Latin America ´s economies reforms:Some facts and Myths (I)

It has been usual to argue that Latin America economiesa are not getting all the benefits from Globalization , even worst it is behind Asian countries, because of its lack of additional and deeper reforms to make it more competitive, specially important these days to face the challenged posed in global markets, by countries like India and China .-
But , is it necessary to go further on with deeper reforms to get higher benefits from globalization? Or , Is it a necessary condition for competition with Asia to implement deeper reforms?.-
First let take a look at the current record concerning the impact of the past reforms done in the nineties. A recent IMF paper, (WP/06/210.Growth and reforms in Latin America: A survey of Facts and arguments. J Zettlemeyer ),analyses Latin America reforms from a broader than usual perspective ,such that it is possible to separate facts (which is the topics the IMF paper is concerned about) ,from myths about it. From my point of view, which of course is not the key one, some of the myths are:

M1:Latin America still depend on government willingness to engage in deeper reforms., because private sector business in Latin America, is not mature enough yet, to be the key leader for further economic integration.-
M2:The view of the State role in the economy, is not possible to change further, because Latin America still need a strong state for social development., stable economic growth and fair income distribution.-
M3:The reforms done in the nineties, were not properly focused, such that the results it has gotten, has not been as successful as it was expected.-
These myths are still pending on the collective mind and somehow the intellectual elites, because much of the free trade experience ,state reforms, market orientated economic policy and institutional changes , were carried out during a very difficulty period for democracy values, such that these achievements were not the outcome of a clear consensus about the path based on such free trade, markets and a smaller role for the State. However, facts indicates that Latin America people might actually have a different perception of these issues and myths ,as long as the economies have managed to have economic growth, better opportunities for the poor, and higher social mobility expectations than with the former situation. The region as a whole, was a lot of more stable during the 1990´s (average growth 3,5 %)than in the two previous decades.( the seventies and the eighties),which given the fact that the region was more open to capital flow volatility and the terms of trade were far less favourable than the previous years ,this is quite significant. Latin America voters are not necessarily supporting deep changes of policies but improvement in its social effectiveness. (M3)
Private business are doing new investment across Latin America, fostering a new wave of closeness between regional governments to push further the integration agenda. (M1). On the other hands, Chile ´s experience is still a benchmark on how the State can be reformed , without loosing its ground on social issues. The State in its current model (the so called colonial bureaucratic state)is not the best way to induce growth, quite on the contrary it is a constraint for growth .All those countries which have the better performance in terms of growth ,are the ones which have reduced the Stat role in the economy (M2).

Government Bureaucracy : An entry barrier for entrepreneurs?

Doing business in Chile or in others key Latin American economy, can be an interesting experience , although there are some cost to take into account .According the World Economic Forum , in the year 2005 it was needed 27 days and 9 procedures to start up in Chile a new business, whereas in Mexico it was needed 8 procedures and 58 days, and Brazil 17 procedures and 152 days. It is not that bad to be in a better position than key players in Latin America Economy. On the other hand, a World Bank Study for Chilean business opportunities ,found that to start up a new industrial business, it requires roughly U$$ 1320 ,and an average period of time of 130 working days to fulfil the whole bureaucratic procedures . To start a restaurant business it requires U$$1240 ,and a grocery store it might cost U$$1185. Highly business orientated countries , such as New Zealand requires no more than 1 or 2 working days and less than U$$40! To get through the whole procedures. In the United States ,it is needed no more than 5 days,5 procedures and roughly U$$210 .
How can we explain these differences? .Maybe there are a lot of alternatives to begin with, but it is clear that those countries which still do not have a business friendly environment ,are the one where the government has some homework to do. In fact , in the Chilean case there are a lot of discussion concerning the necessity of modernizing the State. Sure, very much of those procedures and cost involved in the process of starting up a new business , are related to States bureaucracy. At every level of new business opportunities, let say small, medium or large scale business operation ,there are these bureaucracy costs . Therefore, any new business opportunities must pass the government filter ,before trying to get over the other more important filter: consumer needs..
What does this all means ? It means that Government , is acting like an entry barrier for entrepreneurs to taking advantage of new business opportunities.-
The real issue is not to improve the access to new business opportunities, but who control the access door to that opportunities. In this sense, the State has been captured by politicians, bureaucrats ,and special interest group who depend upon the State to provide them support. The more people depend upon the State, the more needed it is to have resources to finance its services. It is in their own interest to keep the State alive, imposing additional cost to those who try to move away from the State social programs or protections throughout private business.
Chilean Government experience is not too negative on the issue, although there is still plenty of room to move forward..
A 2004 study ,found that the level of effectiveness of Chilean Government was ranked at 14 place out of 155 countries, which is quite satisfactory. The Economic freedom ranking was in the 13 place. This is because Government has implemented different programs to support entrepreneurs ,besides it has created different programs to improve social assistance to the poor, and it has helped to macroeconomic stability following fiscal policy rules. However, business opportunities do not wait and people enthusiasm for seeking new alternatives can not be exhausted by bureaucratic procedures.
To start a new business, it should be necessary only to check some minimum requirements concerning tax laws ,all of other requirements, can be fulfilled through supervisory rules made by consumers decisions and at the same time improving consumer rights protections.-

Oil prices decreases:Is it permanent or transitory?

