Friday, August 25, 2006

Retirement Funds Reforms : The Chilean Case ( I)

In 1981,it started a revolution in the Chilean retirement fund system. It changed the former system of solidarity, of multiples independent public institutions, based upon the state funding capabilities . Each segment of the labor force, had their own affiliated retirement public firm, for instance the so called white collar had different categories such as politicians, journalist, public administration staff, banks staff and so on. On the other hand, the so called blue collar were all in the same public retirement firm, based on what was know as the “ distributive system”. This meant, the monthly contribution of all workers in the labor force, added up to the total amount to be delivered to the affiliates in some previously defined proportion. The nature of this system created a gap between the contributions of workers in the labor force ,and the monthly payment requirements, because given the larger life expectancy of population , and the decrease in active labor force because of lower fertility rates, the amount of workers making contribution were lower than the amount of workers making payments claims. There was no way to avoid the State running out of cash to finance the system, making the increasing public debt the only option available.
The former public system , implied a discrimination among different groups of workers, which were discriminated by allowing the existence of different conditions to get their retirement funds. Some of them needed 15 years of working life like the politicians , others needed 30 years like public employees, aside the fact that there was not a management criteria whatsoever to deal with the use of those resources other than distribute them to the affiliates. The new system solved those constraint making all workers equals, and giving to all of them a chance of getting a professional management of their individual contributions through what it is known as the Retirement funds management companies.
The Monthly contribution of each worker(10% of gross wages), on his(her) individual retirement account, would give him(her) the needed capitalization to live once he /she was out from active labor force. The key stone of the system is the individual capitalization account of the monthly contribution made by each worker ; so the funds accumulated earnings because of the compound interest rate applied on them.-
Dependent workers are forced by law to chose a Pension Fund Firm, where the monthly individual contribution are accumulated. The Retirement Fund management Firm, cover its administration and operational costs with a fraction of workers ´s contributions ranging from 2% to 2.5% . The legal framework limits the income accountable for monthly payment to the Retirement fund management firms, up to a maximum of U$$ 1400.People with higher incomes may add voluntary and complementary contributions, under different schemes such as: Saving account, Programmed contribution with the employer approval.-
The resources accumulated are for the exclusive use of the owner, when it comes to the retirement decision, expected to be at the 65 years old.-
The interesting thing is that the amount accumulated throughout the years, will finance the monthly incomes after the individual retires from labor force. This total will depend of the amount each individual is contributing, ,the regularity of the contributions, and the efficiency in the management of the total fund .According to some calculations, with an average annuals returns for the whole period of 4%,an average affiliated with 45 years of working life, will retire from work with a monthly pension equivalent to the 60% of the latest 120 monthly average income(ten years).-

Friday, August 18, 2006

Copper Mining sector labour strike : The importance of long run contracts (II)

