Friday, December 31, 2010

Brazil and President Lula: Well Done

Brazilians have a lot to celebrate these days. They are in their way to become again the global power they already were before. It is not the first time Brazil is in such situation. In the sixties,(1968) it was among the eight world economies, and its potential on different areas placed it ,in a leading position for the XXI century along with other few Latin America countries.
As we approach the end of the first decade of this century, and we are about to begin the second one ,the usual end of the road kind of evaluation show Brazil as the shining star .In the year 2000 , Brazil was hope, ten years later Brazil is reality. It is within the selected group of economies (8th),which carry out the torch of global growth.
Very much of these achievement comes along with the implementation (1990) of moderate free market economics policies, integration to world economy and fiscal responsibility .As a result, Brazil has been gaining positions both politically ,as a global partner and economically ,in the competitiveness index as well. According to the World Economic Forum in the year 2009, Brazil catch up eight places in the competitiveness index, surpassing economies like Russia.
Brazil economic policies, represent the consolidation of a new approach to free markets economy policies, and an “investment friendly” State, which place Latin America, closer than ever to successful experiences of development known in the past, such that of the east Asian tigers. Of course there are differences, but Latin America pursuing the current path, is in the position to surprise global markets a few years to come .
On the other side, the Brazil trade composition is quite diversified, which is like a markets fluctuations insurance. It includes Latin America (25,9%), European Union(23,4%), Asia (18,9%) ,USA( 14 %) and others (18%).Besides, Brazil exports(60%) are mainly manufactured and semi manufactured goods.
President´s Lula Government made work, what Chilean Governments had made its brand since the nineties. In fact, both cases fit quite well with two new paradigms: Stability and Governance, as necessary (not sufficient, because good economic policies have no substitutes), condition for growth .Let take a look at both.
It is important to remember that before his first election in 2002, there were doubts about candidate Lula commitment with free markets policies, fiscal discipline and integration to the global economy. In those years, Chile was the only economy fully committed to growth based on free markets policies, and private sector investment. Other Latin America countries, were struggling with deep economic crisis on their own, somehow as part of the transition to a new stage, post Washington Consensus.
Thus, after being elected President Lula took the unexpected course, and decide to follow what former President Cardoso set in, although making the social progress an important target( zero hungry policies) . From then on, there were more than one reference in Latin America, in terms of economic policy, which allowed to create with other key countries, an huge geographic zone for trade and investment , creating the condition for Transoceanic routes, which will push further up these potential.
Governance is the second paradigm, which means that there is no way to make Government works with the country paralyzed by violence on the streets or business uncertainty. It is key to implement economic policies aimed at getting social balances, as much as economic growth .After all, wealth creation has its real meaning when more people have access to it . Governance support stability such that both add up not 4 but to 5(synergy).
President Lula is about to finish his successful Presidency, so Latin America will be grateful with his legacy.-

Friday, December 17, 2010

Some economics guidelines for 2011

As the end of 2010 approach, it is useful to take a look back at the most important economics event such that it might be possible to look forward. So ,let start .

a.-There is probably no too much disagreement to consider among the key events in this year, the crisis in the Euro zone and its implication. Alternatively, the Euro requires rule to be considered otherwise it does not work up to what it was created.
b.- The USA recovery seems to be slower than required ,but at least from my point of view it is what could have been expected. The financial sector crisis take a while to be back to normal.-
c.- Global economy does not work as close world economy. It rather works as different segment which does not add up to a fixed previously settle outcome. Thus while coordination was necessary in 2008 to get the whole system back on track, as time went by , it arose different requirement for different economic settings. While Europe needed a more conservative stand, others industrialized economies do not necessarily needed so .Besides emerging economies were on the opposite side of the economic cycle, taking good care of keeping the fundamental ,to avoid the ghost of inflation.
d.- “Currency war” and the war which did not happen .It was a possibility and it still a real one. However, because global economy is not equivalent to a close world economy, it is unlikely it will happen .Diversification works in this case to avoid such outcome. There are more than one market at half of its potential, capable to absorb product from everywhere. Emerging economies ,China, and Latin America, growth a steady pace.-

What to expect for 2011?.
a.- Te whole recovery should take place. However, inflationary pressures might arising from food prices increases, oil prices back to its trend , affecting the pace of global economic growth. Even so the IMF project an economic growth of 4,2% for the next year, with an average of 6,6% for the BRIC group.
b.-The trend will continue for raw material increasing prices. This will represent a new challenge for market inflationary expectation, as long as those prices are influenced by dollar variations, speculative forces ,and real conditions arising from strong demand .-
c.- Technology will continue to be the driving force for economic of scale, cost reduction and efficiency in productive process. However, Human capital is getting more important to keep the pace of such innovations. How about the trend?. Asian countries have a strong potential to take a stronger role. Keep on eye on South Korea, Homg Kong ,Taiwan just to mention a few.On the other side, Africa seems to be left behind.-

Friday, December 03, 2010

Cancun Climate Change Conference: Failure is not an option

A recent report issued by the WMO (World meteorology organization) , set a pessimistic tone to the ongoing discussion about climate change ,at the Cancun XVI Conference on Climate Change in Mexico. The report emphasize the fact that in this year, the emissions of dioxide of carbon has been the highest ever, even though the global economy was not working at its maximum . This fact confirm the trend , which indicates that while in 10000 years the level of emission was level off, in the last 250 year, it has increased by 38%. Therefore , human behaviour has a lot to say about it.-
Thus ,it looks like we are all headed toward an environment catastrophe , and only few seems to be aware of the risk involved in keeping the current pace no matter what might happens next. It is feasible to assume that climate change, will not be solved without some important cost some of them currently under way.
World community wonder whether such a cost is affordable .Perhaps it is , but if it is not , it is better to change the course toward more direct compromises to protect environment . Market solutions, will be slow to provide a long term solution because the main benefit of the trade mechanism no longer goes to those who reduce emissions, but to those who trade the green bonds . Sure, while the one who reduce emission get the actual market value of it, the one who engage in market transaction to make profit from it , get the present value, which is above the current one because it includes the expected gains form future reductions in emissions. Prices signals work in different direction , because there is no a single price to pay for those who contaminate. Environment like any common good has not a price, because nobody can claim property right on it.-
Protocols agreements work as long as governments wants them to do so. If not, Kyoto protocol is a good example of what some Government would like to do, but what they finally do when incentives are not clear enough.-
Therefore, It is not helpful to follow just the path of willingness to take action ,when the cost has already been somehow included in the current pace of growth. Massive flooding , pattern changes in weather temperatures ,rising sea levels, are the first hand cost of the climate change due to human intervention. These social cost must be reduced applying proper policies, which should include subsidies for new sources of energy, tax exemption for reduction on emissions, tax incentives to support clean technologies.-
The real problem is to get a reliable comparison between marginal benefits (Economic growth) with marginal cost (further contamination)of carbon dioxide emissions to make sure there is a net gain .This gain depends upon benefit going higher, faster than costs do. Sooner or later , we will need that technology develops new means to make possible to catch back emissions from atmosphere ,building plant specially designed to do so, such that to bringing down such cost further .
So, it is the time to move forward with a new approach on climate change, based on policy instruments capable of getting result to make the difference on environment protection .-

