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.-

Friday, June 01, 2007

To live up to ours fears (I)

It is widely known that there is no economic progress when the state intervenes in the economic activity beyond what it is needed. This means ,to go further beyond what the State do better than the private sector. It follow that the key point is not to get rid from the State , but how to improve the state performance. At the same time, to limit State intervention does not mean to give a blank check to the private sector, because by nature it also need some level of orientation ,which frequently comes from different sources, among them those which arises from the states policies.
The only source of pure private initiative ,lies upon the individual desire to be free ;to take advantage of all new opportunities ;and to get the benefits of freedom at personal and community level. Individual by themselves guided by the self interest , barely feel some fear when it comes to make decisions based on freedom to chose. The economic approach to welfare improvements, assumes no fear to get the best possible combination of different goods to get the highest benefit of living within a community, throughout voluntarily exchange and well informed decisions, otherwise the is no way to get such optimum . Fear mean suboptimal decisions .-
Society as a whole might have space for some fears because it is bounded to more restrictions than those human faces, such as :regulations, , accountability, news media and environment However ,as long as society is open enough to allow the individual energies to reshape what it is outdated , the whole community get the benefits from it as long as new and wider boundary appears on the process .It is like an open system , which has the proper level of feed back to avoid entropy, even though must fulfil its own restriction .
To avoid that entropy ,it is important to have enough information provide by different means, which is the support for optimal and efficient decisions. Any restriction on information means that society become restricted onto its own boundaries ,it imply no feed back and therefore it imply entropy. That was the experience of east Europe societies in the second half of the twenty century. It has been the experience of any state inspired revolution ,and so it will in the future. .State inspired revolutions; are no better than individual inspired revolution. .Fear within a society mean entropy.
Unfortunately, Latin American societies have been for quite a long time a sort of close societies based on fear ,ruled by different kind of groups whether they are institutional (political parties),dictatorial ( long tradition of military coups) or economics (state intervention),all of them one way or another represent their own interest whether it is to protect democracy , to save the nation or to improve equality and justice respectively. The vital contradiction is that no matter their justification ,it is implicitly founded on fear. Instead of relying on the individual, as a natural source of energy for economic progress ,Latin America societies are not founded upon the individual expectations,(freedom) but upon those coming from special interest groups expectations (fear).As a result ,Latin America is lagging behind the most dynamic areas of world economic growth, still depending on raw material highly volatile on prices , with limitations to private enterprise ,weak institutions and corruption .It seems that this is the continent of fear and worst of all, maybe we live in a continent in fear.-.