Friday, January 26, 2007

The new global uncertainties:Defining globalization frontier (I)

From the economics point of view, uncertainty is lack of information about future events . From the entrepreneurial point of view, uncertainty is a situation which characterize itself because there is no control of key variables which influence events. How to deal with uncertainty ?. The best way to deal with it ,is to improve information levels ,and therefore be able to getting a better control of key variables. It has become usual that firms need information about consumers, competition, regulations and the like, such that they transform an uncertainty scenario into a risky one. Business man works with uncertainty to transform it into a risk. However, one thing is to make decisions at the business level, let say to implement the new market strategy or the innovation policies, under a risky conditions, which means to have all the necessary information to get a better control of it . But what about the global economics scenario, which do not have a single decision maker, but a network of multiple connected small decision makers, which add up a new network? In this case it arises multiples uncertainties.
What do I mean by multiple uncertainties?. Basically three concepts ,one related to the other :
a.- Uncertainty concerning the global economics effects on the world order: The rise on global trade share of China and India, along with the financially stronger Europe , means a new economic and markets reality, which may allow to some extent a decoupling from the USA economy growth .But at the same time, it means higher risk of protectionism .
b.- Uncertainty concerning the leadership capabilities and global institutional framework to deal with these new challenges .-
c.- Uncertainty concerning the geopolitical lasting impact of these new scenario and its expected tensions.. New countries are moving toward Latin America Markets, but more so to its natural resources endowment . What are the implications of these new players expanding their influence?. .-
These multiple uncertainty setting is not a new one, (1973 with oil shock,2001 with religious terrorism) ,except that this time the world has become flatter, which means it has become more horizontally connected .Therefore it is about every one´ s best interest to look for integrated solutions to global problems, which means more coordination among key players on the global networks. However, like the game theory suggest, with no clear incentives, each one looks for their own solution, no matter that there is a gain waiting had it implement a cooperative coordinate option.-
But is it just a coordination problem ?. From the Latin America point of view, it is clear that ideology is still alive , as the globalization institutional frontier has not been defined yet, after all there are winners and losers in the process, therefore there is plenty of room for different multiple projects either inspired by ideology or pragmatism .Let say for example, among the ideologist inspired, the so called “hard leftist ” groups(Venezuela, Bolivia, Equator, and Cuba) , on the other hand , there are different Free trade agreements projects among the Asia Pacific countries, USA and Europe or Europe and China, which are good examples of the pragmatist point of view , or the so called BRIC group of countries,(Brazil, Russia, India and China).
Coordination policies among Latin America economies might be limited by ideological reasons .

Friday, January 19, 2007

Does socialism fit into the market globalization? (II)

The key question, whether to stay inside or to move out from global trend, was somehow solved in the mid seventies. Europe lead the way with visionary leaders which anticipated the change lying ahead to build up the new paradigm: Government was part of the problem instead of being part of the solution, so the State should do its job without interfering markets but complementing them .This plain but powerful statement, opened up the door for the Germany reunification ,Spain rise to the new condition of European union member, and England renaissance out if its economic crisis .It was the so called “Third road”. Socialism can coexist wit markets, such that it replaced the hard line view of getting rid of markets , therefore leaving aside the totalitarian notion of State Socialism. From the rightist point of view , it was the renaissance of the market and its capacity to creating wealth .Therefore, from both sides of political spectrum ,there was a transformation which allowed the market globalization to roll over such as ideology was gone , pragmatism was welcome.
Latin America has not been immune to this new trend. The year 2006 was an election year for the majority of its countries. Although the results, suggest that the leftist approach has taken over the control of the economic agenda, it is not the traditional hard line leftist which represents the current real preferences of voters. There is an alternative path which has taken into account the European influence :Chile , Brazil, Uruguay ,Peru even Argentina represent the modern view of the world from the leftist point of view, which is not apart from Europeans leftist views, such as current Prime Ministers of Spain, Italy and Great Britain.
This convergence between market and the state is good for economic growth, poverty reduction, and inequality corrections. It is also good for being part of globalization and its positive side, while at the same time allows consensus to face its negatives bias . Ideological Isolation is not the best alternative to a pragmatic integration. The proposition of more State to fight poverty and inequality, has been ruled out by history, In today´ s world represents the wrong solution. Latin America paid a very high price to overcome the State failure to solve the problem of lacking hope and expectations. It is not just a coincidence that in the seventies, the dictatorship as an alternative for democratic government ,was spread out as the “solution” for creating more favourable conditions for growth . What it seems to fit better into the current trend, is to modernize the State to make it more efficient, and better focused on urgent social problems , keeping as a top priority its complementary role with markets. This is the mix that has allowed Spain to become an economic advanced country in less than twenty years ,and it is shaping the way for more economic integration in Latin America .Private business has done more economic integration, than the Latin America traditional State did in half of a century. New jobs opportunities arising from private investment in Peru, Brazil, Chile, Colombia, Mexico, to mention a few, means that those people can have hopes not because of the State ,but because of private firms.-
On the other hand, the proposition of fostering growth leaving aside high income markets for exporting products is not realistic. Domestic markets do not have the income potential to sustain demand at such a pace, to justify the exclusion of foreign markets.
Latin America leaders must have the wisdom to identifies where is the right path and its main characteristics. One thing for sure, it is not about ideology, it is not excluding private sector, it is not about the traditional colonial State. All of those “solutions” were proven to be wrong. It follows it is about pragmatism ,it is with the private sector ,it is with a modern State.-

