Friday, August 26, 2011

Chilean Economic model: The social cost of oligopoly (I)
In recent months, Chilean society has been stressed with street demonstration . Why?. Lets try some explanation.When the “Chilean Model” started out 36 year ago, it was based upon a free market economy, with the private sector on the lead to support economic growth and wealth creation, and the state playing a complementary role with the private sector and focusing on public policies related to poverty reduction . The results are impressive. In 2010, Chile became an OECD member. It has reduced poverty from 40% in 1990 to 14 % (roughly)in the year 2009, income per capita has grown in the same period from USS 4000 up to USS16000(ppp),and the current expectation is to reach a developed country status in the year 2018.On the other side ,it is the inequality issue with the Gini coefficient(GC) in 55, which of course is far from the OECD level, which has an average of 32 (GC). Besides, beyond statistics outcomes, there are clear signals of oligopoly in Economic, Political and social areas. The first implications is that those results(poverty , income per capita and inequality index) could have been much better, whether a real free market economics would have prevailed all along.
Economics analyzes oligopoly as a market failure, because it means competition among the few, which imply welfare losses due to higher prices ,lower employment and productivity than other market arrangement. Oligopoly might lead to collusive action to maximize the outcome of those within the oligopoly area, given that it is easier to coordinate a few. Thus, the “Chilean model” has become a structural oligopoly far from the desired competitive market model set in the seventies. Let get to the specific:
The areas of insurance, banking, retirement fund, retail , private health, beverages, air and load transportation are all oligopoly, although there has been a steady improvement in the institutional framework to deal with its consequences. The social oligopoly arises due to the high level of social segmentation (according to PISA index of Social segmentation(2006), Chile has an index of 52 , while Argentina has 39).This social oligopoly implies that the best of any opportunities, goes to just a few .Thus, the gap between the lowest income and the highest 10% income level in Chile is 46 to1!.(more so if we compare the 5% range ). In the banking industry for instance, the wage gap between the top and the bottom managers has reached 43 to 1 . A recent OECD research, has found that Chilean education is among the more expensive of the world, while its quality levels goes below international standard.( PISA achievement has not been on the top 30%).
The political oligopoly arises, from the fact that democratic elections with the exception of presidential one, do not represent the voters preferences, but the ones of those who designed the process specially aimed to protect the election of those supposedly to be icons of stability and governance. As a result, on any side of political spectrum, just a select group can have the access of being part of democratic game, because as long as they become a “brand”, the electoral system assure them what it is left to be elected.

Friday, August 12, 2011

Financial markets tiranny or the cost of efficiency losses?

Do policy makers or politicians have to feel constraint by market reactions to any decision they take?.In other words, do markets performance creates a sort of boundaries on what policy makers should or should not do?.After all, there is legitimate authorities and institutions whom any public decision must be accountable to.-.
We have witnessed these days, the wild fluctuations in stock market world wide due to the unsolved debt problem in key countries, and the current uncertainty concerning policies design and its implementation to cope with it.
Government debt is not a new economic phenomena, but simultaneous high level of government debt at global scale (over 75-80% of GDP), might be a risky scenario for a risk averse global economy following the financial crisis of 2008. Government ability to implement countercyclical economic policies become restricted ,because it can not neither increase spending further when it is needed or reduces taxes. The remaining source of support is the Central Bank .Markets take note of the risk of inflation, and the inability to take action .-
The fact of the matter is that financial market not always match precisely the pace and fundaments of the real economy, because does not consider deeply the underlying process of those data upon which financial market make its decisions, creating room for speculative forces. It all comes to prices and the quality of information prices might reflect. The expectations of falling prices because of lacking of credible information,(more uncertainty) induces massive sell off, and with the expectation of more precise information (less uncertainty) and therefore higher prices, it happens the other way around. In both cases, speculative actions work its way through, because there are different risk preferences.
However, the impact of financial markets goes beyond its fluctuations and volatility: it generates efficiency losses and drop in welfare levels causing damage to the cycle production-investment .Markets have a key role to allocate assets and signaling investment opportunities. Acting as an economic risk filter, It helps to shape expectations as well . Therefore, it is not cost free to dismiss markets reactions, although it is important to keep in mind the adjustment due to speculative bias in its behavior .
Latin America policy makers have made substantial progress in the last twenty year ,considering how to work with markets surveillance .It is not a problem of sovereignty , but a basic references of good economic policies .The result, has been the ability to have a full range of policy instrument at their disposal to cope with the risk of global economy .-