Friday, April 28, 2006

Can Chile perfomance match foreign expectations?

It has been usual to say that Chile is far away form the rest of Latin America countries, specially because of its economic and institutional progress. But ,what about the chances of getting even better economic results, to consolidate this position?. Answer this question requires to check additional background to what has been known and done so far .Among these ones, it is the presence of a prospective economic strategy capable of anticipating events with negative impact either over society as a whole or the economy, also it is the implementation of a strategy to reform education ,and a strategy to pursue higher innovation levels. The evidence suggest that Chile lack of these three orientation. Let looks to the first one : a prospective strategy.-
The high copper price has meant good news for the Chilean economy , although not so for economic authorities .This paradox arises from the fact that nobody was prepared for such scenario. Real appreciation of the exchange rate not too far its long term trend(1986-2005) , budget surpluses over the 6% of GDP, it has meant a scenario with unexpected effects.Let looks first two questions:
a.-Was it possible to anticipate the high copper price and its effects?. If it was so and nothing was done about it ,that is a worrisome signal. If it was not so, and nobody knows what to do to about it now, that is also a worrisome signal.-
I do believe that is was possible to anticipate a steady increase in copper prices, so to design the proper response to apply it just in time it was needed. Probably ,it was hard to set a U$$3,2 (lb) dollar ,but with China pushing strong the raw material markets it was a fair probability to have important prices increases, even if copper prices is adjusted by dollar depreciation. My own estimation at the end of 2002, was a steady increase in copper prices ,moderating itself near the end of the year 2005 . It seems that it was nobody ´s interest to anticipate this increases, and now it is the problem of what to do about it. Central Bank authorities looks the fundamental and long term real exchange rate ,to rule out intervention into the exchange rate market ,for neutralizing the appreciation of Chilean peso .But exporters are complaining louder because of loosening competitiveness. Government authorities are trying to design the Norwegian fund approach ,to cope with excess of foreign currency which it will require months to implement. In the meant time , exporters insist the need to do something about the appreciation of Chilean peso, forgetting that this is not the only relevant price for theirs business.
It is not the first time that there is failure to anticipate major real shocks .Gas supply reliability from external sources, is another one, Still there is not a clear energy policy. Besides, only afterward the free trade agreement were signed, it was noted that tax revenues coming from foreign trade would be lower. Concerning the new strategy for education, experts has said Chile is ten years late to implement the necessary reforms.-
b.- How deep is the key role the private sector have in the economy, whether government ´s help is requested at any difficulties along the road?. Efficiency firms actually supported by Free trade agreement, should be able to cope with a stronger peso (local currency)as they did in the nineties.. Management model based on long term contracts with flexible clauses, low import cost for inputs and capital equipment, low interest rate to finance financial needs, lower shipment cost, and more productive labor force ,should means efficiency gains sufficient enough to confront this challenge. Not to mention innovation, quality of products ,and market diversification
Then, How far is Chile from its fellows Latin America economies?. Given the long tradition of improvisation ,it seems that after all Chile is still into the realities of Latin America way of life ,except that from the economic point of view, it have made some progress not enough though to qualify in the major leagues. So, Chile is on the most difficult part of the development process, the one which requires additional step hard to implement , because it requires to broke up with the fear to make changes, along with the mental legacy of the past. In this stage ,some chilean economist argue for looking abroad to learn experiences, for instance Ireland and its extraordinary achievements in the last twenty years, but it is easy to forget that Ireland is surrounded by strong economies . Another alternative is Finland and its achievements in innovation ,but this country is also endowed with strong economies around. Chile needs proper models to follow throughout the next stage to achieve development and to meets the foreign expectations; but much of those models are in their own understanding that beyond diagnosis, it is necessary a willing for strategic decisions to be applied soon.-

Friday, April 21, 2006

Oil prices increases:¿Global econoomy risk or specific economy risk?

