Friday, March 30, 2007

Free Trade agreement: Chile - Japan

A new free trade agreement is next to be sign up between Chile and Japan. Up to know, Chile has a lot of such free agreement, each one with its own significance. This one means something like a quality certification :Japan is well known because of his tight, some how close internal market for foreign products. Japanese themselves, are quite conscious about what the quality products means. On the other hand ,they have advanced the consumption technology far enough to make the selection between different products, a very sophisticated process .-
With its more than 120 million high income consumers, Japan markets represent a very interesting alternative for more value intensive products, which Chilean economy exports currently lacks, because more than 60% of its exporting sector is concentrated on mineral resources, (2006) while industrial export is no more than 30% .-
The agriculture sector is the one which gets the highest benefit form this agreement , because 53% of its export to Japan will be freed from tariffs immediately , while the 35% will have privilege access to Japanese markets . By the same token, 90% of japans export to Chile will have privilege access to Chilean markets.-
But this agreement do also have geo strategic importance, because it allows to have a business platform for trade flows to Asian markets , transforming Chile in a place of new investment opportunities.
Investment behaviour in Chile , has been rather weak in the last couple of years , reaching close to 25% of GDP, a little below what it is needed if the purpose is to have stronger economic growth, than the current level (4% in the year 2006).-
Beyond the good faith inspiration of all of these agreement, very much of its impact depends upon complementary policies to support new sector to move on board, specially in the case for medium and small size firms . Chilean economic authorities are working about it, trying to implement new set of policy recommendation related to improve competitiveness. Therefore, this agreement comes along in the proper time to take the most advantage from it, which by the way will positively aggregate the accumulative effect of previously free trade agreement ,because of economic of scale.-
The key question now ,is whether the Chilean economy by signing these trade agreement ,has reached a point such that any additional one will have a decreasing marginal effect on trade . This means that due to the marginal decreasing return principle, with the current productive structure, each new agreement will imply a decreasing impact on trade. Each one add up less to trade than the previous one ,so the overall impact might be below expectation.. It follows that the dynamic of these trade agreement, requires new economic incentives(for example more decentralized decisions) for productive purposes, to keep its trade gains moving steadily upward.-.

Friday, March 23, 2007

Water supplies:challenges ahead

Thursday ,March the 22 nd , was the water`s world day .It looked like everyone of us, as usual ,were on our daily basis activitiesl. However some few people has already started to worry about water conservation and water supplies .Why?, Because it is one of the key natural resource next to become relatively scarce . While demand increase at a pace of 2-3% a year, the supply does not increase at such pace.-
No more than 2 % of current available water ,is suitable for human consumption, and more than 90% of water useable for human consumption is underground, which means that it is going to require heavy investment to cope with the increase demand of water. Besides, more than 70% of water available for human consumption ,is used as an input to produce foods, and Mining and agriculture must compete with each other to get the same resource: water.-
Actually there are some communities which do not have water at all, which imply high rate of diseases because of the lack of water. In fact, 1,4 billion people do not have access to safe water and more than double that amount, do not have proper sanitation conditions because of lacking water.3800 children die every day ,because of lacking of proper sanitary conditions related to insufficient water supply.
Some additional data relevant to this discussion make the problem even more complicated: Up to 60% of human body is water, the brain is composed of 70% of water, lungs are 90% of water ,our blood is 83% of water ,and like an engine; human body needs to replace 2,4 litres of water daily. While the reduction in oil reserves can be solved by replacing it, for different and alternatives means of energy ,to keep on moving the engine of growth, water can not be replaced as the main input in human body . As a result of this, if there is no water available for human consumption, that will means higher mortality rates. Water is the essential to make human body to live, like fuel is the essential to move a car .-
The challenges is twofold ( : To reduce wasteful water consumption, and to provide safe water to those who actually lack the supply of it and whose lives depend on it. At the same time, these two challenges, mount to a new model of water management .
Concerning the first challenge( source :USGS)
a.- Nearly ¾ of water that comes to our homes goes down the drain.
b.- A faucet that leaks at the a rate of one drop per second, wastes five gallons of water per day, and 2082 gallons a year.
Concerning the second challenge:
Some key world organization are working on projects aimed at a better access of water, in communities with insufficiency of water supply, most of them in Africa.-
What about the new management model?. From the economic point of view , a scarce resource, must have a price which is equivalent to its scarcity level. Therefore ,those activities highly water intensive, should paid the price for it ,or use alternative source of water, like the one coming from the sea .Therefore ,the new model imply a different prices for water, such as to reduce its wasteful consumption and its misused in productive purposes, and new technologies aimed at take the most advantage of sea water, such that more water will be available for delivering to those communities actually lacking this resource. Finally, global warming and water supply shortages, looks like a global nightmare. Well,that is the challenges the human specie is more suitable for.-