Friday, November 19, 2010

APEC 2010: Interesting projection

Since the beginning in 1989 ,APEC has been an important source for new opportunities for global trade and economic development. The 21 economies which are part of this association, represent 56% of Global GDP and 46% of global trade. Such a share in global economic in motion ,certainly expand the boundaries for growth. Research by the APEC policy support unit (2009), shows that its members are three times more likely to export ,and two times more likely to import from fellow members than non member. Thus, lower transaction cost among APEC members, generate endogenous positive conditions to foster additionally trade and growth, making the APEC area, more active in terms of intra regional trade, than EU,NAFTA and the Asian -7 association .-
While there still a learning process about the complexities of global economy, trade association based not only on economic- financial flows, but also on geography has, proved to be very useful to open up new alternatives for growth. Global economy is not only about mobility of financial resources, risk exposures and its regulation, it is also about additional path for export and import of goods, raw materials and equipment.-
Besides, Global economy preferences for risk, is lower than the economies which are part of it, are willing to be worry . The level of debt of some European countries ,far from what it supposed to be a rule (3% of GDP ), increase the risk perception above what it is desirable for global economic financial and good flows, and it is better to make adjustments than to go away from them.-
An issue which is on its way to get through, is the project for a Free Trade Area of the Asia pacific, pushed on mainly by business leaders (APEC Business Advisory Council), who understand the fundamental of Global economy, better than Governments usually do.
There is currently a whole process of setting common standards for environment protection , intellectual property rights, rules of origin, and services ,which will set the ground for concrete steps toward the goal of such a Free Trade.-
The implications of the further strength of this initially called “Forum”, to become a Free Trade area, are both strategic and economics. Strategic , because assuming business lead the course for future international relations, and politics become constrained by economics, the stronger these associations are, the lower the risk of any single power prominence ,and the higher the chance of multilateral paths of cooperation. Economics, because it creates the conditions for endogenous source for economic growth , providing a sort of safety net for sharp fluctuations on global economic activity.-

Friday, October 29, 2010

Latin America : New trends on social mobility and implications

Recent data and research show that the middle class segment in Latin American economies is growing. While in 1990 53% of the population was in the middle class category, in the year 2010, 63% of the population has reached out such a condition, and the trend is to be even higher twenty year from now , (100 million additional people) as long as economic growth keep the pace.
The implications of this results are wide and complex: Wide because it means that the middle class get stronger. For a society as a whole, is better to have strong middle class, than the opposite. Middle class do support and prefer stability and consensus, it also asks for more information and involvement before making decisions, which is good for an higher quality of the debate and evaluation of alternative options, all of which end up with better public policies design. Free press have key target in middle class readers.
Complex because strong middle class, is helpful to shape a different approach on different subject concerning politics and leaderships, but not always this demand are listened. Middle class demand both different leadership, and better answers arising from Government and private firms as well . Thus, it is not a surprise that women are becoming more involve in Latin America politics. It is matter of style and tuning. The same apply for private firms and their focus on Social responsibility.-
Does it means that strong male leaderships are outdated? Not necessarily so. It is the requirement coming from Latin America middle class voters, to shape new directions for leaderships , no matter whether it is male or female. While in Latin America there was an important proportion of people in poverty conditions , strong and some time populist leadership fitted quite well , to fill the gap between the rich and the poor, had not with concrete result, at least with keeping the hope alive. Politics and economics were far away from each other, but now with economic growth at its current pace , and the expectations of further increase in good consumption, higher banking services demand and investment , the requirement goes on the line of broader and pragmatic consensus.
This time ,Politics needs to be closer to economics. Even Latin America integration , is actually better founded in the principle of politics inspired by business, than the other way around, business inspired by politics. Latin America economic Integration , will not be just because of Government support, but despite Government , private firms will take its place.
Following the implementations of reforms, since 1990 most of Latin America countries have increased its middle class segment. In Brazil(2010), 50% of the population is considered to be in the middle class. Chile (77%), Uruguay(72%), Argentina(71%); Colombia (61%) and Peru(57%).On the other side, economic crisis had an high a price for countries like Mejico (2008) and Argentina. In the later case, at the peak of the crisis (2001),30% of the middle class fall down to a poverty condition. Strong leadership and no conventional economic policies, made its way through to get the country to stand up again.
However, new directions and opportunities arise when middle class voters become more important. Thus ,it is up to the current leaderships in Latin America countries to move forward to take advantage of this trend.-

Friday, October 15, 2010

Water it is not longer a free good

When it comes to keep our health in good conditions, most of us count on food quality, but very few of us realize, how hard this is going to be in the future. Very much of what we need for our health, comes from clean water. Our body is 70% water, which means that the first condition for good health is good quality water. This a well known fact by physicians , but what about its implications when water is scarce?
The problem arise because clean water for human consumption unfortunately has already become a scarce resource. It will require tough competition among its different users, to get what they need. Let check the list(
a.- Every average person need around 200 hundred liter of water for daily consumption.
b.-To produce an hamburger requires 24 liters of water
c.- To produce lettuce 60 liters of water
d.- To produce tomatoes 88 liters of water
e.- To produce apples 332 liter of water
f.- To produce wheat bread 616 liters of water
g.- To produce chocolate 11388 liters of water !
g.- To produce rice 1612 liters of water
The list goes on and the issue is clear enough to look for ACTION. Check this web page out :(, for more .
Less than 1% of all water available on earth is suitable for human consumption. 42000 people die each week, because lack of clean water. Underground source of water are not huge such as to count on them. Productive activities such as agricultural and mining ( whose productive process is highly water intensive )will have to compete between each other for water. Thus, it is a real possibility that severe conflicts might arise because of lack of water.-
The Blog action day deal with a responsible call to make water preservation a duty.-
From the economics point of view , water scarcity means it has an higher price , which we are not paying . In fact in real terms we are consuming free water ,(those people who die because of lack of water are part of the price!), and it seems feasible that sometime in the future, we will have to assume an higher share of water cost in our budgets.
While in the last 40 years we have been worried about oil prices, in the next 50 years or so, we will have to be worried about water prices.-
Besides , water is considered a common good (The tragedy of commons), which mean that there is no restriction about its use, and the risk of over exploitation is real. The solution, include to assign property right ,and this rights might be sell to other customer. As long as to protect water has a price , users get more cautious about the way they use this resource.
But water preservation is not judt a market issue. Government regulations also are important. At the same time,it is also a Government responsibility. Some regular activities concern with such responsibility : Car wash, garden maintenance, laundry requirements are increasingly luxuries goods, but at a very cheap price!. Something is wrong when a distortion like this one is not solved. It is the well know market failure issue, for common property good, which requires efficient government intervention.-

Friday, October 01, 2010

Chile :Two hundred years later (1810-2010)(II)

