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.