Friday, July 29, 2011
Learning from economic crisis: Where the economics science stands?
Although economic crisis means losses of efficiency ,output, employment and welfare levels, the economic science has not been able to reach out the point such that the quality of its economic policies make possible steady economic growth, employment and welfare gains . Rather there has been economic cycles with up and downs ,due to different kind of sources for economic crisis, (Banking , Balance of payment deterioration, external or internal debt ,financial sector failure, information asymmetry and the like)
Keynes blamed the private sector for the economic instability, due to mismatch between production and consumption, focusing in the role of Government as the stabilizing factor. The Evidence indicates that Government can also be a factor of economic instability. Let keep in mind the experience of Latin America economies since the fifties up to eighties, which ended up with the lost decade. Besides ,Government actions might be a factor of economic crisis, because by its own nature it is based upon political volatile criteria, with short run considerations. Thus, overspending lead to over taxation and debt, which decrease consumption , investment and growth.
In such framework, economic policy was focused mainly on the stabilization purposes. Rational expectations assumed that people gather all information they need to make decisions ,which are usually right unless unexpected event happens. Therefore, to get any economic objective the prescription was to surprise economic agents, because they learned from the past and were able to anticipate the effect of any previously applied economic policy.
It follows that economic crisis are somehow the consequence of a mismatch between economic policy and expectations. Thus, the implication for policy design is not to dismiss what markets expect to happen .Taylor(1993) proposed a rule to deal with market expectations, focusing on reducing volatility of both output and inflation improving the quality of information to shape better expectations. Even so, economic crisis are still on the spot of global economic .Does really economic agent learn from the past as rational expectation proposes?.Probably so, but such learning is not homogeneous among economic agents. Given the quality of information, there is learning asymmetry .Just a few learn quickly, but the rest of us do not learn that fast, or we might not learn from the past at all. Unfortunately, the majority is in the later group, and economic crisis might happens because the cost of learning from the past is too high for such a group, and economic policy cannot count on either past experience or previous knowledge ,to make more effective its prescription. Thus, economic crisis do not occur only because of an economic policy failure, but also for a learning failure.
Friday, July 15, 2011
Chilean students of different levels, although mostly from public universities, have been claiming about the current conditions of public education, and the implications of private investment in this field.
Public universities(25),are financed by the State with percentages which has been decreasing in real terms over the years. In the last five years, Public Universities, have submitted its Corporative project to the evaluation of the National Committee of accreditation to get the quality certification ,which is a necessary condition to apply for public funds to develop academic and research programs. At the same time, due to the quality signal, it allows to get the preferences of students. In Chile, there is no free education at the university(college) level. Parents must finance their education when they get into the university. However, there is a virtuous circle of quality which should be considered.
On the other side of the story, since the eighties, Private sector has been allowed to invest in education at all levels. Since then, Private Universities have grown steadily. Actually there are(roughly) 40,which have more than 50% of total students registered in Chilean Universities. Private Universities has allowed an historic increase of students registered in universities, which it is fact to be considered.-
The students (and professors as well) claims have two lines of discussion:
a.- The State and its responsibility with Education requires some definitions.
b.- The negative reaction to the profit –seeking behavior of Private Universities, given that they have been authorized as such based only on academic purposes.
Given that the State responsibility begins where the private sector responsibility end, Private Universities play a key role . Therefore, in this case the State should do what the private Universities can not do, such as pure research and innovation research which are too costly . It follows that the expected course of action, should follow a mixed path :to reinforce private universities, but taking care of its profit level such that to pay taxes for it, and on the public side to focus resources on those subject which public universities based on quality standards criteria, do better than their private counterparts.
Concerning the seeking profit behavior of Private Universities, it is important to keep in mind that there is also seeking profit behavior in private health by physicians ,and related insurance companies, lawyers and some politicians. Thus, the problem with private universities, should be to make them accountable, but not rule it out for this investment.
Friday, July 01, 2011
The Greek economy tragedy: A Plan is necessary
Latin America learned thirty years ago, how hard is to cope with external debt when it goes beyond what it is available. It meant a “lost decade” and incredible enough ,made the whole continent a capital exporter .It had to pay back U$$ 100.000 millions(Dollars of 1980) .Those resources, could not be used to finance roads, schools, educations and so forth.
Does that experience has some value for the current Greek economy debt problem?.Not necessarily so. There are some elements of it, which might be helpful. Others, like the economic setting are not alike, therefore each experience has an uniqueness characteristic .The same applied for the post WW II situation, of USA and Great Britain debt, which kept low interest rate to reduce the interest payment burden on its debt .
What it is helpful is the way different actors(Government, Banks and multilateral Organisms) worked together to confront the problem. Some basic premises at that time (eighties decade) were:
a.- The main source to pay the debt back, was to support the economic growth.
b.- The economies needed to implement structural economic reforms.
c.- Multilateral organism (World Bank ,and the IMF), were the lenders of last resort for economic reforms implementation.-
d.- Private Banks were willing to negotiate loses and debt payment both on short and long run basis,
With these premises it was presented first the Plan Baker(1985) and four years later, the Plan Brady (1989)which was designed to complete the program. This one included three axis: Trade, investment, and reprogramming debt programs. The first two aimed at supporting economic growth, throughout the structural adjustment loans programs (SAL) implementation). The last one, aimed to support a restructure of foreign debt throughout debt swap operations, and the Brady´s Bonds.
Whether this plan was the best way or not to cope with the external debt burden , it is still a matter of analysis, but the fact is that it allowed an opportunity , creating some room for economic growth.
Thus, a plan including a comprehensive strategy to support economic growth for the Greek economy, will give some expectations beyond the current debt rollover programs, other than the need of more debt .-