Friday, September 29, 2006

Self regulation;Is it possible ? (I)

Market allocate resources following available information ,for economic agent to make the right decisions to maximize profits. When that information is reliable and opportune, the results are better than when the information is late and unreliable. Efficient market theory argues , that prices reflect all the information needed to make decisions .Therefore ,it is a matter of knowing the prices which include all the proper information, to decide where it is more profitable to invest in one sector or another.-
However, there are some complications with information, when there is a gap between the time it takes data to becomes information at the organizational levels, and the time it becomes public. In that case, prices will not include the whole information, but only a part of it, such that anyone who buy a financial asset because of current positive information available, might turn out to make losses later on when the real information is available and it might be negative. Let me remind that data is one thing and information is another. To have access to data does not mean to have information. Information imply a judgment which is complementary to data. I might watch a lot of numbers about the financial situation of any firms, but that does not necessarily means privilege information. Data without the qualitative judgment is just that: data. Therefore is the qualitative judgment complementing data, which make some information to be privileged. While data are everywhere, qualitative judgment is rather scarce and some times confidential, such that privileged information has a high price. Let take Parmalat case .It was not the numbers itself which indicates that the firm was in trouble, but the impressions (judgment) that there was not way to overcome the shortage of cash following the loss of credibility, following the fraud .For every data there is a judgment, which is transform it in information.-
What about Privileged information?. This is the most common situation in the inner circle of business evaluation opportunities .This is so not just because of the nature of such activities , but because any projects have its own dynamic closer to their original owner ,than to the potential users or beneficiaries of it. The problem is this : How long it take to close the gap between what it is private information relevant to make decisions and the time it becomes public?. For example, If the directory of any firm approves and decides to implement an expansion program which imply heavy investment on equipment and construction, this will have an impact on firm market value, such that any one who knows about it in advance will have the chance of making profitable decisions buying financial assets of that firms. It is the same whether any one who knows in advanced the positive financial result of a firm, and decides to buy financial assets of that firm .Again ,it will have the chance of making profits using privileged information .
In both cases, it is very important to take that step as faster as possible, otherwise there are consequences on prices and the efficiency of markets transaction. Because privilege information is scarce ,there are incentives to trade wit it. Here it is the point when the regulator dilemma arises. They have two options ;To let the system regulate itself ,or to apply corrective regulation on any situation related to overlapping self related interest , and privileged information procedures to make it public and the like. Of course , it is better self regulation. But is it possible?.-

Friday, September 22, 2006

Regional Integration :Which way Latin America should follow?

The United Nations forums ,give us an opportunity to know the current state of world affairs .At the same time ,it allows to know the different focus world leaders are concentrated on to overcome the main challenges arising from such affairs. For Latin America, it is the special occasion to discuss its position and interests, on that global politic scenario.-
Given that the situation and prospect for a wider global trade including agricultural goods, is standing by after the Doha meetings results, some analysts are saying that it is the time for regional integration, starting with the Asia Pacific area next to have its annual meeting this year in Hanoi. The instrument, would a be a Free Trade Agreement for the whole area included in the Asia Pacific Economic Cooperation forum (APEC),fostering a new impulse on global trade talks.
For Latin America economies, such regional integration strategy would also imply to reinforce trade within themselves and others partners, mainly Europe, Asia and the United States.
The question is which direction should follow such effort?. In the United Nations forums, The Latin America Presidents gave different and heterogeneous speeches. Chile concentrated on the necessity of improving trade, Argentina concentrated on the necessity of improving the financial architecture for capital flow and debt renegotiation, Brazil concentrated on the necessity of reducing poverty, Colombia concentrated on the necessity of reducing violence, and Venezuela concentrated on the necessity of confronting the empire (¿?). There was different styles, moods and strategy to capture the audience attention, but it seems clear that there is no connection between these speeches and the regional integration demand. What if the Venezuela approach is followed?. It means to go nowhere .Insulting does not provide leadership . What about Chile proposition ? .The Doha results are evident that there is still a long way through . Argentina initiative? .It emphasizes the financial requirements for global trade. Brazil proposition ? .A desired goal for development, and finally Colombia proposition?. Peace is the United Nation business.
None of the orientation and guidelines mentioned ,kept the attention on what is really needed for regional integration : To foster growth and wealth creation as the precondition to overcome poverty, violence, and underdevelopment so to be able to have a place on the major leagues.
The regional integration effort during the nineties, has been driven mainly by private business which searching for bigger external markets ,to sustain investment levels in some cases above the levels that domestic markets were capable of support. Latin America firms, went to different countries within the continent , such as it allowed them later on , with the expertise and economy of scale advantage of greater volumes, to improve its access to world markets.-
This integration path got Latin America government policies closer to one another, but behind private firms, not leading them. So, the driven factor ,as mentioned, was not Government ,but firms. The implication of this is that the only integration which have a common language is the one leaded by private sector, which imply a complementary role for governments .-

