Friday, December 30, 2005

2005 :concluding remarks

When it come to make the final balances of a year, it is usual to take notes of those events closely related to the daily news. After all, it is in the headlines that people ´s attention is focused on .However, let me consider from the economy point of view, both ,some facts and trends in the year 2005, which will stay over for some time before it elapses.
1.-Oil prices does not affects global economy ,as quickly as it did in the seventies.-
2.-Global trade is slowly moving toward a more balanced sharing of world markets opportunities.-
3.-China is the big global producer, USA is the big global consumer in the global economy, but Europe and Japan set the quality standards.-
4.- Latin America countries are moving to a different stage of mutual cooperation, based on its own autonomous capacities to support to each other. In other words, Latin America is becoming a political partner for global trade.-
5.- Latin America is moving to a “ Post Washington consensus” agenda , based on a new role (more restricted) for both markets and private sector , different economic priorities, and different sources of growth.
6.- Latin America does not depend as much on foreign aid as it was before. There are two new sources of regional funds:
a.- The income coming from relatives abroad which added up to MU$$ 40.000 in the year 2000.-
b.- The new local financial markets ,and its capabilities to sustain growth wit new sources of funds, such as bonds, allowing in the process, the allocations of capital to improves.-
7.- Chile is moving steadily to a higher level of development, based upon stable growth. Since 2003 the annual average rate of growth is 6%,and the forecast for the year 2006 is in the range of 5,5% - 6%.-
8.- Global warming, is becoming more an important variable for global business decisions.
So, was the year 2005 a good one?. A preliminary evaluation, indicates that this year was meaningful from the stand point of economic development. It was not a lost year. Global growth was higher than expected despite the oil shocks . What is going to be like the year 2006?. Some key elements :a.- The global economic institutions (WTO) are working its way to a new world markets set of opportunities for less developed countries. B.-Oil prices should stabilize to its long term trend level.-

Friday, December 23, 2005

Peter Drucker �s Legacy

It is highly probable that everyone in the job of running these days a business corporation ,had read something about Peter Drucker , sometime in his or her professional career. Even myself had to spent hours of reading his books in the seventies, while I was studing in the University.
It was so influential, specially for his ability to transform complex thing into the simplest and well connected one. For instance ,the battle for protectionism for manufacturing sector ;as a confusion of the symptom with the desease: The decline of manufacturing. On the other hand, his ability to foresees the future of management, has made possible that much of the discussion of today� s management challenges, are based on his ideas, which has allow him to be considered the Father of management.
The importance of human resources in organizations , knowledge as an asset for workers, flexibility throughout all organizational process, information as a source of power, new negotiations boundaries within the firm down the hierarquy scale, and the creation of a customer as a key job for executives, competition among industries are on the main stream of management .-
On the declining of manufacturing he said:
The decline of manufacturing as a producer of wealth and jobs changes the world's economic, social and political landscape. It makes ?economic miracles? increasingly difficult for developing countries to achieve. The economic miracles of the second half of the 20th century?Japan, South Korea, Taiwan, Hong Kong, Singapore?were based on exports to the world's rich countries of manufactured goods that were produced with developed-country technology and productivity but with emerging-country labour costs. This will no longer work. One way to generate economic development may be to integrate the economy of an emerging country into a developed region. This statement is applied to the Free Trade agreements within different countries, such as Nafta between the United States , Canada and Mexico ,or the Free Trade agreement between European Union and Chilean economic. Each one benefit form the other.-
His view that business have two dimensions :The economic and the social one, made the foundations of what today is called the Socially responsibility commitment Firms.
Finally, it is obviously not enough to resume his whole legacy in a short paragraph like this one , but it is essential for understanding the meaning of such a great man anyway. We usually believe that knowledge is on the history books written years before. Well Peter Drucker had the extraordinary intuition to allow us to foresee that knowledge it is what lies ahead of us.-

Pd : Merry Cristmas to everyone !

