Monday, March 2, 2009

Monetary Cause of Poverty

While poverty may be due to reasons most of which are already known in

economics and sociology, it can also be looked at from another viewpoint, namely from the monetary viewpoint. Looked at from this angle, poverty may be significantly due to the structure of the global monetary system itself, particularly the fractional reserve banking system that is practiced worldwide.

The word ‘fractional reserve’ refers to the fraction from total deposits that banks

must keep as reserve. This reserve ratio is determined and used by the central bank as

one tool of monetary policy for controlling the money supply in the economy. The Bank Negara Malaysia, for example, imposes this reserve requirement on commercial banks as the Statutory Reserve Requirement (SRR). This reserve requirement determines the amount of money that commercial banks can create (The total = deposit ÷ SRR). The smaller the reserve requirement is, the more the money that can be created. For example, if the SRR is 4 percent, a RM1 million cash deposit can support a total deposit of RM25 million. The additional RM24 million can be introduced into the economy by the banking system in the form of loans. Opposed to currencies and coins in circulation, the money created by commercial banks takes the form of numerical or accounting money, circulated as cheques, credit card payments, electronic transfers, and the like. In other words, it is money created by means of mere accounting entries. The benefit of new money creation, known as seigniorage (the value given to money over and above its cost of production), accrues to the bank that lends it out at interest. The fractional reserve banking and its accruing seigniorage have implications for asset ownership through their distributional effects, including the creation of poverty. Since fiat money is easy to create, most economies create too much of it relative to their ability to produce goods and services. This results in the growth in money supply that exceeds the growth of the real GDP, thereby causing inflation to reel (The table below, extracted from the writer’s book entitled The Theft of Nations, provides the statistics for some selected countries. The reader can easily guess which countries are likely to experience hyperinflation and hence socio-economic problems). The socio-economic implications of this inflation arise from the fact that the newly created money does not accrue in the hands of every individual ‘evenly’. If the money or income of the people were to grow as the inflation rate does, then their real income would be intact and inflation would not be a problem. But true to the contrary, the new money created in the form of loans would instead go to corporations and individuals who are already relatively ‘well-off’ as only they are capable of depicting better credit-worthiness. A host of socio-economic problems would naturally result as a significant portion of the population does not experience income growth that would match the growth in money supply and the henceforth inflation rate. This group would find its real income being gradually eroded by the annual growth in money supply, and hence the possibility of running into poverty. This increase in money supply can be aptly described as ‘inflation tax’, a tax on every individual in the economy that accrues to the one who creates and owns the money.

To illustrate the point, when a commercial bank extends a loan of RM300,000 for

the purchase of an existing house, all individuals in the economy are actually financing the transfer of ownership of the house to the bank by means of inflation. This is because when the bank creates the additional RM300,000 through fractional reserve banking, there would now be more money in the economy relative to the real things and inflation would naturally come about. Initially, the bank neither had the RM300,000 nor the house. However, a mere accounting entry immediately places the ownership of the house with the bank. The implication of this is that the transfer of ownership is actually paid for by the entire economy through inflation. As a result, the seigniorage of the principal amount and interest accrues to the bank, all by means of mere numerical accounting only.

Basic Metal Products Industry

Malaysia's basic metal industries, which include the iron & steel industries and the non-ferrous metal industries,
have seen significant developments since the last three decades in tandem with the overall growth of the Malaysian
economy.Iron & Steel
The Malaysian iron & steel industries sector cover the primary steel products like direct reduced iron, hot briquetted
iron, blooms/slabs and steel billets and a very wide range of down stream flat and long products like hot rolled coils,
cold rolled coils, coated steel coils, roofing sheets, steel pipes and sections, steel billets, steel bars, wire rods, wire
mesh, hard drawn wires, galvanised wires, steel wire ropes, steel wire products, stainless steel pipes/pipes fittings
and stainless steel wire and fasteners. There are currently 330 companies producing these products with annual
output of RM28.2 billion with employment of 32,900 workers.
The iron & steel industries provide an important linkage in the form of supply of basic raw materials and
components to other sectors of the Malaysian economy, especially the construction industry, electrical/electronic
industry, automotive industry, furniture industry, machinery industry and engineering fabrication industry.
Non-Ferrous Metals
The non-ferrous metal sectors in Malaysia cover products like tin, aluminium, copper, zinc, and lead. However the
main players are the aluminium industries which produce aluminium sheets/foils, aluminium finstock, aluminium
ingots (recycled), aluminium rods and aluminium extruded profiles, the copper industries which produce copper
rods/wires, copper strips, copper tubes/extrusions and tin metal. There are currently 60 companies in the
non-ferrous metal sectors with annual output of RM 7.3 billion with employment of 9,700 workers.
The non-ferrous metal industries provide linkage mainly to the construction industry, electrical/electronic industry,
automotive industry, food and packaging industry.
The recently launched Third Industrial Master Plan 2006-2020 (IMP3) had identified six strategic thrusts to further
enhance the development of the iron & steel industry:
Enhancing the competitiveness of the iron & steel industry to support the growth of the manufacturing and
construction sectors; Sustaining and expanding the exports of iron & steel products for existing and new markets

China's One-Child Population Policy

China's strict family-planning policy of limiting parents to one child has made its population growth rate one of the lowest in the developing world. Experts say the policy is also leading to serious social and economic problems in the world's most populous nation. In this report, part of a VOA series on global population trends, VOA's Heda Bayron in Hong Kong examines the effects of the one-child policy.

Four days after Mrs. Yao gave birth in October, local officials descended on the Yao household in China's Fujian province and dragged her and her husband to a hospital. There, the couple was forced to undergo sterilization.

Mr. Yao, 31, is angry at the heavy-handed action.