As long as the State was key to design the new framework, ideology was the driven force in the following years. On this regard and as a condition to make the State stronger, the institutional profile , was bias toward the law and order, rather than freedom and rights.
The foundation of the new republic was based on the strength of its State and those who supported and controlled it. However, this emphasize on the State responsibilities ,left apart and on a secondary level , the citizens and their role as the most important source of contribution to a nation greatness .The Chilean State was in charge of education ,public health, infrastructure ,even the economy in the second half of the latest century (1940-1975) , was designed upon the State preferences .-
As a result , ideology replaced pragmatism because all what mattered was what to do with such a power . From time to time, politicians forced the institutional framework stretching ideology beyond the level which the system could absorb and sustain. Social unrest and repression was the outcome. From 1958 up to 1970, there was three different but not complementary government programs. Three different way to go nowhere because there was not a long run perspective to go through, other than to get control of the State. The main consequences of these stress, was a permanent social struggle between opposite forces ,with severe consequences as much as the system was not designed to protect rights, but mainly duties from certain segments of society. The human rights concern, is a recent phenomena in Chilean politics and society. Past history on this issue ,is quite fragile to say the least.-
At the beginning of the third century, Chile is in the path to become a development country, just the same way it was before, one hundred year ago. Thus, the question which arise is this : will it be able to make this time such transformation to lead the rest of the Latin America continent ,to higher levels of economic progress and performance?. Historically Chile has been leader on social issues: It was the among the first to recognize women rights, and to implement social security as well. At the end of the twenty century (25 years),it was the first to open up its economy to private sector and world markets getting rid of the State preponderance .Wealth creation became as much important as it was poverty reduction.
Others countries at a different speed, are also following their own path to improve conditions for economic progress and development, based on a more active role for the private sector .
Actually, there is an interesting process to get the development status, which includes almost all countries in Latin America. Politics and economics must be quite well fitted. Ideology is a risk because it might left some countries behind. The majority of countries are moving forward into this century , with a different approach concerning the real force of prosperity and wealth creation.
For Chile own expectation ,the challenge ahead goes on two complementary path to get such goal:
a.- Higher productivity and competitiveness
b.- Better education and innovation
A preliminary evaluation indicates that the chances to get substantial advances on the productivity level are higher, because a deep decentralization of the State, and its full scale modernization as necessary conditions depends upon political will, which has been one of the main assets in the latest 20 years for important reforms. Education improvements needs a very long period of time to show substantial achievements.

Wednesday, September 15, 2010

Chile : Two hundred years later (1810-2010) (I)

These days Chilean people celebrates the most of their pride : to be independent .On September 18 th, in the year 1810 started out a long journey for a new tough land full of scary natural phenomena (earth quakes, volcano eruption, flooding in winter seasons ), but also with the majesty of both geographic and weather diversity. Dry and hot in the north, rainy and cold in the south.
Geography has played an important role to shape Chilean people character, as much it made the quality of leadership and resources endowment, in other independences experiences . Chilean people can endure strong challenges whether they propose themselves because Nature call upon them from time to time, to do so. Just a few months ago a devastated earthquake made it again. Destruction everywhere in the Center south of the country did not change the mood and the will to keep on moving forward.-
But Chilean character it is also about social and cultural heritage .From the beginning Chilean society was stratified by social levels depending on whether there was or not an European background .These differences also shaped the struggle for independence . Although the first signal of independence, was a reaction against Bonaparte ´s Army invasion of Spain(1810), supporting the King of Spaniard Emprire,the real independence came out with Argentine support years later (1818),after decisive battles (1817,1818).As a result of the outcome of those battles, Chilean people at that time, wanted an Argentine General to be the first Head of State of the new country.Thus ,it was at the battle field where the independence was really wrapped up instead of the desk of some prominent citizens.-
The State was also designed upon these social classification .The Army,(later the Navy), the Church ,the public administration were the places for those who were linked to the European status. This is the reason because Chile as a country ,has a strongly institutional profile like no other country in Latin America .Somehow Chile is a mix of credible institutions to make the balance for and important concentration of political power .On this issue, the Centralized State has taken away very much of the entrepreneurs willingness to do business on their own.
To start e new business, still take twenty days and requires almost U$$500. Taxes are among the lowest in Latin America, but they are highly regressive because they are based on consumption. The lower income have an higher share of consumption, so they endure the burden of financing the public expenditures .
All over two centuries, there has been progress. No doubt about it, although there are still some areas which requires more attention. However, the national identity has not changed too much. Chile is still in a transition from an agricultural politically based society , to a entrepreneurship politically based society.-

Friday, September 03, 2010

Monetary Policy and economic expectations: Lesson from 2008

It is going to take years before the main economic stream, will settle down the key variables which could be considered as the main source of the global financial crisis which took place in 2008 , and it is still making noise.-
So far, it is clear that a mix of wrong doings ranging from policy makers up to credit rating agencies , created the conditions for an over expansion of risk in the financial system . On this regard, it is important to make the point, that somehow that is what can be expected from banks and financial organizations. After all, their business is to manage risk up to make a profit out of it. By the same token, it is part of their business to explore new financial instrument for making that profit .A different matter arises when there is no supervision about the systemic implication of such a risk levels, and the quality conditions concerning to those new instruments ,which spread out higher risk along the all financial markets .-
Thus, we might leave aside the financial institutions responsibility as long as they do not manage everything on their own, but according the available regulatory framework. Therefore the focus move toward those variables which these institution work with: The interest rate and expectations about its fluctuation .
Following the year 2001, and for quite a while, the interest rate in the American economy was at very low levels . It was just in the mid of the year 2006, when it started out the process of normalization to a more credible long run level.
The question which arise with this issue, deals with the implications concerning the delays to implement that normalization process before 2006, and the incidence it might have had as a source to ignites an over risk financial expansion. In a nutshell, whether monetary policy failed to prevent such outcome and the subsequent near global financial collapse.
On this issue ,it is also important to make the distinction between the economic fact and the economic expectations. The fact means that with productivity level moving upward , any prices pressure might be contained. It follows that higher productivity levels, perform like a filter to control prices increases. Thus, on this regards, from the Monetary authorities point of view ,the economic fact(productivity increases at an annual rate of 2%) did not match with the imperative of increasing interest rate earlier than 2006.
But what about the expectations?. This is the real issue. Economic agents make decisions about the future based very much on both economic fact, but their expectations as well. As long as the monetary authorities did not make any comment about the transitory nature of low interest rate, it was assumed by market forces that interest rate would stay at low level for a long time.
The failure to manage expectations, was the last input for the financial disaster which were about to come. However, where this failure comes from?. After all economic agent were assumed to be rational ,so they did not need for someone to inform them what the course of interest rate would be. Economic Rationality(learning by the past experience ) suggested to be cautious about low interest rate for a long time. On the other side, economic rationality suggested that some asset like prestige and prudence, have economic value which is the business manager job, to take care of . Therefore at most, monetary authority trusted that the economic evaluation made by banker managers and economic agent, worked this way because that was the way it suggested by the paradigm of rational expectations. Well it did not. The real failure was to focus the behaviour of economic agent within a simplistic framework , leaving aside key parameters of human nature and economic behaviour .-