Friday, January 12, 2007

Does socialism fit into the market globalization? (I)

At first glance it looks like socialism does not match very well with globalization requierments. In a deeper focus it becomes a fact. Socialism and globalization does not match to each other. By definition globalization means the chance of getting access to better business opportunities, higher economic returns and profits throughout a global allocation of resources ,taking advantage of greater capital mobility to move into places with the more convenient input prices. As a result, people chances of increasing their welfare improves, as it has been the case in the last four years for Latin America, which it has benefited from strong global demand for natural resources allowing an economic growth of 4% on average.-.
On the other hand, Socialism means to restraint opportunities only to those one the State can afford . Therefore, it rules out any chance of getting advantages of the best opportunities, because the State (political by nature) moves in slow motion, it is inefficient to manage public resources, and its planning horizon is a short run span. So, given its nature, any possible action derived from the State depends crucially of the resources available .Whether these resources are not enough, the result will be egalitarian poverty, which means every one will turn out to be levelled off downward. On the contrary, whether resources are high enough even above the requirements, the result will be corruption. Those two options, corruption and higher poverty ,represent the past experience in Latin America as a result of state intervention in economic activity. A lot of Latin America countries has understood this fact, so they have changed their approach to dealing with markets and private sectors ,turning out its policies to a more friendly tone. For instance, although politically is considered a close regime, Cuba is a mixed economy strongly depending on tourism ,which is based on private sector. China has moved slowly but steadily to deeper integration with global economy open up opportunities for private sector.-
At the same time these days, poverty and income inequality reduction does not depend only from the State help. Empirical evidence suggests that it depend more critically upon the private sector capacity to create wealth ,which under the proper institutional framework and complementary social policy support for the more vulnerable , allow to reduce poverty and inequality. But, it also depends , of entry barrier for small investor to go into business opportunities. All of this imply less State intervention in the economy, which do not imply to get rid of the State. This has been the Chilean economic experience at its highest point of success.(1990-1998).-
Considering the precedent paragraph explanation , the world economy and the majority of Latin America economies, have chosen to follow the history trends supporting markets to do their job. To pretend the opposite it is not just the riskier thing to do, but it is to move back history clock.-
But not only pragmatic markets options are available to reduce poverty, unemployment and inequality , Idealism is also available, except that it has a high price. Chile paid a high price for such idealism. Since 1940 up to 1985, ideology was the driven force in Chilean economy ,whether it was leftist or rightist , both experiences represent the risk of ideology when it apply into the economy. Idealism do not solve poverty and worse of all, it becomes fatally linked with corruption, How is it so?. Idealism do not produce financial resources to finance it. . Today, socialism and idealism are closer than ever, but unfortunately corruption, poverty and inequality are its derived product . Therefore do move out of global trend, instead try to manage the best way to take advantage from it.

Friday, January 05, 2007

2007 :Some thoughts

The year 2007 has just began. What can we expect from it?. As usual, the new year includes some remaining events from the previous one. On this regard, it is highly probably that the year 2007 will be at the beginning a sort of follow up on issues such as oil prices, USA economy slowdown, and the decoupling from it from the rest of the global economy .
However, some key questions shall be solved:.
a.- The most important one, the USA economy slow down process and its either soft or hard landing and its expected effect on Latin America economies.. At the same time ,the so called decoupling from the USA economy arising from the rest of the global economy .The answer to this question will make a difference for Latin America, and its prospect for keeping its current rate of growth. The expectations among analyst, is for the USA economy to have a soft landing ,which means a transitory slowdown in economic growth, not strong enough to have a negative impact on the economic growth for Latin America economies. Additional data will clarify definitively the situation probably in the middle of this year.
b.- Oil Prices will continue to be on the head lines, just because it is still the key energy resource, but also because its price trends will signal the transition from the oil energy resource which the industrial economy was based on, to a knowledge based global economy capable of changing its energy matrix toward new energy sources. The faster this transition, the lower the long run oil prices will be. But it is unlikely that the speed of such transition ,will be fast enough to push oil prices sharply down below its current trend given considering a normal scenario, which means oil producer cartel react to the lower oil price, and there is not disruptive geopolitical forces in motion. Therefore it is feasible that oil prices are going to be on the range of U$$ 55 to U$$ 65 the barrel.-
c.- New energy sources, will continue to move further ahead on the global energy matrix. Wind power as energy source ,solar panels among others ,will continue to be an alternative solution . It follows that environment, will also continue to be on the spot light ,specially on issues related to energy sources. This is nothing new except that the current institutional arrangement (Kyoto Protocol) will be under stronger pressure to be left out, to clear the way to a new protocol.-
d.- Market mechanism for environment contamination will also moves on upward , as long as there is increasing information about its benefits and expected gains. The price of such financial instrument in the secondary market, the “green bonds” markets, will continues to move in the upward direction.-
e.- The local stock exchange markets will be a good alternative for investment ,specially the retail sector which still has a wide area for further growth. In Chile it has been the star sector in the last five years , and there are strong expectations for higher return this year. Its share on the stock exchange index price has increased from 2,07% in 1997 up to 22.92 % in 2006 ,which reflect the increasing volume of business related to consumption expenditure, key characteristic of a growing economy .-
So, it is time for moderate optimism. Some caution on commodity prices and global economy unbalances adjustments and its impact on the dollar value deterioration .-