the following sub-headings;

(a). Conditions where trade imbalances may be problematic.
(b). Conditions where trade imbalances may not be problematic.

2.1. Conditions where trade imbalances may be problematic

Those who ignore the effects of long run trade deficits may be confusing David Ricardo’s principle of comparative advantage with Adam Smith’s principle of absolute advantage, specifically ignoring the latter. The economist Paul Craig Roberts notes that the comparative advantage principles developed by David Ricardo do not hold where the factors of production are internationally mobile. Global labor arbitrage, a phenomenon described by economist Stephen S. Roach, where one country exploits the cheap labor of another, would be a case of absolute advantage that is not mutually beneficial. Since the stagflation of the 1970s, the U.S. economy has been characterized by slower GDP growth. In 1985, the U.S. began its growing trade deficit with China. Over the long run, nations with trade surpluses tend also to have a savings surplus. The U.S. generally has lower savings rates than its trading partners, which tend to have trade surpluses. Germany, France, Japan, and Canada have maintained higher savings rates than the U.S. over the long run.

Few economists believe that GDP and employment can be dragged down by an over-large deficit over the long run. Others believe that trade deficits are good for the economy. The opportunity cost of a forgone tax base may outweigh perceived gains, especially where artificial currency pegs and manipulations are present to distort trade.

Wealth-producing primary sector jobs in the U.S. such as those in manufacturing and computer software have often been replaced by much lower paying wealth-consuming jobs such as those in retail and government in the service sector when the economy recovered from recessions. Some economists contend that the U.S. is borrowing to fund consumption of imports while accumulating unsustainable amounts of debt.

In 2006, the primary economic concerns focused on: high national debt ($9 trillion), high non-bank corporate debt ($9 trillion), high mortgage debt ($9 trillion), high financial institution debt ($12 trillion), high unfunded Medicare liability ($30 trillion), high unfunded Social Security liability ($12 trillion), high external debt (amount owed to foreign lenders) and a serious deterioration in the United States net international investment position (NIIP) (-24% of GDP), high trade deficits, and a rise in illegal immigration.

These issues have raised concerns among economists and unfunded liabilities were mentioned as a serious problem facing the United States in the President’s 2006 State of the Union address. On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the U.S. to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much in some areas and can no longer rely on the financial sector and consumer spending to drive demand.

2.2. Conditions where trade imbalances may not be problematic

Small trade deficits are generally not considered to be harmful to either the importing or exporting economy. However, when a national trade imbalance expands beyond prudence (generally thought to be several [clarification needed] percent of GDP, for several years), adjustments tend to occur. While unsustainable imbalances may persist for long periods (cf, Singapore and New Zealand’s surpluses and deficits, respectively), the distortions likely to be caused by large flows of wealth out of one economy and into another tend to become intolerable.
In simple terms, trade deficits are paid for out of foreign exchange reserves, and may continue until such reserves are depleted. At such a point, the importer can no longer continue to purchase more than is sold abroad. This is likely to have exchange rate implications: a sharp loss of value in the deficit economy’s exchange rate with the surplus economy’s currency will change the relative price of tradable goods, and facilitate a return to balance or (more likely) an over-shooting into surplus the other direction.

More complexly, an economy may be unable to export enough goods to pay for its imports, but is able to find funds elsewhere. Service exports, for example, are more than sufficient to pay for Hong Kong’s domestic goods export shortfall. In poorer countries, foreign aid may fill the gap while in rapidly developing economies a capital account surplus often off-sets a current-account deficit. There are some economies where transfers from nationals working abroad contribute significantly to paying for imports. The Philippines, Bangladesh and Mexico are examples of transfer-rich economies. Finally, a country may partially rebalance by use of quantitative easing at home. This involves a central bank buying back long term government bonds from other domestic financial institutions without reference to the interest rate (which is typically low when QE is called for), seriously increasing the money supply. This debases the local currency but also reduces the debt owed to foreign creditors – effectively “exporting inflation”

FACTORS AFFECTING BALANCE OF TRADE

Factors that can affect the balance of trade include;

1. The cost of Production, (land, labour, capital, taxes, incentives, etc) in the exporting as well as the importing economy.
2. The cost and availability of raw materials, intermediate goods and inputs.
3. Exchange rate movement.
4. Multi lateral, bi-lateral, and unilateral taxes or restrictions on trade.
5. Non-Tariff barriers such as environmental, Health and safety standards.
6. The availability of adequate foreign exchange with which to pay for imports and prices of goods manufactured at home.

In addition, the trade balance is likely to differ across the business cycle in export led-growth (such as oil and early industrial goods). The balance of trade will improve during an economic expansion.

However, with domestic demand led growth (as in the United States and Australia), the trade balance will worsen at the same stage of the business cycle.

Since the Mid 1980s, the United States has had a growth deficit in tradable goods, especially with Asian nations such as China and Japan which now hold large sums of U.S debts. Interestingly, the U.S has a trade surplus with Australia due to a favourable trade advantage which it has over the latter.

ECONOMIC POLICY WHICH COULD HELP REALISE TRADE SURPLUSES.

(a) Savings

Economies such as Canada, Japan, and Germany which have savings Surplus Typically runs trade surpluses. China, a High Growth economy has tended to run trade surpluses. A higher savings rate generally corresponds to a trade surplus. Correspondingly, the United States with a lower Savings rate has tended to run high trade deficits, especially with Asian Nations.

(b) Reducing import and increasing Export.

Countries such as the U.S and England are the major proponent of this theory. It is also known as the mercantile theory. A Practice where the government regulates strictly the inflow and outflow from the economy in terms of import and export. One major advantage of this theory is that it makes a nation self sufficient and has a multiplier effect on the overall development of the nation’s entire sector.

