Friday, January 25, 2008

Weak dollar hurt Latin America export:Its implications

Most of the Latin America economies exports are highly concentrated on primary products, such as agricultural products (wheat sugar, coffee),mining products (copper, silver) and, few countries export gas and oil within the energy sector. Manufacturers products also are in export supply but they have a smaller share of total export. On the other side,15% of Latin American economies GDP are concentrated on USA markets. It is widely known that the USA economy is under a slowing down process, which means that as long as American income GDP ) decrease, the total demand for Latin Economies export also decrease. Additionally the weak dollar also affect the exporting sector ,because it make more expensive good coming from those economies.
The local currencies of most Latin America economies ,have appreciated not just because of more foreign investment, or incoming capital flows ,but also as a consequence of dollar depreciation.. Thus, the Brazilian real has appreciated by 25% against the dollar, up to October of the year 2007.Brazilian economy though ,is more diversified with its exporting markets.-
According to Latin America Economic Commission, current account balance worsened in 14 out of 19 Latin America economies. Colombia (-3,9% of GDP), Uruguay (-2,6% of its GDP)Mexico (-0,8% of its GDP) .Argentina and Brazil have more diversified its export markets toward Europe ,China and India. In the Argentina case , exports to the USA economy , represent only 0,3% of its GDP , ranked in the third place after South common markets association, and Asian economies.-
The solution is far from an easy implementation, because primary agricultural export got subsidies from European economies which make their prices cheaper than otherwise. It follows that the dilemma for these agricultural exporting economies lies between either high prices because of local currency appreciation ,or low prices , because of subsidies in European markets for some of its primary exports. Therefore these economies are more vulnerable to any change in world economy conditions.
Some sectors of Chilean exports have also been affected by dollar weakness ,although the annual volume for the year 2007 was positive, because of copper export volume ( 60% of total exports),which had a very good price throughout all year. Private Exporters though, have complained about this situation because peso appreciation has led the sectors to important losses of competitiveness. High labour cost, have affected additionally exports performance ,in such a way that world producers like Dole closed its production operation, concentrating itself only in products marketing.-
All of these issue means, that it is important for Latin America economies, to pursue a different and more diversified export strategy, to improve their management model focused on efficiency , productivity and value. All of those exporters (Germany ,Japan , South Korea are good examples) which has made of quality its trade mark, have been able to overcome the cost of its currency appreciation against the dollar.-

Friday, January 18, 2008

Economic Freedom index: The relevance of the Heritage Foundation focus

The Heritage Foundation has announced its Economic freedom index 2007. Chile is at the global level in the eight place, above United Kingdom ,while at the regional level is in third place ,behind Canada and the USA.
The Economic freedom index is built upon ten categories: trade, fiscal policy, monetary policy, investment conditions, financial policy ,labour policy ,state intervention, property rights, and corruption levels.-
What is it the importance of Economic freedom? .It is important because there is no way society can live without it : Let briefly review why :
a.- Given the proper institutional framework, it allow markets to make their way through for better allocation of resources, which means they get the higher return considering all other economic feasible alternatives, maximizing society welfare.-
b.- Freedom is a condition for welfare increase within a community, as long as every one of its member , have the chance to try freely their best opportunities available. The twenty century ,has shown that all those societies based on freedom, are better off than they were at the early years of that century.-
c.- Freedom allow energy to go across where it is needed, like electricity allow the light where is needed , to clear the way through. Freedom have been the seed for major achievements in mankind history, although it might had carried out some cost to preserve it. But no matter the cost, there are people ready to live up to get the freedom level they believe it is necessary.-
The opposite to freedom is labelled with state intervention,(at the extreme, totalitarian regimes) whether it is into the economy or society as a whole. In other words, more freedom is associated with a smaller State .But this smaller State, does not mean to get rid of the State whatsoever ,but in G Sorman ´s word it means “a better State”. Freedom match quite well with a better State, as well as a better institutional framework. Both, a better state and better institutional framework, complement freedom in such a way that, it creates the most favourable conditions for growth, which means more freedom .
Unfortunately ,in Latin America people still live up to their fears instead of their freedom. There is a strong dependence from the State. Historically, the state has been involved in most of the activities these societies lives for. Education ,health care, economic policy have strongly been based on State egalitarian principles , which is the opposite to personal talent principles ,which freedom is based upon. Thus, it is not a surprising that relative younger countries like the USA ,has surpassed most of the older Latin America countries. More devastating the comparison, if we take into account than in the middle of the fifteen century, ancient civilizations were already using technologies for water irrigation, road constructions, infrastructure developments, education and public management model( based on tax collection). The conquerors, did not change that model, and in the process they could not support new entrepreneurial initiatives, losing the opportunity of taking advantage of all what it was available: land, water , technology and expertise .
So, lack of freedom is not trivial for society, even more if you get to the core ethics of it: Freedom allow people to reach happiness ,just because it is every one own choice, to decide what they want to stand for ,just because it allows to get the higher expectations mankind might have as a whole, but above all, because it allows us all to survive. Therefore the higher the economic freedom index the better, keeping in mind what relevant is the proper institutional framework. Latin America countries not only fall behind other countries freedom standard, but also they do not have a modern institutional framework to expand opportunities ,which is the other side of freedom .-

Friday, January 11, 2008

Driven poll events: What if the poll is not accurate?

