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 .-