How to Calculate the Intrinsic Value of Stocks Like Warren Buffett

One of the most sought after calculations in all of investing is Warren Buffett's intrinsic value formula. Although it may seem elusive to most, for anyone that's studied Buffett's Columbia Business Professor, Benjamin Graham, the calculation becomes more obvious. Remember the intrinsic value formula that Buffett uses is an embellishment of Graham's ideas and fundamentals.

One of the most amazing things about Benjamin Graham is that he actually felt bonds where safer and more probable of an investments than stocks. Buffett would strongly disagree with that today due to high inflation rates (a whole different topic), but this is important to understand in order to understanding Buffett's method for valuing equities (stocks).

When we look at Buffett's definition of intrinsic value, we know he's quoted as saying that the intrinsic value is simply the discounted value of the future cash flows of a company. So what the heck does that mean?

Well, before we can understand that definition, we must first understand how a bond is valued. When a bond is issued, it is placed on the market at a par value (or face value). In most cases this par value is $ 1,000. Once that bond is on the market, the issuer then pays a semi annual (in most cases) coupon to the bond holder. These coupon payments are based on a rate that was established when the bond was initially issued. For example, if the coupon rate was 5%, then a bond holder would receive two annual coupon payments of $ 25 – totaling $ 50 a year. These coupon payments will continue to be paid until the bond matures. Some bonds mature in a year while other mature in 30 years. Regardless of the term, once the bond matures, the par value is repaid to the holder of the bond. If you were to value this security, the value is completely based on those key factors. For example, what is the coupon rate, how long will I receive those coupons, and how much of a par value will I receive when the bond matures.

Now you might be wondering why I described all that information about bonds when I'm writing an article about Warren Buffett's intrinsic Value Calculation? Well the answer is quite simple. Buffet values ​​stocks the same way he values ​​bonds!

You see, if you were going to calculate the market value of a bond, you'd simply plug the inputs of the terms listed above into a bond's market value calculator and crunch the numbers. When dealing with a stock, it's no different. Think about it. When Buffett says he discounts the future value of the cash flows, what he's actually doing is summing the dividends he expects to receive (just like the coupons from a bond), and he estimates the future book value of the business (just like the par value of a bond). By estimating these future cash flows from the key terms mentioned in the previous sentence, he's able to discount that money back to the present day value using a respectable rate of return.

Now this is the part that often confuses people – discounting future cash flows. In order to understand this step, you must understand the time value of money. We know that money paid in the future has a different value then money in our hands today. As a result, a discount must be applied (just like a bond). The discount rate is often a hotly debated issue for investors, but for Buffett it's quite simple. To start, he discounts his future cash flows by a ten year federal note because it provides him a relative comparison to a zero risk investment. He does this to start so he knows how much risk he's assuming with the potential pick. After that figure is established, Buffett then discounts the future cash flows at a rate that forces the intrinsic value to equal the current market price of the stock. This is the part of the process that might confuse many, but it's the most important part. By doing this, Buffett is able to immediately see the return he can expect from any given stock pick.

Although a lot of the future cash flows that Buffett estimates are not concrete numbers, he often mitigates this risk by picking nice, stable companies.

Factors Affecting the Availability of Jobs in Developing Countries

Jobs are seen to be very scarce nowadays. The condition of jobs in the developing and the under developed countries is very critical. People are not able to find job and those who do, have to be competent enough for a job to retain it. It is not because of the fact that companies in both the private and public sectors are not offering jobs, but the factors that are involved in the less availability of jobs are:

1) Economic downturn
2) High competition among candidates for jobs
3) Internal recruitment
4) Cost cutting / downsizing
5) No right person for the right job etc

Economic downturn

Since the global economic crisis, the Asian and middle eastern countries have been hit hard and the economies have gone down with high inflation and risk factors that do not allow people to earn as much money as they would have in normal conditions. Tax cutting, extra charges over the loans, interest rates etc have been unusually higher. Due to this, people have started to move from one country to another to locate good jobs that can pay them what they deserve. This has led to them being employed overseas and not in their own countries and hence, the overall condition of one country is worsened.

High competition among candidates for jobs

Countries, specifically the Asian countries have been reported to produce 90% of the total doctors and IT professionals in the world. However, to match up this percentage, jobs are very less for them. This is the same cases for the jobs in Pakistan, India, Afghanistan, Malaysia, Indonesia etc. The competition is rough and tough among all the candidates for jobs and hence only a few get jobs that have references in the companies they apply for. The war has turned to choosing the employee of choice rather the employer of choice.

Internal recruitment

To avoid cost and budget allocation for external recruitment and the procedures for selection, companies have started to retain their employees, without respect to what they do, and promote them so that they do not have to hire from a fresher pool of candidates. This leads the company to have a limited pool of professionals with not perfect expertise, but with normal experience in their jobs. Companies go down in business and eventually bankrupt if they do not regulate the pool of experts in their companies.

Cost cutting / Downsizing

Due to the economic downturn, companies have been facing larger cost measures and they have to cut down the head count to save costs. In worst cases, plants are being shut down so that cost can be maintained and production is not hindered by the conditions. This has also led the foreign investments to be taken back from a country and lesser jobs are in place due to this factor. Cost cutting and downsizing is also done because the living conditions are under the risk of terrorism in some countries. This has led people not to apply for jobs outside their vicinity and this creates lesser people for the competent jobs as well.

No right person for the right job

The concept of downsizing and the cost cutting has led to the fact that now one worker is doing the tasks of 5 people altogether. In addition, with people not applying for jobs they are competent for, companies are taking in the people who are not competent enough to fill up their positions. Those who deserve to be at such jobs are not able to fit in any good job. This effects the job criteria, the output and the candidates as well who keep on looking for jobs.

What should be done?

Government bodies of the countries have to make up policies to control the factors and work diligently towards the betterment of their homelands. People are disheartened and want motivation to pursue them to work. If this is done, betterment can be seen initially that can lead to the negation of the affects of such factors.

Risks in International Business

Just as there are reasons to get into global markets, and benefits from global markets, there are also risks involved in locating companies in certain countries. Each country may have its potentials; it also has its woes that are associated with doing business with major companies. Some of the rogue countries may have all the natural minerals but the risks involved in doing business in those countries exceed the benefits. Some of the risks in international business are:

(1) Strategic Risk
(2) Operational Risk
(3) Political Risk
(4) Country Risk
(5) Technological Risk
(6) Environmental Risk
(7) Economic Risk
(8) Financial Risk
(9) Terrorism Risk

Strategic Risk: The ability of a firm to make a strategic decision in order to respond to the forces that are a source of risk. These forces also impact the competitiveness of a firm. Porter defines them as: threat of new entrants in the industry, threat of substitute goods and services, intensity of competition within the industry, bargaining power of suppliers, and bargaining power of consumers.

Operational Risk: This is caused by the assets and financial capital that aid in the day-to-day business operations. The breakdown of machineries, supply and demand of the resources and products, shortfall of the goods and services, lack of perfect logistic and inventory will lead to inefficiency of production. By controlling costs, unnecessary waste will be reduced, and the process improvement may enhance the lead-time, reduce variance and contribute to efficiency in globalization.

Political Risk: The political actions and instability may make it difficult for companies to operate efficiently in these countries due to negative publicity and impact created by individuals in the top government. A firm can not effectively operate to its full capacity in order to maximize profit in such an unstable country's political turbulence. A new and hostile government may replace the friendly one, and hence expropriate foreign assets.

Country Risk: The culture or the instability of a country may create risks that may make it difficult for multinational companies to operate safely, effectively, and efficiently. Some of the country risks come from the governments' policies, economic conditions, security factors, and political conditions. Solving one of these problems without all of the problems (aggregate) together will not be enough in mitigating the country risk.

Technological Risk: Lack of security in electronic transactions, the cost of developing new technology, and the fact that these new technology may fail, and when all of these are coupled with the outdated existing technology, the result may create a dangerous effect in doing business in the international arena.