The oil prices increases again take the lead on the economics news front. Questions arises about its probably impact on global economy. So far, successive oil prices increases have not restricted global economic growth .This leads us to the question, why it has been so ?. If we understand the answer to this question, we will able to anticipate its effects on global economy or to choose correctly the proper forecast.-
The recent economic forecast of the IMF, set the global economic growth for the year 2006 , at the 4,9% level, which is quite optimistic given the scenario of increasing shortage in oil supply . Others prestigious economist expectations, are not so positive and foresee a risk of global slowdown. Both represent alternative scenarios. Which one you prefer ,it will depend of your own risk preferences and information available. If you are risk averse with minimal information ,you will decide on the basis of the second approach, if you are risk taker with a lot of information, you will decide based on the first approach. However, I think the issue is not about how well informed we are, but how do we understand the fundamentals of the new global economy?. Concerning this topics let me mention some key elements:
a.- The industrial economics, was capital intensive , heavily concentrated on given endowment of capital resources, but with oil intensive production technology .Any increases in oil prices were not matched by capital prices decreases, such that relative prices adjustment ,avoided inflationary pressures. Capital prices did not fall, because the demand from it was steadily increasing, to matching the requirements of emerging economies to sustain their own economic growth, or the industrial economy to keep the pace of their own economic growth.. On the other hand, there was not labor cost mobility either, compensating for such price restriction, such as to allow settle down productive process in those places with lower labor cost. Any oil prices increases , meant industrial economic recession, because lack of flexible cost structure. The transmission mechanism between those economies, both productive and financial ones , would ensure that the recession dynamic were spread out all over industrial economies , so the rest of the world.-.
b.- Global economy is less oil dependent, because of higher factor mobility, because it uses production technology based on alternatives energy sources, and heavily concentrated on knowledge endowment, so that relative prices adjustment either avoid or mitigate inflationary pressures .In this scenario ,any oil prices increases , means another ´s input lower relative prices. and inflationary pressures are neutralized. In fact inflation rates in advanced economies in the year 2004 and 2005 was not much higher than usual, and the forecast for the year 2006 and 2007 are 2,3% and 2,1% respectively, even though the expectations are for higher oil prices, at least up to the point it fit itself to its long run trend.
c.- Information technology applied to the management and productive process in every organization , have allowed productivity gains counterbalancing the impact of higher oil prices ,and keeping inflationary pressures in check. The higher supply of both capital (recycling of capital from oil exporting countries),and lower cost labor supply, ( China as the global producer),have reinforced such counterbalancing effect.-
d.- The huge increase in revenues for oil exporting countries should go somewhere. So, It could go to speculative funds, investment funds ,or portfolio diversification purchases. Wherever it goes, allows higher availability of funds for growth. Sure those economies which are not receiving any of these new additional financial resources will have more troubles to adapt themselves to the new scenario, But those ones who get an increasing fraction of it, will have the resources to support growth .-
Under uncertain conditions, These four factors will jointly explain the future developments concerning global economy, in the higher oil prices schema.
So, it seems that global economy has its own economic protections forces to keep on with a healthy economics growth rates despites oil prices increases. The key question then ,is what happen with the economies which add up the global economy and what level of interdependence exist between them?. It will depend on either how close or how far those economies are from the characteristic of global economy, and your perception of interdependence, Which forecast you should follow .It will also all depend on each business scale ,whether it is globally or locally based. .If you have business on a global scale, the first forecast will help you better. But if you have business on a local scale, the second forecast will help you more to understand what it is next.A different matter is the degree of conection between global economes club , and each of its members.-

Friday, April 07, 2006

Stock Exchange markets:Its predictive power (II)

If the Stock exchange market is better at reacting than predicting, what are the implications?. Following the fundamental of CAPM , it will react sharply either upward(speculative bubbles, rational exuberance) or downward (profit tasking) as soon as available data suggest .This is so, because anything different to what it is expected, will imply expected profit corrections either upwards or downwards. So ,it is highly probable that Stock exchange markets does not anticipate properly an economic recessions, but its quick reaction to the first signals, will be key to avoid its consequences on short run returns.-
To check some numbers. During the first quarter of 2006,the stock market rate of return measured in current dollars,( 1/4/2006) was 52,18% in Venezuela,27,49% in Russia,25,67% in China,13,03% in Germany,6,09% in Japan,4,18 in the Dow Jones (USA),8,73 in Chile and -31,54 in Dubai .In this last case(Dubai), this results shows that investors were waiting for the east American ports deal to be done, such as to increase theirs earning because of the higher market value involved in such a situation, for the all tradable goods sector, insurances companies, logistics sectors business and the like. When it happened not to be so, they reacted quickly moving away to other better alternatives.-
A second issue is the type of firms participating at the trade floor, on the stock exchange markets. In the Chilean Stock Exchange case, firms share in the price index which measures the exchange activity ,has been changing from a heavily regulated firms, which accounted for 71 % of such index in the nineties, to the 26% they have today. On the other hand , Retails firms actually have a share of 18,5% in such index , while in 1996 they had barely 3,9% .Financial services firms have increased their share form 6,2% in 1992 to 20,1% in the year 2005.( 11/02/2006).It is obvious that the predicted power of an exchange market composed either by regulated or protected firms is null. As long as stock exchange markets broaden its business level participation , it might better represent the feeling of markets as a whole helping to improve the information available regarding markets expectations.
Keeping in mind that the nature of short run profit maximization, adapt itself to market conditions, whether good or bad, then the question is what economic information the stock market value most, when it comes to anticipate a slow down in the economy ?. For some time oil prices were the key signal to anticipate a recession. The relationship between oil prices and economic activity situation for the American economy in the last 25 years has been broke down. For every increase in oil and gas prices the American economy fall to a recession. However , because productivity has increased counterbalanced the impact of oil prices increases , actually theses increases are in the mid sixties dollars a barrel and the global economy is growing at a pace of 4% . So, oil prices increases are not a good predictor either, and beyond that signal recessions quality ,stock markets have incorporated such increases in theirs profits expectations.-
Finally ,it is hard to say without additional research, where are the data to anticipate a recession,aside from the traditional threee quartes of nefative GDP growth,(the point is how to anticipate that) , but my bet is that in the first place ,they are on the sales levels and the unemployment levels trend on medium size firms, and the bad loans index .When bad economic times are near to arrive ,medium firms size sales levels fall, unemployment rise, consumption decrease, and bad loans risks increase.-