Opinion Polls represent a kind of summarized information about society ´s mood, concerning some specific issues. From the economic point of view, it represents the reduction in transaction cost, which authorities can count on in their decision making process .Thus, if anyone want to discuss abortion, divorce, environment, political preferences, regulation and the like ,opinion polls show a convergence path about them, to reduce the chance of mistake for any policy design.
However, what is the real relevance of this opinion poll?. Well it depends upon both the quality of the sample, and expert´ s judgement to explain its results. Let take an example: you want to know how people would react , in extremes case such as an alert of tsunami. You guess that between stay in a shelter or running away, at leas 90% would run away , whereas other expert might think that 50% would spilt between running and seeking for shelter. You decide to do some research about it, so you ask randomly to 25 people about what the would do in case of a tsunami: Assume that 10 people of this sample cares about tsunamis ,and 70 % say that they would run away from it, while 30 % say they would seek some shelter around. Both answers imply a public policy requirement either to build up proper shelters ,or to set a proper signalling mechanism for those who would run away. But is that it?. From the public policy point of view, it is important to use efficiently scarce resources, therefore it is a better approach to improve the information about what it is at stake: If you spend money on the basis of poll results, it might end up to be a waste money, because we do not know the probability of occurrence of each one of such event. The next question is , Taking a sample of those ten people ,what is the probability that seven of them, would run away in case of a tsunami threats?. Applying statistical tools, the probability would be 0,0574. What about staying at a shelter? .The probability would be 0,117. Therefore, it is more feasible for people to look for a shelter, than to run away ( 5,7% probability in the former, against 11,7% in the later) . Thus, the correct policy option should more be in favour of building up shelters , instead of concentrating on signalling equipment . Quite the opposite, if the decision would have been based on the first poll result.!. Beware that this conclusion is sensitive to the sample size. It means that whether 8 instead of 7 people run away ,the probability changes.-
Something similar it might happen in a political election: Two candidates go on a very tight race, although one of them have a slight lead. Is that enough to conclude that the one with the slight lead ,would win? .Recent experience shows it might be not. The result depends upon the probability for voters, to keep up to their preferences. Thus , it can happen that the probability of keeping their vote in favour of the one who is leading the polls, is lower than the probability to change their votes, of the other candidate´ s supporters. It means that the one who is leading the poll , has more volatility in his voters preferences, than the one who is behind .In such a case , if you rightly consider the probability scenario as a complement , you would have more information to take a better decision.-
Most of the time, opinion polls show the event in absolute yes/no terms. However, modern times offers citizens a lot of more options to look upon for additional information , which at the same time allow them to shape in a better way their preferences, affecting deeper than expected the probability of changing them. In the information society , instantaneous event make preferences more unstable.-

Friday, January 04, 2008

Some guidelines for the year 2008

It is a tradition among market watchers , to make announcements about the new year economic prospect and expectations. This is a very hard exercise ,which can also be highly risky if you get wrong with your assessment, specially feasible when events which nobody can count on , appears along the way. Even so, it is an interesting experience try to assess what it might become the key event of the new year. My own record ,by the way, it is not that bad .However, I will try to give some guidelines ,instead of specific projections, based on my own judgment of current global economic events.-

1.- Environment will continue to be the key issue for all this year, hitting its peak at the next Global Warming conference to take place in Istanbul ,Turkey on next July. Previously to that event, more than 20 conferences world wide, will keep that issue on the spot light.

2.- Global growth might be a slower pace than the previous two years , because of inflationary pressures due to both oil and food prices increases, and its subsequent probabilities of interest rates increases ,besides the high probability of slowing down in the USA economy growth , and the impact of more than usual, natural disaster such as hurricanes and flooding. Inflation will be the problem to take care of.-

3.- Women will be on the spot light throughout the whole year, because of politics, economy, environment, diplomacy, and sports with the Beijing Olympic games. They might consolidate their influence, as a new source of change.-

4.- Oil prices will be higher following its long term trend, as long as inventories fall after the winter season, dollar depreciation goes deeper , and supply constraint due to geopolitical tension coupled with speculative forces, make their way through to push prices upward .

5.- From the financial point of view, it is expected that important adjustment will take place, specially from those firms anxious to get rid of sub prime market losses. There will be a reshape of financial services industry.

6.- Other industries to keep an eye on, are the automobile and aviation ones ,both connected to the top issues of environment and oil prices . In the automobile industry, Toyota should continue to move ahead with its goal to become the number one in the USA markets and in the world, within the segment of fuel efficient cars. –