Brand New Everything! THE CONCEPT OF DDI Report Completed: 07 September 2014 In the Name of Allah, the Beneficent the Merciful Topic: The Concept of DDI What is FDI? What is FDI? FDI is the acronym for foreign direct investment. This is what most nations have been competing for for the past several decades. They are seeking a capital influx from foreign investors to boost their economies. Many economies have become stronger and are becoming rising leaders in what was once a European-dominated world. Today we hear about developing economies pulling themselves out of poverty such as the “BRICS” nations which consist of Brazil, the Russian Federation, India, China, and now South Africa (Azania). We hear of success stories such as Nigeria, Viet Nam, and South Korea and believe these nations are rising economically, and they are in terms of revenue, gross domestic product (GDP), and trade. However, in all of these countries, poverty remains at epidemic proportions, and it appears that most citizens of these countries do well outside of their growing economies than they can do within their growing economies in spite of the increasing wealth of their nations. Why is that? China has become the second largest economy in the world, and yet most of its citizens are still in poverty. Brazil has some of the largest oil reserves in the world, and we have seen the extreme poverty levels and the treatment of the government towards its citizens during the 2014 FIFA World Cup. India has extreme levels of poverty throughout the subcontinent and yet boasts huge economic growth levels. South Africa continues to maintain apartheid-era conditions for most of its citizens with many still living in shantytowns. Russia may be the only exception to this rule. Then again, Russia has never been on the receiving end of colonialism and imperialism either. However, this is not a grieving, scathing, economic history report. This essay is about solutions. Why FDI? There a certain conditions that create dependency on FDI. Without going too much into the historical causes, these conditions are: Not changing the economic structure that was put in place since the days of colonialism and overt slavery Dependency on the global currency market that is dominated by the US and Western international banking systems Following a tax structure designed to be a “barrier of entry” for domestic entrepreneurs and minimize economic growth of the economy Economic hemorrhaging where economies sell raw materials wholesale and buy finished products made from those same raw materials at retail UNDERDEVELOPMENT OF THE HUMAN BEING Under these conditions, an economy will always look outside of itself for capital influxes. Domestic Direct Investment Well begin with Point #5. Most economies are dependent on exterior economies because they refuse to develop their citizens beyond the scope of being laborers and consumers. They never seem to develop them nor seem to have the desire to develop them into direct participants and developers of the economy. Ill give you an example: What is the most important thing one must do once theyve achieved the highest level of education they have pursued? Answer: Make money. So why is this not taught in school? Why are we not taught how credit works and how to properly attain and use credit as leverage for commercial and personal use? Why are we not taught all the various investment vehicles and how to invest in all of them from equities to debt instruments? Why are we not taught how to raise capital? Why are we not taught how to invest in real estate and all the benefits that come with it? Yet all of these things affect our lives once we decide to go into the world and support ourselves and our families. I know.. I know... not everybody will want to be a business owner or investor. This is true. However, with this knowledge taught throughout our academic lives will enable anybody—whether they decide to be a business owner or a janitor—to create wealth for themselves. This brings me to another question: What is domestic direct investment (DDI)? DDI is when a nation can receive capital influx from its domestic economy. The idea is to create direct investors from its currently impoverished citizens or the majority of its citizens. Of course, certain conditions must exist in order for this to occur. Currently, only a small percentage of a nations citizenry can present a significant amount of capital influx that a nation seeks. Conditions for DDI Point #1 and Point #2 in the conditions of what creates dependency on FDI can be eradicated by Point #1 of what conditions can create DDI. Replace the fiat currency with a currency thats backed by a monetary standard. Create a flat tax for businesses. Dont tax labor. Set the capital gains tax at 0%. Restructure the banking system by nationalizing the central bank and changing the national credit issuance to benefit the majority of the population. Using tax revenues to create socially-beneficial programs such as free education from pre-K to Doctorate levels and free health care for all citizens, free electricity, etc. Incentivize local companies to buy raw materials and create finished products from those raw materials for domestic consumption and then for export. Educate the population on money dynamics such as all of the various investment instruments and