Friday, November 24, 2006

Milton Friedman: The Professor and his Global influence (I)

While the relationship between knowledge ,sciences and the current wisdom is fascinating , the most of it comes out when the right man fit with the right time, to make an old paradigm to change. Keynes and Friedman´ s point of views , were quite apart from each other ,however they both fitted well with the economic history clock.
Friedman was critical of Government intervention, because it was not upon its interest to work out policies well founded on economic stability principles. By its own nature, government looks ahead for the next election, which means to satisfy preferences of voters no matter its effect on economic incentives. Therefore , Government is not more efficient than private sectors ,to allocate public resources on behalf of community .It is safer that you have control of your pocket, than to trust it on someone else according to Professor Friedman ´s reasoning .
Markets works well when they perform with the proper institutional framework. They do not need Government to replace that framework, because most of the time it will make it in the wrong way. Traditional Government intervention in the economy, means economic policies associated with inflation, corruption, special interest influence, and lately even the chance of being captured by those who are expected to serve people.. It follows that the lasting effects of Government intervention, beyond eventual some short run gains, is a long run welfare losses .-
Professor Friedman believed ,that markets flexibility and information was the sufficient condition to solve disequilibrium, whereas its Keynesian counterpart believed that it was needed a more active Government role because of rigidities which imposed heavy cost to society in terms of unemployment.
The end of the twentieth century was characterized from the economic point of view, by a clear dominance of markets orientate policies, and Governments facing the challenges of reengineer itself according to global economy requirements. It might look like a triumph to the one who fight on that direction.
A second line of supporting markets functioning, was related to institutional framework and political liberties, as a necessary condition for economic liberties to allow proper markets allocation of resources .In other words, democracy was a substantial ingredient for individual decisions .Whenever the markets orientated polices, worked out well, there was behind a strong democratic values .It was not clear the direction of the causality-effect relationship, whether political freedom preceded to economic freedom, or the other way around. When Mr Friedman visited Chile in 1975 there was an academic discussion about it to explain what it seemed a contradiction between Professor Friedman beliefs and his actions. Chile experience of markets policies implementation under the rule of an authoritarian regime, did not fitted well with conventional wisdom . But Chile was not at that time the first country to pursue so. So it was Taiwan, South Korea ,even China (1978)with its doctrine two systems one country. The interesting thing was that, market functioning had the ability of adapting itself to different conditions as long as the fundamental (Relative Prices as the guiding light for resource allocation decisions), stay in the right track. Government could also act as a facilitator for markets ,and not just as substitute for it. Of course this does not mean that democracy is substitutable ,but what markets needs can also be granted by government if it wants to.-

Friday, November 17, 2006

Institutional variables and Economic Growth (II)

From time to time there has been allegations concerning the role of religious beliefs and cultural values, on economic growth. Religious beliefs are important because represent the moral approach to issues such as wealth accumulation, and a moral guideline to important untouchable assets like tradition, trust, authority, individual initiative and faith. Religious and cultural beliefs could be the energy flow any society needs to sustain the requirements of growth.. However, it could also mean a state of mind which keep individual static throughout time ,unable to decide any action because of lacking of rational instrument beyond God ´s wishes , to solve any of current global challenges .
Let take the global warming issue. What is the answer from the religious point of view?. Economist, scientist, journalist share a common perception about the necessity of giving key attention to its expected impact, such that to make economic growth sustainable. But Is just faith good enough to overcome the threat arising from global warming? . If it is not , because of the cost of waiting is too high, what is going to be the future role of religious values, if they are not inside the whole discussion? Maybe the religious point of view is the missing variable in the effort to reduce the global warming, although I do believe it is more a matter of economic incentives which are at this point already under way ,such that the invisible hand will start soon to show how it works in the global scale.
Clearly, religious beliefs can not be left out from the analysis because of its cultural impact. In the environment issue, If people do not care about God property (the environment)protection,there is a tough road to follow before any action start to take place.-
Cultural variables are also important for economic growth. Thrift, hard work, and willingness to take risks, are the essential fuel for the engine of growth. It allows innovation , creativity ,saving and investment. When people get the fish instead of the tools for fishing, it is the beginning of the state of mental laziness the first condition for leisure and passive behaviour .It follows that People loss its ability to decide on their own what it is the best for improving their living conditions. Therefore They get trapped on the State machinery of selling services, which it charge a fee for(corruption).
Cultural and religious beliefs are interdependent, besides each one influencing to one another. The critical question then is what is the magnitude of the cross effect they have upon each other? .If religion emphasizes the importance of linking faith to what anyone is able to do, rather than to what anyone can expect to happen, there will be a huge difference in terms of the attitude for getting more than just surviving level of living condition.
The second critical question is: what is the relationship between religious beliefs ,cultural values and poverty?. Is it that poverty stay longer in those areas with values which might become like a cultural constraint?. After all it was just at the end of the twentieth century that the Pope John Paul the Second ,settle down the controversy between capital and labour with Laborem Excercens, later reinforced by Sollicitudo Rei Sociallis which recognizes the individual right to pursue his own economic initiative as a condition to improve common welfare.
Previously to the Pope JP II clarification, Latin America witnessed sharp criticism to private firms even from religious point of view with the so called Liberalization Theology. On the other hand, more than forty years of State intervention, undermined the importance of wealth creation. It also prevailed a social mistrust about private firms , because of its maximization purpose supposedly against people welfare. Is it just coincidence that private firms in Latin America(Chileans ,Braziliens,and Mexicans) has been growing and getting more influence to generate wealth since that John Paul II blessed it ?.

