Friday, December 28, 2007

The year of the environment is almost gone

Next to finish this year,there are three elements which has made the difference between what it was expected and what it was real.:
1.-At the beginning of the year 2007,there was some doubts about the importance environment issues would have.March 2007,marked a turning point when the "Unconvenient thruth" documental was awarded at the Oscar ceremony.It ignited a new focus on a subject most of the time, left for bureaucratic atention,instead of ordinary people and global media concern. It began the new focus, based on world public opinion now pushing hard for new policies and agreements.The Nobel prize award made the whole issue a matter of piece.Therefore, in the next months ,both Europe and the USA,made important contribution to move forward faster than expected. New emerging economies also stepped in, to a global consensus for a different approach on environment,following the expiration of Kyoto Protocol.

2.- The global economy has been stronger than expected to cope with unstability conditions.While the oil price is close to U$$ 100 a barrel,the 2007 year global growth is expected to be within the range of 4%- 5% .This does not mean to rule out complications ahead ,due to the implication of sub prime markets crisis.But the global economy has been resilient so far, which indicate a positive sign of strenghts.-

3.- The economic growth prospect for Latin America economies has improved, after the new Free Trade agreement between the USA and some countries such as Peru and Uruguay, (not considering Central America).However,Free Trade agreement effects turn out to be positive, as long as there is a proper institutional framework ,specially designed to take advantage from it,specially in the case of Medium and small size firms. Although inflation is back because food prices and energy cost increase,the reforms made in the nineties heavely focused on the macroeconomic and financial side of the economy, suggest it will be a transitory situation.

Friday, December 21, 2007

The Asian economic crisis: Ten years later (II)

It might be helpful for current uncertainty about the lasting effect of subprime market crisis, to keep in mind how important expectations are, and how relevant speculative forces are, to set the pace of adjustment path. Once there was well supported doubt, about the real value of each Asian economy exchange rate ,speculative forces were in charge of market behaviour. Any analysis on exchange rate fluctuations at that time, illustrate the magnitude of this speculative effect. R Dornbusch called overshooting , J Keynes called the speculative nature of business behaviour. Indonesia currency felt dramatically from 2,909 (1997)up to 10,014 ruppies per dollar(1998) , Korea currency moved from 950 won/dollar, (January 1997) up to 1600 won /dollar,(January 1998) , and Thailand baths from 31 (January 1997 ) up to 50 (January 1998). With all information available, speculators made quick decisions to move away from an increasing risky scenario. Somehow, speculators care very much about the real conditions of the economy, round the clock gathering information such that they are able to move quickly in case their expectations are not consistent with the fundamental .
It follows that speculative forces (suden changes on capital flows)are like a warning light ,about what is going wrong in the economy .Of course speculative forces by itself ,are not enough if they are not complemented by institutional weakness and misplaced focus of monetary policy.
a.- Institutional weakness. Reckless loan policies by private banks in Asian Economies, led to a sudden increase of loans which were not capable of matching its payment schedule .Bad loans, exacerbated negative expectations which reinforced the depreciation round, because everyone wanted to get out of that market to avoid further losses.The process of large gross intermediation of capital inflows and outflows through the banking system, implied that the domestic Asian bank increased their foreign short term liabilities faster than their foreign assets.. In the South Korean economy case, liabilities increased by U$$ 56 b between 1993 and 1997,while the gross assets increased only by U$$ 19.8 b. As a result, the net liability position of Korean banking system went up from U$$20,8 b in 1993,to U$$ 57 b by 1997,(U$$90b liability against U$$ 33b assets)(Roubini 1998).It is obviously a moral hazard case, which arise because of expectations of Government promises of bailout. Very much of domestic loan , were driven to finance speculative demand of existing fixed supply asset.
Another lesson from the Asian crisis, was that monetary policy must be rightly targeted to keep expectations under control. In most of Asian economies at that time ,it was focused on the wrong target .Instead of reacting to the speculative forces ,it underestimated the magnitude of such forces .It was more concerned with keeping stable the exchange rate throughout foreign currency markets operation, than constrained the aggregate expenditures level throughout higher interest rate which would have also allowed to slow down capital outflow and further currency depreciation . When it realized that such a correction was on top of the list, it was too late to stop the speculative waves.
Quality of information for a proper allocation of resources and economic decisions, was not good enough to guarantee stable economy growth and to avoid the recession in Asian economy by the end of 1997. The investment boom took place in the wrong sectors ,and speculative forces reacted faster than authorities attempt to control the damage. As a result, the whole event were driven by speculative behaviour adjustment , with no chance for macroeconomic policy , forces , to mitigate its negative impact.

Wednesday, December 19, 2007


This video, shows how important it is to get advantage of nature resources ,without hurt them.The fog trapper curtain, allow to get water (7 lt per square meter/day) which by gravity support local communities productive activities.This is part of a 25 years Catholic University research project.

Friday, December 14, 2007

The Asian economic crisis: Ten years later (I)

The Samsung Economic Unit Research Institute( has published a review of the situation focused on the South Korean economy ,after ten years of the Asian economies crisis(1997).
First of all, some background .The Asian economic crisis started off in 1997 in Thailand, when those economies could not get over with the effect of economic growth, based on serious unbalances and disequilibrium. The exchange rate policy applied was Asian currencies pegged to the US dollar, such that while the dollar started to appreciate in 1995,the Asian currencies also had a real appreciation ,which led to current account deficits . On the other hand ,interest rate differential and low exchange rate risk, led to huge amount of capital inflow which prevented currency depreciation. By the beginning of 1997, it was clear that several Asian currencies were overvalued, and that such overvaluation was a factor in the worsening of the current account deficits in many countries of that area ( ). This current account unbalances ignited a series of depreciation in local currencies, which pressed the financial sector ,governments and firms which had huge amount of debt in such foreign currency. At the same time, this depreciations were self reinforced because all of those economies shared the same markets, so they had to protect their exports competitiveness .
At that time ,on November 21st ,the South Korean economy requested assistance from the IMF because of the effect of such a crisis on its own economy, which was not possible for them to carried over. South Korea economy was heavily hit by their neighbourhoods countries, because of the different adjustment of its exchange rate policy. While at the end of September 1997 the average rate of depreciation of Thailand, Malaysia, Indonesian and Philippines currencies, were roughly 33%,the Korean won was depreciated only by 8%,which means that the won was appreciate in real terms. This meant an important loss of competitiveness for Korean economy.
Ten years after the crisis , South Korea economy has fully recovered with some impressive figures. It holds U$$ 260 billion in foreign currencies reserves, and it has a per capita national income of almost U$$ 20.000.Exports has surpassed U$$ 300 billion, specially important the fact IT industry has become much more important on total exports.
The score card for the Korean economy ,according to the SERI report, indicates that in the last ten years firms were reluctant to invest more, reducing capital accumulation. Qualitative growth improved somewhat, because firms enhanced their management models focusing on higher profit.
Some of the challenges which lies ahead includes more labour market flexibility, innovation in small and medium sized business to make them more resilient to markets fluctuations, softer regulations and additional investment in the services industry.
This case illustrate how important is to take the right lesson from crisis time. In fact the South Korean economy, made out an opportunity of that painful crisis, to make deep corrections specially on the financial sector, which otherwise were next to become severe restrictions on growth .-

Friday, November 23, 2007

Public Transportation in Chile : Working with the wrong assumptions (II)

A couple of considerations about the mass transportation system in Chile , known as "Transantiago".( a better name would be "Transexpress"). First ,Working with the wrong assumptions in the first stage, requires a careful approach on the next stage , which is the crucial one to make it a feasible project , on the mid term time span. Otherwise ,the situation can get out of control. Secondly, precisely because of such considerations, following the House of representatives in the Chilean congress , the Senate did not approve the financial resources neededfor the year 2008, which were asked by the Government .The Senate, in a joint partnership of both sides of the political spectrum; the opposition and the current coalition government supporters, are demanding a new and different law with specific and detailed explanation of every aspect of the working plan of the system, instead of being part of the public budget for the next year, just as one more within of a lot ofdifferent sources of expenditures . Therefore the mass transportation system in Santiago (Chile) which generates losses of U$$35 million monthly , do not have the financial resources at the require level, to keep fee at its current level and to increase the fleet. The authorities have ruled out the chance of increasing the cost for commuter, as an alternative source of financial resources. Thus ,the question now is: What is next? .
Although with the participation of the private sector on technical matters(software design) , and some operational areas of mass transportation, the whole project is a State designed one .This is the critical point, because it seems clear that it is beyond its current available options, for the state to go alone with the remaining phases of the project . Therefore the whole project, not just part of it, should become a joint venture between the state and the private sector. The previous experience with firms which have been managed by the State ,is not encouraging enough to support enthusiastically the request for additional money, at least no without some control mechanism or specific justification for it. This project, the way it is right now, could become in the near future, a permanent high demand of public resources project .
The payment system applied so far, could also require some adjustment sometime into the future , taking into account different options of commuters transportation, such as the express line(faster than average with fewer stop), the frequency of traffic (The more often commuters use the system ,the lower the fee) , and the volume of combinations , ( The more combinations the lower the fee),along with the size oif the market (population areas), (The larger the market ,the lower the transportation fee).The current fee system, is hardly affordable in the long run, mainly because the rate of commuter future demand for mass transportation might increase,( it is supposed that commuter will left their car at home),which will imply faster depreciation of current fleet, and higher operational cost because of oil prices increases,plus higher cost for unfrastructure facilites. Sooner or later, there will be additional requirement for more money, which tax payers not longer can support,speacilly whether the quality of service does not improve substantially. Subsidy to the poor would be an option, to take into account,such that the burden of keeping the system working ,is well distributed among commuters different incomes level.-
The fact of the matter , is that the new mass transportation system proposed, is an expensive one, which sooner or later commuters will have to pay the real cost. Anything different to this reality, would the worst of the assumptions.-