Saturday, December 17, 2005

Exchange rates fluctuations

Following Asian economic crisis, the Interim Committee of the Board of Governors of the IMF, stated that “ members should be able to choose a regime that is appropriate to their particular circumstances and longer term strategy. The choice of exchange rate regime, and the implementation of supporting policies, are critical for countries` economics development and financial stability, and in some cases potentially for the world economy”. The choice of an appropriate exchange rate regime should therefore be approached pragmatically.
Free floating exchange rates means advantages but also some risk. Nominal exchange rates fluctuations keep external shocks out of the real variables , such as business activity and employment. On the other hand it may cause excessive volatility and free ride risks. But free exchange rates fluctuations, also have distributional effects. A depreciation on domestic currency favour export producers but punish consumers. An appreciation favour consumers , but may harm export producers, depending on theirs management decisions .Therefore, considering risks, and distributional effects of exchange rates fluctuations ; Central Banks have “fear of floating”
The previous experience for Chilean economy was based on, Capital account regulations , while the exchange rate was quasi-pegged within a band that targeted the real exchange rate (RER).This instrument was of limited effectiveness, when the Asian crisis generated a negative external shock on exports ,and afterward on capital flows.
On September of the year 2000,the Central Bank decided to have a free floating exchange rate market, while keeping the chance to intervene under extraordinary circumstances. Since then, exchange rate in Chile have fluctuated with no clear long term trend, so volatility has increased, although it looks like it is part of the adjustment to a lower long term real exchange rate level . In fact, average real exchange rate in the period 1990-2005, is lower than the one of the period 1986-2005. On the basis of a long term perspective, this is a key factor, once it comes to the argument of whether Central Bank should intervene or not, to rescue the exchange rate deviation from its long term equilibrium value.
However there is an additional point. Chilean economy needs strong firms to compete on the global markets . Its level of openness, requires some known macroeconomics conditions, but also appropriate management models on the firms side, specially the type of model equivalent to the first best approach, which keep cost under control and productivity always increasing. The second best is to seek product differentiation, emphasizing quality and technical assistant .In other words ,this means, firms capable of facing different challenges. But conventional macroeconomics ,assumes no role for firms decisions process when exchange rates are moving in any direction. For instance, an increase the international price of exporting goods due to appreciation of domestic currency (looks the graph),call for the Central bank to intervenes to avoid the negative impact on exports. But, whether export fall or not it will depend on :
• The price elasticity of demand of such products. Low price elasticity of demand means a softer impact on export volume. High price elasticity of demand , means a greater impact on export volume. The former case, is typical of sophisticated product with high quality standards. The latter, is typical of agricultural products .-
• The firms decisions to reduce the impact of international prices fluctuations, on its export revenues. The firm may decide to work on either reducing costs, or prices to match the increases due to appreciation, lowering the profits. On a medium term scenario it is also possible to focus on new markets, and innovations to increase quality. Firms are no neutral when it foucs on international markets.
A competitive firm must be able to face different situations affecting either its price or cost structures ,without other support than its own efficiency level. What it would be the case whether shipment cost increases?. What it would be the case whether insurance cost increases? .Who would protect firms in such a case? .-
Central Banks loose some of its autonomy when intervenes to help some specific interest group and to harm others (consumers). This does not means that Central Banks, should evaluate carefully the every situation, but always taking into account firms capabilities to make theirs own decisions.

Saturday, December 10, 2005

Welfare State : Will be replaced by a New Service State?

