New Financial Models for Emerging Economies

 

New Financial Models for  Emerging Economies

 

(Excerpt of the Research)

 

 

Summary

 

1. The Scope of the Research.

1.1 – Introduction

1.2 – The General Principle of the Research

1.3 – The Target of the Research

 

2. The Target of the Reaserch.

2.1 – The Inverse Theory of Marginal Utility.

 

3. Definitions. – (omissis)

3.1 – Wealth

3.2 – Creditworthiness

3.3 – Investment

3.4 – Profit

3.5 – Money

3.6 – Bonds

3.7 – Debenture.

 

4. Patrimony and creditworthiness. 

– (omissis)

 

5. The construction of a general matematical model. 

– (omissis)

 

6. The construction of a general technical model. 

– (omissis)

 

7. The identified operative creditworthiness models.

8. The investigated new financial models.

 

9. The financial model “TERRITORY’s INNOVATION”.

 

 

 

 

 

 

 

 

1. THE SCOPE OF THE RESEARCH.

 

 

1.1 – Introduction

In performing our research we tried to be as objective as possible, avoiding any personal intromission either into the premises, and the arguments of the statements of the research.

 

We tried to have impersonal behaviour, no political or religious belief, no scientific theorem to which appeal.

 

We reached mathematical statements which could be logically correct, but which could be at the same time difficult or impossible to prove.

 

We believe we have constructed estremely simple financial models, but just for this reason estremely difficult to communicate (considering that financial simplicity is often confused with miscevious actions).

 

We are working in a testing environment certainly not as sterilized as a chemical laboratory, and testing results can not be immediately verificable. For this purpose we hope to have as soon as possible the opportunity of testing our models in an environment different than South of Italy, where bribery, corruption an criminality certainly do not facilitate such experiments.

 

Our research, moving from the premises, and using correct logical arguments, has tried to arrive to correct conclusions. Now we are facing conclusions stated under mathematical models, which should be correct, but which could not be too.

Logically, if premises are correct, and arguments are correct, then conclusions must be correct.

Therefore, the statements of the premises are essential to arrive to correct conclusions.

In our research Premises are stated under the chapter “Definitions”, which is omissis in this excerpt  by reason of space.

In the Definitions chapter we have basically analized and reviewed the following concepts, as far as they are concerned in emerging economies, which-we believe-are essential elements of any financial activity:

 

– Wealth

– Creditworthiness

– Investment

– Profit

– Money

– Bonds

– Debenture.

 

 

 

 

 

 

 

1.2 The General Principle of the Reserach

The general principle of our research moved from the premise that, because economics is a science like physics (a science that deals with matter and motion created by the nature, so unmodifiable by human artifices), or any other science that is based on natural principles,  it should exist a natural condition for which human societies (as any other living beings society), tend to develop autonomously culture, art, and economy.

Now, if culture and art can be developped by natural processes and media, in the same way should be developped economy.

To devolop economy it is necessary ‘to give and to receive credit’. This function is to Finance.

The modern western economic culture is based on the assumption that in any economic investement there has to be a financial capacity expressed in money which is located inside the human society, of course. So, the only problem is that human society is splitted, by impositive laws, into different markets which usually ignore each other, so the instinct (a natural condition) to exchange (in the ecnomic sense) is repressed by political, religious, or fanatic interests.

They could-so they should-exist processes and/or proceedings for which it is possible to self-generate the financial capacity inside a market, as it is possible to self-generate the capacity of any other factor of production and/or demand.

If at the moment we can not see such a possibility that is due to our mental schemes which often make us believe that Finance means only money and not credibility.

 

 

1.3 The Terget of the Research

Then, the scope of the reasearch is to identify wheter and how Finance (considered as a production and demand factor) can support the improvement of wealth such as intended in the economic sense through investments, in order to distribute profits.

 

In the economic sense wealth improvement  indicates the production of more or newer goods or services wich have the quality of being exchanged with other goods or services.

Therefore, in our research Finance will be considered as a medium to produce new wealth, in opposition to any other consideration for which Finance can be considered as a medium to redistribute existing wealth.

 

Etimologically the now virtually defunct weal  (Old English) meant ‘welfare’, and also ‘riches’. The abstract-noun suffix –th  was added to it in early Middle English to produce wealth..  This also originally meant ‘welfare, well-being’ as well as ‘riches’, a sense which now survives only in the compound commonwealth..

The only word which is linked with wealth is the adverb well ‘satisfactorily’.

Welfare can be either the state of doing well, especially in respect of happyness, well-being, prosperity, or the organized efforts for the social betterment of a group in society, or the individual and social improvement in the economic sense.