Friday, November 16, 2007

Public Transportation reform in Chile : Working with the wrong assumptions (I)

Can anyone imagine a transportation system reforms, based on the assumption that it will work with fewer but bigger busses ?.Can anyone imagine a transportation system heavily dependent on the subway transportation, without increasing the frequency of the trains?. The questions are long enough to get mad to daily commuters .But, those are some of the assumptions which the new public transportation system in Santiago (Chile)was based upon. What went wrong ?,asked the Washington Post ( on Tuesday, November 13th .
It is not the first time in Latin America , that a reform on public transportation system is attempted .to carry out. Brazil and Colombia have also tried this reforms in the past, with apparently good results. In the Chilean case, it was a huge effort without precedent, to implement a public transportation system based on a modern concept of environment friendly ,and likeable to commuters .
For many years the old transportation system was on the spot because of a lot of reasons :Pollution, dangerous operational conditions, uncomfortable for commuters needs, which all add up to negative externalities But even with its externalities it worked ,although not that much up to commuters expectations .The new system ,have solved the externalities ,but it does not work as expected !.How come ?. It does not work , because the assumption upon which the whole system was built up, were wrong.
Let take a brief review of some of the key assumption:
a.- Local Subway system, worked for years with less than two and half passengers by square meter .It was one of the cleanest ,nicest and secure transportation system in Latin America. It was assumed that taking as a benchmark the way Japanese did with their own subway; Chilean subway was able to increase the density ratio up to seven passenger by square meter. Therefore ,there was room for increasing the density ratio such as it reduced the sunk cost of idle capacity. The result : The system collapsed and there is no way to use the subway on rush hours (early morning and early evening), because it crowed out.-
b.- How much cash was it needed for the proper implementation, of the new public transportation plan ?.There is an unwritten rule which says that any public plan , whatever it might be, always requires more financial resources than expected . Therefore ,the current cost (roughly U$$800 million),is well above the original budget. Actually there is a discussion going on in the legislature, asking for more than U$$150 million for the year 2008 as an additional supplement .However, the House of representatives, approved symbolically only U$$ 2 !,while it is not clear the way those resources are going to be spent.-
c.- Santiago city is not Madrid ,or New York. It lack the necessary infrastructure to implement a transportation network, the way it works in those cities. Madrid has a kind of ring which surround the city, allowing to get access to down town from any point following straight lines. New York is a huge square, fitted into the Manhattan island, which allow commuters to move either way south or north, west or east in a shorter period of time. In both cases, no matter where you are going, you know where you are. Santiago has grown without a detailed urban path ,some places are like a square(downtown) ,but another are like a circle. Therefore the routes are not straight lines, in fact a recent poll indicates that the current plan, has increased by 11 minutes the time it requires to commuters to move form one point to another. Besides they have to wait on bus stop by 15 minutes, before it pass by. However, all those previous negative externalities it had , qualifies positively.

Friday, November 09, 2007

Social integration in Latin America: An outstanding goal for a Summit

It is about to begin the XVII Latin America Head of States Summit. The main topic will be Social integration and Inclusion, which can also be displayed with the following question: How to keep the balance between economic growth and social progress?. Quite relevant as it is, the issue of social integration has been in the last 15 years ,at the core of economic policy debate in Latin American economies, following the “Washington consensus” approach at the beginning of the nineties.
That goal should not exclude a modern focus on public policy. Actually, the challenge is to find new instruments to make economic growth more effective to reach all of those who most of the time are left behind. Near 40 % of Latin America population live on poverty condition, which looks like there is an urgent need to do something about it.-
Most of modern economic experiences indicates that inequality and poverty, can be solved by a sustainable process of wealth creation ,rather than redistribution of existing wealth at any point in time ,which might turns out to be transitory. All of welfare gains based on the State intervention into the economy ,that Latin America economies achieved in the sixties and seventies ,was lost in the eighties Therefore the focus should be on a more comprehensive view about Economic Growth and its key variables.
How to get higher economic growth performance?: Recent history, tell us that a primary source for economic growth is based upon private firms ability to do its job, and do not interfere them with unnecessary regulations. Private firms, creates jobs at a faster pace than the State. This does not mean that both can no longer work together .Quite on the contrary, they need to one another. To Complement the Free Trade agreement currently in place ,with the right policy mix , means to improve incentives ( more flexible financial rules, more flexible tax policies for new firms, more flexible training program for labour force, more flexible procedures to begin new business ) for more small size firms, to jump into the entrepreneurial track, and at the same time, to make effort to design the right incentives to come in ,for big business with innovation potential ,instead they go elsewhere.
The next step is to design the proper framework for social policies, such as better targeted focus in public health and education expenditures. What about the State ´s role?. There is no way to change inequality and poverty level, without a reform to the State to make it more suitable for current needs of global and deeply interconnected economy, which requires higher competitiveness level. To think otherwise is like to play against physics laws. What ever goes up, it must goes down. That is the main lesson arising from the economic failure, in the eighties. Therefore, it means that the Colonial State , in charge of reducing poverty and inequality, with its current characteristics , will increase poverty and inequality in the years to come. In other words, any gain on poverty based on the State intervention , it might turns out to be transitory!. However , it is important to keep in mind that the Sate needs people asking for more state intervention . But all of those people, with the proper incentives could also start their own business , whether they had the chance to do so, which means that the State should reforms its procedures to allow more flexible requirements to start new business .
If this Summit includes in its reflection this prosperity path, there would be a lot of reasons to considered it a successful one.-

Friday, November 02, 2007

Information as a source for optimal allocation of resources (II)

Ronald Coase wrote an essay on The American Economic Review. (Vol.64,Nº2 1974),about the real differences between the market for ideas and the markets for goods, to justify the regulation framework applied to both of them :None for the markets for ideas, and a lot for goods markets. He suggested that from the regulation point of view, the markets for ideas (information), should be treated the same way it is treated the good market. In other words, regulations should be applied to both markets. Therefore any activity related to the production of information(the press, new sources of information (internet),religion and innovation )should be regulated the same way it is the good markets, to the extent that for Mr Coase , both markets are similar.-
Are both markets alike ?.The big difference is that information is needed for the decisions process of efficient allocation of resources, as much as the human body need water to keep itself alive . Any restriction on information ,is an artificial constraint on data flow which leads to inefficiency and welfare loss.The cost for society of applying regulation to such a data flow ,is higher then the benefit from it. Welfare level depends upon the level of information available, to make possible the decisions making process which leads to production and consumption equilibrium levels , and above all, because it is not possible to substitute lacking of information, it follows that the welfare frontier lies below its optimal level. Information value is at its most, when it is available just on time . Besides by definition, from the economic point of view, nobody get the benefit of the missing information. Hoard information is useless.
Quite different to the goods markets case. Any good can be substituted, because of quality failure or prices ,which allow consumers to protect their welfare level . However, those case of goods which can not be substituted (lack of substitutes) ,gives to its producer an above normal level of benefit . This above normal level benefit, which is absent in the information case (normal market situation), justify to regulate markets such monopoly and , oligopoly to neutralize social cost
What about privilege information ?.Well this information does not have substitutes, and indeed it might provide to its owner, high level of above normal benefit. This the only kind of information ,which should be addressed with some normative approach which is quite different to a regulation framework .In other words ,it is a matter a ethic to allow the benefit of better and more information to everyone , because information production is the result of a lot people working toward the fulfilment of a goal, none of them measure the value of their contribution, therefore the benefit arising from it belong to all of them.
Finally ,Mr Coase ´s essay suggestion that this issue is a matter of convenience for intellectual community ,more powerful than consumers organization , might lead to believe that the problem of regulation in both markers is related to special interest group abilities to pursue their own interest, despite the impact on welfare. In particular, the strong argument for press freedom , made by the new media , it would clear reflect the relevance of this kind of focus .However, the missing point in such argument, is that new media, no matter the means they use (newspaper, Tv ,radio, internet),or the power of its owner, reduce the transaction cost for community itself, (economics agents producers and consumers) to provide all the information it need. It follows that if new media would not care about press freedom, community should! .So it would with people caring about faith and so on.-

Friday, October 26, 2007

Information as a source for optimal allocation of resources (I)

