Sunday, February 6, 2011

The Tale of 2 Dollars

Posted by Dandarius on February 5, 2011
On Transition California

To clearly understand the power of self-reliant economics as an investment model, let us follow the adventures of two dollars as they go out to seek their fortune and make their mark in the world.

Dollar #1 ended up in a civil engineering construction company. The company did relatively well. They won a contract with the IMF to build an oil pipeline in South America. The cost of the pipeline ultimately was the responsibility of the local government, which would end up paying for the interest on the loan to build the pipeline for many years. This road made it possible to transport oil from drilling operations in a remote section of the country. The profits from the drilling were supposed to help pay for economic development projects to benefit the local people. Unfortunately, they ended up being used to pay for the interest for the loan to build the pipeline but this did not affect the profitability of the construction company, which was paid for by the IMF who loaned the money to build the road. And so after ten years, the $1 investment was worth $3.84

There was unfortunately a minus side – environmentally, socially and economically. The pipeline had serious leaks and caused an incredible amount of pollution. The areas for miles around the drilling sites were blighted. The communities protested, but they were not shareholders, and the construction company felt itself answerable first and foremost to the shareholders. The construction company did provide a large number of jobs while the pipeline was being built, but these were generally low paying subsistence level jobs. In any case, workers generally spent all their income in stores which stocked items imported from other places. For this reason, there was no economic development in the area other than the drilling itself. 100% of the profits of the drilling operation thus left the country. The local area, being impoverished, experienced massive social unrest and unemployment. There is no way to put a price tag on these costs.

Dollar #2 went to Working Villages. It was used in the set-up and operation of grain mills. At an initial start up cost of $133,000 and a yearly operating cost of $30,000, the mills had expenses of $433,000 over a ten year period and income of $2.4 million. Net income was almost $2 million on an initial investment of under $200,000. So Dollar #2 had grown to $10 in the 10 year period.
But the story of Dollar #2 had just begun. The $10 was reinvested in development of a chain of cooperative stores, which stocked food, clothing and manufactured items produced locally at prices below the cost of imported items.. All the money earned by the local farmers during the 10 years - about $10 million was used to buy products in the stores. The stores sold items at a 25% net margin, and so produced a net profit of $2.5 million from total gross sales of $10 million over the period, from a startup capital of $100,000. The $7.5 million in gross sales that were paid out to local producers and manufacturers were all recycled through the local economy multiple times. The dressmakers who sold their dresses bought food from local farmers, who in turn bought locally made agricultural implements. The $10 thus grew to $250.

The story of Dollar #2 is starting to get interesting! Income from the milling and the stores was re-invested in building local industries, including clothing, construction materials, furniture, agricultural tools, large fruit orchards, and a large dairy. Oxen were trained to plow and transport goods, enhancing worker productivity. One farmer with a trained ox team can plow at least 10 times more land than a farmer plowing by hand. Agricultural output thus soared.
Because the economy was self-reliant, every transaction within the village economy was recycled back into the local economy. It thus became increasingly difficult to judge profitability exactly, but we conservatively estimate that the original investment produced wealth in excess of $100 million in 10 years in this one village alone. Within 10 years, we expect to have replicated the self-reliant community in hundreds of locations in the region.
The ROI for Dollar #2 was $3.86 while at the same time, by building the local economy, the opportunity for future investment increased exponentially. A local economy that at the outset could properly utilize an investment of at most $200,000 had been transformed into an economy that could effectively utilize tens of billions of dollars – all of this with zero pollution or environmental degradation and total community support.

Which dollar followed an intelligent investment course? If we consider this from the standpoint of investment security, Dollar #1 was better, because the construction company had a proven track record, and was well capitalized. If we look simply at return on investment, both courses appear almost equivalent. But if we look at the long term picture, Dollar #1 created environmental and economic chaos, while Dollar #2 was instrumental in the economic growth of the community, without any pollution or social upheaval creating prosperity across the board.

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