Environmental Risk: Air, water, and environmental pollution may affect the health of the citizens, and lead to public outcry of the citizens. These problems may also lead to damaging the reputation of the companies that do business in that area.

Economic Risk: This comes from the inability of a country to meet its financial obligations. The changing of foreign-investment or / and domestic fiscal or monetary policies. The effect of exchange-rate and interest rate make it difficult to conduct international business.

Financial Risk: This area is affected by the currency exchange rate, government flexibility in allowing the firms to repatriate profits or funds outside the country. The devaluation and inflation will also impact the firm's ability to operate at an efficient capacity and still be stable. Most countries make it difficult for foreign firms to repatriate funds thus forcing these firms to invest its funds at a less optimal level. Sometimes, firms' assets are confiscated and that contributes to financial losses.

Terrorism Risk: These are attacks that may stem from lack of hope; confidence; differences in culture and religious philosophy, and / or merely hate of companies by citizens of host countries. It leads to potential hostile attitudes, sabotage of foreign companies and / or kidnapping of the employers and employees. Such frustrating situations make it difficult to operate in these countries.

Although the benefits in international business exceed the risks, firms should take a risk assessment of each country and to also include intellectual property, red tape and corruption, human resource restrictions, and ownership restrictions in the analysis, in order to consider all risks involved before venturing into any of the countries.

Overview of Zimbabwean Banking Sector (Part One)

Entrepreneurs build their business within the context of an environment which they sometimes may not be able to control. The robustness of an entrepreneurial venture is tried and tested by the vicissitudes of the environment. Within the environment are forces that may serve as great opportunities or menacing threats to the survival of the entrepreneurial venture. Entrepreneurs need to understand the environment within which they operate so as to exploit emerging opportunities and mitigate against potential threats.

This article serves to create an understanding of the forces at play and their effect on banking entrepreneurs in Zimbabwe. A brief historical overview of banking in Zimbabwe is carried out. The impact of the regulatory and economic environment on the sector is assessed. An analysis of the structure of the banking sector facilitates an appreciation of the underlying forces in the industry.
Historical Background

At independence (1980) Zimbabwe had a sophisticated banking and financial market, with commercial banks mostly foreign owned. The country had a central bank inherited from the Central Bank of Rhodesia and Nyasaland at the winding up of the Federation.

For the first few years of independence, the government of Zimbabwe did not interfere with the banking industry. There was neither nationalisation of foreign banks nor restrictive legislative interference on which sectors to fund or the interest rates to charge, despite the socialistic national ideology. However, the government purchased some shareholding in two banks. It acquired Nedbank's 62% of Rhobank at a fair price when the bank withdrew from the country. The decision may have been motivated by the desire to stabilise the banking system. The bank was re-branded as Zimbank. The state did not interfere much in the operations of the bank. The State in 1981 also partnered with Bank of Credit and Commerce International (BCCI) as a 49% shareholder in a new commercial bank, Bank of Credit and Commerce Zimbabwe (BCCZ). This was taken over and converted to Commercial Bank of Zimbabwe (CBZ) when BCCI collapsed in 1991 over allegations of unethical business practices.

This should not be viewed as nationalisation but in line with state policy to prevent company closures. The shareholdings in both Zimbank and CBZ were later diluted to below 25% each.
In the first decade, no indigenous bank was licensed and there is no evidence that the government had any financial reform plan. Harvey (nd, page 6) cites the following as evidence of lack of a coherent financial reform plan in those years:

– In 1981 the government stated that it would encourage rural banking services, but the plan was not implemented.
– In 1982 and 1983 a Money and Finance Commission was proposed but never constituted.
– By 1986 there was no mention of any financial reform agenda in the Five Year National Development Plan.

Harvey argues that the reticence of government to intervene in the financial sector could be explained by the fact that it did not want to jeopardise the interests of the white population, of which banking was an integral part. The country was vulnerable to this sector of the population as it controlled agriculture and manufacturing, which were the mainstay of the economy. The State adopted a conservative approach to indigenisation as it had learnt a lesson from other African countries, whose economies nearly collapsed due to forceful eviction of the white community without first developing a mechanism of skills transfer and capacity building into the black community. The economic cost of inappropriate intervention was deemed to be too high. Another plausible reason for the non- intervention policy was that the State, at independence, inherited a highly controlled economic policy, with tight exchange control mechanisms, from its predecessor. Since control of foreign currency affected control of credit, the government by default, had a strong control of the sector for both economic and political purposes; hence it did not need to interfere.

Financial Reforms

However, after 1987 the government, at the behest of multilateral lenders, embarked on an Economic and Structural Adjustment Programme (ESAP). As part of this programme the Reserve Bank of Zimbabwe (RBZ) started advocating financial reforms through liberalisation and deregulation. It contended that the oligopoly in banking and lack of competition, deprived the sector of choice and quality in service, innovation and efficiency. Consequently, as early as 1994 the RBZ Annual Report indicates the desire for greater competition and efficiency in the banking sector, leading to banking reforms and new legislation that would:

– Allow for the conduct of prudential supervision of banks along international best practice
– Allow for both off-and on-site bank inspections to increase RBZ's Banking Supervision function and
– Enhance competition, innovation and improve service to the public from banks.

Subsequently the Registrar of Banks in the Ministry of Finance, in liaison with the RBZ, started issuing licences to new players as the financial sector opened up. From the mid-1990s up to December 2003, there was a flurry of entrepreneurial activity in the financial sector as indigenous owned banks were set up. The graph below depicts the trend in the numbers of financial institutions by category, operating since 1994. The trend shows an initial increase in merchant banks and discount houses, followed by decline. The increase in commercial banks was initially slow, gathering momentum around 1999. The decline in merchant banks and discount houses was due to their conversion, mostly into commercial banks.

Source: RBZ Reports

Different entrepreneurs used varied methods to penetrate the financial services sector. Some started advisory services and then upgraded into merchant banks, while others started stockbroking firms, which were elevated into discount houses.

From the beginning of the liberalisation of the financial services up to about 1997 there was a notable absence of locally owned commercial banks. Some of the reasons for this were:

– Conservative licensing policy by the Registrar of Financial Institutions since it was risky to licence indigenous owned commercial banks without an enabling legislature and banking supervision experience.
– Banking entrepreneurs opted for non-banking financial institutions as these were less costly in terms of both initial capital requirements and working capital. For example a merchant bank would require less staff, would not need banking halls, and would have no need to deal in costly small retail deposits, which would reduce overheads and reduce the time to register profits. There was thus a rapid increase in non-banking financial institutions at this time, eg by 1995 five of the ten merchant banks had commenced within the previous two years. This became an entry route of choice into commercial banking for some, eg Kingdom Bank, NMB Bank and Trust Bank.

It was expected that some foreign banks would also enter the market after the financial reforms but this did not occur, probably due to the restriction of having a minimum 30% local shareholding. The stringent foreign currency controls could also have played a part, as well as the cautious approach adopted by the licensing authorities. Existing foreign banks were not required to shed part of their shareholding although Barclay's Bank did, through listing on the local stock exchange.

Harvey argues that financial liberalisation assumes that removing direction on lending presupposes that banks would automatically be able to lend on commercial grounds. But he contends that banks may not have this capacity as they are affected by the borrowers' inability to service loans due to foreign exchange or price control restrictions. Similarly, having positive real interest rates would normally increase bank deposits and increase financial intermediation but this logic falsely assumes that banks will always lend more efficiently. He further argues that licensing new banks does not imply increased competition as it assumes that the new banks will be able to attract competent management and that legislation and bank supervision will be adequate to prevent fraud and thus prevent bank collapse and the resultant financial crisis. Sadly his concerns do not seem to have been addressed within the Zimbabwean financial sector reform, to the detriment of the national economy.

The Operating Environment

Any entrepreneurial activity is constrained or aided by its operating environment. This section analyses the prevailing environment in Zimbabwe that could have an effect on the banking sector.