Riches comes from the French richesse  which is the substantivation of the adjective rich.

The original meaning of rich was ‘mighty, noble’, and it goes back ultimately to the Indo-European base *reg-  ‘move in a straight line’, hence ‘direct’, hence ‘rule’, source of English right, Latin rex  ‘king’ (ancestor of English regent, regiment, etc.).

The Old Celtic equivalent of Latin rex  was rix  ‘king’. This was borrowed into preistoric Germanic, where it subsequently evolved into German reich , Dutch rijk , Swedish rik , Danish rig , and English rich . (It was also taken over by the Romance languages, giving French riche ,  Italian ricco , etc.). The sense ‘mighty, noble’ survived in English into the late Middle Ages, but ‘wealthy’ had started to develop in Germanic, and eventually saw off ‘mighty’.

The words linked with rich are: regal, right, royal.

 

The meaning of economic wealth is quite different than that of moral wealth, where the first indicates tangible things, while the second indicates untangible qualities.

Economic wealth is basically produced through labour, and/or entrepreneurship. So any labour (manual or intellectual) and/or entrepreneurship must have a profit to produce economic wealth. Anytime labour does not have a profit it can produce moral wealth (the positive aspect), or slavery (the negative aspect). Both aspects have no economic value, because moral wealth does not produce -in a strict sense- goods or services able to be exchanged, and slavery does not produce a profit at all.

Therefore, because moral wealth can have no profit by definition, it can be reached only through a continous flow of help, such as donations or charity.

In economy donations and charity are worthiless if they have no capacity of generating profit, as it is economic worthiless Finance when it speculates only.

The production factors are: nature, entrepreneurship, labour, financial capital, technical capital, and risk.

Each of them have a remuneration which has a particular definition. Nature is remunerated by royalties; entrepreneurship is remunerated by profit; labour is remunerated by salaries; financial capital is remunerated by interest; technology capital is remunerated by royalties; and risk is remunerated by premium.

In economy each production factor is remunerated. Slavery has no economic relevance because it is not remunerated, as well as charity.

 

 

 

 

 

2. Targets of the reaserch.

 

We can identify the following theoric categories of wealth:

                                  

a) Material goods or Wealth:

any phisical good or service-individual or collective-able to generate profit; (consumer and/or investment product, such as real assets, plants, services,);

 

b) Natural resources:

any movable or immovable goods and resources related to a territory which can generate a profit;  (water, wood, underground, sea, etc.);

 

c) Natural beauties:

such as amenities of the background and environment.

 

d) Cultural attractive:

– Spiritual Patrimony: any non-phisical product or human quality which can generate a profit; (mind qualities related to religion, philosophy, etc)

– Artistic Resources: any product related to arts (paintings, handcrafts, etc.) which can profit.

– Cultural Patrimony: any capacity of the human mind to learn and elaborate proceedings which can generate a profit;

 

f) Playground: any wealth increase related to the improvement of the previous items. 

Swiss as the playground of Europe. (See the theory of inverse marginal utility).

 

The major target of the research is to identify when and how it is possible to transform the forementioned riches into creditworthiness which can raise financial instruments to make new investments.

 

Figure 1 identifies the targets that usually can be reached with the three major types of approach to emerging economies or to economies in crisis, which represent the two conditions in which liquidity is very poor, and sometime completely missing.

 

 

Fig. 1

EMBED Word.Picture.8

a) Charity is able to improve wealth in the short period, for it faces with desparate situations where the alternatives are survival or death. Charity is not able to go further on (and in most cases it does not want to go further on).

 

b) Public procurements have shown the sole capacity of transfering wealth from richer people to poorer people with no increase in total wealth.

In the Mezzogiorno of Italy and in the Former Estern Germany, in a full competition context,  public procurements have generated dameges more than advantages, because local companies have no possibility of competing, so any public deficit spending can not ignite further investments.

 

c) The development of local entrepreneurship is the only way of generating new wealth because it can ignite the economic accelerator principle.

 

 

 

 

Comment:

 

Islamic economic development model is quite different than that of western economies, for does not grant loans or credits for interest.

Rather it finances industrial development projects by holding equity capital or granting loans at a nominal ‘commission’ rate. Islamic Development Bank, for example, extends loans which assist member countries in financing essential imports.

 

Similar to the Islamic principle is the Judaic principle where at each Jubilee all debts shall be remitted and all properties sold shall be returned.

 

 

 

The inverse theory of marginal utility.