Friday, August 20, 2010

The State and the Social Responsibility

It has been usual to evaluate private firms market valuation, by their willingness to get on board of Social responsibility requirements : In this latest report previous to launch the new ISO 26000,( August 2010) the International standard organization says:
“The need for organizations in both public and private sectors to behave in a socially responsible way is becoming a generalized requirement of society. It is shared by the stakeholder groups that are participating in the WG SR(working group on social responsibility) to develop ISO 26000: industry, government, labour, consumers, nongovernmental organizations and others, in addition to geographical and gender-based balance.”
Thus, Social responsibility is getting wider field of application , while includes not just private firms, but public enterprises as well .The implications of this change are quite significant . Let get more details about it:
a.- Public enterprises and private firms might develop business partnerships on the basis of homogeneous management model.-
b.- Public enterprise develop new management model based on the accountability of its results, which creates incentive to transform public enterprises in a source of value creation, quite the opposite to the traditional public enterprises as the source of fiscal deficit, waste of resources and corruption.
c.- The Social responsibility in Public enterprises, set a new frameworks for all firms to do business based on new rules ,focused not just on short terms results but on the long run result as well.-
The implication of this new framework goes beyond business ,and get to politics. The State should also evaluate to be orientated by the boundaries of Social Responsibility.
Actually ,a lot of public services do not qualify to have high quality standard . Public Health, public education, macroeconomic policies , infrastructure capabilities , and even citizen safety .In this case accountability (democratic rules) works with imperfections which are not possible to fix them up ,because it is in the State interest to keep it that way: bad quality is a substitute to higher price, in case those services are provided by private firms.
It follows that this new framework for Social responsibility, will impose sooner or later new demand on the State actions, and how it fit with citizens expectations of better quality in everything , no matter whether it is either public or private.It would not be posssible to have again the experiences of some economies with their badly designed economices policies .

Friday, August 06, 2010

Latin America and inequality : Tough realities for public policies (II)

From the economic point of view, inequality has broad implications for whatever the notion of welfare. Starting from the macroeconomic side, it has been widely demonstrated that inequality is a threat for both social and political stability. Besides, it creates a distortion about the true nature of economic growth ,and the real meaning of freedom associate with it . As long as economic growth by itself do not solve inequality, its positive impact is strongly biased toward those who are able to catch the whole range of opportunities available as a result of growth. Thus, the paradox which comes along, is that economic growth might become “an alternative”, although it should be the best alternative. It follows that to solve inequality, policy makers try other alternatives(second worse), such as direct redistribution which is like inflicting a punishment . Those who are more fortunate, get on their shoulder the burden of the less fortunate. In this case, the state fail twice, the first because it aborts growth, and the second ,because neither it does not propose or implement the proper public policies . From the microeconomic point of view, inequality distort resource allocation as long as those with higher income levels , dictates the consumption and production pattern, because their weight on the total consumption expenditures, is higher than what it is for those with lower income. This implies either, an higher production level of capital intensive goods, or higher level of luxuries goods imports. Both cases do not help too much ,to new jobs opportunities, but do help to increase profits because these goods have higher prices, and inequality becomes wider. To overcome such a distortion, public polices should focus on the proper issue changing the measure of economic progress .It is necessary to go beyond the GDP growth, as the key indicator of economic progress. Using the GDP measure, in the sixties Brazil was among the top ten world economies , but its Gini coefficient (1970) was 0,61.In those years(1968) Chile with lower rates of GDP(2,3 annual average 1960-1975) than today, had a Gini coefficient of 0,49.(actually following the UN report is 0,55). Thus, economic growth needs good public policies and properly focused. These are complementary variables .The “real economic growth” is a broad – based one, with special emphasis for public policies on accelerating incomes growth of target poverty groups. This approach requires to redefine the “character” of Economic Growth. For inequality, it matters more the economic structure, than the rate of GDP growth. The practical implications go on to support actively small and medium size firms. Most of public management model actually applied in Latin America economies, deals with the implications of the rural urban migration flows , from the early stage of industrialization in the beginning of the twenty century ,and its demand for public services(housing, public health, education, infrastructure) .It was necessary for the Sate to organize those services with the implementation of the organizational structure functionally designed .These days, competitiveness challenges, suggest that it is needed a different public management model,a specific targeted focused one, which fit with entrepreneurs expectations (specially those from low incomes) to do business. Finally, it is also needed a different way to measure progress.It is needed an index which focus on the impact and direction of economic growth, rather than just its speed. An alternative would be, to construct a “poverty - weighted index” (Todaro 1981), to measure social welfare progress. This index ,weighs the growth of income , in each income groups, not by the proportion of total income in that groups, but by the proportion of the total population in each group.

Friday, July 23, 2010

Latin America and inequality: Tough reality for public policies (I)

The recent financial crisis (2008),has made of Latin America economies the focus of attention because of its strength to cope with the effects of such situation, keeping the fundamental for steady economic growth . However, unemployment (10 million people in these economies), poverty(higher in countries which were on top of the list, because of its progress to reduce poverty), and inequality are at the core of the real impact of the global crisis.
It is clear that those well endowed with education and financial resources did not feel that much the burden of the crisis, as those less protected did. Thus, all social achievements since the nineties, have become obviously too fragile to overcome the wave of output losses starting in 2008, and no matter the success in terms of growth for more than twenty years inequality is still the big issue.
There are different approaches for inequality. The Gini coefficient, is a statistical measure widely accepted to get a more precise evaluation of the magnitude of the problem, and to make comparison. Thus , while Portugal has an index of 41,Chile,Colombia,Paraguay has an index of 55,just one point below Uganda.
A recent UN report, suggest that inequality depend of public policies design, such that good public policies can do better to reduce inequality, than bad public policies do. Besides, it states the argument that inequality goes from generation to generation, which might be relevant for those people historically displaced from social net work in theses economies .We might distinguish different groups and characteristics.
First, the native population and their civilization, who might be considered a “displaced civilization” by the new sixteen century culture ,which either they did not have a chance to assimilate or they could not properly integrate themselves to it. Anyway, since then on, one way or another, they have been outside of the new institutions including public policies design. Thus, It is not surprising that Latin America countries with higher share of native population, are among the ones with the higher level of poverty and inequality. The UN report, reinforce indirectly this argument with the fact that 10 out of 15 most unequal countries in the world are from Latin America
The second group comes from those who migrated from the country side to urban cities, pushing up the demand for services provision to such a level ,that the system can not afford to provide, creating the so called “ urban poverty bag” These groups are the direct demand for public policies outcomes, and the main variable to measure its effect and impact, but also the main focus of public policies . So, in this case Urban poverty is a consequence of State failure to improve the quality of its services, and lack of Social responsibility in public policies. So, it is the recent increase in these social cost of the global financial crisis.-

Friday, July 09, 2010

Is the global fiscal deficit the right path for the global economy recovery?

