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,NÂș2 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.-