Friday, December 21, 2012

Looking back to 2012: A transition year

The 2012 was the year of adjustments: Economic, social and political ones. The global economy did worse than previously thought. Advances economies are projected to grow by 1,3 % this year, compared with to 1,6% last year. Emerging markets and less developing economies are in the range of 5,3% down from 6,2% last year. World trade growth is projected to be at 3,2 % down from 5,8% last year. The Euro area is expected to decline by 0,4% this year. Latin America and the Caribbean will be in the range of 3,2% -3,9% for 2012 -2013 respectively, down from 4,5 in 2011.(IMF ,October 2012) All of these downward movement in growth rates, comes along as uncertainty was the key input to consider for both policy makers and economic agents in decision making process . Thus, after too much of adjustment policies , 2013 is expected to be the year of upwards (BRIC´s countries ,Latin America ,and Japan) ,and downward corrections (EU(fiscal austerity) and USA(fiscal cliff) ). Of course the final effect between those two opposite directions, will be known as 2013 rolls on. Besides, it is also possible that depending upon the focus, all of the factors can become upwards movements. Social and political adjustment because there were democratic elections (Mexico, USA; Venezuela, Japan), and in some cases change in political leaderships (China) ,which will probably influence perceptions concerning global governance. Whether will it be for better or worse, 2013 will say its last word.- So 2013, is just around the corner and it looks like a unique occasion of reshaping history , at least for the rest of the decade. Am I going too far? .The 2013 will have the last word. So let see, what surprises brings up to us the next year.

Friday, December 07, 2012

The meaning of development

Michael Todaro, a leading economist on economic development issues , asked in his lectures: What is the meaning of development? .Most of us wondered about the meaning of the question, because the mainstream approach to it, was to focus on GDP per capita gains as the key variable for development .- These days Latin American economies, are on top of the expectations because of its outstanding achievements in unemployment (6,5 % , below 11% a decade ago), poverty reduction(28%), economic Growth(average 2009-2012 , 4-4,5%) and inflation rates (average 2009-2011, 6,3%). Government spending (share of GDP) for the whole region, has been in the moderate territory(average 31%).Public debt is not at a risky level (the highest is at 70% of GDP). The implication of this trend, whether it goes on, are quite interesting: Increase middle class segment , higher purchasing power because lower inflation , higher sales on consumer goods markets, and better opportunities for investment. In other word , the virtuous circle of prosperity seem to be working in Latin America, although there is a long way to go before matching for instance east Asian economies performance. Thus, it look feasible to ask for more anyway : the development status. Chances diverge among Latin America countries to get that outcome, but Chile is a leading position to get it through. However, we go back to the initial question . Clearly, GDP gains are not enough. In many Latin American economies, high prices of raw material and commodities, have increased its share on GDP ,which has boosted economic growth rates. For instance ,In Chile mining had 5% share of GDP in 2001, while it has become 15% in 2012.Therefore, there are important GDP gains, but not substantial improvement on what really matter for development such as education (85% of Chilean has level 1 in comprehensive abilities),innovation and knowledge creation . Besides, GDP per capita has important flaws. It does not measure inequality reduction. Professor Todaro, proposed instead a weighted poverty index ,as a better and reliable indicator of welfare improvements. The real meaning of development goes beyond per capita GDP. It should be perceived , as a multidimensional process involving the reorganization and reorientation of entire economic and social system .In addition to improvements in incomes and output, it typically involves radical changes in institutional, social administrative structures ,as well as in popular attitudes and in many cases even custom and belief. (Todaro page 57.Third world development.1983).Chile is undoubtedly in the right track, but it still has key issues pending.-

Friday, November 23, 2012

World Bank Report : Upward Social mobility in Latin America

The latest WBR (November 9th , 20129) brings out interesting outcomes concerning social mobility in Latin America. Over the last 15 years , 43% of Latin americans changed social class and Middle class increased its size by 30 million people , making up in 2009 a total of 152 million, well above the 103 million people within this segment in 2003. Between 2003 -2009, almost 2 million people in Chile , became part of middle class segment leaving behind their poverty condition. Chilean society has 42,3% of its population within this segment, just below Argentina (46,5%) and Uruguay (56,3%).Other countries like Brazil which has 32% of its population within this segment, has also made significant gains in the last ten years. WB report set middle class income ranging from U$$ 10 up to U$$ 50 daily .Besides it identifies a fourth segment with incomes ranging from U$$4 up to U$$ daily, which represent 40% of the population. This segment ,is still considered to be fragile with important chances of becoming poor again. So public policies must keep close attention to it.- What are the implications of these changes: a.- Middle Class was the driven force of history in the XX century, and it will be so again this century. In Latin America ,very much of social and economic changes since the seventies (with cost and benefits), had the middle class as its main engine. b.- Increasing Middle class share means key features for economic progress such as : more stability and social cohesion ,higher demand for services and complementary products, large size of markets for goods with high value added, higher average of education level which improve innovation flows and induces higher productivity . c.- Middle class shift the focus of politics from needs and demand (captured voters), to expectations and supply (autonomous voters), changing the nature of government involvement in economics .- d.- Important Middle class segment mean a government focused on efficiency and quality of services ,capable of fulfill higher expectations than just provide basic and limited assistance . Thus, the surge of Middle Class is not only the outcome of good economic policies , economic growth, and better institutions, which policy makers can count on as a measure of success and effectiveness. It is also the opportunity to move along with stronger policies to eliminate poverty,(30% of Latin America population),as long as it also ignites the virtuous circle of prosperity .