In recent weeks, very much of the discussion about global economic recovery has been focused on the role of fiscal deficit to push up global demand, such that to get back the economic activity to normal levels.-
Some key considerations about this issue, deals with the fact that even though the global economy might be considered a “closed economy”, it is a kind of decentralized economy , with both strong and heterogeneous commercial ties within their members. These commercial ties make the difference between regional rate of economic growth, which add up to global economic growth . Thus, those economies with better quality commercial ties , (outward looking economies) might expect to growth faster, than others with so to speak, more restricted commercial ties (Inward looking economies).Therefore, there are asymmetries between the quality of these commercial ties, as much as the level of openness to commercial ties differ. It follows that as long as these asymmetries includes key global economic players( let say Europe, USA , China, South east Asian countries and Japan, which become “regional economies” from the global economy perspective), it is hard to get a common ground at global scale to get through the global economy recovery with the same “real side “ approach. It means every one working on the side of additional fiscal stimulus.-
The real issue is not about what it is best for the global economy on their own, as much as its performance depends upon of the result of regional economies economic growth. In other words, the argument of the “Closed global economy”, which gives ground for additional fiscal stimulus, do not a fully apply, because the effects are different depending on the nature of commercial ties orientation, those economies “inward looking” get the benefit , but those economies “outward looking”, get the cost .
The alternative view, considers the global economy fractioned by regional economies, each one with different levels of commercial ties, which they must consider as the alternative option to domestic demand expansion, to get faster economic growth. This domestic expansion ,is more suitable for economies with lower level of commercial ties and a higher share of domestic expenditures ( higher level of domestic consumption).
Therefore, beyond the conventional wisdom of industrial homogeneous economies, there are two approaches: that one suitable for regional economies more “inward looking oriented” ,(Fiscal stimulus),and that one suitable for economies more “out ward looking oriented”( Fiscal austerity ). However, the nature of commercial links, make both approaches complementary. Higher domestic expenditures will boost aggregate demand and imports (export from other regional economies which must be competitive, otherwise they stay out of the market). On the other side ,coordinated Fiscal deficit every where at a global scale, will push up both inflationary pressures and higher interest rates sooner than otherwise, besides raising the expectations of higher taxes, making more difficult a sustainable recovery.-.
So, What is all of this about?. As long as the Global Economy become more relevant as the frameworks for policy makers decisions, the nature and scope of such decisions might differ, given the fact that economic heterogeneity become more relevant. Alternatively whether we considered all regional economies as an homogeneous case, we miss the relevance of cross over interdependence, which arise from commercial links diversification. A more complementary designed policy framework, fit better with this interdependence.

Friday, June 18, 2010

Economics and World Soccer Cup

It is a global event every four years, because it gather 32 soccer teams which represent 84% of world GDP, to compete for the privilege of being the Champion. S. Campanario in his book “The Economics of the Unexpected”.(In Spanish La Economia de lo insólito 2009),analyzes the economic impact of such event . Given the fact that a lot of soccer fans leave aside some of their obligation while each game goes on, the first impact come from inside the firm, due to lower short run productivity, although its effect on GDP depends of the magnitude of such out of labour flow, on the fundamentals. As long as the favourite team move forward, the expectations goes higher and more fans join in for the extraordinary spectacle of sport at its best, making the productivity losses more significant at the aggregate level.
However, is it that these short run productivity losses, stay on for longer period of time?. It should not be so. The economics reasoning for fans goes as follows. The marginal benefit of watching each game ,is higher than its cost. Assuming that nobody will risk voluntarily their job because of these matches , the cost is basically the opportunity cost of those activity postponed because of world cup matches .Thus, although firms might get some short run losses, they can get them back , as long as fans goes back to work with higher motivation specially whether their team wins . Watching the game is like a complement to daily routine, which replace other activities such as read the newspaper , talking at the cafeteria, checking internet, and the like This is known as “soccernomics”, which analyze the whole variety of issues concerning soccer. For example, the correlation between team performance and fans attendances which it does not depend on the ticket price for each match. Those teams with higher performance expectations, have more income volatility, than those with more modest performance expectations. Therefore , there is an expectation – gap, which might turn out to be more critical for income purposes ,in those economically stronger teams.
The net economic impact at the aggregate level of world cup ,should be positive. Besides, each country which participates in the event , should also recover any short run productivity losses because of fans involvement .
How come?. These days ,internet make the difference .It allows the chance of being there , without depending exclusively of TV transmission. It also allow , to focus on the most important events of each matches ,all of which reduces the average time devoted to the games. The positive impact arising from it ,compensates the negative side of distraction from main task .In other words, let welcome this fantastic show of natural skills, and let us enjoy it at its best. Which teams goes to the final?: ¡Latin America have a very good chance of get it all! .-

Friday, June 04, 2010

The nature of adjustment economic policies

Sometime ago, Robert Gordon (Author of the book :Macroeconomics, 1983) asked whether recession was the only way to fight inflation or for this matter, the implementation of any stabilization program. The question itself might be an interesting issue of academic value, but it deals with the complicated problem of allocation of the cost of adjustment which economies must face, when expenditures are over expand above incomes, and a reduction is necessary. It deals with the way things happen , instead of the way it should happen.
Recently, another way to cope with this issue, has been the concept of socialization of losses, and privatization of benefits .It means that when it is the time to correct the excesses ,the average citizen get the burden of such cots, while the benefits was concentrated in just a few . Both Roubini and Krugman, have been quite assertive about it, during the 2008 financial and economic recession .-
On the other hand, it has been usual for economic stabilization policies, to stress the demand side of the equation, which emphasizes unemployment cost ,production losses and welfare reduction, which is the usual for stabilization program designed not to foster further up potential economic growth, but to adjust expenditures to the current level of economic growth. In other words, with growth capacities fixed in the short run, there are hardly any different options other than to focus on expenditures, which are supposedly more flexible to adapt. Besides, the safety social net based on unemployment subsidies, perversely reinforce this approach. Latin America stabilization programs in the eighties to cope with external debt ,were based on this premises .The result was massive unemployment , higher poverty and inequality levels than desirable.
Thus, the issue goes on not only as much as to reshape the nature of stabilization program, but to reshape the incentives influencing their implementation as well. Let get first with the later. This does not mean to eliminate unemployment subsidies, but to complement it with unemployment insurance financed with resources coming from both from the firm and the worker. This way of financing the unemployment, increase the net economic cost of recessions to the State because of decreasing tax revenues, but coupled with lower political benefits. After all, subsidies create a sense of either dependence or protection arising from the State, and it is the State´ s interest, to foster that sentiment to support its political expected gains.
What about the former?. The nature of stabilization program assumes that everything should stay the same way as before ,expect that the expenditures levels must decrease. A different approach should consider more actively the supply side , specially the small and medium size enterprises because of their flexibility and adaptation abilities to the new conditions , improving their access to financial assistance, and debt renegotiation opportunities. Besides, it should decrease the transaction cost of moving from those business areas with losses, to that ones with profit expectations. It follows, that adjustment policies, should be an opportunity to support reallocation of resources from inefficient to efficient uses, based not exclusively on expenditures reductions but also on improving the conditions for private sector to do better and more efficient business, without excluding better regulation whether it is relevant . Actually, it seems that most of the stabilization programs, are designed for the State purposes of keeping its role in the economy, higher than necessary. Thus, it should also be based on the reallocation of resources to be done mainly by the entrepreneurs -

Friday, May 21, 2010

Foreign Direct Investment in Latin America : 2009 and beyond(II)