Friday, September 15, 2006

Is Chile weakening its ground ? (II)

When everything looks fine for strong economic performance there are worrisome indicators in Chilean economy. So, where is the real problem?.
a.- Negative expectations both from consumers and business man.(last week blog)
b.-Lack of a comprehensive focus about the real issues currently important for the future prospect of social mobility, quality of public services, better access to opportunities for all well educated person, decentralization , and transparency as a protection against corruption .It seems that it is all about lacking of economic democracy: which means to ensure every one a fair chance to take the proper benefit of the economic growth.
Chile has overcome the macroeconomic reforms quite successfully ,allowing the country a steady rate of economic growth which has reduced poverty (actual levels of 18%),but with a minor impact on unemployment (roughly 9%in the second quarter of this year ).Considering that copper prices has improve public resources availabilities ,it has also induced both better and higher expectations . Therefore ,Chile is living times for leaderships to set the direction to follow through .
The next question is : Is it just a government problem ?.I do not think so. The current Government has concentrated its effort to solve what it is urgent, including some unsolved issues from the past administration. In the mean time, it is still working on what it is important but without a specific plan yet. The resulting gap, push down expectations .Anyway, it is too soon to blame government.-
Some would argue that the government program is quite clear to set the directions which the country should move forward to, however there is still an important challenge to work out some of those ideas with the parliament .My point of view, is that there is no clear priorities at the politicians level(parliament) about what the important issues are for the country. They moves from one topics to another, without a sense of dealing with solutions to real necessities. Some of them are starting to preparing their campaigns for the next presidential election in the year 2009,such that it is harder to work out consensus needed to go deeper on further reforms.-
After 15 years of a renewed democracy and economic growth, Chile has achieved important assets and strength. It is a stable and prosperous environment for doing business, culturally homogenous , well educated middle class, but still with a lot of reminiscence from the past. Close to its 200 hundred year of independence ( 2010),it is still a centralized country with a regional management model , unsuitable and outdated for the present regional needs. This imply that business opportunities are lost , because there is no clear regional autonomy to make tough decisions. The Chilean State has made a strong effort to modernize itself, but there is still a long way to go before giving it a new profile, prone to deal with the solutions rather than to just analyze the problem.-
On foreign affairs, it looks like complex issues such as the energy resources supply and its implications for regional foreign policy, are not articulated within a strategy yet, by the same token , there is not a clear understanding of what the FTA with the US economy, meant for Chilean role in Latin America. Its expected leadership on issues concerning with free market economy and free trade expansion, has been elusive while strong winds supporting a more active role of the state in the economy moves around.-
So, Chile is facing the problems which arises along with growth, whereas other countries are dealing with the problems of lacking of economic growth. Therefore, there are new challenges which should be addressed ,but within the context of a broader view on foreign affairs .-

Friday, September 08, 2006

Is Chile weakening its ground? (I)