CRITICISMS AGAINST THE ECONOMIC POLICY OF SAVING AS A MEANS OF REALISING TRADE SURPLUS

Saving as a means of realizing trade surplus is not advisable. For example, If a country who is not saving is trading and multiplying its monetary status, it will in a long run be more beneficial to them and a disadvantage to a country who is solely adopting and relying on the savings policy as the it can appear to be cosmetic in a short term and the effect would be exposed when the activities of the trading nation is yielding profit on investment. This could lead to an Economic Tsunami.

CRITICISMS AGAINST THE ECONOMIC POLICY OF REDUCING IMPORTS AND INCREASING EXPORTS

A situation where the export is having more value on the economy of the receiving country just as Frederic Bastiat posited in its example, the principle of reducing imports and increasing export would be an exercise in futility. He cited an example of where a Frenchman, exported French wine and imported British coal, turning a profit. He supposed he was in France, and sent a cask of wine which was worth 50 francs to England. The customhouse would record an export of 50 francs. If, in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France, and was found to be worth 90 francs in France, he would have made a profit of 40 francs. But the customhouse would say that the value of imports exceeded that of exports and was trade deficit against the ledger of France.

A proper understanding of a topic as this can not be achieved if views from Notable Scholars who have dwelt on it in the past are not examined.

In the light of the foregoing, it will be proper to analyze the views of various scholars who have posited on this topic in a bid to draw a deductive conclusion from their argument to serve a template for drawing a conclusion. This would be explained sequentially as follow;

(a) Frédéric Bastiat on the fallacy of trade deficits.
(b) Adam Smith on trade deficits.
(c) John Maynard Keynes on balance of trade.
(d) Milton Freidman on trade deficit.
(e) Warren Buffet on trade deficit.

3.1. Frédéric Bastiat on the fallacy of trade deficits

The 19th century economist and philosopher Frédéric Bastiat expressed the idea that trade deficits actually were a manifestation of profit, rather than a loss. He proposed as an example to suppose that he, a Frenchman, exported French wine and imported British coal, turning a profit. He supposed he was in France, and sent a cask of wine which was worth 50 francs to England. The customhouse would record an export of 50 francs. If, in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France, and was found to be worth 90 francs in France, he would have made a profit of 40 francs. But the customhouse would say that the value of imports exceeded that of exports and was trade deficit against the ledger of France. looking at his arguments properly, one would say that it is most adequate to have a trade deficit over a trade surplus. In this Vain, it is glaringly obvious that domestic trade or internal trade could turn a supposed trade surplus into a trade deficit if the cited example of Fredric Bastiat is applied. This was later, in the 20th century, affirmed by economist Milton Friedman.

Internal trade could render an Export value of a nation valueless if not properly handled. A situation where a goods that was initially imported from country 1 into a country 2 has more value in country 2 than its initial export value from country 1, could lead to a situation where the purchasing power would be used to buy more goods in quantity from country 2 who ordinarily would have had a trade surplus by virtue of exporting more in the value of the sum of the initially imported goods from country 1 thereby making the latter to suffer more in export by adding more value to the economy of country 1 that exported ab-initio. The customhouse would say that the value of imports exceeded that of exports and was trade deficit against the ledger of Country 1. But in the real sense of it, Country 1 has benefited trade-wise which is a profit to the economy. In the light of this, a fundamental question arises, ‘would the concept of Profit now be smeared or undermined on the Alter of the concept of Trade surplus or loss? This brings to Mind why Milton Friedman stated ‘that some of the concerns of trade deficit are unfair criticisms in an attempt to push macro- economic policies favourable to exporting industries’. i.e. to give an undue favour or Advantage to the exporting nations to make it seem that it is more viable than the less exporting country in the international Business books of accounts. This could be seen as a cosmetic disclosure as it does not actually state the proper position of things and this could be misleading in nature.

By reduction and absurdum, Bastiat argued that the national trade deficit was an indicator of a successful economy, rather than a failing one. Bastiat predicted that a successful, growing economy would result in greater trade deficits, and an unsuccessful, shrinking economy would result in lower trade deficits. This was later, in the 20th century, affirmed by economist Milton Friedman.

3.2. Adam Smith on trade deficits

Adam Smith who was the sole propounder of the theory of absolute advantage was of the opinion that trade deficit was nothing to worry about and that nothing is more absurd than the Doctrine of ‘Balance of Trade’ and this has been demonstrated by several Economists today. It was argued that If for Example, Japan happens to become the 51st state of the U.S, we would not hear about any trade deficit or imbalance between America and Japan. They further argued that trade imbalance was necessitated by Geographical boundaries amongst nations which make them see themselves as competitors amongst each other in other to gain trade superiority among each other which was not necessary. They further posited that if the boundaries between Detroit, Michigan and Windsor, Ontario, made any difference to the residents of those cities except for those obstacles created by the Government. They posited that if it was necessary to worry about the trade deficit between the United States and Japan, then maybe it was necessary to worry about the deficits that exist among states. It further that stated that if the balance of trade doesn’t matter at the personal, Neighbourhood, or city level, then it does matter at the National level. Then Adams Smith was Right!.

They observed that it was as a result of the economic viability of the U.S that made their purchasing power higher than that its Asian counterpart who was Exporting more and importing less than the U.S and that it wouldn’t be better if the U.S got poorer and less ability to buy products from abroad, further stating that it was the economic problem in Asia that made people buy fewer imports.

“In the foregoing, even upon the principles of the commercial system, it was very unnecessary to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous. It obvious depicts a picture that nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this [absurd] doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium.” (Smith, 1776, book IV, ch. iii, part ii).