FDI flows are important because of its impact on new technology, management models and employment . All of these are the social benefit of fostering FDI. With low social cost, FDI flows requires clear rules and stable institutional framework. Environment ,taxes , ideology are among the main reason for those conditions to change. The expected impact is not just lower FDI flows ,bvariAut a weaker prospect for growth. Although Latin America countries are these day better prepared to cope with FDI fluctuations, this does not means it is within the category of secondary importance for Latin America economies.-
What are FDI flows the most sensible to ?.The Asian economic crisis made it clear. With loses for more than U$$50.000 mill at that time, the worst for FDI are those cases with expenditure levels either whether private or public away from their fundamental, with inflationary expectations getting higher, and depreciation currency making what it is left to be done .Most of those losses ,were because of the depreciation currency which followed the misalignment of key variables from their fundamental ,and institutional disarray.
Despite the widespread drop in FDI flows in Latin America, the 2009 year flows, are among the highest in history(fifth place).Most of the investment activity is concentrated in commodity sector (Mining), low and medium- low technology manufacturing sector, with few project related to R&D.
The financial crisis of 2008 affected every one, but mainly to developed countries. This time, Developing countries did better. As a consequence, the FDI world share of developed countries fell from 69% in 2007, to 57% in 2007, and 54% in 2009.By contrast, emerging and transition economies , climbed from 32% in 2007, to 44% in 2008, and 46% in 2009.Among the most important recipients of FDI are the BRIC countries(Brazil, Russia, India and China),which have made them a new source of global economic growth, and political influence. On the other side, developing Asia on its own, has also climbed since 2007 ,from 17% up to 25% in 2009.-
On the Overall view, merger and acquisitions are strongly correlated with FDI (94% for the period 1987-2009),although in the period of 2000-2009 decreased to 90%. It follows that there is a lot of opportunities for Latin America economies, to counterbalance the ideology winds and its negative impact on FDI flows, to pursue instead an higher level of FDI with a second wave of privatizations as a target, which can be fostered further by the next round of talks between the EU and Latin American economies, to get a Free Trade agreement with all of its positive impact on economic growth , trade and development .

Friday, May 07, 2010

Foreign direct investment in Latin America: 2009 and beyond (I)

The recent ECLAC report about FDI in Latin America and the Caribbean countries, (May 2010 ) shows the high level of sensibility global investors have about systemic risk .In fact , Foreign Direct investment dropped 42% in 2009 , down from the record high registered in 2008.
Global economy financial crisis, deteriorated economic expectations at a full scale level. Thus, there was no sector left aside of negative impacts, once the global crisis started out .As a consequence, in the global economy and for the same period, FDI , dropped 39% .
These results could be considered as “usual” for recessions time, but quite on the contrary in this case, is worrisome. Let checks this out.
a.- At a global economy scale ,it should be possible to have new sectors with growth potential , to compensate those which failed , such that making the balance to keep FDI long run upward trend. Given that Merger and acquisitions are the main force behind FDI flows with a positive correlation between them, the reduction in the magnitude of both was not compensated by new alternatives like Privatizations. Latin America has moved back into the privatization process in recent years because of either ideology , wrong doings (corruption) ,bad management experiences or lack of will to go forward with a modernization of the state agenda, which consider less of the State doing business , and more doing effective social balancing.
b.- Most of the analyst expected the recession to be over toward the end of 2009, gaining momentum for a stronger pace at the beginning of 2010.Thus, new opportunities were available somewhere the global economy, waiting for fresh resources. Trade fares took place in different countries to show this opportunities, therefore it did not seem that FDI decrease is due to lack of information. In this case, the evaluation of risk these days is different to what it was before 2008.Investor are more cautious and more risk averse.-
c.- Latin America has gone through this global recession quite nicely, compared to past experience. A pragmatic evaluation indicates that the economic reform done in the nineties, were after all effective enough to allow these countries a better countercyclical approach, to cope with the consequences of the adjustment to a lower level of global income. How come that FDI flows based upon this focus until 2008 changed in 2009, when the conventional wisdom was that Latin America would get through all of this adjustment better than other countries?. There is a credibility issue about the future prospect of Latin America economics orientation, concerning the importance of the private sector and the role of the State. Too much ideology is negative for business. Moreover, the State as the main source and application of ideology,(whether it is from the right or the left) has led it to be a poverty exporter. Therefore, which of the so called “Two visions” approach to Latin America will prevail , the first based on ideology, and the second based on pragmatism, foster additional uncertainty to that one already in place.
These observations deals about three key aspect for FDI flow: Its dynamic (a), economic expectations (b), and credibility(c).There is a fourth element, which deals with its composition, which can be an interesting line of discussion as well. -

Friday, April 16, 2010

Small firms and information Technologies (II)

The theory of representation might be considered as a restriction for the implementation of new technologies, as long as it cares mainly with the enforcement of every employee contract. Besides, it might also rules out the implementation of the planning process, a basic requirement for information technology to be useful, as long as the contract does not allow any new task other than the one already set in.
However, the real issue with this approach, deals with the handling of risk. In fact, contracts reduce the propensity to risky behaviour of managers, the same way it reduces the necessity of planning. Given that new information technologies by definition, are friendly with risk behaviour,(more information imply better risk control), those contracts will allow only the risk which the firm can pay for ,restricting the potential of information technology to be fully implemented .A different matter is the profit maximization process , in this case subject to a different constraint, which is a set of contracts to enforce, aside from the financial resources available, make in this view ,the maximization process a more limited target.-
Back to the study of these Greeks economist , they classified the IT within the following categories: Enterprise system(ERP,CRM,SCM),Information system (TPS,MIS,DSS,ESS), Digital technologies(E–Business, E-Commerce), telecommunications net works (Wired, wireless).-
Some finding concerning information systems indicates that small firms prefer MIS(Management Information System) ,rather than DSS (Decision Support System), which is used by 34,8% of all small firms ,whereas 50% of small and 77,8 % of medium firms prefers MIS. The enterprise resource planning(ERP) system, is used by 59,1% of small firms ,and 88,9% of medium size firms. This applications, is consistent with the representation theory, as long as it deals with a better picture of human resources performance, inventory levels and information needs ,both at the horizontal and vertical levels.-
The customer relationship management (CRM), is applied at a rate of 45,5% by the small firms, and 55,6% by the medium size firms. These percentages are low for the standard of any firms customer - led management approach , but they reflect the focus of many small firms , mainly the short run and daily needs of cash flow.
On the other side, the Supply chain management(SCM), is used by a very low percentage of firms.28,6% of small firms, and 28,6% of medium size firms.
The overall picture indicates that SCM is used by 32,3% , while CRM is used by 42,6%, and ERP is used by 44,4% of small firms. No matter this percentages, the implementation of ICT, is not too much linked to firm size, but more to the functions and goals each firms might set for these instrument . However, the bigger the size of firms, the better the chance of implementing these technologies, taking full advantage of their potential. In such a case ,the determinant factor for success , will be to have a proper ICT strategy, coupled with the right market focus.
In Greece, small firms, do not have a clear policy concerning implementation of new information technology. Whether this is a global characteristic of small firms, it is a worrisome situation , given the fact that most of the globalization dynamics lay down on the ability of small firms to adapt to new market conditions at a global scale. If they do not have a more aggressive stand on this new technologies, it might be more difficult for them to consolidate new markets opportunities.