The recent data of GDP growth in the month of July (4,2%) has induced a wide spread feeling that some thing goes wrong with the aggregate economic variables. In the second quarter, April-june 2006),GDP grew 4.5%,and in the first six months Chilean economic growth is 4,9%, below the 6.9% at this time of last year. Although core inflation is 3.1% in a twelve month period, it is still within the range of Central Bank inflation target, however there some questions concerning the future pace of current adjustment in monetary policy of increasing interest rates, actually at the 5,25%,shifting the emphasis from controlling inflation to support growth .This is the current cruel dilemma of most of the Central Bank around the world economies .How to make the balance between controlling inflation with oil prices pressuring it up, and at the same time not to disrupt the economic growth pace ? .
The mood is increasingly worrisome even with the actual positive external conditions, beginning with export growth and copper prices, at such a high level of U$$ 3,2lb,as it has not been before. However, consumer confidence index dropped to 46.7 in august.
An healthy macroeconomic environment and saving at a 21.7% of GDP, (down from 22,8% in the same period last year),the expectation is to have a GDP growth of around 5%(it could be a bit less according to some forecast) at the end of the year 2006,also down from previous estimation slightly above 5,5%.So , there is a mix of cautious skepticism coupled with what it could be promising situation.
A month ago, there was a Government ´s package of supply side incentives , to small and medium size companies, lowering some taxes, delaying the time for mandatory payment taxes, all of which is expected to induce a better cash flow conditions for those companies. It is unlikely that these measures will have a strong impact in the short run to counterbalance current monetary restriction on growth , but it is rather more probably it will have so in the medium term. So ,it does not look like there are more difficulties ,other than the necessary tightening on monetary policy .-
A recent report from World Bank , (Doing business 2007),place Chile in the 28(down form 24 last year) preference among 175 nations to do business ,followed by Mexico (43), and Uruguay ( 64).
Where is the real Problem ?.I will develop this answer in two stages:
a.- Negative Expectations about the future course of the microeconomic reform needed to improve competitiveness. While Mexico and Perรบ moved aggressively forward on the microeconomic reforms , increasing facilities for private investment, lowering bureaucracy for doing business, Chile still maintain the 27 days period as a necessary condition to fulfil the legal requirement to open up a business. Therefore it is the proper time to go beyond the current state of affairs, concerning these reforms. But is it possible? .Unfortunately it is not likely in the shorter period of four years of actual Government .Besides the parliamentary forces are not so prone to make deeper support for markets and firms to do its job of creating wealth, because the current majority represent a moderate leftist views concerning the economy ,the state and the market . Social Protection grid issue is the priority right now , before moving on for more market flexibility .-
Business man are expecting to improve market flexibilities, because this way the economy can not only get higher competitiveness but also to take full advantage of new opportunities for growth ,given tough competition everywhere .Past reforms are already exhausted its positive impact,therefore it is necessary to move reforms one step further .

Friday, September 01, 2006

Retirement Fund Reforms : The Chilean Case (II)

In 1989 a step further was taken with the implementation of saving voluntarily account, which allowed to enhanced the saving options. Today there are 814.000 of this accounts with positive balance, accumulating U$$ 827 million. Another account is the Retirement saving account (There are 363.000 of these account)which accumulate U$$1200 million, with an average amount of U$$ 2100.This account has tax incentives .-
An interesting question is what would have happened whether the old system would not have been changed?. It is an interesting but difficult question, because it allows to understand the impact of such reform, but at the same time assuming that nothing else would have done with the former system .
In a recent seminar on the issue (www.afp-ag.cl), two qualifies economist analyses and discuss the topic, among theirs conclusions it is important to mention:
a.- Public deficit would have soared to 8% of GDP
b.- Pension retirement amount would have been between 40 up to 50% of average income. The actual system have an average return of 10%,making possible to have as retirement pension, up to 70% of average income.
c.- Only 35 % of potential retired workers would have collect retirement fund
d.- Capital accumulation would have been reduced by 9.7%
e.- GDP per capita would have been 7.6% lower than what it has been. Almost a third of GDP growth between 1980 and 2001, is explained by the effect of private pension reform.-
An additional step was taken in the year 2002,with the implementation of the Multi option investment funds, which divides the portfolio among 5 investment alternatives, ranging from the higher risk and higher expected return(15% since 2002) , to the lower risks and lower return ( 5.9% since 2000). Actually the total fund accumulates resources by U$$ 73.000 million, (roughly 70% of GDP) ,70% of which are invested on domestic asset, and 30% are invested on foreign assets.
Therefore, Chilean economy growth in the last 25 years, is very much related to the retirement pension reform. On the other hand, its contribution to the financial markets developments, and domestic saving availabilities has allowed to make the economy less dependent from foreign aid and external saving to support growth. As a result, the Chilean economy is less dependent form volatile external resources.-
Is it possible to improve the quality of the system.Sure It is.There are some topics to take care of concerning independent and women workers.-