3.3. John Maynard Keynes on balance of trade

John Maynard Keynes was the principal author of the ‘KEYNES PLAN’. His view, supported by many Economists and Commentators at the time was that Creditor Nations should be treated as responsible as debtor Nations for Disequilibrium in Exchanges and that both should be under an obligation to bring trade back into a state of balance. Failure for them to do so could have serious economic consequences. In the words of Geoffrey Crowther, ‘if the Economic relationship that exist between two nations are not harmonized fairly close to balance, then there is no set of financial arrangement that Can rescue the world from the impoverishing result of chaos. This view could be seen by some Economists and scholars as very unfair to Creditors as it does not have respect for their status as Creditors based on the fact that there is no clear cut difference between them and the debtors. This idea was perceived by many as an attempt to unclassify Creditors from debtors.

3.4. Milton Freidman on trade deficit

In the 1980s, Milton Friedman who was a Nobel Prize winning Economist, a Professor and the Father of Monetarism contended that some of the concerns of trade deficit are unfair criticisms in an attempt to push macro- economic policies favourable to exporting industries.

He further argued that trade deficit are not necessarily as important as high exports raise the value of currency, reducing aforementioned exports, and vice versa in imports, thus naturally removing trade deficits not due to investment.

This position is a more refined version of the theorem first discovered by David Hume, where he argued that England could not permanently gain from exports, because hoarding gold would make gold more plentiful in England; therefore the price of English goods will soar, making them less attractive exports and making foreign goods more attractive imports. In this way, countries trade balance would balance out.

Friedman believed that deficits would be corrected by free markets as floating currency rates rise or fall with time to discourage imports in favour of the exports. Revising again in the favour of imports as the currency gains strength.

But again there were short comings on the view of Friedman as many economists argued that his arguments were feasible in a short run and not in a long run. The theory says that the trade deficit, as good as debt, is not a problem at all as the debt has to be paid back. They further argued that In the long run as per this theory, the consistent accumulation of a major debt could pose a problem as it may be quite difficult to pay offset the debt easily.

Economists in support for Friedman suggested that when the money drawn out returns to the trade deficit country

3.5. Warren Buffet on trade deficit

The Successful American Business Mogul and Investor Warren Buffet was quoted in the Associated Press (January 20th 2006) as saying that ‘The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them’. He was further quoted as saying that ‘in effect, our economy has been behaving like an extraordinary rich family that possesses an immense farm. In order to consume 4% more than we produce-that is the trade deficit- we have day by day been both selling pieces of the farm and increasing the mortgage on what we still own.

Buffet proposed a tool called ‘IMPORT CERTIFICATES’ as a solution to the United States problem and ensure balanced trade. He was further quoted as saying; ‘The Rest of the world owns a staggering $2.5 trillion more of the U.S than we own of the other countries. Some of this $2.5 trillion is invested in claim checks- U.S bonds, both governmental and private- and some in such assets as property and equity securities.

Import Certificate is a proposed mechanism to implement ‘balanced Trade’, and eliminate a country’s trade deficit. The idea was to create a market for transferable import certificate (ICs) that would represent the right to import a certain dollar amount of goods into the United States. The plan was that the Transferable ICs would be issued to US exporters in an amount equal to the dollar amount of the goods they export and they could only be utilized once. They could be sold or traded to importers who must purchase them in order to legally import goods to the U.S. The price of ICs are set by free market forces, and therefore dependent on the balance between entrepreneurs’ willingness to pay the ICs market price for importing goods into the USA and the global volume of goods exported from the US (Supply and Demand).

The Economy’s Greatest Depression Downturn Ever Is Now Just A Few Years Away

What really controls the economy? Forget interest rates, forget deficits, forget the Fed, forget IRAQ, forget which party is in office. In fact, forget just about everything that permeates the news. The greatest force that has controlled the long-term trend of the economy for at least the last century doesn’t give a fig about any of these side-shows. And just what is this “greatest force” now telling us in 2005? The same thing that it has been telling us for at least the last twenty years – that the onset of a catastrophic depression, unprecedented in history, has been marching silently and steadily towards us, and that it is now just a few years away.

It has long been suggested (and feared) that the 77 million or so US Baby Boomers will tank the economy big-time as they begin to pull their savings out of Wall Street when they start retiring around 2011. Well, first of all there are not 77 million. There are really over 100 million American Baby Boomers because the birth upswing actually began in the late thirties not the, “traditionally” chosen, erroneous, post war year of 1946. This means that whatever problems they might created just got 30% worse, and true earliest Baby Boomer retirement began around 2001. Secondly, the hard evidence of nearly a century shows that people retiring has never been a force in the overall trend of the economy. Let’s get back to basics to see why.

It is a well established economic fact that around 60-70% of the GDP (gross domestic product) is simply consumers spending just about all of their hard-earned income. What many people don’t know, or at least don’t think about, is that it’s more than 90% when national and local government expenditures, first taken in from consumers’ incomes as taxes of all kinds, are included. The bottom line is that the consumer is always the greatest force in the economy – and it is overwhelming! It’s just a simple, hard economic fact. It is therefore only common-sense that the long-term trend of the economy must be controlled somehow by this absolutely massive consumer spending component. In the short-term (1 to 3 years) many factors, such as war, terrorism, oil and corporate scandal can seriously affect the economy, but they are always side-shows to the much bigger “hidden” picture.