Information availability allows economic agent the most efficient allocation for resources. Usually market competition works, on the assumption that all information is available with zero transaction cost .Otherwise , it is hard for economic agent to realize the best chances of making profit. Although information has transaction cost , rational behaviour assume that every agent ,will gather information up to the point marginal benefit = marginal cost. When it comes to goods transaction, information is self contained on each product characteristics, such as quality, value and price. If there are not perfect competition, advertising expenditures complement each product helping out to positioning itself on consumers mind with more information about its characteristics .It follows that markets is all about information as much as its institutional framework.. Given an institutional setting ,any restriction of any kind(biased reports) on information flows, will affect the efficiency of allocation of resources.
What about financial transactions ?. It apply the same. Economic agent, needs information about the quality of financial instrument available for investment decisions. However, quite on the contrary to the good case, this information is not self evident on every financial instrument as it is in the good transaction case. There is information asymmetry ,the seller of the financial instrument knows better the quality of it, because it has all the information to evaluate the present value of such asset. This situation leads to the adverse selection problem. Bad quality financial assets, are the predominant ones in markets transaction, because every investor do not have the chance of getting correct information ,any time it is needed.
Financial Markets evaluate the information available , asigning a price to each asset which match the risk associated to it. The riskier the asset the higher the return , but the lower the chance of finding a customer ready to take the risk of buying such asset, when markets behaviour turns out to be risk averse.-
Given the importance of a proper risk valuation , markets need the advise of the asset rating agencies, which classify asset according its different level of risk within a scale ranging from the top to the bottom. Those better qualified get the most ( AAA+) grade, which means low risk high profitable assets, which every one want to include on their portfolio. On the other hand ,those assets which do not get the best grade investment, are the ones which every investor would prefer to get away from. This was the case in the eighties and nineties with defaulted foreign government bond , which at that time allowed the development of the so called swap operation market.
All this discussion lead us to the current situation of mortgage sub prime market crisis, and the implications for market performance,as a case study in terms of the role of information. No matter the ignition factor, the fact of the matter it represent a market failure on two key variables: institutional framework and quality of information .From the quality of information stand point , any one in charge of asset information analisys, is the one to be questioned , about its procedures to properly grade the risk involve on this kind of sub prime transaction. Economic agent, followed and trusted the grade investment those rating agencies gave to every one of this new financial instrument and subsequent transaction.It seems that even with a weak institutional framework, proper and accurate information can make the difference between right or wrong allocation of resources .

Friday, October 19, 2007

The year 2007: Some comments

Most of forecasters are already working on their projection for the year 2008.Michael Mussa ,has said that the best friends for them is luck. At the beginning of this year, there was little concerns about issues such the sub prime mortgage markets crisis, and its expected impact on global economy. At the same time, it seemed that the US economy was getting on its way through, toward a soft landing following the upward adjustment on the interest rate. Markets were wondering what would it be like without A Greenspan as Chairman of the federal Reserve ,and the character of the incoming new boss B Bernanke, along with China stock exchange markets turbulences , after applying new regulation to reduce speculation and gambling .Most of the attention, was on oil prices behaviour . Europe heavily concentrated on environment ,set the pace on the issue for the month to come .Finally Latin America, even with deviation in some countries from macroeconomics fundamental, had the expectation of another year of economic growth.
A famous question which was done by former President Reagan, is fully applied at the end of this year: Are we better off now than what we were at the beginning?. This question matter because when it come to make forecasts , it is very important the conditions surrounding those forecast ,otherwise there is chance to be wrong on markets predictions. Therefore, any forecast for the year 2008 ,should take into account the answer to this question, otherwise who knows what the forecasters are really predicting?. If we are better off, any forecast would mean to improve even further our current conditions .If not, any forecast would mean any thing ranging to be worse off than we are right now ,or to keep the same situation at the same level it is right now. Macroeconomic data only measures the addition to current GDP value, but not the framework which influence those results. It usually appears as the “error term” in the econometric model. Well some time the “error term” make the difference, between right or wrong.
My guess is that we are not worse off now ,than what we were at the beginning . Every aspect of global economy ,is a bit better now than what it was at the beginning of the year , and above all better than what it could have been. Let checks some issues which were on the list of potentially harmful for the global economy: Volatility on global stock exchange markets ,oil prices increases (which contrary to the expected is still below U$$100 a barrel)),sub prime mortgages markets crisis, slowdown on the pace of economic growth in China, India and Europe, and protectionism threats .
How come that global economy has been so resilience, so far ?. My hypothesis is that the world economy , is moving toward a new stage with a more diversified distribution of world product. Actually, 40 % of Global GDP is produced on emerging markets, reducing the risk of global slowdown .The pace of economic growth ,of the leading economies in such a group ,is strong enough to keep the train moving forward. Global economic growth has met its fifth year of continuing growth at a 5% rate. On the other hand, it seems that a global framework is already working to protect specific issues such quality products, and that of domestic economy policy. Therefore there are better instruments and tools to solve current global economic challenges, which means that there is space for moderate optimism for the year 2008.-.

Sunday, October 14, 2007

Global Warming :The new totalitarian ideology?

The 2007 Nobel Peace Prize has made a new call for environment protection, and above all new development for decisive action .A new global institution just for environment?.
Does this means global warming might become the justification for constraining economic growth, human freedom and trade?.This is something what some analyst are afraid of.
First of all, environment protection should not be a constraint for economic growth. It is a matter of making them both complementary, instead of substitutes.-
Secondly, those countries which pursue environment protection policies, have been capable of improving both :Economic growth potential, human freedom and trade , keeping at the same time the proper attention to environment. In Latin America ,Brazil, Uruguay and Chile are good examples about that.-
Third, It is hard that a new ideology comes up from environment ,because every one is watching what it is going on with it, and the expected effect of doing nothing .On the other hand , It is not a matter of belief, it is a matter of fact. Science and scientific community although without unanimity , recognizes that human intervention has some important probability of being responsible for global warming. Even though it could also be part of a cyclical pattern, it is obvious that such a pattern in the last years has been above the trend .The Inconvenient truth documental has made it clear for all.-
Fourth. At this point ,it is too late for such an issue to become an ideology .Thus it should be the basis for a new environmental pragmatism.-
Fifth .Environment is like most of the cases of common property goods. Because nobody might claim property right about it ,there is no incentive to take care of its exploitation level. The expected outcome, is the collapse of such a resource. This a fact which applies for all resources in such a situation, underground water, river side contamonation, fishery industry and the like.
Sixth .Markets mechanism can solve a lack of property right claim, assigning such a right to every firm which contribute to reduce environment damage. Those claims are traded in secondary green markets ,with very high potential for benefit for everyone involve in such a transaction However this markets mechanism can not make the difference as fast as it is needed.-


Friday, October 12, 2007

Special interest ´s groups and economic policy

Economic policy is not neutral when it comes to analyze its distributional effect. A policy designed to reduce inflation ,in the short run might benefit some groups and hurt another. Those who get higher interest rate for their banks deposit are the “winners”, but those who lose their jobs because of unemployment increase are the “losers”. However the overall effect in the long run of such a right policy, is to increase the welfare level for all, because low inflation support economic growth. The same distributional analysis applies with taxes, exchange rates and fiscal expenditure.
These days ,there is a debate in Chile concerning the current level of the exchange rate level .The higher copper prices ,plus the interest rate differential between US and the Chilean economy(almost 100 bsp),has created such excess of foreign currency (dollars), at the rather small foreign exchange rate market, than the local currency (peso) has appreciated by roughly 6,5 %throughout the year 2007. There is also a similar situation in Brazil and Colombia.
Since the year 2000, the Central Bank has applied a “clean” flexible exchange rate policy ,allowing exchange rate instead of real variables and domestic activity, to absorb the effect of any external shock. However this free floating approach, means that sometimes exchange rates appreciates ,and sometime it depreciates.
When it appreciates consumers can get cheaper good from abroad , besides they can take more foreign vacation program. Producers can get capital good also at a cheaper price. On the other hand, the appreciation of local currency hurt exporters specially those who concentrate their export to markets in the US, assuming they export product with high price elasticity, which means substitutable products. Therefore there is a distributional effect which is no neutral because while one group win (consumers),the other one (exporter) loss . While consumers get the benefit ,exporter get the cost of the appreciation. Thus the local authority confront a cruel dilemma, which group should they support? . either one have their own weight for GDP growth , consumption on the one hand, export on the other hand. This is the reason because free floating exchange rate policy , develops the so called “fear of floating” , because there are no minor distributional effect with such fluctuations.-
But that is not the end of the story, exporters are better prepared than consumers to speak out . They are fewer than consumer, therefore they have lower transaction cost to get organize . So, they are in a better position to try to influence authorities to intervene in local markets to push exchange rate to depreciate. But if local authority do so, then economic policy is designed by special interest ´s groups, because any group with strong media influence to get their message across, will try to do the same . In such a case economic policy becomes discretionary, which no one will be in the position to anticipate, increasing the risk level for long term investment and for the country as a whole .-
What it is important in this case is to understand the overall issue. The Chilean economy is growing at a steady pace ,such that it induces to appreciate its local currency because it worth more. In fact on the long term trend ,the exchange rate has been moving downward as the economy get higher GDP level. It follows that ,the real issue is how far is the current exchange rate level form its long term trend ?.Available data suggest that it is not that much further away.-

Friday, October 05, 2007

is Inflation back in Latin America ?