Friday, November 10, 2006

Institutional variables and Economic Growth (I)

Economic theory has different explanations for economic growth, in particular economic development models have stressed in their statistical and econometric estimations, the key role that capital accumulation, technology advances and human capital quality (endogeneous variable)have on economic development. But recently there are a growing interest in what it is called the instrumental variables ,and its effect on economic growth, let say for instance quality of institutions, cultural values and religious beliefs.-
The issue becomes more relevant ,when it is important to have explanations for the steady efforts made since the eighties, to improve growth performance in Latin America, and the outcome measured in terms of poverty reduction ,income inequality corrections and social mobility prospect leaves still some questions .
Before going into the roots of the problem, what if we ask ourselves the following :Who benefits most from the current level of poverty and income inequality?. Most of the policy orientated to fulfil economic growth goals ,are based on the importance of the private business, deregulation, property right protection, the rule of law and the like. However , there is not too much attention about the barrier entry an entrepreneur has to overcome to begin a new business. In other words, the whole idea of market economy functioning is based on the abilities of current business man and entrepreneurs to create wealth ,but without taking into account the barriers they might have to face to get into business and out of the state dependence. It looks like it is part of the State business to keep some portion of citizens as captive costumers for its free services(public education ,health, security, and so on) so to justify its bureaucracy and expenses levels.
Entry barriers to start out new small business , seems like the protection the state needs to keep alive its social network The more people go into the chance of trying its own way to do a better living condition, the less they will depend upon such state services. In fact, all of those who succeed ,would be able to pay a better education for their children , a better health services , improving their welfare beyond what it is case while they are depending only on the state. It follows that in this situation ,those who do not succeed will really need state support ,but as long as the amount of such people is less than before ,the quality of public services would be higher because the same amount of financial resources would be shared by fewer people than before.
Therefore, to improve the quality of public services it is not necessary to have higher public expenditure, but to allow more people to try their own way facilitating their access to new business opportunities .
An additional implication of such state services dependency is that the bureaucracy, charge a fee for it, merely corruption .Each step people has to get over for starting new business, means the chance of charging such a fee. In fact ,corruption is higher in those places where the State has a stronger entry barrier for new business opportunities to be available for anyone. The incentive to keep the current level of state dependency, is about the chance of charging such a fee which has not a cost as long as control mechanism are soft . These cost are low or zero, when the mechanism of control are rather light , or they do not exit at all.
So, given that the effects of free market economy policies ,fall on those who are inside its borders of participating of the business opportunities available, the ones who are left out are those who will be kept inside the state own borders.

Friday, November 03, 2006

Latin America ´s economy reforms: Some facts and myths (II)

Once the myths are melted away, it is more obvious that Latin America has gone too far to move backwards again. The New leaderships styles currently on charge in most of Latin America governments, means the people ´s call for further steps in the direction of finishing the job for this continent, to have its chance of taking advantages of new opportunities arising on the horizon. Although it might be debatable, about its contempt and scope, most of these further steps are focused on the manner the New State will be connected with its citizen and the economy and how each Latin America economy fit the best it can this people demand.-
To have a better understanding of the whole issue ,we need to move further to take into account some fact .Following J Zettlemeyer paper ,fact are classified in two groups: the first one are the well known fact settle down by the research already done in the past, and the second one is the result of new research.
Fact 1: In the last 25 years Latin America economic growth, has underperformed relative to other developing country economies ,such as East Asia pacific , and South Asia.
Fact 2: Slow GDP growth in Latin America, has been driven by slow TFP (Total factor productivity) .This means the overall efficiency of allocation of resources is below the desire levels, taking into account institutional capacity.-
Fact 3: Latin Americas economies shows similar growth patterns until the eighties, but more recently there has been large cross country differences in growth performance. External and internal shocks makes their way through with different patterns, according to each country weakness and strength.-
Fact 4: Business cycles in Latin America are both more volatile and more protracted . Volatility has changed over time, decreasing to its historical levels in countries like Mexico, Brazil and Chile in spite of a much higher capital trade and mobility. This is probably the expected result of applying rules for macroeconomic policy decisions.
Fact 5: Latin America and Africa has suffered more frequent output collapses (falling in output for more than two years resulting in a total output loss of at least 5%) than other developing countries. This means a strong vulnerability when it comes to faces external shocks.
Fact 6: Period of high average trend growth, have been shorter lived in Latin America, than in other developing countries. A possible explanation for this is related to the on and off between economics and politics ,so that as long they do not move together in the same orientation the outcome will be more unstable growth.
What do all these facts means ?. It is not easy to have precise answers or even more difficult to have the last answer ,but it seems probably that like others authors have mentioned on their research, there are institutional traits in the lower than average economic performance in Latin America . The nature of the State role in the economy and its relationship with its citizens is at the key for explaining these facts. The quality of political institutions, the protection of property right, the control of corruption, the rule of law , and the quality of bureaucracy are all relevant to explain different economic growth performance . However, the result available indicates an improvement on these issues in Latin America, but there is one key restriction; the nature of the centralized state which can affect the true democratic nature of its performance. In this situation, there are strong incentives to capture the State by political and special interest groups for their own purposes.-