Available evidence (De Gregorio ,Landeretche and Nelson 2006,mentioned by Central Bank of Chile in its september monetary policy report))suggests that the link between oil prices increases and inflation has been weaker in recent years than what it supposed to be. While in the period 1967-1980 ,an increase of 1% in oil prices meant a cumulative increase of 0.48% in the long run inflation rates, in the period 1980-2006 that impact was just a barely 0,06%.Considering the years 1990-2005 ,such impact of oil prices increases, has been even lower, 0.03%.Therefore, given the magnitude of this effect, current lower oil prices would not necessarily will mean a significant relief for current inflation rates, although if it is permanent it might induce inflationary expectations further downward. In such a case, the positive effect is upon the chance of not just keeping down inflationary expectation, but also because it would allow Central Banks to take a softer approach on inflation, moderating the slowdown impact on economic growth of increase in interest rates.-
What is the explanation for this oil prices decline?. Given that there are supply and demand explanations, it would be important to know the share each factor (supply or demand, being speculative or geopolitical) has on oil prices behaviour at this time. At first glance, it appears that lower global demand is driving oil prices down. The demand expectations for this year is to have an increase of about 1.2% less than what it was expected a few month ago. Concerning the supply there is still no agreement on oil exporting countries about the reduction levels in oil production to counter balance this downward price trend .
Therefore there is not clear indications whether this decrease in oil prices is going to be permanent or transitory .However for the year 2007,markets expectations (oil options markets transactions), indicates a roughly 50% probability that oil prices will be in the range of U$$65 to U$$85 a barrel,(Central bank of Chile ,Blommberg .September 2006) recovering itself from the current below sixty dollars level. The remaining 50% it is roughly split off between the lower range (25% probability of being below U$$65),and the higher range ( 25% probability of being above USS 85). So ,it looks like at least partially, there is a correction in oil prices. This means that only part of the current reduction in oil prices, would be due a decrease in global demand, probably the more significant one related to the US economy slow down. On the other hand ,it is not unrealistic to assume that speculators are changing theirs portfolios to a more secure assets, moving away at the same time (it is a fact that Us economy is slowing down its growth ) from commodities. Global Information available allows them to make such kind of decisions. In this scenario , current oil prices reduction would be transitory.
What about the chance of such oil prices reduction to be permanent? :it is unlikely that oil exporting countries will no react to prices movement .The oil cartel means a strong incentives to act in a coordinated fashion to restraint production further, such as to keep oil prices stable to its mid term levels (probably around sixty or sixty five dollars).At the same time demand is expected to growth although at a lower pace (1.6% next year ,down from 1,7% growth a few month ago)because of the just mentioned US economy slow down. But ,whether as it is expected ,such slow down turn out to be short lived , global demand for oil resources will move back upward again. Therefore the chances of having a transitory oil prices decreases are higher, than the chances of having permanent oil price decreases.-

Self regulation: is it possible ? (II)

Human behaviour can be explained by different disciplines such as psychology , anthropology ,but also by economics. Economic theory tell us that individuals pursue any activity up to the point when marginal benefits are equal marginal cost. This means nobody will carry out any action, without expecting to get a benefit much higher than its total cost. So, the expected benefits of privilege information must be compared with the cost of taking advantage from it. If these cost are rather low, then it is plausible to have information asymmetry.
It should be a golden rule for financial markets, that the cost of using privilege information of any kind, is higher than its benefits. This means strict laws with specific procedures to enforce the rights of those who depends upon information, which might be available with some delays allowing information asymmetry, coupled with strong institutions to deal with all the issues involves in its enforcement .
But how to deal with the privilege information for financial purposes anyway?. If the cost of using privilege information are defined ,what about the benefits? .After all, it is impossible to assume that information does have only cost for the decisions making process and no benefits. Well, it is a matter of technology.
Actually, firms have web page with different design ,services and strength .The on line communication ,is very useful when it comes to get from top to the bottom quickly, to get corrective action. Internal networks allows people to be in touch with each other, the rest of the firm community and external customers and investors .This is the key, because privilege information should become public information, as soon as it develops to get published on the corporate web page, so any one interested can take advantage from it. Any time a decision with implications for financial markets has been made, it should be publish on the web page as soon as it is possible. This way it would be possible to match the higher cost of using privilege information, with the expected higher benefits arising from it. In other words , the benefits arising from using privilege information by a lot of people simultaneously make it public, reduce the cost of using it to zero, and make the most of its benefits .
Therefore privilege information is inefficient for markets decisions, because concentrates its benefits among few people risking high cost. Alternatively, whether it gets public, information allows benefits to a lot of investors ,with almost zero cost.
But the issue of self regulation is still pending to be solve. Economics tools also allows us to understand the reason why self regulation is not feasible. Individual investors seeks their own interest when it come to make decisions, specially when it come to financial ones. The same for corporate business. Because of this characteristics of individual behaviour ,it is expected that the whole community might also get the aggregate benefits from such decisions(assuming they turn out to be correct) through charity, donations , investment and the like . Self regulation contradict this pattern ,as long as it deny the benefits of a better informed decisions to everybody ,specially while information is labelled as privilege. On the other hand, each one want anything on their own, which make harder to regulates individual behaviour.-
So, do not expect self regulation to be the proper guide for dealing with business information. It is a lot more efficient, a clear framework of rules to follow through, when it comes to such topics. What about Ethics standards?. It is an alternative ,but to be useful it requires the proper enforcement mechanism.