Recent annual inflation rates in some countries in Latin America: Venezuela 15%,Argentina 8.5%,Brazil 4%,Chile 6% .Still the average rate of inflation for the whole bunch of countries, was 5,4% in the year 2006,quite below the average in the nineties,263% in the first half of that decade, and 17% in the second half of that decade. The trend in the years 2000,concerning inflation rate in Latin America, has been downward . Therefore it is not the case that Latin American economies are moving backward ,but it is the effect of cost pressures arising from foods and energy prices increases .Whether it is transitory or permanent is a different matter. However, it is probably the new price setting for the mid term period of time. It is going to take a while to develop new capacities to cope with world wide increasing demand for foods, very much so, when the expectations is for a steady increase in such demand. Advanced economies do not face the same kind of pressures because foods do not represent that much expenditure weight on consumption basket . The same apply for energy consumption ,and new sources of supply.-
The important issue is that most of Latin America countries in the nineties, implemented reforms in their Central Banks to give them more autonomy and independency. It follows that Latin America economies have the proper tool to cope with this prices challenge. But, a different issue is how to use this tool, and the willingness to admit that there difficult trade off to deal with along the way.
To which extent is it worthy to sacrifice economy growth with restrictive monetary policy ,whether there will be inflationary impact arising from cost pressures anyway?. Cost pressures arises from the real side of the economy, which means that it is more time demanding to cope with its impactand solution. Productivity increases are a mid term target, and it requires additional reforms which might take more time than available . Labour market flexibility, is difficult to improve in the short term .
There is one option which can not be left out. Central Banks need to be even more autonomous than they are. The evidence indicates that the more its autonomy, the lower the volatility of inflation and so the volatility of output. Thus, the most serious problem, lies on the political side of the equation. Politicians like to threat Central Bank autonomy ,because it reduce their own influence to manipulates economic growth with more government expenditures pressures.-.

Friday, September 28, 2007

Tinbergen Rule :Instruments and targets (II)

From the Tinbergen rule point of view, economic goals should be connected with the expected welfare level society might try to get , such that target and instrument connect to each other , in such a way that society can fulfil its welfare expectations. Mundell has suggested that ,in order to get that expectations done, those more effective instrument to get the target, should have a greater weight on the policy function ,such that it maximizes its impact.-
On the other hand, some times there is not sufficient instrument for every target (reduce inflation, increase employment),so there is no other alternative than to make a trade off ,which means to minimizes welfare losses. It is also feasible to have more instrument for each target. For example to reduce domestic expenditure, and current account deficits.
Uncertainty also have an important role on policy design. It is not possible for the economy, to work with real time data , to know in advance the precise value of the parameter in the reaction policy function , or the effective transmission mechanism for monetary policy . In the stabilization effort done after the Asian economies crisis rolled over, Chilean economic authorities at that time, could not anticipate the magnitude of the impact ,that increasing the interest rate would have on investment and GDP.-
Rules have the advantage of allowing markets ,to know in advance what the future economic policy course would look like given some set of assumptions .It allow to minimize the efficiency losses arising from the unexpected ,and it creates an institutional framework which support long term investment decisions plans.-
Discretionary macroeconomic policy decisions, try to get the best of every chance economic authority might intervene into the economy, without any prior optimization target to minimize welfare losses.
Rules are better than discretionary economic policy, because it reduces inefficiencies, macro variables variability and volatility .On the other hand ,rules must adapt itself to new conditions arising from the dynamic of the economy forces. Some fixed rule like that one stated by Friedman, that money supply must growth at the same pace than product growth, does not take into account the endogenous variables which influences the money demand, such that money supply might growth without getting inflationary pressure to get its way through.-
Latin America economies, are still far away from having a set of rules for macroeconomic policy stabilization purposes. Inflation is back in some countries, as long as fiscal expenditure moves forward. Thus Central Banks have a difficult task, when it comes to get back on track the macro fundamental.-

Friday, September 21, 2007

The Tinbergen Rule : Instrument and targets (I)

For policy maker, It is usual to confront macroeconomics problems with the dilemma of choosing properly the instrument such as it match rightly a defined target(for example increase in investment or reducing inflation) . The success of stabilization macroeconomics policy depend upon the decision about the right instrument which to work with. This issue is very important in cases study related to reducing inflation programs, which has been a problem in many Latin American economies. Although empirical evidence suggest that keeping inflation under control is the job of monetary policy, some textbook experiences ,like Chilean stabilization program applied in the mid seventies and nineties, used a different approach based on exchange rate policy .The assumption was that as long as exchange rate was fixed or within certain range of value, it would allow to reduce inflationary pressures allowing authorities to get the inflation target. In both cases, the result was a failure although for different reasons. While in the seventies the assumption was that the real economy was more flexible than it really was, in the nineties the assumption was that inflation was mainly a cost push phenomena, ignoring the role of a demand pressures and how important is to keep control of them.-
Both cases are “good” examples of not following the Tinbergen rule. In the first case fixing the exchange rate meant to make monetary policy ineffective, so the task of reducing inflation was an endogenous process depending on moderate fiscal policy , but fiscal policy is better aimed for short term product goal. In the second case monetary policy capability, was artificially limited with a semi fixed exchange rate system , supposedly complemented by moderate fiscal policy. The target were confused with the instrument, fiscal policy was not moderate as expected (minimum wages law were approved, and fiscal expenditure increase over the whole period )) . The wrong belief was that inflation reduction program , did not required strong monetary policy, as the key instrument. Instead ,It was thought that exchange rate policy was better instrument for doing so, confusing cost pressures as more important than demand pressures as a cause of inflation .. Recent development in normative macroeconomics, have made quite clear that it is monetary policy the instrument to consider when it comes to get inflation under control, so much so that these days it is applied following a rule ,the well known “Taylor Rule “ which set a framework for a more effective monetary policy to get inflation target. On the other hand, the pass through coming from cost pressures is limited to ability of Central Bank to control inflationary expectations.-
The current concern about global financial market volatility, is a good opportunity to take into consideration the Tinbergen Rule. This market volatility is due not only to the subprime housing market crisis itself ,but much more so to the way authorities will react to its consequences . Both factors are complementary variables in the same equation, which means that the timing for reaction is as much important as the choosing of the proper instrument . This means that as long as this crisis is expected to roll over as a solvency crisis, the proper instrument is the discount rate .(the rate at which the Central Bank allow banks to ask for loan).The interest rate (The rate at which banks lend to each other) is the instrument for inflationary purposes, mainly to keeping demand pressures in check with potential output .

Friday, September 14, 2007

Central Banks ,inflation and economic growth (II)

Because of its role and its influence, most of Central Banks are both independent and autonomous from political interests .The degree of independency , varies among different countries depending on their experience with past inflation. The degree of autonomy depends on the ability for pushing aside government pressures. Available evidence(Measures of central bank autonomy: Empirical evidence for OECD, developed and emerging markets economies. October 2006. WP06/228 :Arnone, Segalotto y Laurens), indicates that autonomy and independence have increased in a ten years period ranging from 1991 up to 2003. They use the GMT index ,and a revisited version of it based on Cukierman approach, for a smaller sample. Autonomy in particular, has increased in emerging economies and developing countries ,as much as economy autonomy. This improvement follows a three stage approach :
S1. To laid down the political fundamentals of Central Bank ´s job
S2. Operational autonomy development
S3. Central Banks get further autonomy in terms of policy formulation and appointment of senior management, due to changes in. Central Banks laws such as to increases its autonomy in the use of instruments.-.
OECD countries also have had an increase in political autonomy (setting of objectives such as price stability) as a consequence of European Central Bank converging to the Bundesbank model . Economic autonomy also has increased ,specially since the 1990,allowing to have a lower dispersion among different Central banks economic autonomy index.
Thus, no matter whether it is OECD or Emerging economy, there are a deeper sense of connexion and causal relationship ,between both economic and political autonomy and higher macroeconomic performance. The trend is for higher economic and political autonomy. Countries with high autonomy level can be found in Perú, Mexico, Brazil, Chile within the group of emerging economies.
Concerning political independence ,OECD CB ´s countries (45,4%of all cases )are more political independent than those CB from emerging (28,6%) or developing ones(26,0%). As far as economic independence is concern, OECD(36,2%), developing (32,7%)and emerging countries (31,0%),are evenly distributed..
Very much of all of this discussion is important in the current scenario of global markets volatility which means strong pressures upon Central Banks reaction function, to make quick and precise moves. According to the available data, Central Banks are in a very well endowed position to handle properly the current situation, away from political pressures, and keeping the risk balances properly between achievements in inflation and stable and not recessionary growth. However, the current volatility it is not just about CB interventions , but it is also about a credible approach to avoid a recession ,in the middle of a monetary program to reduce inflation, settle down the risk perception of massive default.. Which is the best option? .It is important to make the difference between fighting inflation (macroeconomic real setting),and avoiding a systemic crisis due to insolvency in housing markets (microeconomic financial setting ). Reducing the interest rate, might not have the expected effect upon a crisis defined by microeconomic parameter, rather than macroeconomic ones. Worse of all ,it might imply to risk the gains made on inflation control so far, such that sooner or later it will have to be raised again .Besides, with lower interest rate, Banks will not make a difference for debtors unable to pay their mortgage, because it has not changed their risk profile. Reprogramming debt program under special financing conditions might allow a better effect,even continuing adding cash to the financial system it is not a weak approach.-

