Friday, February 29, 2008

Politics and Economics In Latin America:The 2000 years experience (II)

It seemed like everything changed, to keep everything as usual. The State is still considered to be the champion of social welfare and protection. It has kept for itself the monopoly of such values, applying high entry barriers to private sector in case they want to go into those areas. Let take some examples, Public health infrastructure, public transportation (subways),and Education are considered as the “natural“ business of the State .The nature of public goods of such services however, reinforce such notion, given the wrong impression that there is a first best alternative(the state), for good institutional framework, to let markets and the private firms works properly. Chilean experience shows that it is not necessarily the case. Huge amount of money poured since early nineties, into education and public health, have not improved the system, or even worse have not improved its quality at all.
It fallows that to correct market failures, does not imply that public sector by itself will do the job better. At least, not within its current institutional format.
Thus, the reforms done in the nineties, did not ventured deep enough into the roots of most of economic and social problem in Latin America: State intervention in the economy, and those who carried them out, which were also in charge of running the State: politicians, bureaucracy managers, and special interest groups(Labor unions). They protected their own business with a self constrained reform!.Business man, intermediate business associations, regional leaders, intellectuals ,were left out of the process.
Why they did so?. One Hypothesis could be that because they believe their own values, are better that those arising from individual preferences and freedom of choice. A second hypothesis, could be that they depend upon the State protection and privileges, specially the political parties , such that they no longer could afford any substantial self reinforce reform of the State based on decentralization, as part of such process.

Friday, February 22, 2008

Politics and Economics in Latin America:The 2000 years experience (I)

Where Latin America economies are headed to these days ?.This question seems quite relevant after the adjustment process following the eighties lost decade, and the subsequent “Washington Consensus Policies” in the nineties. It looked like the “new economy” finally arrived to Latin America, so it was the expectations with Argentina, Brazil even Venezuela after its own experience with the effect of expansive fiscal policies following oil export income increases, in the seventies. Thus, with the first decade of the XXI century closer to the end , and beyond the favorable current situation with higher commodities prices, economic analyst, business man and politic leaders, start to wonder what is it next for these economies?.Chile was for quite a while, the reference to work out the new path. Market orientated economic policies, complementary role of the State , flexible regulatory framework, and stable macroeconomic policies and reliable institutions, seemed to be the first best approach. Unfortunately, there has not been that much sense of a leadership purpose ,in this successful experience. In fact, actually ,Chile looks somehow isolated within Latin America, trying its own economic path, which by the way, is the one (supported with further microeconomic reforms),upon which sustainable welfare levels increases are feasible .
However ,the fact of the matter is that most of the key Latin American economies, still rely on the State to pursue economic development. Argentina and its new Government first 100 days, seems to validate the traditional State intervention paradigm. Private sector depends on the state policies for transport infrastructure, urban development, macroeconomic policies design(inflation is controlled throughout special agreement with private sector).Refreshing views about either a modern more efficient State, or stronger private sector role in the economy, are out of the daily debate. So it is in Brazil, and Venezuela, although with different degrees. Brazilians authorities, have been far more pragmatic, than their ideological counterparts. They have followed a moderate approach, and as a result President Lula ´s support, is among the highest in the region,because of the results in terms of growth and poverty reduction.

Friday, February 08, 2008

New management rules for the CEOS (II)

Wealth creation means the ability to take risk sucessfully , but what are the price of those risks?.Benefits (returns),are the first measure of risks´price . The higher the price(risk) the higher the return .That is Tobin analysis of the relationship between risk and return for an individual investment. A different thing is to manage risks on behalf of others people´s interest, like firms do.
Milton Friedman said in the seventies that the only justification for business is private profit ,which means that firms should ruled out any sense of social compromise , other than with shareholders. From this point of view ,risks are justified upon the ground of seeking short run profit, thus it does not matter the risk price ,whether there is a reasonable chance to get the highest return ,measured at the end of the year accounting balance and dividends . Following this behavior, it is usual to find opposite interest between management and owner. This is so ,because in the process managers get a pay for the results they get, the better the result the better the pay. Therefore ,short run seeking profits decisions, are vulnerable to conflicting interest, more than long run strategies, because in the short run ,CEOS do not have limits other than the expected positive result .If they fail, their retirement bonus will fix it all.
What about a long run strategy?.Any strategy has different and particular support upon which stand,(market share, increase in sales, segmentation, innovations and the like),but no matter its justification, it allow to define a set of values complementary and sometime necessary, to the proper implementation of those strategies .In the long run, social values such as compromise with community , employees and markets stability, match quite well with the profit seeking strategy. This is what empirical evidence shows since the nineties .In other words, Corporate social responsibility fit better than exclusively short run result ,the right combination of management values other than simply to earn money. It follow that the best way to match different interest within firms ,is based on a long run shared view of what each business is about. Profits seeking by itself ,do not guarantee neither stable and sustainable firms growth.-

Friday, February 01, 2008

New management rules for the CEOS (I)

From the economic point of view, there is a theory(agency theory) within the field of organizational economics ,which explains the opposition between the CEO´s management interest, and those of the shareholders ,employees and community. This is more obvious when it comes to risk management, because in case of failure the burden cost lies upon shareholders and the community (employment losses),but not necessarily in CEO´s pockets, because they might claim their retirement bonus ,unless they face justice to clear up their responsibility, when such a risk turn out to be a business failure.-
On the other side, Management models have tried to deal with this issue, throughout the so called Contract Theory, which says that because firms is so widely considered like a network of different and some times conflicting interests, there is no better way to internally regulate those one, than with the help of contracts. These contracts, might be the kind of either short run or long run periods contracts , depending on its scope and level of application. Thus, on daily operations these contract are the kind of well done job contracts, with penalties for failures (for instance low quality,) and bonus for results achievement (productivity or profit). On the strategic level, (CEO´s field) these contract, are the kind of a long run focused time span, although with strong emphasis on short run financial results, which becomes like the monitoring board, to evaluate the application of strategies .-
Whatever the focus of these contract, the fact is that risk management is hard to assess, mainly because of the nature of new strategies which the CEO´s are responsible for. New strategies implementation, means to undertake risks anyway, thus the question becomes what kind of risks failures are they accountable for?. Risks are within the core of business and wealth creation, therefore too much control about risks, might imply to introduce additional constraints to the whole decision making process, and profit seeking strategies. Double check procedures, and rotating risk involvement decisions among team members instead, within the frameworks of performance contract, seems to be a valuable instrument ,to get the proper equilibrium between those interest linked to short run profit seeking behavior CEO´s job) ,with those linked to its long run sustainability (shareholders ,employees and community ).