Form the economics point of view it is usual to argue about the implications of welfare state. Although its popularity was widespread during the years following the golden age of industrial expansion and economic growth (1950- 1970),its consequences were quite difficult to understand for politicians, intellectuals and business man who take for granted the state support for its business decisions and social problems solution. After 1950,that was the case in most of Latin America countries, and of course also in Chile. In theses countries, this centralized focus for growth, meant an inward looking view of both economic growth and development, the famous ISM (import substitution )models. According to this view, because of unstable private sector, and dependency from the
advanced economies, the state should play an active role in the productive sectors, with markets interventions through heavy regulations, and social expenditures with the subsequent inefficient allocation of resources specially when it went out of the line, because they were not used up to the level of its potential. -
It is known that the productivity of resources depends not only of its uses, but also of its owner. Who care of others ´ property uses?. Public use of resources, may imply a lower productivity than the private use of resources. Corruption, mismanagement of public enterprises, over spending in useless project, are some examples of this statement. The higher the State participation in the economy , it means higher capture of resources(,Daniel Kaufmann), affecting the prospect for growth and poverty reduction
Given that there is scarcity of resources, the only way emerging economies may be more efficient in international markets is with a “lighter weight state”, which means a greater proportion of those scarce resources to be managed by private sectors. There is no way to get the necessary efficiency level and higher productivity ,while the state activity take an important share of scarce resources.
The traditional theory of comparative advantage ,is based on a fixed endowment of capital and labor to concludes that international trade is advantageous. It is a static view of trade. Globalization has made this view somehow outdated. The dynamic of high mobility of factors such as capital, technology, ideas, creativity and so forth, characteristics of global markets, requires a different approach to get the benefit of international trade. Those mobile resources goes where there are cheaper complementary factors such as labor and services. So, the new business scenario, requires competitive business, efficient government, complementary State, and flexible markets to get higher income associated with international trade. Otherwise, those countries which sustain these conditions, will get the main share of the benefits of global trade. For this reasons, important advanced countries ,are working through a process of reform to make adjustment to their welfare state . In Europe , Germany is engaged in an important process of getting a modern approach to what may be considered as a New Service State. This type of State role emphasizes a different relationship between citizens and the state, between the productive sectors and the state ,and between the political power and the state. The Services State is a smaller and a better one, and it replaces the welfare State, because it is related to the new needs of citizens such as local participation, security, markets information, job trainings, environment, and research. Welfare it is not about to wait for someone to help without cost, but to take advantage of all means available today for people to help themselves, paying a reasonable cost. In other words, higher welfare can be obtained with the complement of the State, not exclusively because of the State.-
Chile has gone a long way through it, the whole process is complex, but it is hard to believe in a different alternative, unless we all move the clock of economic history , backward.-

Saturday, December 03, 2005

Competitiveness :Challenges ahead

The World Economic Forum has made public its report with the Competitiveness global index, plus two additional indexes related to a better understanding of the dynamics of such process. Chile stay well above the most important economies of Latin America, measured by volume and added value to product (23rd place followed by Uruguay 54th place). The question is How Chile has been able to get such improvement?. The report itself give some answer , mentioning those factor which explain for other countries a relative lower position in the ranking : Political instability, Bureaucracy and corruption. Chile is better on this issues than its neighbourhood. How is it possible? . The extraordinary high cost of the whole reform process, carried out during the first stage (1974-1990),has created incentives to follow a consensus based agenda on key issues for the second stage (1990-2010), such as the reform of the state to make it more competitive, and smaller than what it was in the seventies (The subsidiary state concept, which allowed the participation of private sector to build up what it was usually known as public investment : new modern high ways, ports , and airport facilities), helping to release public resources to allocated them to social programs, improvements on institutional variables(financial sector reform , accounting practices supervision, public business information policy, business social responsibility ),and macroeconomic policy coordination based on rules. In other words, it is a unique combination of the private interest with the public interest, such as to make possible a sustainable increase in long run welfare levels. Is it enough? . It seems that there still a long way to go, in the modernization process. Of course the deeper each country goes into it ,the more feasible the remaining steps to be concluded and the better prospect for growth.-
The key fundamental of all the previous reform package, is to understand that the Role of the State, must be balanced with the role of the market in a complementary way. Too much State, can make heavy harm on the welfare potential of society. Too little State, it is also risky when markets fail.-
The WEF report also includes two additional indexes. The Growth Competitiveness index, and the Business Competitiveness index , related to company –specific factors to improve efficiency and productivity at the micro level.
On the Growth Competitiveness index Chile also is on the 27 nd place,(two places above 2004), which means it has the institutional support to sustain growth. On the other hand, the Business competitiveness index place Chile on the 29th place, (the same as 2004).It is interesting that this index allows to know the strength of national firms to do their jobs, which is to create wealth. In this case, this result shows what has been discussed on the academic level concerning the weakness in the management style of Chilean companies. They do not make well on technology information application to management, decreasing its expected productivity impact ,along with some deficiencies on the chain value added process.-
What lies ahead ?.Competitiveness is not an objective by itself, because it does not imply any specific result in terms of short run welfare increase . It is an important measure of some capabilities to pursue growth, which is the first step to increase welfare. From the long run perspective, it is positive to stay on the top 25 of the list, however the challenge is also to maintain and improve the conditions for higher competitiveness giving more attention to better environmental consideration, quality of education, and modernization of the State.