"My wife just had a 4 1/2 kilogram baby four days earlier. It is wrong to ask her to do another operation," he said. "At least wait until six months when she recovered. What they have done was very cruel."

The Yao's mistake, as far as the government was concerned, was having a forbidden second child. Mrs. Yao already had one son from a previous marriage.

China implemented the one-child policy more than a quarter-century ago to prevent a population explosion at a time when the country was reeling from leader Mao Zedong's disastrous economic experiments in the 1960s.

Women were forced to undergo abortions and sterilization. Couples who had more than one child faced economic penalties.

The result: a population growth rate today of .6 percent a year, one of the lowest in the developing world and near the level seen in some wealthy countries.

Grandmother and babyThe government says the policy has helped to usher in rapid economic development. Without it, Beijing estimates there would have been 400 million more Chinese than today's 1.3 billion, a huge additional strain on resources.

Despite often-draconian enforcement, Delia Davin of Leeds University in England, who has studied the one-child policy, says it can be credited with improving the lives of many Chinese.

"I do believe that the limit in population growth has also been associated with rising education levels, particularly for girls, and also rising standards of living for smaller families," he noted.

But Davin and other population experts say the policy has also created serious problems.

In less than 30 years, China's population is expected to peak at 1.5 billion, and then start to shrink. By then, 20 percent of the population will be over age 65, compared with seven percent at present.

Like many countries, China will have to figure out how to care for this growing number of elderly people, while adapting to a shrinking number of young workers.

Wang Feng, an expert on Chinese population issues at the University of California - Irvine, says a smaller work force could be disastrous to the economy.

"The increase of labor force supply will stop by 2013 and will start instead to decline," he noted. "So for the Chinese economy, although unemployment is a concern, continued supply of young labor, skilled labor, is one of the engines of China's success in the global economy."

Another effect of the one-child policy, in a society that values sons over daughters, has been to encourage sex-selective abortion and female infanticide. By 2020, there will be about 40 million Chinese men unable to marry, because too few girls will have been born.

Sociologists say that could trigger aggressive behavior among frustrated bachelors, including kidnapping and trafficking in women.

Experts say it is not too late for China to reverse the trend, but Wang says the government must act now.

"With the population it takes more than 20 years to have the future labor, and more than 60 years to have the future elderly," he explained. "Whatever is going to happen will not be reversed in a short period of time, but because it's a long process, people don't realize that things [have] to be done quickly."

The government has started to address the situation. One method being tried is a program to change attitudes toward girls.

Some Chinese academics suggest easing the one-child policy to rejuvenate a graying society, but that appears unlikely anytime soon. The Population Ministry says the policy will continue, with the aim of holding the population to 1.37 billion in 2010.

However, modernization is bringing changes to Chinese thinking, and there are indications that ending the one-child policy would not necessarily lead to a baby boom.

Yao of Fujian Province says he and his wife never wanted more children.

He says they will put all their efforts into their one child. He says there is no need to have lots of kids, because they do not live in the country, where children are needed as farmhands. He says many people in his city, where the economy is doing well, would volunteer for sterilization after one or two children.

Surveys among young urban Chinese show many prefer to have only one child, because of the cost of raising children and because of their busy new lifestyles. Younger Chinese appear to be following the pattern set in Japan, Singapore, and many other countries around the world, the wealthier they become, the fewer children they want to have.

Monday, February 23, 2009


Modern sukuk, sometimes reffered to an Islamic Bond, are better described as Islamic Investment certificates. This distinction is as crucial as it is important, and it is stressed throughout this pioneering work that sukuk should not simply be regarded s substitute for conventional interest-based securities. The aim is not simply to engineer financial product that mimic fixed-rate bills and bonus and floating- rate notes as understood in the West, but rather to develop innovative types of asset that comply with Shari'ah Islamic law.Conventional bonds that yield interest, or riba, are of course prohibited under Shari’a law.
Furthermore, those who buy and sell conventional bonds are rarely interested in what is
actually being financed through the bond issue, which could include activities and industries
that are deemed haram such as the production or sale of alcohol. Companies that are
highly leveraged with bank debt may seek refinancing through issuing bonds, but such companies
are not regarded as suitable for Muslim investors.
The aim of bond traders usually is to make capital gains as fixed-interest bond prices rise
when variable market interest rates fall. Bond trading is therefore largely about exploiting
interest rate developments and trading in paper that is usually unrelated to the
value of any underlying asset. The major risk for holders of conventional bonds is of payments
default, but this risk is usually assessed solely on the basis of credit ratings, with
the ratings agency rather than the bond purchaser estimating the risk. Hence the bonds
are regarded as mere pieces of paper with third parties estimating the risk and the purchaser,
at best, only making a risk/return calculation without any reference to the business
being financed.
A number of Shari’a scholars, most notably Muhammad Taqi Usmani, have stressed that
one of the distinguishing features legitimising Islamic finance is that it must involve the
funding of trade in, or the production of, real assets.3 Merely funding the purchase of
financial securities would involve second order financing akin to lending for derivatives,
the subsequent gearing being speculative and increasing uncertainty, or gharar. Hence,
with murabaha, commodities are purchased on behalf of a client and resold to the client,
the temporary ownership of the commodity justifying the financier’s mark-up. Istisna’a
involves the financing of manufacturing capacity through pre-production payments, but
these relate to construction or equipment purchases where real capacity can be identified.Similarly, ijarah involves the leasing of real assets, with the use of the assets justifying the
payment of rental to the owner.
As Islamic finance is by nature participatory, purchasers of sukuk securities arguably have
the right to information on the purposes for which their monies are to be allocated. In
other words, the funding raised through Islamic bond issues should be hypothecated or
earmarked rather than used for general unspecified purposes, whether by a sovereign or
corporate issuer. This implies that identifiable assets should back Islamic bonds.