The political environment in the 1990s was stable but turned volatile after 1998, mainly due to the following factors:

– An unbudgeted pay out to war veterans after they mounted an assault on the State in November 1997. This exerted a heavy strain on the economy, resulting in a run on the dollar. Resultantly the Zimbabwean dollar depreciated by 75% as the market foresaw the consequences of the government's decision. That day has been recognised as the beginning of severe decline of the country's economy and has been dubbed "Black Friday". This depreciation became a catalyst for further inflation. It was followed a month later by violent food riots.
– A poorly planned Agrarian Land Reform launched in 1998, where white commercial farmers were ostensibly evicted and replaced by blacks without due regard to land rights or compensation systems. This resulted in a significant reduction in the productivity of the country, which is mostly dependent on agriculture. The way the land redistribution was handled angered the international community, that alleges it is racially and politically motivated. International donors withdrew support for the programme.
– An ill- advised military incursion, named Operation Sovereign Legitimacy, to defend the Democratic Republic of Congo in 1998, saw the country incur massive costs with no apparent benefit to itself and
– Elections which the international community alleged were rigged in 2000,2003 and 2008.

These factors led to international isolation, significantly reducing foreign currency and foreign direct investment flow into the country. Investor confidence was severely eroded. Agriculture and tourism, which traditionally, are huge foreign currency earners crumbled.

For the first post independence decade the Banking Act (1965) was the main legislative framework. Since this was enacted when most commercial banks where foreign owned, there were no directions on prudential lending, insider loans, proportion of shareholder funds that could be lent to one borrower, definition of risk assets, and no provision for bank inspection.

The Banking Act (24:01), which came into effect in September 1999, was the culmination of the RBZ's desire to liberalise and deregulate the financial services. This Act regulates commercial banks, merchant banks, and discount houses. Entry barriers were removed leading to increased competition. The deregulation also allowed banks some latitude to operate in non-core services. It appears that this latitude was not well delimited and hence presented opportunities for risk taking entrepreneurs. The RBZ advocated this deregulation as a way to de-segment the financial sector as well as improve efficiencies. (RBZ, 2000: 4.) These two factors presented opportunities to enterprising indigenous bankers to establish their own businesses in the industry. The Act was further revised and reissued as Chapter 24:20 in August 2000. The increased competition resulted in the introduction of new products and services eg e-banking and in-store banking. This entrepreneurial activity resulted in the "deepening and sophistication of the financial sector" (RBZ, 2000: 5).

As part of the financial reforms drive, the Reserve Bank Act (22:15) was enacted in September 1999.

Its main purpose was to strengthen the supervisory role of the Bank through:
– Setting prudential standards within which banks operate
– Conducting both on and off-site surveillance of banks
– Enforcing sanctions and where necessary placement under curatorship and
– Investigating banking institutions wherever necessary.

This Act still had deficiencies as Dr Tsumba, the then RBZ governor, argued that there was need for the RBZ to be responsible for both licensing and supervision as "the ultimate sanction available to a banking supervisor is the knowledge by the banking sector that the license issued will be cancelled for flagrant violation of operating rules ". However the government seemed to have resisted this until January 2004. It can be argued that this deficiency could have given some bankers the impression that nothing would happen to their licences. Dr Tsumba, in observing the role of the RBZ in holding bank management, directors and shareholders responsible for banks viability, stated that it was neither the role nor intention of the RBZ to "micromanage banks and direct their day to day operations."

It appears though as if the view of his successor differed significantly from this orthodox view, hence the evidence of micromanaging that has been observed in the sector since December 2003.
In November 2001 the Troubled and Insolvent Banks Policy, which had been drafted over the previous few years, became operational. One of its intended goals was that, "the policy enhances regulatory transparency, accountability and ensures that regulatory responses will be applied in a fair and consistent manner" The prevailing view on the market is that this policy when it was implemented post 2003 is definitely deficient as measured against these ideals. It is contestable how transparent the inclusion and exclusion of vulnerable banks into ZABG was.

A new governor of the RBZ was appointed in December 2003 when the economy was on a free-fall. He made significant changes to the monetary policy, which caused tremors in the banking sector. The RBZ was finally authorised to act as both the licensing and regulatory authority for financial institutions in January 2004. The regulatory environment was reviewed and significant amendments were made to the laws governing the financial sector.

The Troubled Financial Institutions Resolution Act, (2004) was enacted. As a result of the new regulatory environment, a number of financial institutions were distressed. The RBZ placed seven institutions under curatorship while one was closed and another was placed under liquidation.

In January 2005 three of the distressed banks were amalgamated on the authority of the Troubled Financial Institutions Act to form a new institution, Zimbabwe Allied Banking Group (ZABG). These banks allegedly failed to repay funds advanced to them by the RBZ. The affected institutions were Trust Bank, Royal Bank and Barbican Bank. The shareholders appealed and won the appeal against the seizure of their assets with the Supreme Court ruling that ZABG was trading in illegally acquired assets. These bankers appealed to the Minister of Finance and lost their appeal. Subsequently in late 2006 they appealed to the Courts as provided by the law. Finally as at April 2010 the RBZ finally agreed to return the "stolen assets".

Another measure taken by the new governor was to force management changes in the financial sector, which resulted in most entrepreneurial bank founders being forced out of their own companies under varying pretexts. Some eventually fled the country under threat of arrest. Boards of Directors of banks were restructured.

Economic Environment

Economically, the country was stable up to the mid 1990s, but a downturn started around 1997-1998, mostly due to political decisions taken at that time, as already discussed. Economic policy was driven by political considerations. Consequently, there was a withdrawal of multi- national donors and the country was isolated. At the same time, a drought hit the country in the season 2001-2002, exacerbating the injurious effect of farm evictions on crop production. This reduced production had an adverse impact on banks that funded agriculture. The interruptions in commercial farming and the concomitant reduction in food production resulted in a precarious food security position. In the last twelve years the country has been forced to import maize, further straining the tenuous foreign currency resources of the country.

Another impact of the agrarian reform programme was that most farmers who had borrowed money from banks could not service the loans yet the government, which took over their businesses, refused to assume responsibility for the loans. By concurrently failing to recompense the farmers promptly and fairly, it became impractical for the farmers to service the loans. Banks were thus exposed to these bad loans.

The net result was spiralling inflation, company closures resulting in high unemployment, foreign currency shortages as international sources of funds dried up, and food shortages. The foreign currency shortages led to fuel shortages, which in turn reduced industrial production. Consequently, the Gross Domestic Product (GDP) has been on the decline since 1997. This negative economic environment meant reduced banking activity as industrial activity declined and banking services were driven onto the parallel rather than the formal market.

As depicted in the graph below, inflation spiralled and reached a peak of 630% in January 2003. After a brief reprieve the upward trend continued rising to 1729% by February 2007. Thereafter the country entered a period of hyperinflation unheard of in a peace time period. Inflation stresses banks. Some argue that the rate of inflation rose because the devaluation of the currency had not been accompanied by a reduction in the budget deficit. Hyperinflation causes interest rates to soar while the value of collateral security falls, resulting in asset-liability mismatches. It also increases non-performing loans as more people fail to service their loans.

Effectively, by 2001 most banks had adopted a conservative lending strategy eg with total advances for the banking sector being only 21.7% of total industry assets compared to 31.1% in the previous year. Banks resorted to volatile non- interest income. Some began to trade in the parallel foreign currency market, at times colluding with the RBZ.

In the last half of 2003 there was a severe cash shortage. People stopped using banks as intermediaries as they were not sure they would be able to access their cash whenever they needed it. This reduced the deposit base for banks. Due to the short term maturity profile of the deposit base, banks are normally not able to invest significant portions of their funds in longer term assets and thus were highly liquid up to mid-2003. However in 2003, because of the demand by clients to have returns matching inflation, most indigenous banks resorted to speculative investments, which yielded higher returns.

These speculative activities, mostly on non-core banking activities, drove an exponential growth within the financial sector. For example one bank had its asset base grow from Z $ 200 billion (USD50 million) to Z $ 800 billion (USD200 million) within one year.

