»5 Minute Wrap Up by Equitymaster

On This Day - 2 MARCH 2012
Have we been fooled into poverty?

In this issue:
» Is this Africa's Singapore in the making?
» Brazil declares a 'currency war' against cheap money
» Unemployment in the Eurozone hits the roof
» Salaries of Indian CEOs drawing closer to global peers
» ...and more!

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Poverty- what does this word bring to your mind? It could be defined as a state wherein the people do not have sufficient resources to sustain themselves. Economists believe that the Industrial Revolution was the world's way out of the age of poverty. But though the industrial economy managed to make some people filthy rich, a significant portion of the world's population continues to be under the grip of poverty.

A rational approach suggests that if a solution doesn't work, it is best to reconsider it. Wrong solutions are often a result of an incorrect understanding of the problem. This seems to have happened in the case of poverty. Most economists think of poverty as an original sin. Poor people are seen as those who have not been touched by the magic wand of economic growth.

But is this the right way to look at it? Noted Indian environmentalist Vandana Shiva shares an interesting perspective on this. According to her, most Western economists have a false view of the history of wealth and poverty. The countries of Asia, Africa and Latin America that are poor today are not so because of the lack of industrial progress. They are poor because they were robbed of their resources by Europe and North America. It was this forceful exploitation of the Third World resources and markets that created enormous wealth in the North and poverty in the South. So it was the industrial economy that actually elevated the problem of poverty instead of solving it. And yet today, the world continues to look for solutions in mechanisms which very much resemble the economic colonists. Our obsession with GDP (Gross Domestic Product) growth figures has grown even more. But there is a serious problem with such indicators. For instance, if you consume what you produce, it does not contribute to GDP growth. For Westerners, such sustenance living means poverty. Economists and policymakers have misguided the world away from self-reliance. And into a system that more often than not leads to monopolisation of resources and power, concentration of wealth, unproductive debt burdens and environmental destruction. The colonists of yesteryears are very much present even today in the garb of transnational corporations. As long as the disease is offered as the cure, poverty will continue to live on.

Though Shiva has some very valid reasons for the causes of poverty, she does not present the picture in its totality. Several factors such as attitude towards work and savings, investments, political institutions, intellectual curiosity, etc. also go a long way in determining the wealth of a nation. Moreover, the industrial economy cannot be blamed for all the evils in society. In fact, some of the best innovations and developments have happened because of it.

What, according to you, is the real reason for poverty in the world? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Foreign exchange (forex) reserves can be described as deposits of a foreign currency held by the central bank of a country. In a globalised world, forex reserves play an important role. A good amount of reserves tends to boost global confidence in an economy's monetary and exchange rate policies. At the same time, it allows central banks to intervene during times of adverse swings in forex rates. Today's chart of the days shows the countries that have the highest forex reserves. China leads with more than US$ 3 trillion in forex reserves. India ranks 9th with about US$ 297 bn in reserves. It must be noted, however, that inflows from foreign institutional investors (FIIs) constitute a sizeable chunk of our reserves and these funds are mostly short term in nature.

Data source: Rediff.com
*As of December 2011

Can a city of the stature of Singapore bloom in the continent of Africa? If The Economist is to be believed, this miracle can indeed happen. In fact, it is a work-in-progress even as we write this. What's even more surprising is the fact that the nation that is being given showered with this kind of praise is none other than Rwanda. The very same country that is best known for the genocide of 1994.

The genocide was so brutal that the entire middle class of Rwanda is believed to have been wiped off. But the land locked African nation seems to have come a long way since those days. Thanks mostly to its controversial yet charismatic president, Mr Kagame. He has been credited with making the country free of red tape and has also given it one huge advantage over other African nations. The advantage of the rule of law. Consequently, business is flourishing and foreign investments are pouring in. However, immense challenges still remain and the way Mr Kagame will go about overcoming them will determine whether the title of Africa's Singapore will adorn Rwanda for a long time to come

To protect its own manufacturers, Brazil has imposed a tax on foreign borrowings. The idea is to prevent the Brazilian currency, Real, from appreciating too sharply. The country's leaders have also threatened the developed world with further capital control measures. These would be put in place if the latter continue to adopt expansionary policies at the behest of Brazil. Brazil was one of the first emerging market to put measures in place. This was to check the flow of cheap money which the developed markets, particularly US, had flooded the world with. Their claim then was that this money has done nothing but to inflate the asset prices in countries like Brazil and eventually overvaluing their currency. This in turn has hurt the manufacturing companies in Brazil as the overvalued currencies make their goods and services less competitive.

The job scenario in the Eurozone seems to be looking no better. Months of debates and austerity drives seem to have made no difference to the region's employment scene. What is more, the statistics clearly put the optimists to shame with nearly half of Spain's youth being out of jobs. In several other economies as well, the unemployed account for nearly 11% of employable population. Economic de-growth and risk of inflation make the case worse for those in hope for better living. With rating agencies sounding off warning signals, piling on more debt is also now a lost solution. Thus, tough times are here to stay for the debt ridden economies in Europe. Decades of unchecked spending and poor saving habits may come to haunt them for several years.

Tensions in the global oil market are heating up. With the Western nations imposing sanctions on Iran on account of its nuclear programme, oil prices have shot up. Brent crude has reached US$ 128 a barrel. This is the highest since July 2008 when crude had touched a high of US$ 147.5 a barrel. As investors anticipate lower supplies from Iran on account of sanctions, the demand-supply mismatch has pushed prices higher. But what has also raised fears are reports of a pipeline burst in Saudi Arabia. This has, however, been denied by the latter. It must be noted that both Saudi Arabia and Iran are major players in the Middle East oil market. Thus, escalation of tensions there has lent an air of uncertainty with respect to how higher the crude prices can go. What has made matters worse is the growing rift between Saudi Arabia and Iran. Since the sanctions have impacted crude exports from Iran, the latter has been warning Saudi Arabia to refrain from making up the shortfall by increasing production. Whatever be the case, the world economy will have to gear up for firmer crude prices in the near term at least.

Lately it seems that regardless of whether the company's networth is up or down, the compensation packages of chief executives are consistently increasing. Especially in the US where when the subprime crisis hit, several firms sought bailouts while their chief executives still received huge bonuses. The situation in India is no different. Although Indian chief executives are paid less when compared to their global peers, the trend is now changing. The gap between salaries of Indian CEO's and their global counterparts is decreasing. This could be a dangerous signal, especially if the company is eroding its networth. More often it is the shareholder's, the company and the workers who bear the brunt of the lavish executive compensations.

In the meanwhile, indices in the Indian stock markets moved higher towards the noon session after opening weak. The BSE Sensex was trading higher by 97 points at the time of writing. Heavyweights in the banking space such as ICICI Bank and State Bank of India (SBI) were seen driving gains, while realty major DLF was trading deep in the red. Most of the Asian indices closed higher today.

 Today's Investing Mantra
"The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'swing, you bum!" - Warren Buffett

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