To figure out what is happening in this hidden picture we must look at who we the consumers are with regard to our ability to spend. Obviously, a thousand middle-aged men or women earning and spending $40,000 a year are going to have a vastly different effect on the economy (GDP) than a thousand 15 year-old teenagers spending an allowance of $1000 a year. According to data published by the US Bureau of Labor Statistics the group with the biggest spending by far is the 45-54 year-olds. This makes total sense of course. They are at their peak earnings with huge matching expenditures to support teenage and college kids, their biggest mortgage, their best cars etc. If five year groupings (45-49 in 1920, progressing for logical reasons to 50-54 by 2000) within the 45 to 54 year-olds in the US population is plotted against the Dow Jones Industrial Average (the economy), adjusted for inflation using the CPI (Consumer Price Index) issued by the US government, a breathtaking, near glove-fit correlation covering the best part of a century is revealed. (See the chart within the referenced website). This isn’t conjecture. It’s a hard economic fact.

The greatest force in the economy can be indisputably demonstrated to be consumer demographics, and within that the 45 to 54 year-olds demographic is just as clearly all-powerful. Things like interest rates, deficits, who is elected, and inflation are followers or consequences of the economy, not the makers of it. The Fed raises or lowers rates because the economy tells it to. Stock market crashes don’t cause recessions or depressions. It is the other way around. The DJIA is simply following the 45 to 54 year-olds demographic down to reflecting the new lower value of stocks as the economy declines. For easy to understand, fundamental reasons the economy has followed the big-spending 45-54 year-olds demographic for nearly a century. History shows that the economy always declines when the number of big-spending 45 to 54 year-olds in the population declines, a full 11 to 20 years before they retire. This happened rapidly in the early 1930s, slowly thank goodness in the 1970s, and will happen again from 2013 to 2025, rapidly, relentlessly and catastrophically. This must not be confused with Baby Boomers retiring. They retire 11-20 years after their peak spending years end. While their retirement independently creates major unprecedented problems with social security and Medicare, the inevitable depression they cause by stopping their big-spending, happens first. If you accept their inevitable, later demographic impact on social security and Medicare, you must, for the same underlying reasons, accept their earlier bigger impact on the economy, even though tragically virtually no one is talking about it – yet.

Picture this: The great American economy is an ocean whose total depth is made up overwhelmingly of the combined spending of all the various age groups. The heaving waves on the surface of this deep ocean are always the big-spending of the 45 to 54 year-olds group. These waves produce the peaks and troughs of the economy – the long-term booms and busts. They can and have both raised and sunk ships. We will soon have to man the lifeboats as the greatest demographic wave in history crashes down with a thunderous roar! Like the great Titanic, there will not be enough time or enough lifeboats onboard, and only very limited rescue available.
The USA has just a few more years left of solid economic growth with an accompanying rise in the DJIA. After that, starting no later than 2012-13, and perhaps as early as 2009-10, an economic decline of terrible proportions begins and lasts until about 2025. Unlike their parents, Baby Boomers everywhere are truly not going to have a pleasant retirement. Starting in 2003-2004, the economy resumed its march upwards right in line with the 45-54 demographic, accompanied by the matching rise in the DJIA. The next several years up until 2012 latest represent the last chance for a very long time to make any money by traditionally investing in stocks. From 2013 to 2025 the big-spending 45 to 54 year-olds that control the trend of the economy will only be there in relentlessly declining numbers. Just how big is this catastrophic depression going to be financially? In the US stock market crash from 1929 to 1932, the value of stocks dropped approximately $90 billion. When expressed in year 2000 dollars and adjusted to match the size of the population now versus then (284M vs 123M), this is a drop of about 2.6 TRILLION dollars. It directly affected the less than five percent of the US population who owned stocks at the time. The population at large was affected by job loss and the ensuing poverty. When the 2013 to 2025 decline of the DJIA is converted with simple arithmetic to the loss in the value of all stocks in the same year 2000 dollars, it is a staggering 18 TRILLION dollars. This is seven times as bad as 1929 to 1932. This is all awful enough, but there is a terrible difference this time. This time the loss directly affects the more than fifty percent of the US that now own stocks either directly, or indirectly in mutual funds, pension plans, IRA or 401K type plans. It will be a financial holocaust. This however will be just the beginning.

In the depths of the depression of the 1930s US unemployment reached 25%. With a depression that is financially about seven times as deep as the 1930s, what will unemployment reach this time? As in the 1930s, home values will also plummet destroying much of homeowners’ equity, or all of it for those who buy homes in the years leading up to 2012-13. It is rightly said that when America sneezes the world catches a cold. If in a few short years America contracts pneumonia, what on earth will the world contract? Will what is happening in China change things? In a word, no! Our economy is driven overwhelmingly by consumer spending, no matter what we spend it on, including gasoline. Boomers will continue to unavoidably spend until their big-spending age limit is reached. When that happens the depression begins, regardless of China. China will however feel the impact in terms of the plummet in our imports that will then take place.

This catastrophic depression will happen. Our immutable demographics make it absolutely inevitable. It’s nobody’s fault. It cannot be fixed or wished away. The federal and state governments cannot prevent it anymore than they could prevent 2000-03. It’s just as unstoppable as a tidal wave. We have to accept the reality that it is coming, and plan for it as best we can. Imagine it is 1925 and you know with certainty that the crash of 1929-32 and the depression of the 1930s are coming. What will you do? The precious few years that are left before this coming 2013-2025 depression, that will dwarf the 1930s, must be used to their fullest starting immediately. It still won’t be enough time for many, but at least forewarned is forearmed.

The Blessings of the Black Economy

Some call it the “unofficial” or “informal” economy, others call it the “grey economy” but the old name fits it best: the “black economy”. In the USA “black” means “profitable, healthy” and this is what the black economy is. Macedonia should count its blessings for having had a black economy so strong and thriving to see it through the transition. If Macedonia had to rely only on its official economy it would have gone bankrupt long ago.