However bankers have argued that what the governor calls speculative non-core business is considered best practice in most advanced banking systems worldwide. They argue that it is not unusual for banks to take equity positions in non-banking institutions they have loaned money to safeguard their investments. Examples were given of banks like Nedbank (RSA) and JP Morgan (USA) which control vast real estate investments in their portfolios. Bankers argue convincingly that these investments are sometimes used to hedge against inflation.

The instruction by the new governor of the RBZ for banks to unwind their positions overnight, and the immediate withdrawal of an overnight accommodation support for banks by the RBZ, stimulated a crisis which led to significant asset-liability mismatches and a liquidity crunch for most banks . The prices of properties and the Zimbabwe Stock Exchange collapsed simultaneously, due to the massive selling by banks that were trying to cover their positions. The loss of value on the equities market meant loss of value of the collateral, which most banks held in lieu of the loans they had advanced.

During this period Zimbabwe remained in a debt crunch as most of its foreign debts were either un-serviced or under-serviced. The consequent worsening of the balance of payments (BOP) put pressure on the foreign exchange reserves and the overvalued currency. Total government domestic debt rose from Z $ 7.2 billion (1990) to $ 2.8 trillion Z (2004). This growth in domestic debt emanates from high budgetary deficits and decline in international funding.


Due to the volatile economy after the 1990s, the population became fairly mobile with a significant number of professionals emigrating for economic reasons. The Internet and Satellite television made the world truly a global village. Customers demanded the same level of service excellence they were exposed to globally. This made service quality a differential advantage. There was also a demand for banks to invest heavily in technological systems.

The increasing cost of doing business in a hyperinflationary environment led to high unemployment and a concomitant collapse of real income. As the Zimbabwe Independent (2005: B14) so ​​keenly observed, a direct outcome of hyperinflationary environment is, "that currency substitution is rife, implying that the Zimbabwe dollar is relinquishing its function as a store of value, unit of account and medium of exchange "to more stable foreign currencies.

During this period an affluent indigenous segment of society emerged, which was cash rich but avoided patronising banks. The emerging parallel market for foreign currency and for cash during the cash crisis reinforced this. Effectively, this reduced the customer base for banks while more banks were coming onto the market. There was thus aggressive competition within a dwindling market.

Socio-economic costs associated with hyperinflation include: erosion of purchasing power parity, increased uncertainty in business planning and budgeting, reduced disposable income, speculative activities that divert resources from productive activities, pressure on the domestic exchange rate due to increased import demand and poor returns on savings. During this period, to augment income there was increased cross border trading as well as commodity broking by people who imported from China, Malaysia and Dubai. This effectively meant that imported substitutes for local products intensified competition, adversely affecting local industries.

As more banks entered the market, which had suffered a major brain drain for economic reasons, it stood to reason that many inexperienced bankers were thrown into the deep end. For example the founding directors of ENG Asset Management had less than five years experience in financial services and yet ENG was the fastest growing financial institution by 2003. It has been suggested that its failure in December 2003 was due to youthful zeal, greed and lack of experience. The collapse of ENG affected some financial institutions that were financially exposed to it, as well as eliciting depositor flight leading to the collapse of some indigenous banks.

Terminal Wealth Dispersion, Life Expectancy and Individual Retirement Accounts

Terminal wealth dispersion is the technical term that describes the variability of the future value of investment portfolios. This inevitable variability means that no one knows what the value of their investment portfolio will be when they reach retirement age or at any time during their retirement. And the uncertainty of individual's life expectancies compounds this problem.

Hedging against the risks associated with these two factors places an onerous burden on individuals. Although this hedging could result in a very comfortable retirement, if one can afford the hedge and their timing is right, the potential downside risk is so great that it may be deemed unacceptable by many individuals. So one has to ask "Do individuals really prefer to forgo a sure but modest retirement income and play the odds with their retirement savings in hopes of being very well off in retirement?"

With individual accounts, individuals lose the benefit of the pooling of risks. The two risks that force individuals to over-save are investment risk and the risk of living beyond the average life expectancy. In both cases the outcomes, terminal wealth and life span, are highly variable. When the risks are pooled for a large number of individuals over many overlapping life spans, the average outcomes are highly predictable, which is what makes traditional pension plans work so well.

Traditional pension plans exist, for all intents and purposes, in perpetuity. This being the case, they can build reserves during good times in the financial markets and weather the bad times, thus enabling them to make consistent payouts to retirees regardless of the timing of their retirement. Unfortunately, individuals do not get to choose their holding periods or the years of their retirement and must take whatever comes along, and what comes along might be good or it might be bad. Thus individuals must set savings goals that are sufficiently high to hedge against the risk of the average return of an investment portfolio over its holding period falling well short of that which would be expected very long term.

The relatively short duration of individual's holding periods leave them very susceptible to the effects of market cycles, which are notoriously unpredictable in amplitude and frequency. Being broadly diversified mitigates this risk but does not eliminate it, as it's entirely possible for a worldwide bear market to occur during one's holding period. Then at the end of the holding period for wealth accumulation, a second holding period begins, which will be the term of retirement, and this second holding period carries the same risks as the first, but at a time in life when there is no source of income to make up for portfolio under-performance.

The other component of risk that individuals must hedge is the risk represented by the uncertainty of one's life span, which means that individuals must aim even higher when setting their savings goals. The managers of large pension plans can depend on retirees living on average for only the average life expectancy of employees who reach retirement age. The average life expectancy for someone who reaches the age of 66 is currently 82 years, and 66 is currently the age when workers are eligible for full Social Security benefits, which makes it a reasonable baseline. Based on those assumptions, the average term of retirement would be 18 years and pension plans should only have to be funded to the extent necessary to cover the cost of this average term of retirement.

Individuals, however, do not know how long they're going to live, so they must over-save to ensure that they do not run out of money before they run out of time. This need to over-save is independent of the first need, thus the need to over-save is compounded, ie, an individual needs to save enough to cover the cost of living well beyond the average life expectancy and the targeted amount of savings at retirement age must be great enough to ensure with a reasonably high level of certainty that the actual amount on hand at retirement is at least the bare minimum necessary to get by on.

A popular estimate of the term of retirement for which individuals must plan is 30 years. Saving enough to cover the cost of a 30-year retirement is a much greater burden than saving for an 18-year retirement, but planning on a shorter retirement exposes individuals to tremendous risk. It also exposes taxpayers to tremendous risk, as individuals who outlive their savings will undoubtedly require some form of public assistance to make ends meet and are likely to become wards of the state when they become physically incapable of caring for themselves.

An individual who bases their retirement saving on living to the age of 96 but only lives to be 82 will have forgone a lot of pleasures in life, such as travel, fine dining and better vehicles, that they could otherwise have enjoyed. But many individuals just do not have the level of income required to support the saving rate necessary to amass the wealth required to hedge against the downside of terminal wealth dispersion and the possibility of living well past the average life expectancy. For them it's not a matter of forgone consumption, it's a matter of going through life with the knowledge that they are likely to spend their golden years living in abject poverty and that that will be their reward for 40 or 50 years of hard work. And it gets worse!

Some economists now believe that within 15 years or so, given the current rate of health care inflation, 100% of Social Security benefits will be spent on medical expenses: Medicare Parts B and D premiums, copayments, uncovered expenses and medigap insurance premiums. If that becomes the case, anyone without substantial savings or a defined benefit pension will be looking for public assistance the day after they retire. Although this is probably a worse case scenario, there is a general consensus that individuals retiring today will need to set aside approximately $ 180,000 for medical expenses not covered by basic Medicare.

With the situation already at this state, adding private Social Security accounts to the mix would be like throwing gas on a fire, as individual Social Security accounts carry the same risks as other individual retirement accounts. Those who have tried to kill Social Security since its inception find private accounts very appealing. But, not so coincidentally, most of them seem to be in the enviable position of not needing Social Security to support their retirement. More recently, younger workers, too, have come to oppose Social Security, but not for the same reason as the traditional opponents. Young workers may be crushed by the growing burden of Social Security and may never receive any benefits from the system. Those who oppose Social Security simply because it's a social program should be expending their efforts on reforming it rather than killing it.

