Labor Markets reforms: What really matters with it?

From the general equilibrium point of view, markets works propely when they are flexible enough to allow its equilibrium.Mosts of labor market reform, work toward that direction given the fact that unemployment is considered a disequilibrium.
The current global economic do not necesarily is founded on that premises.Unemployment might be part of a search process.Of course this search is the result of job expectations.If there is not such expectations, people just get out of that search process, and out of the labor force as well.
The point is that labor market reforms, usually take into account the first approach.It deals with lower entry cost to the firm, throughout lower exit cost.The lower this exit cost, the higher the chance of hiring someone.But it does not consider the training qualification variable.Firms need labor whichs is complementary with capital.It is not just any kind of labor. The better qualified the labor is, the more effective such a reforms might be.
But as usual, that qualification is not good enough, thus it might be insuficient to solve the problem a labor reform only focused in the entry cost.
Labor market reforms should incliude the training factor,just because people and firm search for training match and training qualification respectively, which can sustain labor services flow with high productivity. No matter the low cost of hiring , firm will not get into its productive or management process, people not qualified for it.Therefore, some complementary incentives to improve on the job training ,works in the right direction.

Small and medium size enterprises: The road to more jobs (II)

The global economy needs to create more han 600 million jobs in the next decade.Three quarter of them because of population growth..-
The pice of capital goods is decreasing because of the scale factor at the global economy level, technological progress, and free trade.This lower prices induces a substitution from labor to capital specially in the manufacturing sector ,which might imply slower rates of employment gains in the that sector.Besides ,current unempolyment levels in ost of the advanced economies , make aditional pressure on the employment gains side.
Therefore, the goal of creating more jobs have some constraints other than those related to labor policy desing.
Thus ,the question is where those jobs will come from ?
The answer to this question is the importance of SMZE to the issue. It means that policy makers have to focus on those incentives more suitable to let the SMZE enterprises to do what it can do best : Create jobs, and support innovation. On the other side ,much of those new jobs need to be more quailified , given the fact that these kind of jobs are complementary with capital goods.-
The whole design of SMZE policies is a new challenge for the traditional macroeconomics setting, quite fiited to aggregate variables, but not that much prepared to understand the new dinamics of the mix economics (micro and macro at the same time).
Some of those new policies might include.
a..- Tax incentives
b. On the job Training facilities
c.- Closer link with educational entities (Univerisites)
Better market flexibility might help, but not that much if it does not considers more qualification and trainig needs.-

Small and medium size enterprises(SMZE): The road to more jobs (I)

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SMZEs have been considered in many countries ,to be the core for economic dynamism and growth. When these firms get its market target and become well positioned to compete, it creates not only additional jobs, but also are a source of innovation .
Global economy characteristics have important implications for SMZEs: It increase connectivity, it increase markets size ,it develops new market segments because of fragmentation, it foster innovation and value added.
On average , 98,5% of total enterprises in Latin America, are SMZEs. The remaining 1,5% are in the upper size category .It is well known the impact SMZE have on employment: 75%(roughly) of employment in Latin America economies arise from SMZEs. Leaving aside Costa Rica which has the highest level of employment arising from big enterprises (45%),,the percentage goes even higher (almost 80%).These data are not accurate enough to draw a definitive assessment , but it make clear the relevance for the social outcome , the SMZE have for the economy. Even though they do not have a strong performance in the exporting sector (15% in Argentina,2% in Brazil,4,8% in Chile, less than 20% in Mexico ,and 2,2% in Peru, Source: Center for the promotion of SMZES ,R Servat. Peru, 2005), the main positive externalities of these firms, are jobs. In 2011, unemployment in Latin America was 6,8%,probably because of SMZEs employment gains due to economic growth.
In fact, the road to employment is within the SMZEs area, no matter whether they are from the services or productive sectors. However, it is not a wise approach to take them for granted , because SMZEs also have weakness ,which can be decisive in times of economic crisis to fulfill its expected job creation capacity. Let review some of them :
a.-Limited access to financial sources, which is an important constraint when the economy is in recession. The Chilean experience on this issue (1997 ,2009),shows that SMZEs access to stable credit for cash flow ,does matter.
b.- The quality of management is behind the best practices .Most of Latin America SMZEs, do not have a standardized procedures and quality standards .They survive with informality , which it turns out to be a constraint for the capital accumulation process.
c.- Low level of networking support for its operations .In Chile , only 35% of SMZEs(roughly) ,have internet connection,(the area of services instead (commerce )with 44%).Thus, without the internet support, productivity is lower than otherwise, market information is available with delays and lags which means loses of business opportunities.
All of these weakness, do not mean that SMZEs lack of strengths. They do have the ability to get innovation flow, they do have flexibility to adapt itself to new market conditions as well. More than 60% of global business come from SMZEs. In fact, because of theses strengths, these kind of business is the one which have benefit most, from global economy growth.