Thursday, April 01, 2010

Small firms and information Technologies (I)

It has been quite usual to assume that because there are new information technologies available, it should have a positive impact on management had they are applied. However, the empirical results does not follow the path of a straight line.
A recent research done by Greek economists o(Global Journal of Business Research, Volume Nº 4 ,Number 1, “An empirical study of Small and medium sized enterprise information communication technologies”,2010), concludes that smaller firms do not consider technologies other than those related to specific functional matters, while larger ones (from 10 up to 250 workers), based on these technologies, try to integrate their processes. Thus the main concern is to support the internal horizontal development( It means to get the organization flatter ) , taking into account internal vertical development (Management requirements to make sure positive financial results. In other words , using information technologies is related with the unification of internal with external environment (markets ).-
What are the implications of these findings?. A better understandings about them, require to take a look at the justification for using information technologies within firms. From the microeconomic theory point of view ,there are two approaches about firms structure :The theory of transaction cost, and The theory of representation.
According to the theory of transaction cost, firms expand up to the point that their organizational internal cost ,are just equal to the external cost of getting the same product from other firms. If these costs are higher, firms will try to reduce it both throughout externalization or better management skills. This management skills, includes new technologies ( not to mention cultural values), whose purpose is to increase productivity such that the expected lower operational cost, keep the organization more efficient that their competitors. In this process, firms substitute labour specially unskilled one. The more skilled labour, is complementary with higher capital value, arising from new information technologies equipment available .Physical Capital stock might also decrease, because what it counts in terms of efficiency is capital flow(information, data, prospective analysis).The design process within the automobile industry is a good example, of this substitution.
These days ,such a process is done mainly using computers simulation which imply less period of time to get the final design( a car) ready to be produced. Quite different to the experience of designing the Ford Mustang in the seventies, even with a highly qualified team, with Lee Iacocca as their leader took more than one year.
The theory of representation ,assumes the firm as a set of contract between different people, with different interests and not necessarily connected with the firm maximization profit purposes. The only way to take control of such disparity and its implications in terms of cost ( these people need to be managed, supervised and controlled) , is using contracts , but these contracts supervision also means higher cost. Thus information technology, allow firms to reduce such a cost, because it allows the implementation of shared values center ,and better contracts management, keeping cost pressures under control.-

Friday, March 19, 2010

The €uro : A recession proof currency?

Europeans are wondering about the prospect for the €uro ( ,march 9, 2010), following the seriousness of the Greek economy difficulties these days. Three unbalanced account (Public debt, fiscal deficit (12% of GDP) and current account deficit), is the usual menu for economic crisis, which might turn out to be political ones. The financial situation of other European countries , has made a usual post recession scenario, a highly complicated situation to care about.
A mix of doubt and fear goes across borders within European Union concerning the implications of such a risk. Will the €uro be capable of coping with these difficult times? .
Just a few months ago international analysts were predicting the fall of the Dollar as a global currency, because of the US economy long run prospect for solving its fiscal deficit and debt. The €uro, seemed quite in good shape to take a better stand as a global currency. All of a sudden, it seems all is gone. Speculators as usual, take advantage of this uncertainty , betting against the €uro ,just as they did some time in the past against the dollar, or other weak currencies.-
Since the beginning of the €uro experience, (1999),it should have been clear that although from the economic point of view was an interesting approach to Europe economic progress and political stability , from the political point of view was not that much friendly. A currency which works like a fixed exchange rate among its different partners which are include in the monetary Union , means very unpopular and some time politically unsustainable requirements to keep it working.
Thus, there are key elements which are hard to get implemented for a single country, more so for a community of countries. These are : Flexible markets (specially labour and goods market,), steady productivity increases, and fiscal deficit under control. The founders of the monetary union ,cared publicly only about the third requirement ,setting tough restriction for making fiscal policy €uro friendly ,fixing the limit of overspending at 3%.Of course such a target become just good intentions when the recessions wind comes along the way. In fact, most of the current problems in the €uro zone ,deal with the fact that the European monetary framework is not recession proof, which means that it exacerbates the implication of fiscal activism for the €uro stability, in those countries forced to go ahead with more spending. Any adjustment follow a different path, because there is no way to depreciate local currencies, to support tradable goods to reallocate resources from domestic spending to exporting sectors , and with low level of productivity , alternatives fall within a very narrow space: To reduce both labour cost and incomes ,which is politically unthinkable .Thus ,external financial support is the only way to get through at the cost of losing sovereignty.
What is it next?. It is unlikely that the €uro will be short lived. It is more likely that the whole institutional framework which support it, will have to be more flexible, including better design for the lender of last resort issues, and the prevention of moral hazard behaviour.

Friday, March 05, 2010

Chile :After the earthquake , the painful recovery

Just a couple of weeks ago, Chileans were next to finish their vacation season. A lot of them, were getting ready to go back home with personal bags full of nice memories, after enjoying their free time .From the political point of view, the expectation were running high with the new incoming Center right Government, which was also getting in shape to cope with key challenges mainly about the economy performance . All of that, suddenly changed the Sunday February 28th at 3.34 am in the morning , because a strong earthquake(8.8 in the Richter scale)left the country upside down.
From then on, a lot of questions and considerations about the emergency management model capabilities, have been in the public discussion and analysis. Besides, the economy recovery (GDP grow 4,3% in January),from the last year global financial recession currently under way , will be delayed for some time .
Let looks each of these issues:
a.- The emergency management model. The Katrina disaster, showed clearly that it is hard to fully anticipate the magnitude of these nature disarray. So ,it was in Chile. Years of preparations, plans and trails were useless when it finally happened the furious awake of the nature. A different matter deals with the quality of the plans, its effectiveness, the level of decentralization, and the quality of contingency decision. Thus, override it by the unexpected, the emergency model did not have sufficient instruments to keep itself on. The result were, delays to make critical decisions and, lives which might have been saved, losses which might have been avoided, and desperation of those in need , which might have been mitigated . Anyone might agree with the difficulty to predict the unpredictable. However, the problem lies on the ability to design effective plans , in a country widely known because of these natural disasters, and severe past experience (1939.,1960,1985,2007), more so in a country which is pride of itself because of its economic achievement based on good public policies at all levels . Therefore ,it is the time to make a deep reform to the State, the responsible of last resort in the whole emergency machinery. Those of us who have been calling about it, were right to stress the necessity to undertake such a reform in the new Government.
b.-The recovery process. Early estimation indicates the magnitude of losses at a range of 10% up to 20% of GDP (roughly Chilean GDP is at USS150 bn).How long it will take to get all the economic infrastructure back to normal, will be key to improve the recovery speed. Some preliminary data suggest that such process, will last at least one (1) year, and up to a maximum of four (4) years. Thus ,in the optimistic scenario, GDP recovery pace will, be negatively affected throughout this year up to the month of June. It is expected that during the second half of this year, the impact of higher public spending will be in place allowing to finish GDP grow for 2010, at around 5 to 6%.The more probable scenario though ,deals with a slower process of normalization, (The same centralized model applied to a different situation),a deeper negative impact on GDP grow and higher inflation. In short, probably a couple of years with GDP growing below its long run trend. Just for the record, half of the national fishery industry is in the area devastated,100% of the forestry industry is in the same area, the highway networks will be operating at 100% capacity not before 8 months. The new rules for construction industry (heavily questioned for the poor quality of buildings), will delays the process of building construction, and employment data improvement. The damage to the stock of physical capital can not be underestimated concerning its impact on the economy. What it will become important ,is the stock of human capital. Chileans at this hour, must take the best of them no matter whether they are. That is the beginning of the real recovery.