If Social Security had been managed like a pension plan rather than the ilconceived system it is, with today's workers paying for yesterday's workers' retirement, its current situation would not be so dire. Indeed, it might very well be a fully funded, functional system. CalPERS and other large public employee retirement plans have operated successfully for decades, with success being defined as being able to meet their obligations, not having an adverse effect on the financial markets, no scandalous events attributable to malfeasance by the plans' sponsors and being free of influence from elected officials. There's no reason that Social Security can not also be managed in such a manner. It would literally take an act of Congress to do this, but the hardest part for Congress would be letting the system run without their interfering with its operation.

Passing off the burden of retirement to individuals was a great deal for corporations but it's a very poor deal for most individuals, and extending individual accounts to include the Social Security system would only make a bad situation worse. It's not a poor deal for all individuals because there will be some who can afford to save a substantial portion of their income and whose holding periods will coincide with bull markets, thus putting their wealth in the upper range of their terminal wealth dispersion, and who also live a long, healthy life. They will be the ones who benefit from over-saving and living beyond the average life expectancy, but they may end up forfeiting a portion of their wealth in the form of taxes to support the less fortunate. I do not believe that is what the public expects from a well-conceived system.

Advantages and Disadvantages of In Vessel Composting Versus Other Organic Waste Treatment Methods

The composting of municipal waste (mostly garden waste and food waste) in the UK has grown rapidly in the last ten years, with the vast majority of councils now collecting garden and other green waste separately for composting. But, the composting industry has only been scratching the surface of the total composting market. There is yet no ceiling either to the market which can consume this compost. It is estimated that the UK's arable market alone could absorb over 50m tonnes of compost per year. In 2009 a total of les than 4m tonnes of finished compost produced in this country annually, so there is still plenty of scope in the UK for finding sustainable markets for compost.

Benefits: Arguments In Support Of in vessel composting versus other organic waste treatment methods include:

1. Although the capital cost needed for an IVC plant should not be put down lightly, it can represent top value for money for local authorities. The capital value of an IVC plant definitely compares well with rival technologies that are frequently commercially realistic only on an enormous scale. Additionally, IVC operational costs are often lower than most other technologies

2. Analysis shows the public favours recycling and composting over alternative solutions, that may be regarded as wasting dear resources. Source separation of waste permits high recycling rates of dry recyclables, while the organic fragment is composted to provide a high grade product. Many people would be inclined to say that a mixture of recycling and composting is, the "people's choice".

One additional basis for the choice is the plants for composting can be quite small, reducing fuel miles, and costs of transport, with the related benefit of reduced traffic on the roads is another reason why many people would be inclined to say that a mixture of recycling and composting is, the "people's choice". This contains the added advantage of, that could prevent making the error of.

3. In-Vessel Composting could be a low risk methodology for local authorities. There are a bunch of technologies that have been proved in Europe and America for over 10 years and on scale. With punishing measures connected with LATS failure there is not any need for local authorities to reveal themselves to experimental technologies

Then there is the fact that in-vessel composting could be a low risk methodology for local authorities. There are a bunch of technologies that've been proved in Europe and America for over 10 years and on this scale. That is certainly very important because it may it may not be widely realised that with punishing measures connected with LATS failure there is not any wish for local authorities to reveal themselves to experimental technologies, and perhaps more people should appreciate that speed, simplicity of construction and implementation are other important factors. When you take that under consideration, then it makes sense to select in-vessel composting as a favourite technology.

The points above show the positive aspects of in vessel composting versus other organic waste treatment methods. There is also a negative side. Let me look at a handful of the disadvantages.

Disadvantages: Reasons Against in vessel composting versus other organic waste treatment methods

1. Energy use for ventilating and then turning the compost is however significant.

If you ever look at in-vessel composting versus other organic waste treatment methods, that might produce the effect of raising costs more in the future as energy costs rise at a rate above inflation. There is no way that could be a good thing. In fact, it may well be a good enough reason to avoid it completely.

2. In-vessel composting plants may cause odours if run badly, although good management should be the norm.

3. Poor quality compost can be hard to sell and get paid for, but IVCs should produce good compost so this is seldom considered to be a problem.

We said that one more valid reason in avoiding in vessel composting versus other organic waste treatment methods is poor quality compost can be hard to sell and get paid for. I advise people to think about this factor seriously, given it might lead on to the production of more good quality compost into a wide open agricultural market if you determine to make the choice in favour of in-vessel composting anyway.

That is it, the actual advantages and disadvantages of in vessel composting versus other organic waste treatment methods. It may not be what's right for everybody, but it is definitely beneficial to lots of people. You ought to now look at the points made above and decide if this is best for you. Hopefully your final decision process is going to be aided greatly by the pro and con info provided here.

Preservation of Wealth Review – Do not Join Until You Read This

Preservation of Wealth MLM is not the first silver and gold network marketing company, however, POW is the only silver, gold, and numismatic network marketing company to offer wholesale prices. Get ready to dive in as I give you my honest Preservation of Wealth review. We'll take a look at their compensation plan, their products, and I'll also provide you with a few marketing tips to help you catapult your POW business over the coming weeks!

Most people have never heard of Preservation of Wealth MLM even though they just celebrated their one year anniversary. The truth is they were simply over shadowed by a competing numismatic company who launched just 45 days later, the popular Numis Network. Even with a slow start and their modest grass roots approach, I would not consider Preservation of Wealth down for the count. They present their customers with a unique opportunity to buy at wholesale prices!

Preservation of Wealth MLM is Great for a Number of Reasons …

Primarily because they have eliminated many of the costly fees typically associated with running a home based business. With their simple, yet profitable comp plan, POW offers their members the ability to save 15% – 60% by purchasing gold and silver at wholesale, WITHOUT a mandatory auto ship.

One of the biggest challenges with network marketing is promoting a product that really matters to people. Most network marketing products are consumed primarily by their distributors. Preservation of Wealth MLM with their wholesale prices not only appeal to business builders, but also dealers, investors, and the average person wanting to buy gold and silver at a substantial discount. Buying gold and silver is a great way to weather tough economic times. Tangible investments hedge great against inflation and now can be done without those expensive brokerage fees.

Does a Preservation of Wealth Scam Exist?

I seriously doubt Justin Davis, owner of POW, is running a scam. They simply provide a membership and the ability to buy precious metals at wholesale prices. Their products are high grade and come from leading government mints from around the world. After speaking with Justin Davis and hearing his vision for the future of POW, you can bet they are on the right track and will be around for many years to come.

Besides building wealth with POW products, creating a home based business in the Internet age is one of the best ways to build up a life long residual income. However, it does take a serious commitment of time, money, and energy; I've thrown in a quick tip to help you reduce your overall learning curve.

Preservation of Wealth Marketing Tip …

The first rule of network marketing is making sure you're talking to a qualified prospect. 95% of the people on your list will NOT join your business. And trying to convince them they're missing out on the opportunity of a lifetime is wasting your time. To build a prosperous downline, you must learn to generate quality leads, prospects who actually want what you have to offer. Today, there is no better way then to attract prospects to you leveraging the Internet.

Export Processing Zones (EPZs) and Their Effects on the Growth of the "Globalization Project"

Allow me to begin this article by simply introducing some basic definitions. In general, the globalization project is referred to as the actions taken place by the government to participate in the world economy, usually through liberalization; giving out freedom of trade and cutting off custom restrictions. The process of expansion of international trade and financial flow, as well as flow of production factors for an economy such as foreign direct investments are the main acts under the globalization project in an economic sense. Some statistics available show that this global movement -the globalization project -has raised the living standards for many, benefitting people all across the world. But I would have to mention that at the same time, it also has promoted poverty across the globe (which will be discussed in this article as it continues). The globalization project has many aspects to itself which one in particular could be defined as the development of EPZs, the neoliberal economical approach towards the global market and adjustments plans such as the ones used at the time of debt crises.