how to properly invest in them, the proper attainment and use of credit as leverage for commercial and personal use, how to raise capital, and how to properly invest in real estate. Also business management must be taught in order for the citizens to organize and manage themselves and their affairs better. Of course, there is more that must be done. However, these are the basic conditions needed to create DDI. Point #1: Replace Fiat Currency with One thats Backed by a Monetary Standard To succeed with Point #1, Point #3 must be accomplished first. Nationalizing the central bank means that the government must take it over. However, the central bank body must become simply an executive arm as opposed to being a think-tank. They can only execute policy—not create policy. Currently all economies are directly pegged to the US dollar. The US dollar is controlled by its central bank. This effectively makes the US central bank the central bank of the world. To reverse this, a monetary standard must be put in place. A monetary standard is a set price per measure of a monetized commodity that indicates inflationary and deflationary pressure at its earliest stages. It allows a nation to maintain monetary and economic stability. It also acts as an insulation from external market pressures. Currency can act like a buffer--protecting the domestic economy from the market fluctuations of other economies. Currency can be added and taken away to maintain the set price of that one monetized commodity which will stabilize the economy by preserving the value (purchasing power) of the currency. This way supply-and-demand dynamics of the various markets can be based on the stability of the currency as opposed to being manipulated by the volatility of an unstable currency. The standard will act as an anchor to preserve value in volatile waters. The monetized commodity must meet two criteria in order to be considered qualified to become a monetized commodity: It must have scarcity or a productive use: Gold is scarce. Oil has a productive use. They are very sensitive to the change in value (purchasing power) of a currency due to these qualities. It must have a simple standard of measurement: Gold is measured simply by its weight--$1200/ounce Oil is measured by its volume--$98 per barrel Corn and cotton are measured by its weight also--$3 per bushel These are all qualified to become a monetized commodity due to their scarcity/productive use and their simple standard of measurement. *Diamonds would not be qualified as a monetized commodity. Although it is scarce, the value of a diamond is determined by too many factors: weight, clarity, flawlessness, and size. Point #2: Changing the Tax Structure Flat tax for businesses The current tax structure in most countries should be removed and replaced with a much more simplified tax structure. For domestic and local companies, the tax should be at a flat rate not to exceed 15%. This will increase tax revenues significantly. Most tax structures are designed to be a barrier of entry for local competition so that they will have a difficult time growing their companies while more established companies enjoy tax loopholes and tax incentives and benefits that may be unknown to local upstarts. Creating a flat tax will increase revenue as domestic companies grow. This incentivizes the creation and growth of local businesses which will increase taxable revenues geometrically—even exponentially. A flat tax should also be applied to multinationals and foreign companies but at a higher rate than domestic and local companies. Dont tax labor For most businesses, labor is considered an expense. Most businesses are normally taxed after expenses. So why tax an expense? Labor taxes (income taxes) are considered a form of double-taxation because something that is not supposed to be taxed is being taxed. Secondly, the cost to collect those taxes and secure them for government consumption is quite high. Thirdly, different employees are being taxed at various tax rates depending on income level. This slows down growth for the company tremendously. Money that is being directed towards confiscatory taxes at various rates and amounts with the extra labor costs to collect and secure these taxes from an area that is not supposed to be taxed because it is considered an expense, could go towards expanding business and investing within the company. However, this stifles growth and reduces the growth rate of the company. Although the government is collecting tax revenue, it is significantly reducing its own growth levels by taxing labor. It would be more effective and more efficient if laborers are simply taxed through consumption taxes. The more disposable income a laborer has will reflect in the amount of consumption a laborer does. In other words, the more money a laborer has left over after taking care of bills and financial obligations, the more he/she will spend. In this wise, the government will make money from an increase in consumption taxes and an increase in taxable revenue from companies that are benefiting from the increased consumption levels. This is a win-win! Set the Capital Gains Tax at 0% A capital gains tax should be removed completely. This is another form of double-taxation. When an investor or a company is taking after-tax money and is putting that money at