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