Since the economic crisis in the west in the 1980s (will attend to this point as we continue with the rest of the article), export processing zones have become a very important part of neoliberalism development strategy, which once again falls under the globalization project. Entry to the global market appears to be a very tempting opportunity for many countries since it attracts foreign markets and raises the GDP, the income of the government through attraction of foreign currencies and the number of sales of the domestic goods on a greater scale. The improvements in sales of a country are relevant to the supply and demand figures for domestic products. The fact that the consumer demand rises when the market is expanded helps a country to increase its exports. EPZs are a well known method for the governments to gain easy access to the global market. Export processing zones are defined areas of a country that are designed to attract foreign investments accordingly; based what explained previously. The efforts start where government regulation, taxes and trade tariffs are lifted or are reduced. It is believed that through the entry in the world market, the economy of any country would benefit impressively without any losses, but when examined, globalization has some negative aspects towards the such nations. Such examples could be mentioned as: downgrading the social goals of the national development of a country and favouring the rich in order to help them earn more profit while the poor suffer even more. Thus, one could simply say that the acts of globalization promote poverty indirectly.

Practically, export processing zones (EPZs) are used as a strategy to promote economic development; therefore, EPZs are connected to the globalization subject through the elaboration of such developments. The goal of globalization is more varied that what it seems it would be. It could have been addressed to as the development of economy on the global scale, while the internals, national developments of a country are not much affected by the project. EPZs are helpful in order to achieve this goal and they allow countries reach out into the international market despite the negative aspect of employment and wages that EPZs might bring for the nations involved. The role of the state in labour-management relations and the type of workers employed in these export zones is another factor that could relate the growth of globalization project to EPZs. These roles are some critical variables which might affect the state's capability to maximize the economic potential of EPZs, resulting in earning more money / profit. Then again the lack of regulations in these trade zones comes at a great cost to workers, affecting their rights, health issues and security, environmental standards of the workplace and social protections. Governments might increase their profits, but they may face some internal issues in the future instead. People at the EPZs are hired through short term contracts (example would be like three months contracts) which increases the amount of employee turnover is such regions. Companies in the EPZs also deny additional trainings for the workers. Not only this would increase the rage among the employees, but it would also create unrest; workers would more likely go on riots, especially since they want to obtain permanent jobs in comparison to a job that could let them off at any time. Ergo low-grade jobs are created at these countries. The solution to such a problem would be creating a production line. If manufacturing takes place, a need for high skilled employees and personnel would appear that demand higher wages. In this scenario, a multiplier effect on employment is taking place which expands the domestic market. This helps out such nations to develop much quicker and better, just like what the western nations did in order to achieve independency in their development stage / project.

The export processing zones / free trade zones tend to be an attraction for the capitalism ideology. They have minimal custom control and domestic taxes which help businesses benefit much more from their sales. Another attraction of EPZs is the negotiation option available to the employees. EPZs allow labour forces to organize themselves freely and bargain collectively, but mostly in the favour of the business though. Another factor would be that multinational firms involved in the globalization project benefit by collection of large sums of money earned as profit and are provided immense wealth through EPZs. EPZs encounter countless opportunities of trade with no limits that corporations could use for their benefits. As mentioned in "Development and Social Change" by Philip McMichael, EPZs mean more freedom for the business, but less freedom for people.

Sometimes EPZs are involved in exportation of resources and raw materials, a factor that makes the poor countries involved in the globalization project remain poor. Such nations are forced into exporting their commodities due to many factors which some of such reasons are argued about and are mentioned in this article as the audience follows on reading.

This ideology of neoliberalism uses a factor called debt. Many developing nations are in debt and poverty nowadays, partly due to the policies that some international institutions such as the World Bank or IMF have developed and spread around the globe. Debt is used by the rich nations around the globe to get in touch with the poor countries in order to gain access to their raw materials for cheaper prices. Basically debt management is being used by the wealthy nations as a tool to take away the poor nations independencies, and to make the unfortunate regions dependent on loans. When tariffs are in place, countries focus on the development of internal industries and they compete in order to increase their sales, but when in debt, tariffs and other controls are removed which results in increscent of cheaper exports (especially raw materials) and imports of finalized products from the other nations. When a country is in debt, it is forced to sell its products in mass amounts and for cheaper prices to be able to a pay certain portions of the loan payments as soon as possible. This strategy has affected the living standards of such nations for decades. An example of this trend would go back to the 1970s and 80s, during the "Lost decade". The world experienced a debt crisis in which highly indebted countries, mostly developing Latin American nations were unable to repay their international debts. Mexico was the first to declare inability to pay off its debt, and the scandal spread to the rest of the world in a blink of an eye. To counter this, "structural adjustment ideology" (liberalization and privatization) was administered, run by IMF and the World Bank. Long-term commercial debts were involved in this situation which was accumulated in the public sector. The governments of such developing nations such as Mexico were not able to repay the money, so financial rescue operations were given priority to and became necessary. The crisis of 1980s was mostly caused by long-term loans that governments took from foreign forces / banks along with some official grants and loans that could have assisted out their nation's private sector.

Also by the beginning of 1980s the world economy faced recession, and the inflation days were over. USA's anti-inflation campaign was able to increase dollar's interest rate in the 1979; therefore, debt service payments rose rapidly. Change in exchange rates was not the only reason behind the crisis though. As mentioned the world was facing a recession, so the demand for exports fell and lower terms of trade was faced. Highly in debt countries faced payment difficulties as the result and the crisis took place. Banks stopped lending out money and loans were terminated. That was where the World Bank and IMF started to financially rescue such nations from their debt problems. New lines of loans were introduced which later on led to the adjustment programs. The assumption was that the private sector would grow strong and would cover up for the debt payments if the role of the state was removed and industries were privatized. Instead such strategies led governments to drown further in debt. The crisis of 1980s was eventually solved though. One factor contributing in solving the dilemma was the discovery of Latin American niche products in the global capitalism. The other solution to the crisis was mostly reduction of the amount of debts owed, or simply cancellation of debts or rescheduling the payment dates by the World Bank.

When countries are highly in debt, they are forced to cut off the money supply on health and other services in order to pay off the debt. Such behaviour is not recommended since it has negative effect on the living standards of such nations. But on a second glance at the situation, the results of such actions seem to favour the western world, so not many people oppose against them. Prevention of such behaviour would cost the advanced countries their positions in the global market along with the other benefits which they may obtain such as enormous amounts of money they earn; therefore, such systematic strategies are still being used in the globalization project.

When countries are in debt, they have limited options to choose from. The IMF and the World Bank tend to provide financial assistance to the nations seeking it. Their debt management plan is to apply a neoliberalism economic ideology in order to retrieve the money loaned. They have come up with structural adjustment plans such as "liberalization" of the economy and resource extraction / export-oriented open markets. They have minimized the role of the state and the have encouraged privatization. The protectionism over domestic industries is revoked. In some cases even currencies are devalued. Even at times, EPZs are constructed and introduced which leads to deregulations, while the standards are reduced or removed. The impact of such conditions on the poor countries could keep them in debt forever, leaving them dependent on the developed countries. Such behaviour towards the poor nations leaves them with no options except for raising more money through more exports, even though they may not be ready to enter the global market yet. In this situation, when a country's insecurity is high, they may apply for another loan after another. This leads us to observe price wars on a large-scale. The insecurity also leads the poor regions to sell off their resources for cheaper. In such a stage, inspection of the situation reveals that high numbers of exports are also done in order to keep the currencies stable and earn foreign exchange which would help to pay off the debts. The results of such actions leave the government facing such disasters such as social unrest, decrease in the labour value and even depreciation of capital flow. In the worst case, such nations' economies collapse and the poor country remains poor, or even becomes poorer.