 

Marginal utility is the extra utility obtained from an extra unit of any good or service.

Matematically expressed as:

 

ΔU

MU = ————-

ΔX

 

where U is utility, X is the amount of a good, and ‘Δ’ is a ‘small change in’.

 

In practice it should sound likewise:

If an individual is very thirsty he is available to spend a lot of money for the first glass of water, because the marginal utility is ‘vital’; he will spend less for the second glass of water, and less and less for any further additional doses, because their utility decraese with the decrese of the need of drinking.

 

But, when we face a problem of investing in develiping one of the categories of wealth we are dealing with, any individual will have increasing marginal utility for any increasing investment dose, because the more he spends in investing the more he gets in marginal utility.

Matematically expressed  as:

MU = ΔU  • ΔX

In practice:

If an individual has a house in a poor quality area, the economic worth will be of ‘X’ amount. Now, if he spends (together with all the other proprietors in improving all the buidings and the area itself) 100 units, at the end of the investment period his patrimony will not be ‘X + 100’, but ‘xX + 100’ where ‘x’ is the coefficient of multiplication of his marginal utility.

This coefficient increases at each further investment up to the saturation of the maximum worthiness of the area, but anyway it increases , in opposition to the general theory of marginal utility. In effect, in the case of an investment for the improvement of a territory (quartier in a city, county, country, etc.)  the worth of each single ‘unit of investment’ (dose) is inverted to the marginal utility, because the more we invest the more we increase the value of that territory, consequently the individual quotas located in that territory.

The only condition needed to let the model work is that any intervent has not to be distructive.

    

 

                              

 

3. Definitions. (omissis)

 

 

4. Patrimony and creditworthiness. (omissis)

 

 

5. The construction of a general matematical model. (omissis)

 

 

6. The construction of a general technical model. (omissis).

 

 

7. The identified operative creditworthiness models.

 

 

 

 

At the moment we have identified a few operative models which to work with, such as:

 

7.1 – The contact model – Charity as order and ruler.

 

7.2 – The context model – Culture as order and ruler.

 

7.3 – The impositive model – Regime law as order and ruler.

 

7.4 – The remunerative model – Profit as order and ruler.

 

7.5 – The conditioning model – Charism as order and ruler.

 

In the contact model charity is the only ‘order and ruler’ we can identify, where for order we intend the rules which conduct the operations.

The contact model of investment is based on particular scopes, which have poor economic effect, such as humanitarian aims, proselitism, acculturation, etc.

The result of those approaches on the improvement of what we have identified as ‘wealth’ can be observed in Fig. 1. The only financial model we can see in this approach is based on the employment of savings, grants, donors, etc.

 

In the context model culture is the order and the pace maker of the investment.

The definition of context model is borrowed from the theory of communication which states that no information can become communication if the transmitter is not able to identify an adapt the context of his information to the context of the receiving part.

In the economic theory that means the necessity of adapting any investment to the culture of the society whose need has to be satisfied. Our context model of investment moved from the consideration (verified in the Mezzogiorno of Italy and in the Former Democratic Republic of Germany) that no public deficit spending and no public procurements have been able to improve wealth in those areas. On the contrary, public investments have degenerated more and more an already degenerated economic culture. In an interview held by Herr Gussen to people in Cottbus (Magdeburg Land) to the question: “What would you like to do to improve your economy?) the most common answer was: “We want to be granted from the Government”.

The contex model of investment tends to develop local entrepreneurship based on local culture.

The only limit of the model is the poor capacity of adapting and accepting a more international context, so the capacity of competing in international.

The advantage of the model is its capacity of igniting a very high economic accelerator principle in the short time.

 

In the impositive model the Regime law is the impositive order and ruler of any economic activity, as in the former USSR, for instance.

The limit of this model can be identified in the missing of any efficiency in any economic activity or field.

The advantage is given by the fact that, because of a closed market, there is no competition, demand is not free, and production can invest and produce anythingh that have the appearence of being accepted.

 

In the remunerative model profit is the order and ruler, where for ruler we intend a set of rules (public or private) which steers the concept of profit in the whole economy.

Rules can be of common law or positive law. They can be settled by Public Organizations (National and/or International Parliaments, Governments, the World Bank,) or by Private Organizations (i.e., the International Chamber of Commerce,) which by its reputation can be considered as Institutions.

For long time, Profit has been the only element which recognized the validity of any human activity, where working for nonprofit meant the condition of being a slave. In a more modern context, nonprofit works are penetrating in several fields of social activities, where nonprofit stands for ‘profit not to be distributed’, but reinvested in the same or collateral activities.