risk, then if that investor receives a gain from the risked capital, that gain should not be taxed. It is like a penalty for being a successful investor. It discourages investment and capital growth. Besides, its money that has already been taxed being taxed again for growth. Although if a loss is achieved it can become a tax-deduction for the amount loss, this still is an incentive for losing after-tax money put at risk. Then its for the amount put at risk—not for the potential gain. Again, this discourages financial growth. Most of these tax policies were either designed by those who want to maintain dominance over the economy or imposed by international banks and/or external donors that do not want to see the economy thrive independently. Point #3: Restructuring the Banking System Nationalizing the Central Bank Most governments have not nationalized their central banks. They nominate various governors and central bankers to positions within the central bank, but the ownership of those banks have yet to change hands from former colonial powers to the actual people of the country through government control. This must be done, then a monetary standard must be implemented to support the national currency. This will effectively make the central bankers the executors of policy, but no longer the creators of policy. The maintenance of the monetary standard will effectively be the policy. Also, the minimum interest rate must be eliminated. This has caused too many problems throughout the world. For example, the so-called World Financial Crisis was caused by the Federal Reserve raising interest rates while creating deflationary pressure through the selling of billions of dollars of 30-year Treasury bonds. This brought prices down—causing businesses to generate less revenue while simultaneously increasing debt by raising the minimum interest rate for companies to pay on their current debts which brought most companies into bankruptcy. Currently, the same central bank has lowered interest rates while simultaneously creating inflationary pressure through the purchasing of billions of dollars of 30-year Treasury bonds. This makes it difficult for banks to lend out money when they will receive back dollars with decreasing value. The only incentive is the purchasing of mortgage-backed bonds which allows the liquidity available for banks to make loans to commercial and industrial interests (C&I). Of course, the QE experiment is coming to a close and soon the US economy will be off of life support. Anyway, when a monetary standard is implemented, then monetary stability will be in place. This effectively will no longer justify the central bank to impose a minimum interest rate. The markets should be allowed to determine interest rates. Nationalizing Credit Issuance Most banks are notorious for their selective credit issuance policies based on income, race, ethnicity, etc. Most people are not even taught how to use credit yet start off with debt when they are attempting to receive higher education. Many are able to apply and receive credit cards before they know how to use them. Those who desire business loans are turned down because they have no assets to secure the loan. The metrics that determine credit scores remain a huge mystery. Those who have credit—good or bad—are unable to maintain or improve their credit due to devastating economic events like the so-called World Financial Crisis. Since most people are not responsible for the fluctuating of the purchasing power of their currencies nor the imposition of minimum interest rates, the mass populace must have their credit scores “reset”. The government should have all of their citizens register using their government-issued ID numbers for credit reset. This means that they must first be taught how to properly use credit as leverage for both commercial and personal purposes. A test that is administered between each lesson to measure retainment of knowledge should be given. Upon passing the course(s), the citizens credit score should be brought to the utmost pristine level. From that point, the citizen can take responsibility for its own credit score maintenance. That determination and issuance of credit should be regulated by a governmental credit issuance agency that is responsible for the maintenance of the register. Students upon graduating from secondary schooling would automatically qualify once money-dynamics is taught in school as proposed above. This will enable exponential growth in entrepreneurship and business development in the economy from local citizens. This will create increased taxable revenue for the government and increased job creation and consumption levels. Banks will receive increased investment opportunities, increased loan distribution levels, and increased deposit accounts. Not many racist/colonial legacy bank owners will be too thrilled about this. If banks are found opposing this credit issuance policy, then there are sticks that can be implemented with the carrots. Opposing banks can be fined heavily, denied capital infusions, nationalized, insurance loss, tax increases, etc. Racism and disenfranchisement of the poor darker populations can no longer be tolerated. Fluid credit issuance and capital distribution must be enforced. Bank regulators can be implemented to ensure fluid capital flows amongst the