Friday, September 07, 2007

Central Banks,inflation and global economic growth(I)

These days ,Central banks are on the market attention because of the way their reaction to the current issues of food prices increases, and the sub prime housing markets crisis, will impact the global economy.-
First of all it is important to say that Central Banks are in charge of monetary policy to keep control of inflation, aimed at the goal of getting price stability, which means they set interest rate(fund available for customers), discount rates (funds available for banks).To decide interest rate level, Central banks follows the “Taylor Rule”. This rule means that as long as effective inflation deviates either upwards or downwards, from a target value, interest rate might go up or down respectively . It goes up when inflation is above target ,and it goes down when it below target. The uses of this rule has decreased the volatility of inflation ,so it has decreased the volatility of GDP which reduces efficiency and welfares losses.
On the financial side of the economy ,Central Banks can carry out open markets operations, which means to sell and buy financial instrument. .Besides, Central Banks are the lender of last resort ,which means that they are the one which banks expect help from when there is a credit crunch and they might transitory run out of cash. Then ,a key second role for Central Banks ,is to keep stability on the financial sector , which means to keep the payment chain in motion and Banking sector liquidity .On this task ,there is no rule except that one arising from avoiding the risks of economic depression ,and a proper judgment of the macroeconomics conditions that financial institution are facing at some moment in time. For instance ,the current global volatility due to the housing sub prime market crisis in the USA, required Central Banks to support financial institutions ,which otherwise were close to run out of cash , which would have a subsequent impact on markets expectations about macroeconomic performance.. While it has been on the financial side, Central Banks have been able to cope with the requirements of a markets with higher risk aversion than before. What if it goes beyond the financial side of the economy? .-
Central banks also needs some complementary policies to get a better results and impact coming out from its decisions. On the aggregate macroeconomics side, fiscal policy should be closely coordinated with monetary policy.
Price stability and financial stability ,are the key contribution Central Banks can make to foster economic growth .Therefore, economic growth is not out of Central Banks ´s concern. In fact it is its third, although less visible, main concern. There is no sustainable economic growth with high inflation and financial instability . Some Central banks have this goal very explicit on their responsibility list, whereas others includes this concern in a less explicit format. Either way, there is no Central Bank chairman who is not aware of the implications for economic growth ,arising because inflation might be above target. On the other hand, the uses of rules have made Central Banks more reliable and credible because that means less volatility ,and future conditions are better predictable .
Because of its Importance and influence most of Central banks are independent .The degree of independency varies among different countries .-

Friday, August 31, 2007

Ethical wages and the Catholic Church in Chile (II)

For better or worse, the Catholic Church in Latin America, has a long tradition of involvement on social issues ,since it started to modernize its beliefs concerning ethics, philosophy, politics and economics in the late XIX century . The Pope Leon XIII, wrote in 1891 the “Rerum Novarum” letter; which emphasizes the concept of “fair wages”, private property and labour rights. Ninety years later , the Pope John Paul II wrote Laborem Excercens, somehow as a follow up of the “Rerum Novarum”, but with a different approach to the meaning of work .In this modern approach, work means to be participant of the wealth creation process, rather than a kind of punish ; in fact capital is seen as the result of previous accumulative work, it follows that both factors are not against one another ,but they are complements instead .However, John Paul II made clear that individuals are more important than capital ,and improve Human dignity should be the main focus of the Church.
Some critics of Church involvement in daily life affairs , might argue that ethical wages it is a matter for politician and firms. Besides ,they would like to listen the Church ´s critics focused on different issues such as corruption practices, environment and a stronger approach on moral issues such as the involution in marriage institution. On the other hand, there are sceptics who believes that this new focus on ethical wages , will end up in social unrest .
The fact of the matter ,is that more people is starting to feel that their basic needs of education, health, and working conditions are well behind their expectations, very much so when it comes to share the benefit of growth.. Chile ,is still among those countries with highly unequal income distribution .Therefore, the real issue is not the Church involvement on the ethical discussion about wages and incomes, but its scope and lasting impact on current social –productive status, with a lot of small and medium size firms, which struggle to survive competition.-
Keeping those issues in mind , The President Bachelet invited 45 experts to participate as members of a National Commission to discuss the issue from the social justice point of view , which is expected to present its conclusions on March 2008.. What are the expectations for this working group?. All of them are highly qualified ,and they should be able to put forward concrete proposals to move ahead on this matter. Taking into account that this kind of initiatives has been set on the table before (In the mid seventies, it was called the Social and Economic Council), it is not he first time there is a serious attempt to make corrections on wages inequality .Part of the legacy of those first attempts ,it was to settled down the foundation for the national labour- firm accord at the beginning of the nineties .This time the goal is more ambitious , because it deals with society as a whole and its ethics standards .(The commission did not include labour and firm delegates) So there are two probably outcomes :Some guidelines to establish a national labour -firms relations policies, along with some guidelines to reinforce new instruments and additional resources for supporting social programs like food, education, health care, services subsidies (water, and electricity consumption) and transportation .-
Beyond the intention of doing something about it, it is important to consider into the equation, that the current model of public management for social programs available in most of Latin America ,is outdated with the current requirements .This means that any real effect on social and ethic standards, also should take into consideration the quality of the model designed to apply those recommendations and new policies. After all , poverty and inequality in Latin America stilll exist because it is in the State ´s interest, to have “customers” claiming for State help.

Friday, August 24, 2007

Ethical wages and the Catholic Church in Chile (I)

In the last couple of weeks ,there has been an interesting discussion concerning the Catholic Church proposal to improve wage conditions for those who earn below U$$ 300.Average Latin America low wages are probably below U$$ 200 or even less than that amount.-
The issue itself has two different angles . First the Catholic Church role within the Chilean society, and secondly, the real dimension for firms of being efficient ,and at the same time being fair.-
Catholic Church has been decisive in modern Chilean history and Latin America as well. The `1964-2005 period , has been quite active for Church involvement in daily life affairs .In the sixties and the seventies, it supported social changes, in the seventies and eighties fought against human rights violation, in the nineties tried to protect key values such as family (divorce discussion)and life(abortion discussion).Although a brief look ,it is sufficient to realize the important role Catholic Church has had in Chilean society. Therefore it is not a new situation that politicians, economist and business leader, must listen the Church on these matters. On the other hand, on environment protection issues ,the Catholic Church role has been less decisive.
It follows that the Church preferences are toward living conditions and human dignity ,no matter whether it is from the material or spiritual point of view. On this regard there has been a strong emphasis on the influence of different actors on Chilean economic transformation process, but few attention has been given to the way the Church also helped to shape it. Somehow the Church feels it is their right to speak out, when it believes must do so.,
Secondly. The issue of the real dimension for firms of being efficient and its implication for wages. Marginal productivity theory says, that each firm will hire inputs (knowledge, labour services, capital flows)up to the point where its contribution to production (productivity) is equal to its cost (payment). Firms pay wages according to productivity .The higher the productivity ,the higher the wages paid That is the market ethic to solve the problem of hiring one applicant, despite others ready to work in the same job. Therefore from the ethical point of view, an ethical wage is the one connected to productivity otherwise, the firm is not longer capable of keeping the pace of competition. Thus , the problem is how to improve productivity, as a condition to increase wages
On the other hand, given the fact that not all of the labour force have the same abilities and skills for the same job , there will be productivity dispersion ,and so a wage dispersion. Those with lower productivity are the ones part of the problem , because their wages could be below certain minimum level, such as that to avoid this effect, most countries have a minimum wage law. Empirical evidence, however shows that such minimum wage laws means higher unemployment for young people, women and the elderly looking for job opportunities.
Thus the real issue is to raise ethical income level. From the firm stand point , training opportunities, production goals bonus ,and performance bonus are the way each worker can increase his incomes to a higher level ,but it seems that to get an ethic standard is more an issue and a moral obligation for society and its values as a whole.. Increasing facilities for starting new business, better education, unemployment insurance, labour market information ,helps to creates a better condition for improving living conditions This is so, because society must apply public and social policies aimed at improving the standard of living, but at the same time without hurting the proper incentives for economic growth . Otherwise , this would mean an ethical failure for society .-

Friday, August 17, 2007

Poverty reduction : Is it the battle impossible to win ?