Friday, November 09, 2012

Different ground for conservatism.Election also matters

Mexico and the USA: Two presidential elections. Two similar outcomes. The center left take it both over. That is what democracy is about. But in the USA case , there was more than just a democratic exercise. Facing the avenues of time for this century, this election was stated as a matter of choice between two models self excluded from one another. The basic of it ,goes like this : More or less government, More or less regulation, More or less taxes and so on. It seem increasingly plausible that these were the slogans for the XX century,already gone. Chile usually considered as leading example of free markets policies, have a center right government .But it has applied a tax reforms , with lower taxes for middle income people although higher taxes for business (from 17 to 20%), which it has been estimated will create losses to firms of more than U$$ 100 million. It added up more government influence in economic activities, with new public organisms for education, environment, and inland security, and manage public expenditure running at a pace of 7% for the first months of this year .Is there something wrong with it?.Does it means that the center right has quitted their ideal and principles?.Not necessarily so . From the Government point of view, is a matter of governance, social inclusiveness ,stability and the chance to be competitive for the next election. It follows that these last three values have become the constraints , that none platform to run a government and win elections , can get rid of. It seems that the same apply to our neighbors in the north. Citizens of the world are more involved throughout social networks, which can get together huge crowds no matter their individual preferences, for the sake of what to expect from Government .But What do people expect from Governments ?.Let try some answers: a.- Pragmatism to cope with people expectations and needs. Ideology is for books, novels and intellectuals , but not for politicians .- b.- The issue is not whether to have more or less Government, but to have a both better and more efficient government.- c.- The dilemma rich against poor, is a false one. These days, what count is middles class needs ,which goes on the line of quality of services (health, education, safety, life style) resetting public policies priorities. d.- Demographic factors: People get older than before and live longer, therefore demand protection. Immigrants flows have something to say. Beside they also have values to believe in, and hopes to carry on to get some outcome. Young people and women looks for different dreams. They look for better place to live, with less congestion and environment contamination such that they feel they are in charge of their life and destiny. e.- Finally, there are different values away from traditional ones , but not necessarily worse than those ones but different , and leaders must be able to navigate through with them. Otherwise is to stay out of the winds of history.

Friday, October 26, 2012

The emerging Markets Bond index

A few days ago(October 18th) , the Emerging Markets Bond Index (EMBI+) for Latin American economies was released. The EMBI+ tracks total return for traded external instrument in the emerging markets. There are two categories of such index. The JP Morgan EMBI global , and the EMBI+ index . The former covers the Brady Bonds, loans and Eurobond .The later has a more strict setting related to secondary market trading liquidity .Instrument in the EMBI + must have a minimum face value outstanding of U$$ 500 million. The J.P. Morgan indexes are a popular benchmark for money managers that deal in emerging market debt, so investors make a comparison with their mutual funds or exchange-traded funds. Because of their higher interest rates, emerging market bonds can significantly outperform U.S. Treasury bonds. For example, in the 10-year period ending in May of 2004, the J.P. Morgan Global Emerging Markets Bond Index had a total return of 248%, greater than both U.S. corporate bonds and the S&P 500.(read more at Concerning the Latin America economies, the EMBI+ index is a good indicator about the current position of these economies, to take advantage of the situation of traditional safety investment places. It becomes increasingly evident that the Euro Zone, is not longer capable to get out of its austerity trap soon.The USA is facing quite a challenge , with the so called Fiscal cliff, to be solve before the beginning of 2013. The BRIC group is in the adjustment path to new scenarios and Japan is still on its way to get a sustainable recovery. Thus ,all of the sudden, higher economic risk seems to have shifted to developed economies. Therefore, Latin America has the opportunity to take an higher share of investor preferences, as long as its economies risk level, does reinforce the perception of these economies, as reliable places to invest. In fact, the EMBI + average index for Latin America economies was 346, which means that taking as reference the Brady Bonds, any Latin America country might get financial resources paying a 3,46% return above those Bonds return. Sure, this average is misleading as long as there are economies which outperform the average (Venezuela , Argentina and Equator). But there are others, whose EMBI+ index fit quite well with market expectations and investment grade status. A somehow surprising case, is the EMBI+ index of Colombia (96), and Perú(91).These economies need to pay less than 1% above the base return of the Brady Bonds, to get external financial resources.Quite remarkable for both countries which have experienced the tragedy of terrorism ,at its most devastated level. It is important to keep in mind (as others have already said), that this results do not mean an insurance as a protection for wrong economic policies. It rather imply, that there is a path which can be pursue steadily ahead ,such that to consolidate this higher reliability status. Finally, the Chilean economy risk level (117),(like Brazil(133) and Mexico(139)), is below average but above the expected, which is a signal to take into account . Chile , like Uruguay, have the strongest institutional framework to deal with economics matters. Perhaps its weakness (shifting up its Risk level), is right on both the environment and energy institutional frameworks which still have some flaws to solve.