mass populace. National Collateralization Program Of course, collateral will be an issue of concern for lenders. Most impoverished citizens do not have assets to put up to secure the loan. This is where most bankers are in position to rightfully deny a prospective borrower a loan. The borrower can apply to a national collateralization program that will back the loan with a government bond equal to amount borrowed if the borrower defaults. The borrower will have to pay back the loan to the government, at favorable terms, that takes in consideration the circumstances under which the borrower defaulted. This will bring the borrowers credit score down (which is recorded and regulated by the national credit issuance agency) until the debt is paid. In this wise, debts remain internal or in-house. This will enable more fluid capital flows. Point #4: Using Tax Revenues for Socially-beneficial Programs Education Subsidies The increased tax revenues must go into alleviating the mass populace of the effects of poverty—especially extreme poverty. Tax revenues generated from the production and the consumption of the mass populace must be reinvested into that very same mass populace in order to grow the economy into a much more robust and healthy economy and much better society. Education must be subsidized fully from the most elementary level to highest university levels. In this wise, the investment in the people will transform the economy from a mostly labor-intensive economy into a more knowledge-based economy. As the people develop, so will the economy. Teachers and administrators should be paid high salaries and wages as they are responsible for the advancement of the nation. Healthcare Subsidies Cuba is a pioneer in this. They have more doctors per capita than the United States! How can a nation have a thriving healthy economy if the health of the people that make up the economy is not protected? Doctors and medical staff should be supplied high salaries and wages as well. They are responsible for the health of the nation. If their education has been subsidized by the government, this is less debt on them for their education—effectively allowing them to be healers as opposed to being glorified drug distributors to pay off their education debts. This will enable doctors and local medical communities to develop cures for diseases on their own instead of looking to foreign or multinational drug and chemical companies for medicines and vaccines that do no good for the people. Ebola is a great example. It has ravaged several African countries but only when two white US citizens get the disease that a “cure” or “experimental treatment” is introduced. African victims do not have access to this experimental treatment, yet they are the most victimized by the disease. Subsidies should be earmarked for domestic research and development of treatments and cures for diseases that affect the mass populace within their borders. Other Socially-beneficial Programs Tax revenues must be directed towards advancing and improving the standard of living of its mass populace. This creates security and stability for the nation and protects a nations sovereignty. However, a welfare state should not be created. This is where Libya under the Jahamarriyah government and the current Venezuelan government have went wrong. Ill explain. The Libyan government created the richest most self-sufficient African nation ever known in the modern world. However, its economy was too dependent on oil revenue. Bro. Leader Khaddafi did attempt to create an agricultural-based industry with the creation of the Great Man-Made River which would have made the Libyan desert fertile for agriculture. The Libyan government made housing easy and accessible to the mass populace. Education was free as well. However, the education needed to ensure that the mass populace will further develop the economy themselves, I do not believe was introduced. They were very comfortable and directly benefited from the oil wealth, but there was too much dependency on the oil sector. Other sectors of the Libyan economy were not developed and this is where money-dynamics education is most crucial. The citizens must not only benefit from the wealth of the nation, they must further develop and advance the economy in order to protect it. I see Venezuela under President Maduro going in a similar direction. The mass populace must eradicate dependency on any level through direct participation in and direct development of the economy. This will not reduce growth in any major sector of the economy. In fact, growth will increase due to a much larger participation of the mass populace. However, other sectors must be developed. This will increase economic growth exponentially as well as taxable revenues. This will also decrease dependency on any one sector of the economy. Point #5: Incentivizing Creating Finished Products from Raw Materials Most developing nations sell their raw materials at wholesale and buy finished products made from those very same raw materials at retail prices. This is what I call economic hemorrhaging. This is why most economies are dependent on foreign trade, foreign aide, and foreign direct investment. They put out more then they take in. As more local domestic companies are created, the buying up of raw materials for production by these