Is it efficient long run labour contracts? Or Is it fair long run labour contracts? Two key questions to be answered on the basis of strategic consideration for firms´ decisions. To answer the first question, it requires to match marginal benefit with marginal cost. It means, each firm should consider what are the gains and what are the losses for each additional year of labour contract on the negotiation table . Among the gains there are :better information level to make strategic decisions, better stability standard and lower internal uncertainty, to be focused on strategic decisions concerning the chain value ,market segmentation and innovation strategy ,because variable cost are moderated by the rule of flexibility clauses , moreover Human resources can concentrate on getting their goals on productivity, production ,cost reduction and innovation practices. .Among the cost, it is the burden of higher negotiation cost , the administrative costs of enforcing the signalled longer contract and higher fixed labour cost because of health care programs, training programs feasible to schedule in a longer period. In other words, stability and better information for strategic decisions has its price. Each firm should evaluate this price on the basis of their own strategic planning goals . But, as long as firms get solved the labour cost issue for longer period of time, the better the firm can concentrate on other cost threats, such as the operational ones related to the machines functioning, or the organizational procedures related to the management better productivity results, human resources rotation cost and the like. So it is efficient up to the extent that it allows better decisions framework for strategic management.
Whether this mechanism is fair, It all depends upon the chances of allowing the firms with this format negotiation, to have better tools to adjust itself to both competition and uncertainties, than otherwise would be the case. For human resources, it is fair as long as they get better protected against ups and downs on business activities, such they can concentrate on long run firms goals . It follows that having negotiations for two years, is neither efficient nor fair.-
Let takes as applied examples the air lines sector .With the oil prices well above the expected, most air lines are no longer in the position of assuring their workers what is going to happen for sure in the next two years with theirs jobs, unless they all make a joint effort to keeps cost down ,such as to compensate short run cost out of the line increases due to persistent oil prices increases .If that joint effort ,is under the negotiation rule for a longer period of time, the result will be better than what it would be the case without it . Firms needs long run compromise to reduce cost, to increase productivity and to improve innovation practices.-
Another example. Firms under the threats of competition .In this case, each firm must deal with the uncertainty of new firms sharing the markets and the subsequent prices competition reduction. What would it be the firms situation which do not anticipate such scenario? There are two alternatives : Either ;first to repudiate its labour contract, or to ask workers to accept to renegotiate current contract, but none of this option is better than the former one , of having negotiations for longer period of time.-
In the longer period negotiation case, firms can distribute negotiation cost in a wider range of time. A 10% increase in wages , to be applied in four years is better than to applied it in just two years. Besides ,it solve the issue of labour cost ,such as to make possible to concentrate on other cost as long as its strategic plan moves along.-
So, long run negotiations have a lot of advantages over the shorter period of negotiation of two years .Flexibility clauses, allows to negotiate in advance ups and downs , it also improves information level for making decisions, avoiding the risk of overreaction and its cost.In the Escondida Mining situation,I would recommend to increase the period relevant to solve the current negotiation situation from two to four years.-

Friday, August 11, 2006

Chilean copper mining labour strike:The importance of long run contracts (I)

The Labour strike which is taking place on the most important private copper mining firm in Chile , “Escondida” ( roughly 10% of world copper production),is expecting to last weeks. This is so because of the negotiations differences, actually making a deep gap between both sides. While the labour union is asking for a wage increase of 13%, the firm is offering 3%,and while the labour union is asking for a bonus per worker of almost USS 30.000,the firm is offering near USS13000. Actually the average workers in “Escondida” earn a monthly salary of about USS2700 , (including both the fixed and variable part), well above the national average worker wages of USS 500.The whole labour package would cost to the firm in the two year period of expected collective contract ,USS 640 million. However from the labour negotiation team point of view, that cost would be USS 375 million in the same period.-
Although it is usual in each negotiation to have initial gap, in this case it looks like it will take longer time to close it . The differences are too high, to expect a quick solution to this conflict. The so called bargaining zone which each side focus on, allows to have a divergence between both sides, such that while the negotiations is under way that gap is expecting to be narrower than at the beginning. However, this imply each side willingness to make concessions ,which are more feasible when that gap is not that much wide, as it is in the “Escondida “ labour negotiations .-
The effects of this strike over firm ´s production are already clear. Actually “Escondida” is producing 40 % of its 3500 ton of daily copper production. This means, each day of labour strike have a gross cost of around USS 16 million, considering current copper prices USS3,5 /lb. The impact on prices, will be given by the period of time the labour force is on strike .The longer that period and the deeper the reduction in production , the higher the expected impact on copper prices. However, the impact on world copper prices will also be influenced by inventory levels. So, at the beginning, it is probably a moderate increase in world copper price.
Before this strike, the trend on inventory levels was to increase , and prices were near a stable trend. Forward copper prices were declining. However, all of this is under keen scrutiny right now. The state owned firm “Codelco” is also with productions problems, which will also put additional pressures on the short run higher copper prices.So, later on the actual situation ,the probability of substantial copper prices increases is relevant.
Since the year 2002(January) the annual average copper prices has increased from USS 0,70cts/lb to almost USS3,5 lb in the year 2006( July ).The labour expectations with the new contract (2006-2008) were obviously high concerning the copper price trend, and the expected benefit level for everyone ; the firms and the workers.
Was this strike avoidable? .It is hard to say from outside the firm, but it is obvious that given the actual copper price trend, the labour expectation for this negotiation would be high . From the strategic point of view ,firm ´s management should have anticipated this scenario, working a set of options to put forward in a period longer than the two years self restricted scenario.
The key point on this issue is the length of labour contract , which is usually settle down for two years. This means that every two years, the management process is under stress because of the probability of failure on each negotiation.
What would be the case with long run labour contracts?. In this case, negotiations would be for a longer period, let say four years,(assuming that four years make equal the marginal benefit with the marginal cost of such length in labour contracts ) such that the expected ups and downs of business activity during that period are considered as a part of the negotiations throughout flexible clauses which anticipate such eventualities. This means that each firm includes in every negotiations the eventual situation of ups and downs on business activities during the relevant period (four years),to negotiate it in advance the way to deal with each one of them, It is like a forward price contract, except the fact that even the eventuality framework scenario, can be revisited according to how it fit the real situation.
But there is already something on the table to deal with, which is much more than the current expiring contract . This negotiation format is quite useful under uncertainty conditions concerning competitions, prices trends .
In the “Escondida” case, whether it would have applied this long run format in the negotiation of 2004, when copper prices were increasing but there was no clear indication to be around USS3,5 /lb, it would have allowed the firm to have a better conditions to solve the workers expectations .