Germany at its best hour: Leadership for european economic recovery

Some economic agents might be surprised about the recent downgraded by ratings agencies, of European countries, Banks and even stability funds, but perhaps much more from it, because it did not hurt (at least in the short term) too much the market expectations about European economy prospect , to cope with its debt constraint . .-
Well , maybe an analogy might help.It is like you drive in a Dakar-America rally, or for this matter any rally . It is not just about the driver , but also about the engine. There has been criticism about the driver in the Euro zone economy , whether it is the European Central Bank, or Politicians, but the engine (German economy) has been strong enough to keep going. The markets expectation concerning Europe, might well be also shaped around the German economy prospect to keep the pace on growth .-
Thus, no matter what the ratings agencies said, markets look at the performance of the main engine of Europe economy ,as the key force capable of getting things back to normal , including the credit worthiness. However, it is not only about the German economy(the engine), but also about the required reforms to keep the pace. Let go first to the engine , then to the reforms.
As a consequence of the financial crisis , Germany economy (GDP) shrunk by -5.1 % (2009).It was the deepest fall in more than sixty years. but the two following years (2010, and 2011), the German economy made strong gains in economic growth (3%), which allow it to have an healthy fiscal position due to tax increase by 6% because of growth (meaning 1% deficit, well below Euro zone average), and public debt under control.
Although German economy is considered to be an export driven economy, (40% of its GDP comes from exports),consumption and investment ,made its way through in 2011 to increase up to 1,5% , the highest in five years (www.Spiegel.de, 1/12/2012).
Besides, German economy was leading contributor (2010) for intra EU share of trade in goods, services and foreign investment which is more than 50% of total .Moreover ,Germany rates of Exports growth kept a steady pace (16% in 2010).Thus ,Europe expectation to deal successfully with the debt crisis implications are linked (at least 50%)to Germany economy performance. Will it be enough to avoid the risk of recession in the euro zone?.It will depend upon the complementary strategy, Germany and its allies apply to support neighbors´ economic growth.-
Although the consensus forecast 2012 for Europe, goes into the direction of slower economic growth with 50% probability of a recession, the strength of the German economy engine, might play a key role to get a better performance for the euro zone economy, such that the recovery comes along sooner . However, it all comes down to the implementation of proper reforms and policies specially those aimed at supporting growth (medium size enterprises) and competitiveness( higher efficiency on States programs). Therefore ,It is not just a matter of austerity ,but also of economic growth. The German made engine,is still running.-

Macroeconomic Policy and Central Banks: The Financial variables are key
Most of the economies which have autonomous Central Banks , might count on it as a key tool for price stability .Latin America in the nineties started off with its own experience on the matter ,and the outcomes so far are pretty satisfactory. On average, Inflation rate has been steadily going down , up to a one digit level , something quite unusual a few years ago. Between 1972 and 1987 the average rate of inflation in six countries (Brazil 166% , Peru 2789%, Chile 802%, Bolivia 602% , Mexico 3710% and Argentina 257% ), was 150% on a year by year basis !.
On the other side, while in the year 2010 the average inflation rate in Latin America was 6,6% , during the year 2011 it is expected to be 7,7%. The inflation rate for this year, is going to be a main concern for Latin America Central Banks. The path of strong economic growth ,and the risk of inflationary pressures which comes along with it, becomes the issue to deal with it.
In this case the usual (textbook) approach, is for Central Bank to increase interest rate. Another matter is the speed and the magnitude of such increases, which depends on each economy particular situation. The fact is that before the global Financial crisis (2008), this kind of decisions was based on inflation gap ( The difference between the spot and the long run target inflation rate), without any consideration (aside from the output gap),other than to get inflation back on track.
The financial events of 2008, made clear that Central Banks must also include within its policy options the financial sector exposure to systemic risk. As interest rate goes up, Banks begins to feel the impact on its loans performance. The probability of default rate might increase. At the extreme (2008), it might get the whole financial system with it.
The contractive nature of increases in interest rates, impose an additional restriction. After all, as the economy cool itself down , the inflationary pressures also goes down calling for slowing the pace of interest rate increases .Besides , all of these chain of events works with lags, therefore in the mean time the issue of credit access to overcome the slower demand, with higher expected default rate, become critical. Thus, the financial sector enter into the optimization rule twice :
a.- Its risk exposure, which might be a threat to the whole financial system as the interest rate goes up.-
b.- Its flexibility to work counter cyclically, to financing the cash flow when firms needed it most, mainly those labor intensive medium size firms.
It might be the case that when condition (a) and (b) are so to speak, less than 0(high risk exposure and low flexibility to finance cash flow), Central Banks might turn out to impose unexpected efficiency loses on its effort to get inflation under control. The Chilean experience in 1998 and 2009,suggest that the Central Bank approach ,misses out the integration of key financial variables into the macro policy decision model. In both cases, the Chilean economy got a mild recession (-1,5%) following a previous steady pace of economic growth.