local companies will increase. An incentive such as a discount/tax incentives for buying up locally-produced raw materials by local companies can be implemented. Even tax incentives for intellectual property (IP) transfers or IP sharing of multinationals with local companies can be implemented. I still to this day cant understand how nations that produce metals and chemicals necessary for armaments can not or do not manufacture their own armaments. This should be a concern for national security. Why import something that can be domestically produced and manufactured? The extra incentive would be that it can be exported. Reversing the economic hemorrhaging of the nation must be paramount. This includes the so-called “brain drain” of most developing nations. Why not retain local talent? Incentives should be in place that will help local talent to remain within the country after graduation. Tax incentives can be given to local companies or companies that are locally-based to hire local talent at competitive salaries and wages. This will prove to sustain and increase economic growth severalfold. Point #6: Educating the Mass Populace in Money-dynamics Teaching the mass populace the various investment instruments and how to properly invest in them, attaining and properly using credit for commercial and personal purposes, how to raise capital, how to invest in real estate, business management, and financial literacy will enable the mass populace to directly participate, directly develop, and directly benefit from the economy. It would not matter what station of life they choose, they will be able to create and grow wealth for themselves and their families. This will enable them to protect the economy and the sovereignty of their nation. A government no longer will have to ask for loans from international banks and involve themselves in structural adjustment programs or austerity measures. If investment is needed, they can go to their local citizenry to raise the investment capital. This will make the economy even more attractive for foreign direct investments. Foreign exchange would become the icing on the cake as opposed to being the cake itself. In fact, foreign exchange will increase due to more domestic participants. A recent OECD report has been published verifying the positive effects of teaching the mass populace money-dynamics education. Reference: oecd.org/finance/wp33finedulac.pdf Lets recap: We have a stable monetary system where the national currency is backed by a monetary standard. The monetary standard preserves the value, or purchasing power, of the currency which simultaneously protect the national economy from external inflation and deflation. We have a tax structure that is fluid and incentivizes growth and increased consumption levels. The fact a laborer can save some money after paying off obligations can help a long way in poverty-reduction. The banking system is transformed to benefit the mass populace through maintenance of a stable currency, elimination of an imposed minimum interest rate, and fluid credit issuance that puts the mass populaces credit rating at the utmost pristine level. This will effectively allow the markets to determine interest rates under a stable monetary regime. This will enable local companies and local banks to thrive. Ultimately, the economy will thrive due to an increase in taxable revenue levels. The national debt will decrease significantly because it has significantly reduced the debt of the mass populace by investing in socially-beneficial programs such as free education, free housing, free healthcare, etc. This will enable the mass populace to grow in health and knowledge without the chain of debt slowing their growth. The economy will benefit the most due to a much healthier, more productive, and wiser and innovative mass populace. This will make the citizen more of an asset to the economy than becoming a draining liability on the economy. Freeing the citizen of debt will free the nation of debt. Retaining the raw materials produced within the nation to sell to local manufacturers and then sell finished products for local consumption then to export on the open markets will retain wealth within the nation and increase revenue levels from foreign exchange. Also the retainment of local talent will effectively increase growth levels within the economy. Educating the mass populace in money-dynamics will enable the mass populace to directly participate and develop the economy. With all of these things being implemented, where can poverty exist in such an economy? Why would a nation seek investors from outside itself when it can develop and cultivate investors from within its own borders? If the mass populace of an economy are financially strong, prudent, and competent to become direct investors in their own economy, why would a nation have to borrow money from international banks and subject themselves to humiliating structural adjustment programs? This is what DDI, or domestic direct investment, is about—developing investors from within the domestic economy from the mass populace. Deitric Muhammad is the Chief Economist of MGE19s Economic Research & Structural Models Company website: mge19 He can be contacted at dmuhammad@mge19
Posted on: Sun, 21 Sep 2014 17:50:31 +0000
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