 

In the conditioning model  charism is the ruler and the order is accepted by everybody by definition.

Of course such a condition can be not so static and absolute as stated, and a lot of variances can be found in any real model. Nevertheless, charism is a dictatorship accepted and welcome.

Economy can not accept such a model because it limitates the demand function freedom.

 

 

 

 

 

8. The analized new financial models for emerging economies.

 

Between the financial models we have analized, we would like to pose to your attention the following major models, which we estimate the simplest and most reliable to be applicated.

 

7.1   – Territory’s Innovation

7.2   – Natural Resources BondsDebenture

7.3   – Natural Resources Financial Trading

7.4   – Real Assets Financial Trading

7.5   – Real Assets Bonds/Debenture

7.6   – Agriculture Resources Financial Trading

7.7   – Agriculture Bonds/Debenture

7.8   – Financial Assets Trading

7.9   – Savings Trading

7.10 – Constructions Bonds/Debenture

7.11 – Public Utilities Financial Trading

7.11 – Public Utilities Bond/Debenture

7.12 – Privatization Bond/Debenture

7.13 –

 

 

Of couse, each model is linked in several senses to one or more of the others, so that we can state that it exists no absolute innovative finacial model for emerging economies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9. The financial model “TERRITORY’s INNOVATION”.

 

From the forementioned models, we are reporting below the mathematical descripion of the first one, which is under test in Italy in the Regione Calabria.

The reason for which we are using the “Terrutory’s Innovation” Model is that, in order to reach the EURO membership, and because of its abnormal debt, Italian Central Government drained in 1997 the equivalent Lira of some US$ 130,000 billion from funds to be distributed to Local Governments, in order to reduce its debt, and to respond to the Maastricht’s parametres.

Therefore, liquidity is completely finished, and neither Central nor Local Governments have any possibility of fundind public investments.

The model is mathematically expressed as:

 

 

Given

 

(1) W = f(Nr,Nb,Ca,Pg,Ra)

 

we found

 

(2) W= (Nr + Nb + Ca + Pg + Ra +) I/C

 

where

 

 

 

W = Wealth

 

Nr = Natural resources

 

Nb = Natural beauties

 

Ca = Cultural attractive

 

Pg = Playground

 

Ra = Real Assets

 

I = Financial Profit

 

C = Creditworthiness

 

 

Note:                                  

a) Wealth:

any phisical good or service-individual or collective-able to generate profit; (consumer and/or investment product, such as real assets, plants, services,);

b) Natural Resources:

any movable or immovable goods and resources related to a territory which can generate a profit;  (water, wood, underground, sea, ground, etc.);

c) Natural Beauties:

such as amenities of background and environment.

d) Cultural Attractive:

– Spiritual Patrimony:

any non-phisical product or human quality which can generate a profit; (mind

qualities related to religious, philosophy or other);

– Artistic Resources:

any product related to arts (paintings, handcrafts, etc.) which can generate a profit.

– Cultural Patrimony:

any capacity of the human mind to learn and elaborate proceedings which can     generate a profit;

f) – Playground:

any wealth increase related to the improvement of the  previous items. Swiss as the   playground of Europe. (See the theory of inverse marginal utility).

 

 

 

Comment:

 

The financial model “Territory Innovation”  is particularly suitable for “context model” creditworthiness, where the employ of local entrepreneurship can raise a very high incentivation to invest, an immediate ignition of the accelerator principle and a very high increse of economic culture.

In a small scale we are trying to test the model in Italy, Regione Calabria, Harbour of Gioia Tauro and sorroundings in a Plan of Urban Restructuring, related to the Harbour development.

We estimate we can raise, versus a proposed public investment of some US$ 15.0 million, a private investment of some US$ 20.0 million through  direct partecipation of private individuals and companies to the total investment, which could short-circuit the public investment too.

The first response is expected by 3d Qtr. 1998.

If results will be positive this could witness that in one of the most troublesome part of Italy it is possible and suitable to raise private investments in connection/or substitution of public investments, when people was earlier oriented only to receive Governments grants, which never ignited any accelerator principle.

Our proposal has been accepted by private investors once we have had the opportunity of explaining the theory of the inverse marginal utility theory, and the expected result of the investment.

Just to give an idea of the difficulty of this test we have to point out that our proposal has been neither funded nor paied by any public Institution -neither central or local- because that would have raised the attention and intromission of local pressure groups.