Friday, August 04, 2006

Global information and personal choices

The actual daily attention of current global economic data, is related not just to natural curiosity , or social necessity, but it is related to the fundamental of human behaviour: To make rational decisions. From the economic point of view ,rational behaviour is defined as the best solutions given stock of data and perfect information, such as to maximize individual welfare. Prices reflect all the information needed to make decisions either from the consumer or producer perspective to allocate resources .When there is no enough information, it arises price dispersion and the individual decisions are no longer the expression of pure rationality.
The problem is that perfect information is not the kind of free available good. It has both transaction and opportunity cost. The benefit of information, is the quality of decisions made with it and the expected impact on individual welfare. Rational expectations imply that nobody will carry on additional effort to get more information , if the cost is higher than the benefit.
These days there is uncertainty everywhere, such that information is an expensive good .The implications of this is that, most decisions are based upon partial available information, which also imply that not always they are good decisions. It is the limited rationality situation. Any consumer before buying any good , do not check out his or her chances of loosing his or her job. He or she decides on the basis of expectations, such that do not need to gather all information available. The result in this case, might be a wrong decisions concerning higher consumption level ,and the subsequent debt increase whether the real probability of loosing the jobs is high. So, uncertainty is inefficient .A politician will decide public affairs based upon the result of opinion polls, but public opinion changes faster than what it is possible to measure ,because of instant global news network. So, like the consumer it might also be in the position of making wrong decisions. The same situation is for business man and global market trends.
Therefore it is crucial to reduce uncertainty throughout better information. Internet allows to get down transaction cost of getting an expensive goods, as it is information in such a situation. However, no all the internet sources all worth to trust, every user must discriminate the good from the bad sites. There is not ISO norms for internets sites. Should it be possible that before enter over internet sites, you could have a signal of quality such as the ISO norms for internet?. It would push down further transaction cost !.-
Let take as an example current global imbalances .It is clear enough that sooner or later there will be an adjustment .The uncertainty is to what extent it will impact global economy. There is no way to solve this doubt hundred percent sure, no matter what econometrics model might predict, but there are very goods internet economic sites , plus global news media, with high quality information , capable of collecting every important on the spot data to allow internet users to make the right decisions as never before. What it is the impact of such information levels on the current quality of decisions ? What is the impact on the economic expectations? .I guess it has been crucial to get the global economy moving forward to its new adjusted stage, in rather smooth way . Without this level of information, it is highly probably that the post adjustment scenario would be very different than what actually is expected to be.-.-