Friday, March 16, 2007

Market volatility and global economic growth

There has been a lot of up and downs on markets in the last weeks, and economist are wondering what is the explanation for such a sudden change , considering that the world markets have somehow assumed the oil prices increases shock, higher geopolitical risks, and some global disequilibrium. As always, in economics matters there is no easy answers. Like human body, what it fail at any moment, have an impact beyond its natural sphere , even though the health condition are good enough ,to overcome difficulties.-
The global economy looks pretty robust taking into account some of the available forecast. The IMF (preliminary draft) is expecting to have a global economic growth of 4,9% ,although at a slower pace than global economic growth of the year 2006(5,3%). This slower pace is founded upon the current adjustment in the USA economy, and the lingering question concerning its impact on global economy .It seems that such adjustment will moderate global growth, but not enough to reduce its dynamism. In fact the USA economy , according to the same IMF report, will have a GDP growth in the year 2007 of 2,6% ,somewhat below the 3,4 of the previous year, but Europe and Asia economic growth expectation, do not look fragile at all . So, it is plausible that the global economy is going through a slow down adjustment ,to a more sustainable long run economic growth.
All of the previous subject, are exogenous data markets , already considered by investors in their portfolio analysis, because of all the information currently at their disposal for investment portfolio managers. However, markets also include speculative forces; those who are trying to get the higher benefit, at the lowest risk possible . Therefore they follow not just the exogenous variables, but also the endogenous one before making profit maximizing decisions.
Which are the endogenous variables affecting markets ?: on the positive side it is creativity and innovation ,which allow for new product to shape market trends. This have been the driven force for quite a while on global economy, with new global players boosting global trade throughout services , technology and quality. But this positive factors ,coexist with negative ones such as rumours, worse than expected data, contagious pessimism about current situation ,political changes impact, and key economic sector expected performance(housing, construction ,manufactures).Both variables exogenous and endogenous, make the balance for the overall markets expectations and investor `s subsequent decisions . With rational economic agent ,which collect all the information necessary to make decisions, .this balance will always clear. However the path which it follows it is not without cost ,because not all the speculative investors have the same risk prone behaviour, some of them are more risk reluctant ,so they react more quickly and get the market forces behind them .-
In short ,markets behaviour are more independent from the fundamentals of the economy ,because they also considered this endogenous variables , given the fact that its adjustment velocity is faster than the economy as a whole. As Paul Samuelson has said: Stock Markets has anticipated 10 out of the four economic recessions. Therefore, volatility is part of the risk in markets behaviour. The market mood has high sensitivity to everything which might change the expected profit. In the process, it allows to correct those prices overvalued and those prices undervalued.-

Friday, March 09, 2007

Latin America as a political asset

Some times it looks like Latin America still depends on foreign attention to pursue its own guidelines concerning democracy ,economic growth and social progress .Sure ,we are part of a global network which make every country permanently connected to each other. Therefore, it is very important to know what its natural partners thinks about new developments on different issues, to move along upon the basis of consensus. The world has changed. It has become smaller, and self connected ; new global interests get closer what in the past were rather apart. Let take some examples. China is steadily increasing its economic ties with Latin America, because it provide raw materials and foods supply .Some Middle east countries are also getting closer to Latin America, because of the need of energy resources common policies, due to the expected decreased oil reserves. At the same time, Latin America has also worked out alternative energy supply sources, like ethanol which arises as an option to control the global warming trend. On the other hand, remittances from relatives abroad has made Latin America economies less vulnerable to foreign aid fluctuations, and although sharply questioned, the “Washington Consensus” has made its way through to impose better designed domestic economic policies to promote growth , investment and trade . This overall picture, despite some pessimism , has generated upbeat expectations for improving the political position of Latin America on regional affairs. In other words, these days Latin America have become mostly on its own, a more valuable political partner which to do business with.
What make the differences?. Latin America has its natural allies and friends, which stay well above short term political calculations. Latin America has worked hard these last ten years to find its own way to development and growth, and it does not need permanent advice either. However, there are winds which are blowing to move back economic history clock, what former Prime Minister from Spain Felipe Gonzalez ,call it the “regressive utopia” .Latin America has made strong improvements on democracy, human rights and economic conditions for growth, but there are still pending social problems such as poverty and inequality, which demand attention with a new approach, but not a regressive one .It also needs technologies assistant for non traditional source of energy supply, along with a reform to the state; not to get rid of it ,but to make it better, more efficient and connected to their own people ´s needs, and capable of providing effective solutions .-
What can be expected from all of this ? : The more obvious one should be that it is not the moment for turning back the economic history clock, there is still a lot of progress to do on social issues, as well as on trade practices .However ,there are some views , who believe that to solve these problems , the economy should be managed by the same policies which are responsible for what it was the worst economic depression in the eighties, widely known as the “lost decade”.
Above all, Latin America needs to complement growth with more effective social policies ,a modern state and institutions ,so that key values like democracy, private firms and markets instead of the state , prevail as the engines of economic growth. Following this path will improve even more its political value.-