While in the nineties rich people had thirty times more income than poor ones, actually that difference is even wider:130 times !.1500 million people ( almost a third of world population) live with less than one dollar a day. This is part of the report of 28th Amnesty International council meeting, held recently in Mexico . The preliminary conclusion?: It is highly plausible that the UN millenniums goals, set for the year 2014,(poverty reduction) will not be reached. However, the World Bank economic report 2007, “Global economic prospects”, predicts that by the year 2030 , world population living with less than U$$ 1, will fall by half to 550 million people.
Current global Economic growth pace (2004-2006, 4% - 5%) seems to be insufficient to allow deeper progress in poverty reduction. On the other hand ,new business opportunities closely connected to information and knowledge as the main inputs, creates incentives specially for talented people, making the gap between those on the lead and those on the back, wider. Sure, poor people are among the worse talented on the talent distribution.
What to do about it?. The answer requires a clear understanding ,of the characteristics concerning the economics models applied in those countries which poverty is more concentrated on. At the same time it requires two necessary premises as a working tools:
a.- Economic growth by itself , is not enough for quick poverty reduction unless it is supported by complementary social policies : Since 1990 up to 2001, average world economic growth was roughly 3%, and global poverty felt from 28 % to 21% respectively. This seems to suggest that good social public policies , might imply that whether economic growth is not that much high as it is needed, it is possible to get progress in the battle against poverty.
b.- Additional resources for poverty reduction programs must be allocated properly, supported by control measures against corruption .-
It seems that the second condition, is more difficult to fulfil than the first one. Some of the assistant programs previously implemented for poverty reduction ,ended up in corruption or misuses of such resources . The microeconomics of poverty seems to be more restricted ,than the macroeconomic of it.-
Africa has the highest percentage of world population, living with less than one dollar a day. There is a strong challenge under way , to shape new economic and social policies in that continent .Africa is behind the new emerging economies, making that challenge even more pressing. There is also important levels of poverty in countries like India and China. However ,these two countries are growing at a very fast pace ,which means that they might be able to cope with the problem, as long as they keep the momentum for economic growth, and design good social complementary policies. Latin America also has important levels of poverty (40% of total population),although in the last ten years has made important progress to reduce that percentage because of economic growth .
Poverty as a moral problem means questions and challenges which requires answers , and willingness to overcomes difficulties ,however there is no easy way to get out from it. Poor people themselves are also part of the problem ,instead of being part of the solution. This is so, because there are incentives which they are not aware of, to keep them in such a level of living conditions, to justify an active role of the State in the economy ,but without giving too much attention to the risks of corruption involved, which make the poverty reduction effort more difficult to be successful .-

Friday, August 10, 2007

Food prices increases and inflation (II)

What make inflationary expectations control so important?. First of all Central Banks are in charge of Monetary Policy, which means that they are responsible for keeping inflation stable. Each Central Bank has autonomy to do its job, although it might have different complementary macro variables aside from price stability itself, to focus on. It follows that monetary policy as the main tool to get inflation under control ,it is not that much applied in a kind of homogeneous textbook style. Some Central Banks keeps focus also on growth and employment, another Central Banks keeps focus just on inflation , and others keeps its focus also on price expectation .-
Inflationary expectations are an important component of economic information, as part of the decision making process to allocate resources. Economic agents ,want to know in advance what the inflationary trend looks like , to avoid being caught in the middle of a transition from low inflation to high inflation ,or the opposite. Either way mean both efficiency and welfare looses. Consumers and producers makes their decisions on the basis of the best information available including expectations. Inflationary expectations by itself, might validate an higher inflation rate, whether the monetary policy is not credible enough to convince consumers and producer, “not to take inflation on their own hands” by charging in advance higher prices .-
Thus, food prices increases might imply higher price expectations, as long as demand expansion goes along with it, because in such case all prices moves upward.. It follows that to keep control of aggregate demand expansion, and effective GDP(Gross domestic product) and potential GDP gap, is a necessary condition to keep inflationary expectation under control. A second condition is to have credible monetary policies.-
A different questions arise again and again: Why is it so important to keep inflation under control, even up to the point of keeping attention upon the price expectations?. The economy needs information to allocate resources(right prices) ,and inflation means a distortion in that process ,because it changes prices signalling ,it give a higher price to activities based on rents, specially those best protected against price fluctuations (real state) , and away from productive ones such as investment. Nobody want to risk huge amount of resources which are going to be devaluated by inflation.
On the other hand , inflation means a tax which is paid specially for low income people who are badly protected from inflation .In other words ,inflation has negative social effects because it affects stability at society level. In Latin America, very much of its economy instability in the past has, been strongly related to inflation and its consequences. In advanced economies high GDP volatility because of inflation , also have welfare effects. Therefore, inflation hit the rich and poor economies.
These days monetary policy has made a lot of progress to confront inflationary pressure coming from different sources and its associated risks. Inflation has become less volatile ,so it has the GDP and economic growth has become more stable and persistent in time as well . Monetary policy Rules have allowed to have a more effective tools to fight against inflation. So, the fact of the matter is that these days in the global economy, for any inflationary pressures there are better monetary policy instruments available.-

Friday, August 03, 2007

Food Prices increases and Inflation (I)

A United Nation report has said that food prices has increased in 2007 on average by 13 % .The explanation for this situation is strongly connected to higher demand from Asia emerging economies, but also due to higher amount of these food used to produce alternative energy resources.
Quite on the contrary with the oil prices increases which led to a substitution away form oil toward cheaper energy sources, food are not possible to substitute as part of the nutrition component. The alternative would be, a kind of a heavily criticized transgenic food (genetically manipulated food) . Leaving aside the controversy surrounding this kind of food, this alternative would prevent to have higher inflationary pressures for some time in the future .This the typical cruel ethical dilemma which might arise in the global economy. -
The current problem is different. .After all global economy means lower inflation ,as much as the global supply grows faster than demand. Transportation and communication cost has decreased sharply since the nineties, because of the bigger business scale concerning to global markets. But, to what extent food price increase can have a strong impact on global inflation ?
This an old discussion between inflationary experts and researchers; concerning the difference between cost pressures ( price shocks) and demand pressures as a cause of inflation. The main stream of analysis, consider that any cost increase pressures can be counterbalanced by other relative cost decrease forces .In other word ,inflation arises from demand increase pressures, which imply all prices increases in some period of time at a persistent rate. .In this case food prices increases, would be counterbalanced for instance, by transport and communication cost decreases keeping global inflationary pressures stable. In fact inflation in US is decreasing, and it is in check in Japan and the Euro zone economies . Actually , effective GDP and potential GDP gap in industrialized economies, is decreasing which means more stable inflation behaviour in coming months .
Therefore, inflation would still be a matter of Central Banks ability to keep inflationary expectations and demand pressures, in check with the macroeconomic fundamentals.(potential GDP). It therefore means, the ability to make the proper balance between growth (employment) and price stability. If there is any relaxing on monetary policy adjustment curse to get price stability, food prices increases might indeed become relevant because of its dynamics of a faster pace rate of price increases than other goods prices .-

Friday, July 27, 2007

Currency adjustments: The way global financial markets works

Currencies connect the economies to each other. On the long run , there is only one price for goods adjusted by parity conditions among different currencies. The Big Mac index is a measure of that unique price, and at the same time any deviation from it .
Those deviations, measure the undervalue and overvalued value of any currency at some point in time, in other words ,its deviation from the unique price long term price.. Thus, while an hamburger actually cost in the USA U$$ 3,22 , in the euro zone cost the equivalent of U$$ 4,06.It follows that at current price parity conditions , the euro would be overvalued by 25,65%.The same exercise applied for the yen show that this currency would be undervalued by 27,95%. These mismatches currency values, implies portfolio adjustment against the dollar. Considering the dollar and the euro , the trend has been in favour of the euro . However,since 2001 up to 2006, productivity in the euro zone has been stable, while the euro has appreciated on average by 14,3% . Therefore, somehow the current high euro value,(appreciation) would reflect the port folio adjustment which is taking place among other variables ,because of expectations of further decrease (depreciation) in dollar value.-
Which are the explanations for such expectation ?:
a.- The interest rate differentials between Europe and US are falling. The Euro zone Central Bank , is increasing the interest rate .-
b.- US economy growth, can be affected by sub prime housing market correction, deeper than expected. (Sub Prime represent no more than 15% of total housing markets credit)
c.- Current account unbalances in the US economy ,which is expected to be up to 5,9% of its 2007 Gdp.-
d.- Portfolio adjustment in favour of the euro issued assets , and carry trade transaction.
Whatever the reasons ,dollar depreciation has effects on global economy. It push upward raw material prices . Most of Latin America economies strongly orientated to primary good exports ,are ,getting an external boost for their growth performance. It also means increasing risks for further inflationary pressures.-
On the other hand, some European countries are started to be worried because of the euro might be getting close to the danger zone, risking loss of competitiveness for exports .A strong Euro, has a positive impact in those economies with high productivity levels, but as long as there are differences in productivity levels, some of them get a better share of the benefit than the others, and some are left behind .At the same time, an undervalue currency (yen) is also risky because it is away from macroeconomic fundamental.-
At present ,it is important to have some perspective. Over the short run, financial flows are more important than trade flow to explain exchange rate fluctuations .It follows that unpredictable financial markets movements, are more important as an explaining factor of currency fluctuations ,than real variables. However ,in the medium and long run it is possible to substitute traded goods, and exchange rates are determined by real forces that influence their relative prices.( A fair exchange?: Theory and practice of calculating equilibrium exchange rates .IMF /WP/ 05 /229.Bayoumi,Faruqee and Lee).
So, it seems that we are looking at the sensitivity and worries of global financial markets , concerning the fundamental of the global economy. Overreaction is a short term phenomena .The long term course, will be determined by the chance of a coordinated adjustment policy between different global currencies.- Whichever these forces is stronger it will mean more or less volatility in financial global markets.-