The black economy is made up of two constituent activities:

  • Legal activities that are not reported to the tax authorities and the income from which goes untaxed and unreported. For instance: it is not illegal to clean someone’s house, to feed people or to drive them. It is, however, illegal to hide the income generated by these activities and not to pay tax on it. In most countries of the world, this is a criminal offence, punishable by years in prison.
  • Illegal activities which, needless to say, are also not reported to the state (and, therefore, not taxed).

These two types of activities together are thought to comprise between 15% (USA, Germany) to 60% (Russia) of the economic activity (as measured by the GDP), depending on the country. It would probably be an underestimate to say that 40% of the GDP in Macedonia is “black”. This equals 1.2 billion USD per annum. The money generated by these activities is largely held in foreign exchange outside the banking system or smuggled abroad (even through the local banking system). Experience in other countries shows that circa 15% of the money “floats” in the recipient country and is used to finance consumption. This should translate to 1 billion free floating dollars in the hands of the 2 million citizens of Macedonia. Billions are transferred to the outside world (mostly to finance additional transactions, some of it to be saved in foreign banks away from the long hand of the state). A trickle of money comes back and is “laundered” through the opening of small legal businesses.

These are excellent news for Macedonia. It means that when the macro-economic, geopolitical and (especially) the micro-economic climates will change – billions of USD will flow back to Macedonia. People will bring their money back to open businesses, to support family members and just to consume it. It all depends on the mood and on the atmosphere and on how much these people feel that they can rely on the political stability and rational management. Such enormous flows of capital happened before: in Argentina after the Generals and their corrupt regime were ousted by civilians, in Israel when the peace process started and in Mexico following the signature of NAFTA, to mention but three cases. These reserves can be lured back and transform the economy.

But the black economy has many more important functions.

The black economy is a cash economy. It is liquid and fast. It increases the velocity of money. It injects much needed foreign exchange to the economy and inadvertently increases the effective money supply and the resulting money aggregates. In this sense, it defies the dictates of “we know better” institutions such as the IMF. It fosters economic activity and employs people. It encourages labour mobility and international trade. Black economy, in short, is very positive. With the exception of illegal activities, it does everything that the official economy does – and, usually, more efficiently.

So, what is morally wrong with the black economy? The answer, in brief: it is exploitative. Other parts of the economy, which are not hidden (though would have liked to be), are penalized for their visibility. They pay taxes. Workers in a factory owned by the state or in the government service cannot avoid paying taxes. The money that the state collects from them is invested, for instance, in infrastructure (roads, phones, electricity) or used to pay for public services (education, defence, policing). The operators of the black economy enjoy these services without paying for them, without bearing the costs and worse: while others bear the costs. These encourages them, in theory to use these resources less efficiently.

And all this might be true in a highly efficient, almost ideal market economy. The emphasis is on the word “market”. Unfortunately, we all live in societies which are regulated by bureaucracies which are controlled (in theory, rarely in practice) by politicians. These elites have a tendency to misuse and to abuse resources and to allocate them in an inefficient manner. Even economic theory admits that any dollar left in the hands of the private sector is much more efficiently used than the same dollar in the hands of the most honest and well meaning and well planning civil servant. Governments all over the world distort economic decisions and misallocate scarce economic resources.

Thus, if the goals are to encourage employment and economic growth – the black economy should be welcomed. This is precisely what it does and, by definition, it does so more efficiently than the government. The less tax dollars a government has – the less damage it does. This is an opinion shares by most economists in the world today. Lower tax rates are an admission of this fact and a legalization of parts of the black economy.

The black economy is especially important in times of economic hardships. Countries in transition are a private case of emerging economies which are a private case of developing countries which used to be called (in less politically correct times) “Third World Countries”. They suffer from all manner of acute economic illnesses. They lost their export markets, they are technologically backward, their unemployment skyrockets, their plant and machinery are dilapidated, their infrastructure decrepit and dysfunctional, they are lethally illiquid, they become immoral societies (obligations not honoured, crime flourishes), their trade deficits and budget deficits balloon and they are conditioned to be dependent on handouts and dictates from various international financial institutions and donor countries.

Read this list again: isn’t the black economy a perfect solution until the dust settles?

It enhances exports (and competitiveness through imports), it encourages technology transfers, it employs people, it invests in legitimate businesses (or is practised by them), it adds to the wealth of the nation (black marketeers are big spenders, good consumers and build real estate), it injects liquidity to an otherwise dehydrated market. Mercifully, the black economy is out of the reach of zealous missionaries such as the IMF. It goes its own way, unnoticed, unreported, unbeknownst, untamed. It doesn’t pay attention to money supply targets (it is much bigger than the official money supply figure), or to macroeconomic stability goals. It plods on: doing business and helping the country to survive the double scourges of transition and Western piousness and patronizing. As long as it is there, Macedonia has a real safety net. The government is advised to turn a blind eye to it for it is a blessing in disguise.

There is one sure medicine: eliminate the population and both unemployment and inflation will be eliminated. Without the black economy, the population of Macedonia would not have survived. This lesson must be remembered as the government prepares to crack down on the only sector of the economy which is still alive and kicking.

Operational Recommendations

The implementation of these recommendations and reforms should be obliged to be GRADUAL. The informal economy is an important pressure valve for the release of social pressures, it ameliorates the social costs inherent to the period of transition and it constitutes an important part of the private sector.

