Cultivating CONSUMERISM

There comes a point of saturation in every rich man's life that he owns everything he needs and he buys no more. Ditto with rich countries. At this point of saturation there are 3 kinds of demand that drive growth namely, 

• Replacement demand - to replace old products that are not satisfactorily functional
  
• New Product demand - a product that satisfies previously unsatiated needs. Too far and too few innovations
  
• FMCG demand - regular consumption, as the name suggests

These demands cannot fuel double digit growth of economies. On this intersting premise,  Arindham Chaudhuri builds the case why the current recession is good for India and other emerging economies. 

Drawing an example, he suggests that it is essentially because of this phenomenon coupled with the non-materialistic culture of the country and its declining population that the Japanese economy has been reeling under recessionary pressure for over the last decade.

He extends the logic to Americas and Europe where he says despite the above mentioned saturation, people have been drawn to buying more than they actually need owing to their materialistic culture and easily available credit. Now a time has come when on an avearge every American's income for the next 15 years has been pledged to fuel this consumerism. This has in effect built up a dangerous bubble. Credit cannot no more drive safely drive consumerism here. The bubble has burst and banks can no more offer have loans that are not sub-prime. 

Why is it good for India?

Like the Sonys and the Toyotas moved outside the boundaries of the Japanese market in search of growth over the last few decades, the only option ahead of the America Inc is to explore large virgin markets viz. India, China, Eastern Europe, Latin America SE Asia and Africa. In essence these companies will also work to give the Indian population the purchasing power  that can so much be a short-cut for all their investor's woes. The next couple of decades look promising !!! 

To read more: Page 62, B&E, 30th April 2009

International Monetary Fund FAQs

What is the International Monetary Fund? 
    The International Monetary Fund (IMF) was one of the institutions to emerge as a result of the United Nations Monetary and Financial Conference held at Bretton Woods, United States in July 1944.The widespread devastation of the Second World War had made the need felt for an international organization that could regulate international payments and exchange rates. The Fund today has 185 member countries. 
Does it control international exchange rates? 
Not any longer. Member countries that joined the Fund between 1945 and 1971 agreed to maintain fixed exchange rates between their currencies and the US dollar. This Bretton Woods system fell apart when a high inflation rate in the US and the growing trade deficit prompted the Americans to allow the dollar to float. Since then, IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely; pegging it to another currency or a basket of currencies; adopting the currency of another country; or participating in a currency bloc. 
What exactly does it do? 
Its three main activities are surveillance, technical assistance, and lending. As part of surveillance role, IMF provides periodic assessments of global and regional developments as well as policy advice to members. It provides technical assistance to member countries in fiscal policy,monetary and exchange rate policies,banking and financial system supervision, and statistics. Its financial assistance, unlike that of the World Bank, is provided not for specific projects but to help countries tide over balance of payments problems or for structural adjustments to their economies.It also gives concessional loans to the low income countries. 
Where does the IMF get its money? 
The IMF’s resources come mainly from quotas that countries deposit when they join the IMF. Quotas reflect size of each member’s economy. Larger economies have larger quotas, while smaller economies have smaller ones. Quotas are reviewed every five years. Quotas, together with equal number of basic votes each member has, determines a country’s voting power. In that sense, they are akin to the shareholding in a company. Quotas also help to determine the amount countries can borrow from the IMF, and their share in allocations of special drawing rights (SDR). Most IMF loans are financed out of members’ quotas. The exceptions are loans under the Poverty Reduction and Growth Facility, which are paid out of trust funds administered by the IMF and financed by contributions from the IMF itself and member countries. 
What are SDRs? 
Countries deposit 25% of their quota subscriptions in major currencies, such as US dollars or Japanese yen, or in Special Drawing Rights, which were created as an international unit in 1969 to support fixed exchange rate system. IMF can call on the remainder, payable in member’s own currency. The SDRs so formed are an international reserve, but since they belong to depositing countries, they can account for it in their external reserves along with foreign currency and gold reserves. The value of an SDR is set daily using a basket of four major currencies — the Euro, Japanese yen, pound sterling, and US dollar. The SDR also serves as the unit of account of the IMF and some other international organizations.

Source: ToI, 6th April 2009