One of the effects of structural adjustment programs on the developing countries is the increase of their exports. Usually commodities and raw materials are exported by the poor nations in such situations. This would lead them to lose out in the global business market when they export such commodities (that are cheaper in comparison to finished goods which they'll end up importing). Also these nations are effectively blocked or denied from industrial capital and real technology transfer; therefore, not only they lose their raw materials, they do not have the technology to make domestic products neither so they'll end up importing rather expensive finished products from other nations (due to the added labour costs to make the product from those commodities that they, themselves have sold for cheap). In general, this leads in a low turnover of money for the nation and the country loses cash. The factors mentioned are some of the main reasons that differentiate between developed independent economies and poor dependent regions. The former winner of the Nobel prize for economics and a well-known professor at the Columbia University – USA, Joseph Stiglitz talks about the structural adjustment programs as the following: "the World Bank, at the time of frustration, hands every minister of any poor country the same four-step program described as the following:

1. Privatization. Some politicians are corrupted; therefore, they go ahead with some state sell-offs: "Rather than object to the sell-offs of state industries, they use the World Bank's demands to silence local critics-happily flogged their electricity and water companies. 'You could see their eyes widen 'at the prospect of 10% commissions paid to Swiss bank accounts for simply shaving a few billion off the sale price of national assets. "

2. Capital market liberalization. Stiglitz talks about the capital flows which may ruin economies as being "predictable," and says that "when [the outflow of capital] happens, to seduce speculators into returning a nation's own capital funds, the IMF demands these nations raise interest rates to 30 %, 50% and 80%. "

3. Market-based pricing. "A fancy term for rising prices on food, water and cooking gas which leads, predictably, to Step-Three-and-a-Half: what Stiglitz calls, 'The IMF riot.' After such bloody riots, foreign corporations … can then pick off remaining assets, such as the odd mining concession or port, at fire sale prices. "

4. Free trade. "As in the nineteenth century, Europeans and Americans today are kicking down barriers to sales in Asia, Latin American and Africa while barricading our own markets against the Third World's agriculture, under the guiding hands of IMF structural 'assistance'. These adjustments have made africa's income drop by 23%. "

Seems like the well industrialized countries are forcing open markets on the poor nations, and these attempts are not helping the global market to develop much; instead the rich countries are gaining access to gather cheap raw materials while they are selling off cheap products for higher prices in the poorer regions, making up false promises of their aid and assistance in economic development for such areas instead.

This report indicates that some global institutions such as the World Bank encourage the growth of EPZs since it helps them dominate the countries that are in debt. Although EPZs eliminate the trade barriers and allow countries to exchange goods and money more freely in the global market, they also allow IMF, World Bank and such institutions to gain power on a larger scale. Such actions appear to be problematic. Especially since exports of the poor nations are increased in huge amounts while they do not tend to benefit the nations as they are intended to. These exportations must become cheaper because of all the loans and debts that the poor have gathered over time, to assist the nations to pay off their debts. As a part of structural adjustment programs, the poor regions are globalized against their will and are being used by the advanced nations for their needs. In the conclusion, this kind of scenario benefits the western world and that is why the governing institutions in the globalization project encourage the growth of such acts. They also tend to show their support for the expansion of globalization ideas such as creation of export zones.

Concepts Of Deficits And FRBM Act, 2003

Q1. Write a note on concepts of deficits and their trends.



A public budget is a systematic estimate of government's revenue and expenditure for a period of one year. It shows the planned expenditure of the government and the expected revenue from taxes and other sources during a given year. A public budget can be balanced, surplus or deficit. A deficit in a budget indicates excess of expenditure over receipts.


In India, the budget has always shown deficit. A deficit in the budget has many implications for the economy and it influences the process of policy making. The followings are the various concepts of deficits and their changing trends in India.


Revenue deficit takes place when revenue expenditure exceeds revenue receipts. Revenue receipts comprises of direct and indirect taxes, fees, fines, and surpluses of public enterprises, etc. Revenue expenditure is the expenditure incurred on administration, defence, interest payments and subsidies.


The Government of India has shown the following trends in Revenue Deficit:

Yr. Rs. (In crores)% of GDP
1990-91 18 562 3.3
2007-08 52 569 1.1
2009-10 4.6 2,82,735

Revenue deficit has increased to a great extent since 1990-91. The major reason for this increase can be attributed to increase in INTEREST PAYMENTS and SUBSIDIES. In 2007-08 the revenue deficit in terms of% of GDP declined.

However, in 2008-2009 and 2009-2010 revenue deficit rose significantly (both in absolute terms and in terms of% of GDP) to overcome the problem of economic slow down.


Budget deficit is the excess of total budget expenditure over total budget receipts.
Both, revenue and capital expenditure and receipts are taken into consideration.
However, the concept of budget deficit has lost its significance since 1997-98.


Fiscal deficit (FD) occurs when total expenditure (TE) including net lending (NL) exceeds revenue receipts (RR) + external grants (EG) + non debt capital receipts (NDCR). Thus fiscal deficit can be explained as:
FD = (TE + NL) – (RR + EG + NDCR).


FD = Fiscal deficit, TE = total expenditure, NL = net lending (loans – recovery), RR = revenue receipts, EG = external grants, NDCR = non debt capital receipt (proceeds from disinvestment of public sector enterprises)

Also, fiscal deficit can be:

• Gross Fiscal deficit = (TE + NL) – (RR + EG + NDCR)
• Net Fiscal deficit = GFD – NL.

Trends in Gross Fiscal Deficit:

Yr. Rs. (In crores)% of GDP
1990-91 37 606 6.6
2007-2008 2.6 1,26,912
2009-10 6.5 4,00,996

Fiscal deficit reflects the indebtedness of the government more comprehensively has been since 1991, the Government making attempts to reduce fiscal deficits. However, the fiscal deficit continued to rise till 2001-02.

Since 2001-02, GFD as q% of GDP began to decline as a result of the governments efforts.

Again in 2008-09, due to global economic slowdown, public expenditure increased significantly to boost growth rate.

4) Primary Deficit:

Primary Deficit is equal to fiscal deficit minus interest payments.

It can be divided into

• Gross Primary Deficit = GFD – interest payments.
• Net Primary Deficit = NFD – interest payments.


Yr. Rs. (In crore)% of GDP
1990-91 16 108 2.8
2006-07 -7.699 -0.2
2009-10175485 2.8

This indicates that the Government has been making efforts to bring down the fiscal deficit. However huge amount of interest payments and economic slowdown in 2008-09. Obstructed these efforts.

Q 2. Critically evaluate the FRBM Act, 2003.



The Fiscal responsibility and Budget management Bill was introduced in the parliament in December 2000, with the primary objective of reducing the debts and deficits of the central Government.

The FRBM bill became an Act on August 26, 2003 and it was brought into force on July 5, 2004.


The following are the main objectives of the FRBM Act, 2003.

1) To set a limit on the governments borrowings.
2) To bring down fiscal deficits.
3) To adopt prudent debt management techniques to reduce the burden of debt payment on future generations.
4) To generate revenue surplus.
5) To ensure long term macro-economic stability.
6) To improve transparency in the fiscal operations of the Government.


The following are the main features of the FRBM Act, 2003 and the FRBM Rules, 2004:


The FRBM Rules, 2004 stipulate that the central Government must take appropriate measures to reduce the fiscal deficit by 0.3% or more of GDP at the end of each financial year, beginning with 2004-2005, so that the fiscal deficit is less than 3% of the GDP by the end of 2008-2009.

1) REVENUE DEFICIT: The FRBM Rules, 2004 stipulate that the central Government must take appropriate measures to reduce the revenue deficit by an amount of 0.5% or more of the GDP at the end of each financial year, beginning with 2004-2005.

The FRBM Act, 2003, stipulates that the Central Government must take appropriate measures to eliminate the revenue deficit by 2008-2009, and there after build up adequate revenue surplus.


The FRBM Rules, 2004 stipulate that the Central Government should limit additional liabilities (including external debt at current exchange rate) to 9% of GDP in 2004-2005 and progressively reduce this limit by at least one percentage point of the GDP in each subsequent year .


The FRBM Act, 2003 stipulates that the Central Government is not to borrow directly from the RBI except by way of advances to meet temporary shortage of cash.