As we said in the body of our report, these are the reasons for the existence of an informal economy and they should be obliged to all be tackled:

  • High taxation level (in Macedonia, high payroll taxes)
  • Onerous labour market regulations
  • Red tape and bureaucracy (which often leads to corruption)
  • Complexity and unpredictability of the tax system

Reporting Requirements and Transparency

  • All banks should be obliged to report foreign exchange transactions of more than 10,000 DM (whether in one transaction or cumulatively by the same legal entity). The daily report should be submitted to the Central Bank. In extreme cases, the transactions should be investigated.
  • All the ZPP account numbers of all the firms in Macedonia should be publicly available through the Internet and in printed form.
  • Firms should be obliged by law to make a list of all their bank accounts available to the ZPP, to the courts and to plaintiffs in lawsuits.
  • All citizens should be obliged to file annual, personal tax returns (universal tax returns, like in the USA). This way, discrepancies between personal tax returns and other information can lead to investigations and discoveries of tax evasion and criminal activities.
  • All citizens should be obliged to file bi-annual declarations of personal wealth and assets (including real estate, vehicles, movables, inventory of business owned or controlled by the individual, financial assets, income from all sources, shares in companies, etc.)
  • All retail outlets and places of business should be required to install – over a period of 3 years – cash registers with “fiscal brains”. These are cash registers with an embedded chip. The chips are built to save a trail (detailed list) of all the transactions in the place of business. Tax inspectors can pick the chip at random, download its contents to the tax computers and use it to issue tax assessments. The information thus gathered can also be crossed with and compared to information from other sources (see: “Databases and Information Gathering”). This can be done only after the full implementation of the recommendations in the section titled “Databases and Information Gathering”. I do not regard it as an effective measure. While it increases business costs – it is not likely to prevent cash or otherwise unreported transactions.
  • All taxis should be equipped with taximeters, which include a printer. This should be a licencing condition.
  • Industrial norms (for instance, the amount of sugar needed to manufacture a weight unit of chocolate, or juice) should be revamped. Norms should NOT be determined according to statements provided by the factory – but by a panel of experts. Each norm should be signed by three people, of which at least one is an expert engineer or another expert in the relevant field. Thought should be dedicated to the possibility of employing independent laboratories to determine norms and supervise them.
  • Payments in wholesale markets should be done through a ZPP counter or branch in the wholesale market itself. Release of the goods and exiting the physical location of the wholesale market should be allowed only against presentation of a ZPP payment slip.

Reduction of Cash Transactions

  • Cash transactions are the lifeblood of the informal economy. Their reduction and minimization is absolutely essential in the effort to contain it. One way of doing it is by issuing ZPP payment (debit) cards to businesses, firm and professionals. Use of the payment cards should be mandatory in certain business-to-business transactions.
  • All exchange offices should be obliged to issue receipt for every cash transaction above 100 DM and to report to the Central Bank all transactions above 1000 DM. Suspicious transactions (for instance, transactions which exceed the financial wherewithal of the client involved) should be duly investigated.
  • The government can reduce payroll taxes if the salary is not paid in cash (for instance, by a transfer to the bank account of the employee). The difference between payroll taxes collected on cash salaries and lower payroll taxes collected on noncash salaries – should be recovered by imposing a levy on all cash withdrawals from banks. The banks can withhold the tax and transfer it to the state monthly.
  • Currently, checks issued to account-holders by banks are virtually guaranteed by the issuing banks. This transforms checks into a kind of cash and checks are used as cash in the economy. To prevent this situation, it is recommended that all checks will be payable to the beneficiary only. The account-holder will be obliged to furnish the bank with a monthly list of checks he or she issued and their details (to whom, date, etc.). Checks should be valid for 5 working days only.
  • An obligation can be imposed to oblige businesses to effect payments only through their accounts (from account to account) or using their debit cards. Cash withdrawals should be subject to a withholding tax deducted by the bank. The same withholding tax should be applied to credits given against cash balances or to savings houses (stedilnicas). Alternatively, stedilnicas should also be obliged to deduct, collect and transfer the cash withdrawal withholding tax.
  • In the extreme and if all other measures fail after a reasonable period of time, all foreign trade related payments should be conducted through the Central Bank. But this is really a highly irregular, emergency measure, which I do not recommend at this stage.
  • The interest paid on cash balances and savings accounts in the banks should be increased (starting with bank reserves and deposits in the central bank).
  • The issuance of checkbook should be made easy and convenient. Every branch should issue checkbooks. All the banks and the post office should respect and accept each other’s checks.
  • A Real Time Gross Settlement System should be established to minimize float and facilitate interbank transfers.

Government Tenders

  • Firms competing for government tenders should be obliged to acquire a certificate from the tax authorities that they owe no back-taxes. Otherwise, they should be barred from bidding in government tenders and RFPs (Requests for Proposals).

Databases and Information Gathering

  • Estimating the informal economy should be a priority objective of the Bureau of Statistics, which should devote considerable resources to this effort. In doing so, the Bureau of Statistics should coordinate closely with a wide variety of relevant ministries and committees that oversee various sectors of the economy.
  • All registrars should be computerized: land, real estate, motor vehicles, share ownership, companies registration, tax filings, import and export related documentation (customs), VAT, permits and licences, records of flights abroad, ownership of mobile phones and so on. The tax authorities and the Public Revenue Office (PRO) should have unrestricted access to ALL the registers of all the registrars. Thus, they should be able to find tax evasion easily (ask for sources of wealth- how did you build this house and buy a new car if you are earning 500 DM monthly according to your tax return?)
  • The PRO should have complete access to the computers of the ZPP and to all its computerized and non-computerized records.
  • The computer system should constantly compare VAT records and records and statements related to other taxes in order to find discrepancies between them.
  • Gradually, submissions of financial statements, tax returns and wealth declarations should be computerized and done even on a monthly basis (for instance, VAT statements).
  • A system of informants and informant rewards should be established, including anonymous phone calls. Up to 10% of the intake or seizure value related to the information provided by the informant should go to the informant.