From the investment we foresee to generate some 2,000 new jobs in the first three years and a trend of inducted new jobs of 100 people a year for the following ten years, while current parametres of job creation through public grants is one job per US$ 700,000.00

Now, we perfectly realize that this context could be estimated a little bit different from any other context of an emerging economy, but personally we do not agree, and we can witness the result of the survey which moves to this conclusion.

 

In the Urban Restructuring Plan of Gioia Tauro we have assumed the following very simple financial model, and than we have played with the positive cash flow to go on.

 

 

If from (2)

 

W= Ra  (I/B)

 

given

 

Ra = LIT. 2.000.000.000

 

B = 90%

 

I = 40% profit a year

then we have:

 

a) W, in a year :2.000.000.000 x 0,90 x 1,40 = 2.520.000.000  (at simple interest rate)

b) W, in two years:2.000.000.000 x 0,90 x 1,40 x 1,40 = 3.528.000.000 (at comp. i. r.)

c) Ra, at beginning time = 2,000,000,000 – Ra, at final time = 6,000,000,000.

 

 

NOTE:

– Capital guaranteed by collaterals issued by local banks and investors.

– Investor can not discount the profit of the investiment before one year.

– Financial profit obtained through a financial investment program.

– Public funding expenditure no more necessary.

 

 

The increase of the single elements of W, can be estimated as follows:

 

ΔW = (Total Wealth increase estimation) = 125%

 

ΔNr = (Natural resources worth increse estimation) =     0%

 

ΔNb = (Natural beauties worth increase estimation) = 200%

 

ΔCa = (Cultural attractive worth increase estimation). = 100%

 

ΔPg = (Playground worth increase estimation) = 200%

 

ΔRa = (Real Assets worth increase estimation) = 300%

 

ΔC = (Creditworthiness increase estimation) = 200%

 

 

 

 

Comment.

 

We estimated the deltas as follows:

 

a) ΔW

The estimation of the increase of the total wealth comes from a pondered average of the single items increase.

 

b) ΔNr

In this case for natural resources we take into consideration only resources such as gas, water, oil, wood, etc. exploitation. So such increase is equal zero.

 

c) ΔNb

The estimation of natural beauties comes from an ‘a priori’ simulated survey held on a “Plan of Urban Restructuring basis” (considering that we have no other way of testing the expected results).

The Natural beauties worth tooken into consideration appeals to elements of needs satisfaction such as:

– living standard;

– facilities (improvement of public and private services);

– environment evaluation.

 

d) ΔCa

The cultural attractive improvement has been estimated using the same procedure as for natural beauties.

 

e) ΔPg

The playground worth improvement has been tested following a survey  of Boots & Partners who analized on request of the Italian Government the reasons for which foreign multinational companies preferred to invest in Countries such as Galles, Scotland, etc;, more than in the Mezzogiorno of Italy. Betwen the conclusions of the survey the Playground negative impact has been considered and tooken as term of referement. Testing procedure as per description under point c).

 

f) ΔRa

The improvement of Real Asset worth has been verified with most italian experts.

 

g) ΔC

Creditworthiness improvement has been verified with most prime italian banks.

 

 

 

In this test we would like to demonstrate that in many markets there exists the possibility of self-financing most investments. That is a natural ability or capacity.

What Finance can do (where applicable) is to push investor to react to a “placebo funding”, as medicine does in its field, where placebo stands for “an inert  medication used for psycologic reasons or as a control”.

In our case placebo funding can be efficient because we are in a market where it is possible to raise investing capacity from natural, financial, technical and entrepreneurial resources.

Our placebo is the proposal of a public investment, which has reaised the attention and the will of investors, but which stands-on immobile, waiting for the rise of local entrepreneurial capacities.

At first sight, such a proposal seemed ingenuous to us too, but nevertheless we can state now that it is going on quite good.

If in the next few months we will see the first positive results, than we can state it works.

 

We are convinced, however, that, under given circumstances, this process can work even in the poorest economies, with effects related to the economic instruments and artificies used, and that Finance can be the placebo, so it can reach effective results transfering only a minimal part of resources.

 

 

Enrico Furia
Enrico Furiahttps://www.aneddoticamagazine.com
Multilingual executive with experience in international finance, foreign investment, business development, negotiations, product planning, strategic planning, ICT, energy, academic and vocational teaching. Strategist with proven success in pinpointing profitable opportunities while realizing corporate objectives Established solid business relationship, maintaining a large network of international contacts. Motivational leader and team builder experienced in cross cultural teaching, management, and people development. Hands-on manager with sound technical skills and global perspective of potential markets Multifaceted financial advisor on information systems, project management, energy, banking, and investment analysis. Posts

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