Friday, July 20, 2007

Priviledge Information: The new ethics for Chilean business man (II)

The following question is the key one :What is considered to be privilege information? No matter the different definitions available , there is one in particular which is quite clear to stress the nature of the privilege : Privilege information is the one which is known by just a few , and it might have an impact on financial markets valuation. In other words, it might help to any of those few potential investor to get higher economic return than it would be otherwise .Thus, the problem arises when such investor are from inside the firm.-
Privilege information includes: future investment plans, financial statement to the public authority, merger approval and the like. In all this cases ,the market value of the firm might go up or down depending upon the nature of such information. For instance, the approval by the executive board for new investment plans, which will impact positively the stock market valuation of such a firm, is the typical example of information shared by a few. Any internal potential investor , would benefit buying before those plans are made public . However, the same opportunity should be available for anyone from the public ,with that information so they can buy stock options and expect its return to be higher in the future. The problem is that it is not always so. The same case apply , whether anyone know the financial results which might show an increase in profit .It is possible to make a profit buying before those results are made public. The ethic dilemma arise because of the gap between those who have the information , and those who do not, or have to wait for it to be public before making their portfolio decisions.
These situations are considered as market failure ,and privilege information is a negative externality , which arise because of the nature of business decision in competitive environment .In this kind of environment, nobody want to give up their privileges of being the first, in favour of their competitor. The social benefit of information is higher than the private benefit, so less information is available and few people have more information for their advantages instead of society ( potential investors).
What is the role of institutional framework?. As long as there are property right concerning information clearly defined; which from the financial market valuation stand point, means that there is a legitimate owner of certain level of key information. Therefore, the issue is to get control of how those owner use that information, without affecting the chance of other investors to benefit also from it, specially if the firm is depending on stock market as a source of financial resources . So, it has been established the black out period, which imply that nobody within those few with access to privilege information, will take advantage of that information .Those who do not fulfil that requirement exposure themselves to heavy fines, usually a proportion of the total transaction. The black out reduce the social benefit of information, because somehow there is no information available for anyone ,therefore nobody can make business transaction with some specific , while the new information is not available yet. As a result, when the information becomes available both private and social benefit are similar ,as long as everyone has the same chance of making profit with it .Another alternative is to increase private benefit arising from information ,making it available on firm ´s web pages as soon as it is useful for market transactions.-
The last question: what about a politician with business interest ,trying to get a higher profit because of its position for getting better information?. In this situation, it is more an ethical problem than a market failure. Therefore, sanctions should be higher .-

Friday, July 13, 2007

Priviledge Information: The new ethics for Chilean business man (I)

Ethics has not always been on the core of market decisions .In fact, business are not ruled necessarily by ethics standards unless they are clearly set by laws. This is so , because self interest maximization assumes no restriction other than the impact on others people´ s welfare, which by itself would be a kind of ethic boundary to business, settled down throughout the institutional framework. This aspect of market behaviour, has made market economies , ethically stronger than other alternatives for society to solve the allocation of scarce resources. Markets are neutral. On the aggregate, the self regulated ethic works well, as long as wealth creation get through to everyone ´s benefit.-
This issue has also been considered as a core one, on the debate about the application of new ethics standard on business decisions ,after some high profile cases (Enron and recently Siemens).As long as the benefit of wealth creation, is concentrated on just a few it deserves a penalty whether it is founded on priviledge information .Some would argue that with such approach, there is the risk of overregulated the market with fees and sanctions ,such as the markets based on self regulated behaviour, would have a competitive advantage for financial transaction.
Chilean finance market regulators , has been working hard in the last ten years, to improve the quality of ethics standard for business decisions. Mergers, strategic alliances, hostile take over operations, and higher market concentration have driven them to be alert. New laws and regulations have been part of that effort. However, one thing is to have the law ,and another one is to enforce it.
Chilean business culture, has historically been based on informal networks closely connected to family ,friends ,political and social ties. Laws are not designed to be obey but to be bypassed one way or another . Therefore , any attempt to move ahead to change that culture , have a lot of difficulties concerning market reaction, news media coverage impact on foreign perception, public opinion evaluations and the like. Even more complicated ,when it comes to impose sanction on key political leaders who at the same time are also very active on business activities.-
Some key questions are useful. Is politics by nature, in conflict with business ?.Not necessarily. A lot of politicians have strong ties with business activities ,without being considered it as an unethical situation, as long as there is a clear division between both. On the other hand, politics might be inspired by business consideration, or the other way around as well. A couple of examples. On the first case, politics inspired by business is “ The initiative for the Americas, to foster trade and investment” in the nineties, and on the second case, business inspired by politics ;the “Venezuela Oil supported Bank of the South for Latin America” .It follows ,that at the aggregate level business and politics might have go along quite well, however at an individual specific level , it is a different matter . Politics as a first motivation, deals with the art of what it is possible to serve society expectations; while business first motivation, deal with self interest . From the Political point of view, it does not seems to be the best approach to motivate other people beliefs into any politician project, to concentrate efforts working on self profit maximizing behaviour, above community needs and priorities, worst of all, when there is suspicious of using priviledge information.-

Friday, July 06, 2007

Eastern Island Civilization collapse: An economic point of view (II)

Is it global warming and climate change an accounting problem?. Unfortunately it is not an accounting problem. Environment accounting , might help to register the losses on the environment arising from economic growth ,but it does not solve the core issue of degradation resulting from human intervention on ecological equilibriums . Brazil, has done a lot of progress taking into account the accounting of environment damage , but of course that it is not neither the whole problem ,nor the whole solution. Real prices of environment damage, are higher than the prices economic agent (consumers and producers)are currently paying, so there is over consumption . It follows ,it is rather a market failure which requires a different institutional framework.-
Third lesson arising from Eastern Island experience, is the fact that weak institutional framework for environment protection and policies design, can be as much harmful as it is the human intervention on environment . When societies do not have the proper institutional framework to cope with any challenge coming across to their survival , it is harder to overcome the consequences of it. There is no tools which to get hand on, therefore no possible solution to count on. Eastern Island civilization, did not have such an institutional framework because at one point in time, they probably did not realized how important was the environment, but when they did ,it was too late.-
Actually, there is not a global environment institution, as it is for trade (WTO), world peace (UN),education (UNESCO),labour (ILO) and the like .The UN, has been trying to move forward on the issue based on a political “good willing” approach , but it seems that the time is for deeper commitment which involves new friendly environment technologies, reduction of dioxide carbon emissions , better incentives for “green bonds” trade markets , permanent dialog on the issue and the like. All of these challenges are, quite demanding for any organization with objectives , different to that one connected exclusively with the environment protection.
Fourth lesson. There is a moment for thinking , and a moment for solutions. When the right time is over, there is no way to get it back. It is interesting to mention that even though we can borrow everything we need in excess to current available resources, including time when we extend our life span throughout scientific progress , we can also borrow time for environment purposes. The green bond markets is an effective mechanism to borrow time for environment protection.
The Eastern Island civilization ,realized too late that the time for solutions aimed to avoid the environment damage , was over. Therefore , they moved to a different set of solution. How to make the proper decisions to survive , minimizing the cost of destroying themselves?. The decided to chose someone , capable of imposing the rules under the new conditions .That was their “solution”. Ours ? . It would be to ask for new global environment institutions.-
The Stern report and the recent UN report ,are clear yellow lights indicating that we are at the right time to implement solutions concerning environment better protection. If we do not work for solutions , what would be our legacy left for posterity? .. Eastern Island civilization ,at least left behind the "Moais" (stone made monuments).

Friday, June 29, 2007

Eastern Island Civilization collapse:An economic point of view (I)

The Eastern Island, is currently applying as one of the new seven wonders of the world. Located 2500 miles west from South America southern Coast, it has become a subject of scrutiny the real reasons behind its civilization collapse.
A kind of small triangle in the middle of the south pacific,(120 square kms ), Eastern Island itself , was not naturally designed to be a different place other than just one more island among thousands of them across the ocean. What made it an interesting place to visit ,and its civilization legacy , an important subject of analysis and study, were the lessons which have arisen to explain the real causes of its collapse .-
Conventional wisdom ,(Jared Diamond´ s book: Collapses of societies, and ), emphasizes the fact that the inhabitants of the Eastern Island, did not make the right decisions concerning the environment protection. Its idolatry to theirs ancestors, was the leading force to build up those volcanic stone statures known as “Moais”. However, in the process of moving them toward a different place to the one where they were built ,required a lot of rolling trees such as at the end of the experience of making more than 900 hundred oh them, the whole wild forest was eliminated, such that the ecological equilibrium which kept the island alive, was broken up , and the whole civilization somehow extinguish themselves. It was the “tragedy of the commons “ case.
Because nobody had clearly defined property right on those forest ,nobody cared too much about the risk of deforestation and the subsequent collapse of the environment. But ,the argument for the Eastern Island civilization collapse, might also goes in a different way. Although environment damage was a sufficient condition ,it was not a necessary condition for the Eastern Island civilization collapse. The necessary condition was the lack of trade flows with other areas , because the Eastern island inhabitants , did not have the resources needed to build up transportation means for navigation .Given the fact that they already had exhausted all the wood available, Eastern Island inhabitants got themselves trapped in a deadly autarky situation, which it was probably too late when they realized about it , to make corrections. Their destiny was inevitable. The result was a struggle for surviving the impossible, with no enough foods for the whole population (20000 inhabitants at the highest point of its development), and no trade flows to get the additional food supplies to the one which came from fishing.-
What are the lessons arising from this experience?. First of all ,it is quite appropriate to study this cases because there is an ongoing concern about climate change and its impact on our civilization. There is a risk of transforming environment protection, into the new ideology which by itself might become even more dangerous than the potential damage on environment on their own. However ,the other extreme of not caring enough about the risk of environment damage ,is fatally driven to the worst.-
Secondly :Environment and economic growth, seems to be complementary instead of substitutes .There would not be a trade off between environment and economic growth. In other words, more growth does not necessarily means worsening the environment. It follows that the current global growth coupled with environment damage, is in fact a negative real economic growth .The global welfare ,is moving backward instead of forward.