Saturday, November 26, 2005

APEC 2005

The word APEC ( Asian Pacific Economic Cooperation) maybe is an example of what globalization somehow means,( to make things both comprehensive and accessible for all ),but at the same time, keeping in mind that the real meaning and implications of this phenomenon ,is to acknowledge the importance of alliances . In the global world, associations, strategic alliances ,joint effort and partnership are the key to get the advantage of this process ,, and minimize its adjustment costs . So, it looks like the world economy is moving along toward a global network of commercial, economics, geopolitics and politics links, where everyone loose some autonomy ,but at the same time, everyone share the gains of increasing trade.
Well, probably that is the justification of the recent meeting of APEC in Korea .In other words, how to get the best of globalization with the minimum of its costs. But, there are also another important topics to take into account .
APEC was founded in 1989 by 12 founding members. It represents roughly one third of the world ´s population,47% of global trade, and combined GDP of approx UI$$ 18 trillion(more than half of total world production ).After a decade nearly all Apec economies have doubled their share of trade as a percentage of GDP. From the Chilean perspective,54% of its exports goes to APEC .
Its vision seek to emphasize the notion of a “Strong Asia pacific community”, which implies consensus based model of decision making, cooperation and voluntary commitment to assume obligations.
Its objectives are Free trade, and more investment level in the Asia-pacific area by 2010 for developed members economies, and the year 2020 for developing economies. Since its foundations has made constant progress to promote free trade, investments facilities mechanism ,and sustainable economic growth. Chile became a full member in 1994.
Chile by itself does not get the all benefit of trade with the Apec area, as it would get through higher integration with other Latin America countries like Argentina, Peru , Bolivia ,and Brazil. Why ?, because size matters!. A sample of shoes, to send to the China consumers market ,is equivalent to the annual production of the whole local industry. However, this integration process should be based on stronger private enterprises , capable of pursuing a “growth oriented “strategy, based on solid strategic alliances, along with complementary public policies “business orientated”. Actually, there is some structural gaps between theses economies, which make the whole process more complex .Thus, it is the right time to give the proper weigh to the lessons of the past. The lost decade can not happen again.-
In the seminar “The Asia pacific area and its Latin American projection”, held in Chile, last year ,was stated that to improve its attractiveness for foreign investment, specially that one coming form the Asia Pacific ,this continent should enforce the private –public alliance and integration among Latin American countries. This means that the challenges of opening the domestic economy to the world market ,of the previous 30 years ,are changing to a second stage level where coordination among different countries on key topics such as energy consumption, and higher volume for exporting are also important. The other side of the story, is to allow this economies to get a better access to all of its potential production.-

Saturday, November 19, 2005

Free Trade accord with China

Chile has a Free Trade agreement with China. 92% of Chilean exports to China, are now tax free, and only 52% of Chinese export to Chile are tax free. So it looks like a good accord, specially for consumers and producers who will have the time to adjust to the Chinese products competition. However, more important than that, from the China point of view, is the better access to the other Latin America markets (Brazil, Argentina) through the pacific ocean for its textile and manufactured products, investments and technology . On the other hand, improve ties with Latin America as trading partner, is an important step , for dealing with other important countries in the global scene.
According to available data, trade between China and Latin America ,has increased from U$$ 200 million in 1975 to U$$ 40.000 million in 2004.China investments in the region are U$$ 37,700 million, and the expectation is to move this figure upward in the coming years..
Economics projections based on the five year plan, (october 2005)for the period 2006-2010, indicates that China economic growth is expected to be 7,5% on annual average and its GDP to become U$$ 1,38 billions in 2010, twice the level of the year 2000. In his recent “China Trip report”, New York University ,Professor Nouriel Roubini ( ), suggest that as far as China economic growth is unbalanced,(rural-Urban unbalance), and with key prices currently distorted, excessive investment growth, excessive real estate investment and export growth is more a signal of this prices distortions than healthy economic expansions. So, sooner or later bottle necks may arise along the way. For instance, energy requirements are very important for economic growth ,but at the same time it implies higher level of investments to match the growing energy demand, This investment projects requires energy prices to be high enough to get back some return, but whether this price is artificially low, so it will be the expected return. The result, underinvestment in a key sector , can reduce the speed of growth.-
Chile benefits from this Free Trade accord, are related to the chance of diversify its market even more, and to make higher scale of production, an incentive for higher investments levels and stable export growth, as long as it can compensates commercial troubles in other export markets.-