Friday, February 19, 2010

The moderate right in charge of Government in Chile:Its real meaning

The presidential election results in January 17th 2010 , will be considered another historic day, just like that one ,when for the first time a woman was elected to be President(2006). It looks like Chile has learnt to work upon a long run span, quite unusual for countries like the Latin Americas ones which for most of the twenty century , hardly were able to cope with day by day challenges. Chilean voters have elected Mr Sebastian Piñera a business man, to be the next President of Chile.
Now is all about expectations with the new Government which it will take oath next march 11th After 52 years, and leaving aside the exceptional period 1973-1990, the so called conservatives forces will be in charge of Government again. The exceptional circumstances of having gone through a recession, has made more significant this result: In times on recession people has voted for the moderate right.
A couple of considerations about this event and its long term implications:
a.- It was not a surprised at all, the electoral defeat of the current Government coalition, after 20 years in power, due mainly to lacking of new ideas and innovative proposals to cope with today Chilean economy ´ challenges. After a very successful integration into the international markets, based on the Free trade agreements (more then 60 in 20 years), recently upgraded by Chile {s admission as a new member of the economic European association, the next step is the more difficult one because it requires deeper reforms on the State management model, specially the way it deals with incentives to small business and investment, productivity increases and competitiveness improvement . A recent report done by a the World Bank ,indicates that Chile has a disadvantage in logistic cost compared to some of its competitors,(Australia, New Zealand).Besides as a percentage of the GDP the logistic cost in Chile represent 18%, twice that one from the European Countries (9%).The whole process of preparing the trade (export-import) documentations ,take in Chile 21 days while in New Zealand it take half that period. Another study done by the European organization for development and economic cooperation, has signaled the importance of more flexible labor markets and better educational setting. All of these challenges are by its nature, long run kind of task. This lead us to the second consideration.
b.- Chile has been steadily making economic progress since the mid eighties, increasing its GDP per/capita form USS 5000 in 1980,up to more than USS 12000 in the year 2005,but with a 70% negative gap compared to that one of developed countries(50% because of lower labor productivity).Thus, any additional achievement on development status requires better policies on labor regulations, taxes, and efficiency of public policies. At the same time, this economic progress has allowed to decrease poverty (12%), and improve expectations about future standard of living .People feel they have the chance of living better, with better access to buy assets like either a car or an house .As a consequence ,there are a new emerging middles class which also demand better education, health services and safety on streets. The new Government, will have the challenge of meeting those expectations. So far, it looks like it is up to it.

Friday, January 29, 2010

Paul Samuelson:The economist and his time (II)

Originally a scientific not an economist, Samuelson set the tone from the beginning. While he was defending his PhD thesis, Schumpeter who was among those present at that moment said:” I do not know whether this jury is able to write something as brilliant as this thesis” .
The contribution to macroeconomics has made Samuelson the real father of Macroeconomics, quite on the contrary to the conventional wisdom which give that credit to Keynes. As usual, public validation goes through a different way to what it should be.
Samuelson `contribution might be summarized as follows: The economic analysis as a conditional optimum (1947)(these days this is known as limited rationality).It made the so called neoclassical synthesis (1948),which means the classical approach plus Keynesian approach, to be applied to the way the economy works: mixing market with the State. Other areas includes Consumption theory,(revealed preferences 1947), International trade theory (The Stolper-Samuelson Theorem) , and the conditions to make equal world prices of capital and labor,(1948).Public economy and markets failure which affect optimality on market result(1954).Economy Growth theory ( 1939) and the accelerator principle ,the first overlapping generation model (1958).On the financial side , Samuelson worked on the efficiency of diversification(1967),and the rules to build a life time efficient portfolio (1969).He gave microeconomics a better mathematical support , such that it allowed to improve the quality of its implications .All of this transformed the economy from the traditional -static social science, to a modern –dynamic science with strong mathematics background.
On the political economics side, he said that both Marx and Friedman were wrong ,which it is true about the Marx interpretation concerning the real forces of History . but unlikely about Friedman statement that inflation is a monetary phenomena, or the nature of market forces and its close ties to human motivations, which add severe limitations to the role of Government in the economy . Friedman was probably wrong concerning his approach about the role of institutions , which apparently he ignored, and his misinterpretation of the strong ability of capitalism to adapt itself to different political regimes. However, it is hard to say that Samuelson had the last word about the way markets and Government works .The recent financial crisis ( 2008-2009 ) proved that both government and market might fail, and what it count more at the end of the day, is to have strong and reliable institutions. Thus, it seems that Douglas North Is the one who has settle down this discussion, although it is not the case to be a shadow on the outstanding Mr Samuelson` contribution .

Friday, January 08, 2010

Paul Samuelson: The economist and his time (I)

It is not easy to say something relevant when it comes to comments the legacy of a prominent economist .Thus, maybe it is better to side step. But ,I am an economist just like Paul Samuelson. Sure, I am not a genius like him ,but I am fully capable of understanding the magnitude of his legacy . I studied with his books, my basic notions of economics.
Like many other great economist once they pass away, the real issue becomes not just theirs contribution , but how it fit properly with the times. Let checks some examples: Michael Kalecki was a polish economist(socialist) ,who stated the foundation of Government intervention into the economy(1933) , just like Keynes (Liberal)did a few years later(1936). However, they had a different impact with this approach of Government activism. While Keynes has been widely considered the founder of macroeconomics, Kalecki is barely known outside the academic circle .Rudiger Dornbusch, a German born economist, who helped to reshape the financial implication of both capital mobility and monetary policy impact on exchange rate(overshooting effects), and along with it , the foundations of the normative macroeconomics , did not get the same recognition and impact as Robert Mundell got, who even rised himself up, above his colleague and mentor, Fleming . Thus, great economists with outstanding contributions do not get always the recognition they deserve .That was not the caser of Paul Samuelson .
Is it a matter of luck?. I think it is more a matter of timing. To be on time with history and its requirements , neither sooner nor later, but just in time. Knowledge is the input of economic progress and society welfare, and like any input its usefulness is higher when it is available at the right time, where it is most needed and with the format more comprehensive to all. Friedman ,although not the first one to call the attention upon the inflationary impact of money growth ,was also on time to cope with the implications of both Fiscal and monetary expansion.His contribution, cames along when Governemnet intervention and fiscal expansion were considered as the conventional wisdom. Therefore, it is the proper combination of the man ,the time and the knowledge which provides, which make the most of brilliant ideas.-
Paul Samuelson contribution was wide and diverse. It was famous his explanation of stock fluctuations and its ability to anticipate recession. “They had anticipated nine of the last five recessions” ,he said in a TV interview in the eighties. Beyond what it is at the surface, he was sceptics about markets and its ability to solve the cyclical fluctuations ,which make him an icon of Government interventionism. However ,Did he had the last words about it?.-