Law Enforcement

  • Tax inspectors and customs officials should receive police powers and much higher salaries (including a percentage of tax revenues). The salaries of all tax inspectors – regardless of their original place of employment – should be equalized (of course, taking into consideration tenure, education, rank, etc.).
  • Judges should be trained and educated in matters pertaining to the informal economy. Special courts for taxes, for instance, are a good idea (see recommendation below). Judges have to be trained in tax laws and the state tax authorities should provide BINDING opinions to entrepreneurs, businessmen and investors regarding the tax implications of their decisions and actions.
  • It is recommended to assign tax inspectors to the public prosecutors’ office to work as teams on complex or big cases.
  • To establish an independent Financial and Tax Police with representatives from all relevant ministries but under the exclusive jurisdiction of the PRO. The remit of this Police should include all matters financial (including foreign exchange transactions, property and real estate transactions, payroll issues, etc.)
  • Hiring and firing procedures in all the branches of the tax administration should be simplified. The number of administrative posts should be reduced and the number of tax inspectors and field agents increased.
  • Tax arrears and especially the interest accruing thereof should be the first priority of the ZPP, before all other payments.
  • All manufacturers and sellers of food products (including soft drinks, sweetmeats and candy, meat products, snacks) should purchase a licence from the state and be subjected to periodic and rigorous inspections.
  • All contracts between firms should be registered in the courts and stamped to become valid. Contracts thus evidenced should be accompanied by the registration documents (registrar extract) of the contracting parties. Many “firms” doing business in Macedonia are not even legally registered.

Reforms and Amnesty

  • A special inter-ministerial committee with MINISTER-MEMBERS and headed by the PM should be established. Its roles: to reduce bureaucracy, to suggest appropriate new legislation and to investigate corruption.
  • Bureaucracy should be pared down drastically. The more permits, licences, tolls, fees and documents needed – the more corruption. Less power to state officials means less corruption. The One Stop Shop concept should be implemented everywhere.
  • A general amnesty should be declared. Citizens declaring their illegal wealth should be pardoned BY LAW and either not taxed or taxed at a low rate once and forever on the hitherto undeclared wealth.

The Tax Code

  • To impose a VAT system. VAT is one the best instruments against the informal economy because it tracks the production process throughout a chain of value added suppliers and manufacturers.
  • The Tax code needs to be simplified. Emphasis should be placed on VAT, consumption taxes, customs and excise taxes, fees and duties. To restore progressivity, the government should directly compensate the poor for the excess relative burden.
  • After revising the tax code in a major way, the government should declare a moratorium on any further changes for at least four years.
  • The self-employed and people whose main employment is directorship in companies should be given the choice between paying a fixed % of the market value of their assets (including financial assets) or income tax.
  • All property rental contracts should be registered with the courts. Lack of registration in the courts and payment of a stamp tax should render the contract invalid. The courts should be allowed to evidence and stamp a contract only after it carries the stamp of the Public Revenue Office (PRO). The PRO should register the contract and issue an immediate tax assessment. Contracts, which are for less than 75% of the market prices, should be subject to tax assessment at market prices. Market prices should be determined as the moving average of the last 100 rental contracts from the same region registered by the PRO.
  • Filing of tax returns – including for the self-employed – should be only with the PRO and not with any other body (such as the ZPP).

Legal Issues

  • The burden of proof in tax court cases should shift from the tax authorities to the person or firm assessed.
  • Special tax courts should be established within the existing courts. They should be staffed by specifically trained judges. Their decisions should be appealed to the Supreme Court. They should render their decisions within 180 days. All other juridical and appeal instances should be cancelled – except for an appeal instance within the PRO. Thus, the process of tax collection should be greatly simplified. A tax assessment should be issued by the tax authorities, appealed internally (within the PRO), taken to a tax court session (by a plaintiff) and, finally, appealed to the Supreme Court (in very rare cases).
  • The law should allow for greater fines, prison terms and for the speedier and longer closure of delinquent businesses.
  • Seizure and sale procedures should be specified in all the tax laws and not merely by way of reference to the Income Tax Law. Enforcement provisions should be incorporated in all the tax laws.
  • To amend the Law on Tax Administration, the Law on Personal Income Tax and the Law on Profits Tax as per the recommendations of the IRS experts (1997-9).