Saturday, November 12, 2005

FTAA : What it is next ?

FTAA : What is next ?

The latest summit for the Americas (34 countries),held last Saturday (November 5th),in Mar del Plata ,Argentina has created the impression of a failure in the process to move along the Free Trade Agreement for the Americas,(FTAA) .Given the nature of negotiations, I believe ,that any preliminary light evaluation may be an oversimplification of the matter whether it does not consider some specific facts which are now on the bargaining table.-
a.- When the Free Trade zone for the Americas started out the process to be a concrete project, labelled as “The Initiative for the Americas” at the beginning of the nineties , the three key points which it was based on ,were: Trade, Finance ,and debt. At that time, the Latin America economies were struggling to recover from a deep recession and “The lost decade” concept, reflected the harsh reality of those countries eager to follow new ways to get back on the track of economic growth, after the collapse of the import substitutions model. Then, it was not rare that, the “Washington consensus” based reform program,(as a follow up for the “Initiative for the Americas”) was applied by the Latin America economies ,because it also meant an answer to both the uncertainties and confusions of that time . To boost economic growth , it was necessary to reduces the state role in the economy, promoting privatization of public enterprises, reducing regulations and let the markets to do their job of allocation of resources with a strong private sector as the engine of prosperity.
b.- The focus on debt of “The Initiative for the Americas”, is key to understand its initial success .It helped to alleviate it trough the “Plan Brady” and the swap operations for debtors countries. In this scenario, it was announced in 1994 the commitment to a comprehensive and balanced FTAA .At the end of that decade the balanced for Latin America economies was positive ;average growth was 3.5%,poverty decreased from 41% to 37%,inflation decreased from an average of 500 % (annual rate ) to 7% in 2001,and foreign investment soared from MU$$9000 to MU$$ 70.000 in the year 2000.The unsolved problems though ,were inequalities and corruption.-
c.- Since then (1994),the situation has changed completely .There are new social, economics , and political realities .Populism is on the rise, political and social distress has been a critical variable in some countries, and polls show that people does not believe in democracy as much as it is expected. On the other hand, Latin American economies have improved theirs bargaining power.. After all, there is also the chance of moving toward a Free Trade Accord with the European Union. For instance, Chile already has such accord in the highest premium category.-
What are the implications of this scenario for the FTAA?. This means the product (FTAA) should be adapted to the new conditions. Free Trade is key to economic growth, poverty reduction and prosperity. However, it requires reciprocity. Latin America countries are not among the most favored by globalization, precisely because much of its economic potential face artificial restrictions. At the same time, it is clear that old solutions, based on the active role of the State in the economy, has not been successful for those purposes. The question then is: What kind of FTAA? : Light FTAA?, Plurilateral FTAA? .a premium category FTAA ?. Although it is possible to make additional progress with the countries actually on the negotiations process for Free trade accord, it is unfeasible that some of this options will be applied to a broader scale, without taking into account the new focus Latin American economies are demanding from their counterpart..-