2012: Some guidelines

This year has been plenty of uncertainties concerning the global economy possibilities to overcome the spillover effect of the financial crisis of 2008.Policy makers, confronting tough choices about fiscal and monetary policies, and politicians thinking about the next election (whenever it is),rather than the next generation, made the whole year a mixing experience of mild recovering on the one hand ,but soft recession on the other hand .-
On the other side, emerging global partners are shifting the attention of global economy toward the pacific .Latin America is on the trend to increase its focus on the pacific, which undoubtedly will have an impact on both its economic growth prospect , and its strategic importance as the key supplier of necessary raw materials . Therefore, this focus toward the pacific will also have geostrategic effects, unclear to foresee completely up to know, but for sure, Latin America is increasingly positioning itself as a reliable alternative for global investment flows as this trend goes along .
Thus, there is currently a change in global power parameters as long as geography ,market size, knowledge , and GDP share at global level matters. This is not something new, but this year has made it all a fact .-
What can we expect for the year 2012?.
a.- Latin America ,might become a key player on the solution side of the global economy constraint. (4,1%, 4,4% of economic growth in 2011,and 4,3% , 4,8% expected for 2012, ). This expected outcome, is an incentive for more investment which means more production, less unemployment, more consumption, more imports (machinery ,equipment and goods ),from economies which needed it most . -
b.- Latin America moving forward with its integration process, but mainly based on the private sector lead .Business culture work faster than politics, as a tool for integration. This has been the case since the nineties, and it will continue in the 2012. This process will imply to have more pragmatic Governments, complementary with private sector to support the still low percentage of intraregional trade (20%). It is also expected , to go further on transforming the Latin America State .
c.- Global economy growth will stay at a soft pace, as long as Europe do not solve its debt constraint and inflationary pressures arises in some emerging economies. Latin America might also have the impact of such restriction , but not strong enough to reduces its prospect for growth , although depending on China economy keeping strong demand for raw materials.
d.- Europe is increasingly moving into the territory of economic recession, which might be longer than expected unless there are some additional definitions on the nature of its institutional framework, currently based only on prices stability, leaving aside financial stability and its impact on growth. There has been some progress , but market anxiety will push hard for more.
e.- The USA economy keeping its (slow)pace toward a full recovery , but depending for it ,upon a more dynamics global economy .-

Will the Euro Survive ?: The Eu at its critical hour

Will the Euro survive?: EU at its critical hour

Most of analysts agree that the chances for the Euro to survive the current debt problem in the EU , goes along with Central banks focusing on financial stability as much as they do on price stability.-
The problem is that in most of the world economies ,Central Banks have made of price stability a trade mark based upon its importance for sustainable economic growth. But as the financial crisis of 2008 (and many other crisis as well) showed , it is hard to get economic growth ,when banks cannot keep the cash flow working.
There are a lot of reasons for Banks to be in a weak position, but probably the most complicated deals with confronting speculative forces. This is one of the reasons that the “lender of last resort” comes along as key partner to control what it might be a liquidity problem to become a solvency problem, because the fall of the financial system ,imply a longer and more difficult period of recovery.-
When such a lender of last resort it is not available, Banks must go on its own. In this scenario nobody trust nobody, and hoarding money becomes an alternative ,although it means a higher chance of credit crunch for productive purposes. Thus , at this stage it is the moment when the price stability focus , become a source of recession instead of growth.
This paradox is to say the least puzzling because it contradicts the main stream of macroeconomic policies, whether it is monetary or fiscal policy , which is to play rules concerning economic growth stability. Therefore, there are three simultaneous variables for central banks to take care of : Price stability, financial stability and economic growth stability. This is not an impossible triangle, but it assumes the availability of proper tools both legal and economics ones.-
The EU economic institutional framework, was not designed for situations like the current one .If that would have been the case, probably the Euro never would have come to live, because economic discipline was a necessary condition for the whole experience to be successful .However , some country members saw the monetary arrangement , as a ticket to wasteful spending anyway .Most of them thought that they were too big to let them fall, but a few if any, thought that at the same time , they could become too big to save without risking the fundamental of the Euro currency principles.
The EU is trapped within its own design. Any modification needs more time than it is available. Besides, without the lender of last resorts, the options are between two social cost : economic recession, or the euro going to the economic history book.-