Friday, June 22, 2007

Income Distribution in Latin America: How to take one step forward? (II)

In practical terms ,Education seems to be complementary with other goods, such as social background, social network, and quality of jobs rather than the other way around. It follows than the true nature of education is connected to be s kind of screening device to keep some quality standard at society level, whatever that standard might be. To understand this statement, let us ask ourselves the following question?. What is the real chance that a student with weak social background ,and an average education level ,can get to the top of a business management?. For this matter any student in such a situation ,will have a lower chance than another one with a better social background ,and above average education level . In this later case ,the screening device mechanism works better than in the former. Therefore, the impact of education on income distribution ,even assuming equal talent endowment for all, will be negatively affected. So ,because of the talent for education is distributed among few people, or because of high quality needs for the screening device , education by itself in Latin America, would not be sufficient to get substantial income distribution improvement.
On the overall aggregate impact, education is important to improve economy competitiveness, as long as it improves the qualification level for different jobs , and productivity is higher. However, the overall impact of education on income distribution is somehow conditioned to complementary policies designed to get better quality of jobs accessible for every one, or a better quality of entrepreneurial programs within the education curricula. .-
The other alternative is to support entrepreneurship among young people ,specially those who have entrepreneur potentials. When we are born, all of us have a potential for learning and adventure. In Peru, 50% of its population is engaged in business activities which require entrepreneurship abilities, so does Colombia with 30% of its population,(Global entrepreneurship monitor , june 2007). Traditional education though ,somehow neutralize those potentials because it is not designed to do anything different than to prepare people for public management kind of jobs, whose basic characteristic are to be stable, predictable , self disciplined by fear .- Therefore, it is important to have an educational system designed to improve those potential, instead of nullify them.-
After the new educational system does its job for improving the entrepreneurial potential, those entry barriers for new business should be eliminated or reduced .To start a new business in Chile requires more that 10 days of waiting time for different approvals, and more than U$$ 500 in legal procedures. Some preliminary research has shown that at local communities level, more than 50% of the total financial resources needed for a new business ,comes from requirements arising from the State involvement on different aspect of any new business, such as sanitary requirement, safety standards and the like. The argument goes into the idea of promoting a kind of “ownership society” different to the concept of “income dependent society”. Every one should be able to get a fair access to property, throughout entrepreneurial activities , as a way of getting personal prosperity, which will pave the way to improve income distribution. The idea it is not a recent one. In the eighties, Chile started out a program of promoting the access to ownership ,throughout the so called “popular capitalism program”. Within this program, in those companies which were privatized ,it was allowed to ordinary citizens, to buy a proportion of its stock options, supported by State subsidised loans, payable with the annual return coming from those stocks. Moreover ,those who bought those stocks had a tax credit as an additional incentive.Unfortunately, the program has not been implemente again.
We need more owner than workers,becasue that way , capital accumulation will allow its benefits , to make its way through for everyone, not just a few..

Friday, June 15, 2007

Income distribution in Latin America:How to move a step forward?(I)

Income distribution, is a sensitive issue in most of Latin America countries, not just because of its relevance for social policy design, but because this region is among the more unequal income distribution in the world.-
The usual instrument for measuring income distribution ,is the Gini coefficient. This coefficient has a range of value between zero (0)and one (1), with (0) meaning a perfect income distribution, each person get the same income, and (1) meaning the worst income distribution, with one person getting the whole income generated in an economy. Thus while in the OCDE countries the average Gini coefficient is somewhat below 0,30,in Latin America is above 0,3 and close to 0,5 with an average of 0.41. Some countries like Brazil, are on the top of this range, and others ,like Uruguay and Costa Rica are on the bottom of it.
The available empirical evidence suggest (south east Asia Tigers, and Chile after the mid eighties recession ,Panama and Guatemala since 1990 up to 2002) that, economic growth is the first step to improve income distribution .
As long as that growth meant higher employment level, the overall impact of such growth was to improve income distribution, because the fraction of labour income over total product was higher. However, the underlying assumption is that labour services markets were flexible enough to support employment opportunities .-
Usually it is more often to have labour services markets with income bias, which means that labour laws and regulation make the labour service market less flexible, because it protect income instead of employment. The paradox in this case, is that firms do not have any chance different to that of laying off people ,or substitute people for capital when it comes to adjust themselves to different market conditions. Either way , the connection between higher economic growth and higher labour income share , get weaker. It follows that the economy might get higher growth , and keep its former income distribution unchanged. That was the experience (in the same period) for Argentina, Paraguay, Venezuela, Equator, Nicaragua and Brazil).-
It has been suggested ,that education is the second best tools to improve income distribution. The south east Asian economies experience of investing in education , has lead that beliefs to be like the driving force on the issue, leaving aside some particular aspects of Asian experience, such us the strong sense of commitment and compromise, Asian people had for getting a better education which by the way, was strongly connected to highly qualify job opportunities in theirs global firms networks. Thus, it was not education by itself, but its complementary nature with high performance kind of job. On the other hand, education achievements are strongly related to individual natural talents, which are not that much evenly distributed in Latin America. In fact, because talented people is scarce, education might have the opposite effect to the one which is expected: To deteriorated income distribution !. Better talented people concentrate the best education opportunities, allow them to get the higher paid jobs(including bonus compensation, stock options) widening the gap between them and those less talented.
In fact , since 1990 Chile has invested huge amount of resources in education ,and income distribution has not changed substantially in the same period ,although its trend is to improve slightly although not exclusively because of education.
Therefore, two of the classics tools for income distribution improvement seems to have some weakness to cope properly with the issue .-

Friday, June 08, 2007

To live up to ours fears (II)

The key question is : Where do fears comes from ?. Of course there is no easy answer. Maybe it should be a matter of psychology, maybe. But, I do believe(my hypothesis)that it is matter of education and beliefs .-
1.-It is matter of education. Fear of freedom.Traditional education emphasizes discipline, obedience and standardization behaviour among young student, such as any one who get out of the line must be punish. Moreover, education was suited to match a production system requirements, based on physical productivity and standardized production. It was not necessary to think about anything . Thinking was others ´s privilege, mainly those on the top of the management, whether it was private or public. From the public management point of view, it was necessary to do just the minimum . Public management in Latin America, has been inspired by its colonial foundation, which was based exclusively on tax collection rather than promoting local business or entrepreneur behaviour. After independence the tax collectors were replace by local authorities, who of course did not want t make major changes on the way the State managed the economy.
On the broader view, our education system in Latin America is far from been competitive , just because by its nature it is not designed to foster self independent spirit ,character and competition .-
2.- It is matter of beliefs: Fear of democracy. Chile, .wanted in the mid eighties, to have a “protected democracy” so it was its constitution ´s inspiration(1980) . The current constitution (reformed in the year 2004) has a different kind of “protection”. While legislators, and politicians kept their tenure in the Senate, and in the lower house of legislation (8 and 5 years respectively), the Presidency was schedule for a four(4) year period, instead of the previously settled in 6 years . What does it means ? ..-
Fear of private business .In the eighties ,Hernando de Soto (Peruvian economist) wrote a book which might be described as the “fear to private enterprise”. To start a new business , it was necessary more than 360 days to match legal requirements, and to spend more than U$$1200 .The State with such a high entry costs ,made people to believe, than private business was something to be afraid of . Chile, currently considered a model for economic growth, in the period running from 1995-2007,has set tariff protection for some products (11), leading the trend for protectionism in Latin America.
3.- It is a matter of Attitude . Fear of risks.It is easier to be protected than to be on our own. Latin America cultural values ,are basically characterized by some sense of vulnerability, which lead people to seek protection in terms of always looking for other´ s certainties instead of our own uncertainties . In most cases ,the State assume that protecting role Alternatively ,it might be the social network instead of personal credentials .-
Once upon a time, some Latin America countries had such a huge amount of public employees , as it was the case in countries with bigger population. So, The State is deeply rooted in Latin America history and tradition.. To understand the nature of our fear ,is to understand the nature of the State: Self protected on the basis of fear.-