Saturday, November 05, 2005

Central Bank designation

While in USA the Federal reserve is preparing the new period with Mr B Bernanke as a Chairman,here in Chile ,both the discussion and analysis are related to whom is going to be the next member of the advisory counsil ,which is the key support for the chairman of the board decisions at Central Banks.-
Some considerations are important to take into account for Chile Central Bank designation ´s decissions.
a.-The expected role of Mr Bernanke in the USA Federal Reserve,indicates that although the time for macroeconomist are not over yet,to lead the Federal Reserve decisions,there is important consideration concerning to the micropoliciy issues arising from a different economy.In fact The "new" economy,emphasizes the key role of transaction cost,information bias in financial markets,simetry conditions for policy rules such as it is posible to count on credibility as an asset for controling expectations.This means that as long as Chile Central Banks´s designations is concern,it may imply the possibility of different options among the professional orientation of those so called "natural candidates". The original board was set in 1990, for a period where inflation control was an important goal to achieve,so the atention was on macroeconomic policy rules to get inflation down.Single annual inflation goal,coupled with exchange rate fluctuations bands,were the available instruments.Although not the perfects one, it was possible to reduces inflations even at the cost of a mild recession in 1999.Today economy conditions are different to the ones of those years. For instance ,there are new requirements on the financial sector which needs to be pro growht orientated,rather than pro financial results as it is actually.
b.- The Autonomous Central Banks is no a political trofee.The technical nature of its job, should keep away political considerations on the whole deliberations process to chose the name of any new member of the advisory board.Maybe the market tolerance to it ,is limited to the decissions concerning the chairman´s choice once every eight years.The chairman role is precisely concentrated on both technical and political considerations. Lets take for instance a recessionary economy ,the output rule criteria in such a case,is based on the impact that a recession would have on demand ,employment and investment even though inflations may increase a little bit in the process of stabilization.The advisory board, should give him the best advice based on the economic information available.
On the other hand,with an expansionary economy,the inflation targeting rule is also based on the lasting impact inflation has on relative prices,investmente decisisons,employment and financial stability even though ,that may imply to reduce the pace of growth.So in both cases, political considerations are an exclusive responsability of the chairman. His legal obligation of keeping prices stability,does not give him to much chance to political considerations other than what it is necessary

Saturday, October 22, 2005

Game theory,economics and corruption

Game Theory ,economics and corruption
Despite some critics, there is widespread acceptance of the key role Game theory has had to understand human and business behaviour.. The basic question is ¿ Whether our competitors are rational, and try to maximize theirs benefit, how come that such behaviour may influence our own decisions about to chose the optimal strategy for prices, production or innovation?. Take a look to what it is going on with air lines `s reaction to the increases in oil prices, How much they do care to make the first move to increase ticket prices.-
The same reasoning may be applied to corruption. The figure below, shows the case for two people “a” and “b”, They do not know each other , before doing a commercial transaction which in general, give high value to credibility, and honesty. “0” means loses , and “1” means a gains. In such a case, they would chose quadrant IV, (1a,1b, the lower right corner) and the no corruption solution (NC) would prevail. However, at society level with no clear incentives to favour the same values, which means a weak judiciary and legal system to make sure everyone is equal to confronts the law, or elusive procedure related to check out decisions at a management level, the result would be the quadrant I, (0a,0b,)the one of the upper left corner! in which the society loses. Nobody cares to protect his integrity, whether they feel alone and therefore with no reward in keeping that value. In such a case ,it does not matter to follow a corrupt pattern of behaviour. Society as a whole make a lose because of corruption. The recent report coming out from Transparency International,(GCR 2005, ) shows countries with different levels of corruption ranking from high to low levels. Those countries with higher level of corruptions, are the ones usually considered to have lower economic growth expectationsl . Corruption increases transaction cost for business decisions.
On the other hand, those countries with low level of corruptions have a more stable democracy and prosperity.
The figure shows options for a society
between corruption(C) and no corruption (NC)
Cb NCb

Ca 0a,0b 0a,1b

NCa 1a,0b 1a,1b

Therefore, the challenge is to keep society and business away from the suboptimal quadrant I (0a,0b).This means to improve the quality of legal systems to impose sanctions, the accountability of decisions related to the allocations of resources whose utilizations is a matter of public good faith, and transparency when it comes to check out administrative procedures -

