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.