The Government should not provide guarantees to loans borrowed by the state Government and public sector enterprises in excess of 0.5% of GDP in any financial year beginning with 2004-2005.


The FRBM Act states that the revenue and fiscal deficit may be more than the target specified in the Rules, only on grounds of national security and national calamity or other exceptional grounds as may be specified by the Central Government.


The FRBM Rules, 2004 states that the Central Government should specify four fiscal indicators to be projected in the medium term fiscal policy statement:

• Revenue deficit as a percentage of GDP
• Fiscal deficit as a percentage of GDP
• Tax revenue as a percentage of GDP
• Total outstanding liabilities as a percentage of GDP


The FRBM Act states that the finance Minister should conduct quarterly reviews of receipts and expenditure in relation to the budget and place the outcome of these reviews before the parliament. Moreover, he must make a statement in the Parliament explaining the reasons for deviations from the FRBM Act targets and also announce the corrective measures that are proposed to be taken inorder to overcome these deviations.


The FRBM Act states that the Government should reform accounting system, improve fiscal transparency, disclose information on revenue arrears, guarantees and assets latest by 2006-07.


The FRBM Act requires that three reports be placed before both the houses of the parliament every financial year:

• Macro-economic framework statement
• Fiscal Policy Strategy Statement
• Medium term Fiscal Policy Statement

The FRBM Act has been criticized on the following grounds:


The FRBM Act required the government to reduce revenue deficit to zero by March 2009. However, the revenue deficit increased to 4.4% of GDP in 2008-09 and to 4.6% in 2009-10. Thus, critics point out that target set for deficit reduction are unrealistic.


The FRBM Act is based on the following assumptions:

Lower fiscal deficit leads to higher economic growth in the long run.
Larger fiscal deficit leads to inflation
Larger fiscal deficit leads to balance of payment problems.

Economists like CP chandrashekhar and Jayati Ghosh object to such assumptions. They state that if fiscal deficit is large due to large capital expenditure on infrastructure, then it will generate employment and demand for goods and service will rise, resulting in economic growth.

Inflation occurs when demand is greater than supply, irrespective of fiscal deficit. Moreover, if large fiscal deficit is backed by large foreign exchange, it may not cause external sector problems.


At present, the amount of capital expenditure by the Government is very low. Capital Expenditure increase the efficiency and productivity of private investment and thus contribute to the development process in the country.

Since 1991, the capital expenditure GDP ratio has been declining. This will have a negative effect on economic development.


If the government reduces social sector expenditure on education, health and family welfare, it will adversely affect human development.

This will have a negative impact on growth and development


Equity is the fair a just distribution of income among all the citizens of the nation. Some critics believe that FRBM Act will harm equity they argue that the government will reduce expenditure on subsidies with a view to control fiscal deficit.
This will lead to social injustice.


The FRBM Act over emphasizes reduction in public expenditure and ignores importance of revenues. Deficits can be controlled if collection of tax and non -tax revenues is improved.


Economists argue that if capital expenditure on infrastructure is reduced, it will have a negative impact on private investment due to decline in productive efficiency.

This will adversely effect economic growth.


Subsidies form a very large part of the government's revenue expenditure. However, in reality, it is a wasteful expenditure because many times subsidies benefit those who do not need them leg rich farmers. This limits the effectiveness of FRBM Act.


Fiscal deficit is not a complete indicator of the Government's liabilities. Some PSU receive hidden subsidies from the Government but they are not shown in the budget. These subsidies are indeed liabilities of the government and are known as quasi – deficits. These liabilities are very large, but they are beyond the scope of FRBM Act.


In spite of all the above criticisms, the FRBM Act, 2003 is an important step taken by the Government for better management of its financial operations.

Also, the FRBM Act need not necessarily affect the economic and social development of the nation.

Halal Investment Options for Muslims in Canada

I've always been a huge advocate of avoiding Riba (Interest), either earning or paying. There are definite financial, social and religious reasons for this and we, as Muslims, are aware of them.

There has always been a concern among the Muslim community in Canada of where they should put their extra money in terms of Savings or Investments, earn money from that or at least hedge against the Inflation and other factors. Based on my knowledge and experience (Allah knows best), I was able to dart down the following investment opportunities available in the Canadian market.

Investing in Commodities eg Gold and Silver

Gold and Silver have historically been the best source of securing your wealth over a long period of time. From my research of historical Gold prices, they have tripled in last 20 years. Silver is not far behind. Rather, silver has outperformed gold if we take different time ranges. So let's say you are not someone who has huge sums of money and can make big investments, investing in gold or silver is definitely an option for you. This is purely a halal investment and if you are looking to invest for a longer period of time, let's say saving money for your child's education, investing a couple of hundred dollars a month should not be difficult. This way you are preserving your wealth and, in the meantime, saving money for your child's education. You can buy gold from banks or can even purchase from an accredited gold dealer in Canada.

There are other commodities you can invest in but for a domestic investor it would be hard to store those commodities over a long period of time.

Investing in company Stocks ie shares

Basic reasoning as to why stocks are halal investments is as investors you will be rewarded with profits of the company and will also to have bear losses, if any. There are different types of stocks you can invest in based on your investment horizon ie time period you want to invest for and the amount of risk you can handle. Moreover, it also matters what kind of income stream you have in mind ie do you want regular dividend payments or you are more interested in Capital Gains (IPO's ie companies that are recently launching their stocks into the stock market, are best for Capital Gains) .

Examples of stocks you can invest in as Muslims are:
1. Retail companies
2. Oil and Gas companies
3. Trading companies etc.

There is a list of type of companies we, as Muslims, should not invest in ie these will not be considered as Halal investments. Companies that primarily deal in:
1. Financial institutions ie banks, loaning companies
2. Alcohol
3. Pork and pork related products
4. Tobacco
5. Weapons and ammunition
6. Entertainment

The list provided above is just an example and is not extensive.

As a normal person who does not have much knowledge about how to invest in stocks in Canadian Stock markets, best thing is to reach out to someone who knows. They may be your relationship managers at the bank, a muslim scholar who has finance knowledge as well and knows financial markets or contact brokerage companies.You will need to make sure you have explained to them in detail the criteria for your investments ie type of companies you are looking into.

Some banks such as RBC Royal Bank give you an online account that you can use trade stocks online. For this you need to have reasonable knowledge of how stocks work and how to analyse an investment opportunity.

Land and property

If you have enough spare cash that you have saved over a period of time and looking to invest in halal options, property and land present another option for you. People do engage into buying houses through mortgage and increase their asset base, but that is definitely not a halal option. So, if you are someone who likes to avoid interest, you should not go into buying houses through mortgage.

Now there are 2 scenarios:
1. You have enough money to buy a house. In this case you should be on the look for best investment opportunities in terms of property and land. I've seen people usually invest more into buying houses than buying land in Canada. This is not a bad option and is more secure. But investing in Land around the areas that have potential in terms of future growth and have developmental projects in the pipeline is something that can generate higher returns for you.

2. You do not have enough money to buy a house in Canada. In this scenario, since almost all of us are immigrants here, there is always an opportunity available in your country of origin. You can invest in smaller properties there and once you have collected enough money, you can bring it back here (if your goals is to own property in Canada).
Investing in new companies

A large number of Muslim business men / women want to start their new projects, they have good ideas but do not have the money to invest. You can find these people in your community or social networks and discuss about their ideas. If you have the financial knowledge, try and analyse their ideas, both in terms of practicality and future revenues. If you do not have the knowledge, have them create a business plan and then present that business plan to an investment advisor.

You can also create a pool of money with your friends, acquaintances and start a business that you normally can not afford. Investing in new projects ie businesses, is riskier than investing into an already running business but if weighed and measured properly and work hard on, can generate much better returns.

In the end, my knowledge is limited and above mentioned options are just suggestions, but I am hopeful they can give you an idea about investing halal and saving yourself from the curse of Riba (Interest). I'd be more than pleased to help with any of the above.