Tuesday, October 11, 2005

Business socially responsible

Following the  global trend, firms has been changing in Chile the way they face   its internal clients, its consumers and society. This change is explained by a variety of factors. Lets take for instance workers ‘s abilities .In the past century, most of  his  abilities were based on physical strength, discipline and dependency .However ,the twenty one century‘ s worker  abilities endowment,  means a greater autonomy and  self confidence to carry out innovative productive process to deal with the complex phenomenon of  the new information technology applied on business strategic decisions.   On the other hand, reengineering by itself ,is not enough to cope with complex issues such as the organizational values. From the internal point of view, there are new challenges for organizations whose characteristics are a greater horizontality and a higher relational component generating incentives to include  social and private values into the management decisions criteria.-.  
The old paradigm of  Taylor ‘s firms  based on its own profit goal as a matter of reducing cost is  moving away ,  to make room for a  new vision:  The business social responsibility (Corporate Management) .It implies  business management  more linked to transparency, communication, and accountability. This is a new business ethics, which   impact positively on  profits result, just as the traditional  cost reducing approach.-
From the external point of view, the firm is increasingly integrating itself  in a series of  different network .Input Suppliers, services suppliers ,Outsourcing suppliers, Private Banks ,environmental organizations, financial markets , regulatory agencies ,customers needs, government organisms and the like;  shape the way the firm   moves on over competition forces to get profit . It is not just the firm alone facing competition, it is the network competition as a whole. Any wrong doing will affect assets prices and economic value, some times with a devastating effect. Therefore, business failure involves  a broader spectrum of actors, including  not only banks, and owners , but consulting firms, community  needs.-
This new scenario force the firm to identify common values within these networks, otherwise there is no way to get trough to get higher profit.. The markets is watching closely for opportunities, such that business must stay where those opportunities are. Common values reduces the transaction cost for doing business, and get firms and its networks partners, closer to each other allowing more cooperation. Business social responsibility is like a bridge to reach out   those new opportunities.-
From the ethical point of view, this transformation is above the widely known “dualistic ethics approach ”, which means that morality of each business act, is more important and it is before  than the  financial results. The business social responsibility may be an effort to morally justify the legitimacy of profit.  
A different approach ,and confronting the “justification issues”, is related to  the “implementation  issue” . This focus  imply the verification of empirical behaviour and its implications for a community, as a reference to justify its ethical value. Business ethics is more related to real behaviour. Maximization is strongly connected with optimization of resources, such as the environment, and entrepreneurships . Considering these approach, Business social responsibility would mean  the  new business ethic, as long as the community as a whole gives value to it , which  it seems to be the case. More private firms are  trying  to get  considered as “Socially Responsible”.-

Wednesday, September 28, 2005

Global warming

Global Warming: Who pay the cost?
The recent climatic events in such a different countries as USA, China, Germany and Chile, with massive flooding and devastation, means a clear signal that something definitely goes wrong with the global climate. But is it?. There is no conclusive opinion about the real basis of global warming. Recently, some researcher have said that most of the actual models to evaluate global climate, and measuring global temperatures changes, are based on an isolated phenomenon of freezing temperatures which took place thousand years ago. As a result, the scientific community is split in two views concerning global warming, one which consider it like a normal cyclical long term pattern, the other one which consider it like a “recent” trend. So, it is hard to build up consensus on the role of mankind on global warming, to what does not look like a single cause to focus on. Anyway, nature can be either gentle or tough. .-
To make matters worst ,the Kyoto Protocol is expecting to have effects no sooner than 2012. Moreover, some countries who signed it up, increased its emissions between 2002 and 2003. In the mean time the effects of global warming is stressing fiscal budget, economy expectations, fuel costs, and the whole fundamentals of economic growth .
So far, macroeconomics has been orientated to equilibrium analysis on the basis of constant natural resources (climate, and technology progress included) endowment ,such that there is no need of environment policy to match the economic growth with the preservation of ecological equilibrium. Most of economic progress is measure considering only the value added on goods and services, but ignoring the value substracted on environment. The impact of Katrine and Rita hurricanes, and other natural disaster are measure only at present time value, but what about future value?.
Markets adapts to the reaction of nature with a pessimistic mood. Guy Sorman said in a recent article, Government is no longer the only way to get through. It is the time for non profit organizations, private initiative, and local community organization to take an active role. An example? CGI (Clinton Global Initiative).-
From the economic point of view, two issues arises on this topics :
a.-Who pay the cost of global warming?. At first glance, it seems that the cost is evenly distributed between the rich(higher prices of oil ,and losses of real states value) and the poor (losses of hopes).The implications is to support those in a more vulnerable position .However ,in the long run less sustainable growth will increase poverty, natural disaster , and shortage of key resources like water.-
b.- How the markets internalize the new restriction on growth?. Green bond markets. Keep an eye on it !.This type of bond is expecting to be more profitable as long as firms is getting more conscious on environment. The prices of these bonds, will increase in the near future as long as it will value the “right” to contaminate. The implications, although not a perfect solution, anyone who buy such bonds today is next to get the benefit of its higher prices. -