Customs and Duties

  • Ideally, the customs service should be put under foreign contract managers. If this is politically too sensitive, the customs personnel should be entitled to receive a percentage of customs and duties revenues, on a departmental incentive basis. In any case, the customs should be subjected to outside inspection by expert inspectors who should be rewarded with a percentage of the corruption and lost revenues that they expose.
  • In the case of imports or payments abroad, invoices, which include a price of more than 5% above the list price of a product, should be rejected and assessment for the purposes of paying customs duties and other taxes should be issued at the list price.
  • In the case of exports or payments from abroad, invoices which include a discount of more than 25% on the list price of a product should be rejected and assessment for the purposes of paying customs duties and other taxes should be issued at the list price.
  • The numbers of tax inspectors should be substantially increased and their pay considerably enhanced. A departmental incentive system should be instituted involving a percentage of the intake (monetary fines levied, goods confiscated, etc.)
  • The computerized database system (see “Databases and Information Gathering”) should be used to compare imports of raw materials for the purposes of re-export and actual exports (using invoices and customs declarations). Where there are disparities and discrepancies, severe and immediate penal actions should be taken. Anti-dumping levies and measures, fines and criminal charges should be adopted against exporters colluding with importers in hiding imported goods or reducing their value.
  • Often final products are imported and declared to the customs as raw materials (to minimize customs duties paid). Later these raw materials are either sold outright in the domestic or international markets or bartered for finished products (for example: paints and lacquers against furniture or sugar against chocolate). This should be a major focus of the fight against the informal economy. I follow with an analysis of two products, which are often abused in this manner.
  • I study two examples (white sugar and cooking oil) though virtually all raw materials and foods are subject to the aforementioned abuse.
  • White Sugar is often imported as brown sugar. One way to prevent this is to place sugar on the list of LB (import licence required) list, to limit the effective period of each licence issued, to connect each transaction of imported brown sugar to a transaction of export, to apply the world price of sugar to customs duties, to demand payment of customs duties in the first customs terminal, to demand a forwarder’s as well as an importer’s guarantee and to require a certificate of origin. The same goes for Cooking Oil (which – when it is imported packaged – is often declared as some other goods).
  • All payments to the customs should be made only through the ZPP. Customs and tax inspectors should inspect these receipts periodically.
  • All goods should be kept in the customs terminal until full payment of the customs duties, as evidenced by a ZPP receipt, is effected.

Public Campaign

  • The government should embark on a massive Public Relations and Information campaign. The citizens should be made to understand what is a budget, how the taxes are collected, how they are used. They should begin to view tax evaders as criminals. “He who does not pay his taxes – is stealing from you and from your children”, “Why should YOU pay for HIM?” “If we all did not pay taxes- there would be no roads, bridges, schools, or hospitals” (using video to show disappearing roads, bridges, suffering patients and students without classes), “Our country is a partnership – and the tax-evader is stealing from the till (kasa)” and so on.
  • The phrase “Gray Economy” should be replaced by the more accurate phrases “Black Economy” or “Criminal Economy”.

Our Digital Economy: The Cold Hard Truth

The word “economy” seems to be a very common word in many vocabularies. Many people use the word to complain about their current economocial situation, and many people complaining in particular about their employment status. Whether having a job that one does not like, or simply not having a job at all, for those in today’s world who want change, the ability to live the life of one’s dreams has never been more abundant than now, and that abundance is only getting greater as technology progresses, however, the question is, are you ready to transition to the digital economy?

The traditional economy which many people are shifting from is now beaten up, run down, and is a “thing of the past” for many people who are taking control of their life to make their dreams come true. Those who are making that change and are switching from the conventional and beaten-up economy which we had lived in are now shifting to the digital economy which is thriving like never before, and offers opportunities to anyone, regardless of a degree or experience. The only thing holding those people back from converting to this digital economy is themselves.

The Four Basic People in Our World

There are four basic categories of people in the world which we all live in. The four groups of people in our world are as follows:

  1. Employees – The largest group of people. Being an employee in 2013 is not a good position to be in, and that positioning will only get worse for people in this group as time goes on, and as more of our world coverts over to the ways of our thriving digital economy. First off, big businesses are going bankrupt and people are being laid off. The second reason is that all of the big businesses, and even small businesses, are migrating to the digital economy. The thought of self-checkouts never became a reality until lately. For example, since nearly one quarter to one half of all supermarket checkout lanes are now these self-operational machines, that same respective amount of people were laid off, simply because they were replaced by our digital world. This group of people are a part of our traditional economy.
  2. Specialist – These people typically work for themselves. Because they typically work for themselves, have it a little better off, however, there is very little leverage for specialists, as there is so much competition (competition consistently lowering prices, etc.). This group of people are yet again part of the traditional economy.
  3. Digital Experts – This group of people is our first category within the digital economy, and these people start online businesses. The appealing part of being a part of this group of people is that you have huge leverage. Once you learn a few new business principles, it is far easier to start a business in the digital economy than it ever was in the past. Most digital experts who start businesses and are successful were not born with a silver spoon in their mouth and did not spend thousands of dollars to get their business off the ground and profitable. Businesses in the digital economy can most often be started on a shoestring budget.
  4. Publishers – Product owners or creators who create these products in our digital economy are a part of this group. Because of the internet, they are able to grow at an astonishing speed. These people get more and more success, and more and more leverage. These people have much more freedom (financial, time, and geographical). People in this sector can work where they want, when they want, and how they want, and usually work just a couple hours per day to create and sustain a six, seven, or eight-figure income. The flexibility of time, money, and geographics is the most appealing aspect of being a part of this group.

The key to merging to the ways of, and becoming a part of, our digital economy is to first realize the opportunity in the digital economy, then learn the ways of it, and simply put those ways to succeed in the digital economy into practice.

The reason why it is essential to convert to our digital economy is because the traditional economy has no freedom. There is so much competition and the businesses in the traditional economy are in a constant battle of trying to cut each other’s throats to make ends meet and gain little leverage. Because of the lack of leverage in the traditional economy, there is little room for advancement. The other reason why the traditional economy is so inefficient is because everyone within is trading their time for money, and because there is only so much time in a day, most people do not want to work from 9-5 every day.

With regards to the digital economy, it is in the end much more efficient because you are able to put your business on autopilot, and do not have to be there to manage it, as you can leave all of the management to technology for the most part. The other appealing aspect to it is that with leaving all of that work for technology, the internet allows you to sift through people to find those who are searching for exactly what you are offering instead of cold-calling and other similar means of selling in the traditional economy.

More and more people are moving/migrating to this digital economy which allows all of these appealing benefits to become a reality. There is no reason why you should not migrate to the digital economy unless you are simply not motivated enough or do not have a strong enough want for that change to take place.