Friday, December 28, 2007

The year of the environment is almost gone

Next to finish this year,there are three elements which has made the difference between what it was expected and what it was real.:
1.-At the beginning of the year 2007,there was some doubts about the importance environment issues would have.March 2007,marked a turning point when the "Unconvenient thruth" documental was awarded at the Oscar ceremony.It ignited a new focus on a subject most of the time, left for bureaucratic atention,instead of ordinary people and global media concern. It began the new focus, based on world public opinion now pushing hard for new policies and agreements.The Nobel prize award made the whole issue a matter of piece.Therefore, in the next months ,both Europe and the USA,made important contribution to move forward faster than expected. New emerging economies also stepped in, to a global consensus for a different approach on environment,following the expiration of Kyoto Protocol.

2.- The global economy has been stronger than expected to cope with unstability conditions.While the oil price is close to U$$ 100 a barrel,the 2007 year global growth is expected to be within the range of 4%- 5% .This does not mean to rule out complications ahead ,due to the implication of sub prime markets crisis.But the global economy has been resilient so far, which indicate a positive sign of strenghts.-

3.- The economic growth prospect for Latin America economies has improved, after the new Free Trade agreement between the USA and some countries such as Peru and Uruguay, (not considering Central America).However,Free Trade agreement effects turn out to be positive, as long as there is a proper institutional framework ,specially designed to take advantage from it,specially in the case of Medium and small size firms. Although inflation is back because food prices and energy cost increase,the reforms made in the nineties heavely focused on the macroeconomic and financial side of the economy, suggest it will be a transitory situation.

Friday, December 21, 2007

The Asian economic crisis: Ten years later (II)

It might be helpful for current uncertainty about the lasting effect of subprime market crisis, to keep in mind how important expectations are, and how relevant speculative forces are, to set the pace of adjustment path. Once there was well supported doubt, about the real value of each Asian economy exchange rate ,speculative forces were in charge of market behaviour. Any analysis on exchange rate fluctuations at that time, illustrate the magnitude of this speculative effect. R Dornbusch called overshooting , J Keynes called the speculative nature of business behaviour. Indonesia currency felt dramatically from 2,909 (1997)up to 10,014 ruppies per dollar(1998) , Korea currency moved from 950 won/dollar, (January 1997) up to 1600 won /dollar,(January 1998) , and Thailand baths from 31 (January 1997 ) up to 50 (January 1998). With all information available, speculators made quick decisions to move away from an increasing risky scenario. Somehow, speculators care very much about the real conditions of the economy, round the clock gathering information such that they are able to move quickly in case their expectations are not consistent with the fundamental .
It follows that speculative forces (suden changes on capital flows)are like a warning light ,about what is going wrong in the economy .Of course speculative forces by itself ,are not enough if they are not complemented by institutional weakness and misplaced focus of monetary policy.
a.- Institutional weakness. Reckless loan policies by private banks in Asian Economies, led to a sudden increase of loans which were not capable of matching its payment schedule .Bad loans, exacerbated negative expectations which reinforced the depreciation round, because everyone wanted to get out of that market to avoid further losses.The process of large gross intermediation of capital inflows and outflows through the banking system, implied that the domestic Asian bank increased their foreign short term liabilities faster than their foreign assets.. In the South Korean economy case, liabilities increased by U$$ 56 b between 1993 and 1997,while the gross assets increased only by U$$ 19.8 b. As a result, the net liability position of Korean banking system went up from U$$20,8 b in 1993,to U$$ 57 b by 1997,(U$$90b liability against U$$ 33b assets)(Roubini 1998).It is obviously a moral hazard case, which arise because of expectations of Government promises of bailout. Very much of domestic loan , were driven to finance speculative demand of existing fixed supply asset.
Another lesson from the Asian crisis, was that monetary policy must be rightly targeted to keep expectations under control. In most of Asian economies at that time ,it was focused on the wrong target .Instead of reacting to the speculative forces ,it underestimated the magnitude of such forces .It was more concerned with keeping stable the exchange rate throughout foreign currency markets operation, than constrained the aggregate expenditures level throughout higher interest rate which would have also allowed to slow down capital outflow and further currency depreciation . When it realized that such a correction was on top of the list, it was too late to stop the speculative waves.
Quality of information for a proper allocation of resources and economic decisions, was not good enough to guarantee stable economy growth and to avoid the recession in Asian economy by the end of 1997. The investment boom took place in the wrong sectors ,and speculative forces reacted faster than authorities attempt to control the damage. As a result, the whole event were driven by speculative behaviour adjustment , with no chance for macroeconomic policy , forces , to mitigate its negative impact.

Wednesday, December 19, 2007


This video, shows how important it is to get advantage of nature resources ,without hurt them.The fog trapper curtain, allow to get water (7 lt per square meter/day) which by gravity support local communities productive activities.This is part of a 25 years Catholic University research project.

Friday, December 14, 2007

The Asian economic crisis: Ten years later (I)

The Samsung Economic Unit Research Institute( has published a review of the situation focused on the South Korean economy ,after ten years of the Asian economies crisis(1997).
First of all, some background .The Asian economic crisis started off in 1997 in Thailand, when those economies could not get over with the effect of economic growth, based on serious unbalances and disequilibrium. The exchange rate policy applied was Asian currencies pegged to the US dollar, such that while the dollar started to appreciate in 1995,the Asian currencies also had a real appreciation ,which led to current account deficits . On the other hand ,interest rate differential and low exchange rate risk, led to huge amount of capital inflow which prevented currency depreciation. By the beginning of 1997, it was clear that several Asian currencies were overvalued, and that such overvaluation was a factor in the worsening of the current account deficits in many countries of that area ( ). This current account unbalances ignited a series of depreciation in local currencies, which pressed the financial sector ,governments and firms which had huge amount of debt in such foreign currency. At the same time, this depreciations were self reinforced because all of those economies shared the same markets, so they had to protect their exports competitiveness .
At that time ,on November 21st ,the South Korean economy requested assistance from the IMF because of the effect of such a crisis on its own economy, which was not possible for them to carried over. South Korea economy was heavily hit by their neighbourhoods countries, because of the different adjustment of its exchange rate policy. While at the end of September 1997 the average rate of depreciation of Thailand, Malaysia, Indonesian and Philippines currencies, were roughly 33%,the Korean won was depreciated only by 8%,which means that the won was appreciate in real terms. This meant an important loss of competitiveness for Korean economy.
Ten years after the crisis , South Korea economy has fully recovered with some impressive figures. It holds U$$ 260 billion in foreign currencies reserves, and it has a per capita national income of almost U$$ 20.000.Exports has surpassed U$$ 300 billion, specially important the fact IT industry has become much more important on total exports.
The score card for the Korean economy ,according to the SERI report, indicates that in the last ten years firms were reluctant to invest more, reducing capital accumulation. Qualitative growth improved somewhat, because firms enhanced their management models focusing on higher profit.
Some of the challenges which lies ahead includes more labour market flexibility, innovation in small and medium sized business to make them more resilient to markets fluctuations, softer regulations and additional investment in the services industry.
This case illustrate how important is to take the right lesson from crisis time. In fact the South Korean economy, made out an opportunity of that painful crisis, to make deep corrections specially on the financial sector, which otherwise were next to become severe restrictions on growth .-