Friday, September 02, 2005

economics and politics

Chile is moving toward its next presidential election on december  11th  like  a mature democracy. The  economics scenario is quite promising even though  oil prices increases are a  threat which to count on. Sure ,the copper prices are  at the highest level in  years(since 1988),and the expectation is that high prices  will continue  at least for the next year. Private investment this year  is  growing strong at a 27% annual rate , domestic demand also is surging at an annual rate of 9.8%,and inflation is  on line with Autonomous Central  Bank projections according with its recent monetary report( September 2005). So, the Chilean economy looks pretty well for investors looking for opportunities  abroad . Corruptions level are low ,the country ranked 18th on the organization’s corruption index in 2001 (with the U.S. ranking 16th). On the same index, Chile ranked first among Latin American countries.and  there is a climate of political and social stability which is in a sharp contrast with the reality in other Latin American countries. Recently in a forum  organized by The newspaper “La NaciĆ³n”  in Buenos Aires , Argentina, ( the Chilean economy  was called the “Boutique economy”,  suggesting a selective list of investment opportunities. The aggregate cost tough, both in the seventies and eighties, has been high enough to create strong incentives to keep the pace of growth  with stability .
The next Presidential election, to be held on December 11th,is on schedule like  a political  event which goes on  without interfering  the economy. The IMF(  in its recent report (September 2005),says : “Political consensus in Chile on the macroeconomic framework remains very strong. All the main candidates have reaffirmed their commitment to fiscal prudence, inflation targeting, and trade openness”.
In  a recent  business polls, only 9% of those who were interviewed ,responded that they were postponing  investment decisions because of political  uncertainties, the other 91 % are looking for  new business opportunities creates by Chilean  economic growth, expected to be between 6 - 6.5 % this year ,and 5 ¼   -6 ¼ for 2006.
This situation is rather unusual for the standard  in Latin America, where there is still a debate between  different approaches to the economy concerning for instance to the role of State ,the law, the markets and regulations to private  firms. Chile has evolved to a moderate political path based on consensus, and the rule of law  . This does not mean a static society, but one which moves forward based on a sort of an implicit contract between  voters and elected government officials .So far, it looks like this contract has  worked  out properly. Most opinions polls ,show that the probability of a second  center left government, following actual President Lagos´s government  is  high, and quite on the contrary to what  someone can expect,.  center left in Chile actually   mean a market orientation economy.-

Monday, August 29, 2005

Oil Prices increasesOil prices increases do no have the same effect on global economy as it happened before, because of some the following reasons: a.-Increases in productivity, due to information technology, which has been like a sterilization factor for agregate prices level further increases. b.- Increases in global supply of goods ,(China playing the big global producer role) push downward pressure on global prices level.- c.-Substitution of oil by another sources of energy ,have increased in recent years , such that those economy are less vulnerable to oil shocks. Brazil ,for instance has reduced its dependence on oil ,using alcohol.- These three factors have probably allowed the economy to goes by pretty well (Specially for Central Banks),even while oil prices are increasing .So far, the supply side shock, due to oil prices increases has been sterilized. However it is not clear for how long. On the other hand, Consumers, have not adjusted theirs expectations as quickly as expected, to this shock because they have not known precisely whether this phenomenon were permanent or transitory. Now ,it looks like it is permanent, oil demand is increasing at faster pace thane supply . But , there is still a big question. Where do the all additional money received by oil producing countries, will goes to?. In the seventies , Latin America economies received huge amount of “oildollars”, allowing these countries to get higher economic growth than otherwise would have been possible .Nowdays ,it is highly possible it will go in a different direction. The answer to this question, can make the difference between moderate growth or a recession