Monday, October 15, 2012

WE the citizen of the world: A reflection

The current global events, whether these are economics, political or geopolitical, makes us all to believe that although We endure the burden of its cost , WE are not taking into account for its solutions. Lack of effective political leadership, weak institutions, the trap of wrong designed economic policy, the aggressiveness of those who believe they own the last truth, the pace of environment destruction, religious intolerance, women and the poor as the XXI century slaves, the nuclear threats , make us all to think that WE are going nowhere. This civilization has made outstanding progress on different topics such as, technology, science, artificial intelligence ,which have been the result of ordinary people, like We citizen of the world are, who realize that their abilities and skills, belong not to them but to the rest of us. So, We are the masters of knowledge and human skills As a result, We have become more engaged with daily life affairs, and because of that, We have become the conscience of the world, and the last moral column of it, who think that We need ( a. Religious Tolerance which we cannot live without. It make us all stronger as humans being, as long as we all share the value and virtue of life, We are all called upon to preserve it . b. Wider opportunities for freedom, both economic and political freedom , for those who live in poverty, oppression and despair ,who have become dependent from inefficient Governments and politicians, instead of themselves. c. Better environment policies. The world is not just a matter of rich and poor. It is also a matter of keeping sustainable God properties. d. Leadership capable of shaping the events ,and not the other way around As We move along into this century solving those issues, We will keep hope alive .

Friday, September 28, 2012

The right policy mix: New evidence

The recent IMF report (September 27th ) ,says that many emerging and developing economies did well over the past decade and the latest financial crisis. This mean that these economies, spent more time in the expansion pattern, than advanced economies. 60% of this outcome, comes from better policy design. The current trend is to continue this upward pattern for emerging and developing economies , while the advanced economies trends go in the opposite direction. The world economy seems to be upside down!. What is the meaning of better policy design?.At first glance, it deals with the purposes of macroeconomics policies to secure sustainable economic growth, which requires the ability to keep fiscal expenditures and inflationary pressures under tight surveillance. However, the financial crisis of 2008 , is a strong evidence that it also includes the ability to react properly with effective policy tools, to deal with any kind of shocks, both external and internal . So, it is a set of characteristics which go beyond the conventional wisdom of self adjustment, based on a strong “knowledge endowment” of economic agents, or market flexibility. This last two might be considered as a desired conditions, but it is hard to find them fully disposable, so policy makers have to figure out the right policy mix based on lack of effective learning, some time weak political leadership, unpredictable economic agent behavior , policy decision lags and the like. By the same token, Government intervention might be useful when it is based on credible rules ( fiscal deficit/surplus limits, and debt limits,) .These days, economies have high rate of resources mobility, and anything which affect transaction cost for it (like discretionary Government intervention),turn out to be negative or less effective. Markets scrutiny and global economy more risk aversion, make what it is left to erase any option of effective impact for such policy. Therefore, better economic policy design take into account, the implementation of rules for both , monetary and fiscal policy as well. This is what emerging economies have done : Inflation targeting, flexible exchange rates and fiscal responsibility ,which allows a stronger policy mix with more space to maneuver to stimulate aggregate demand or supply , when the economy is weak, and to reverse when the economy is overheating . Latin American economies (some of them are within the leading groups of emerging economies), learnt those lessons in the eighties, and worked with them out since the nineties. There was a consensus about it, which was the starting point for a new path to get economic development .The “Washington Consensus” made it right to be the first step. However, it could not be perfect and some of its weakness (lack of social needs explicit priorities),were adjusted along the way. Thus “Socially Inclusive economic growth”, became the new paradigm which has allowed Chilean economy to get poverty down from 40% in the nineties ,to 14% in 2012 , or Brazil which got 16-20 million people out of poverty, increasing the middle class segment, widening market size for small and medium size business, and placing itself on the top five world economies. The same is happening in Mexico, Peru, Colombia ; Uruguay. On the other side, it is also important to keep in mind that better economic policy are not based on ideology but on pragmatism. The institutional framework and its improvement, matter. Getting rid of these criteria lead to the well known social bad : Inflation, poverty, informal employment , underemployment and no effective signal for private investment . PD : Greetings to our boss (Google) in its birthday day (september 27th )

Friday, September 14, 2012

The nature of entrepreneurship (II)

Entrepreneurship is a matching process between the abilities of entrepreneur, and the abilities of the economy to sustain economic policies aimed at supporting business creators . At the same time, it allows opportunity takers entrepreneurs , to go on with ideas which fit nicely with the economy when it is growing. Thus ,entrepreneurship is an adding up win –win game, which take into account not just the economic environment ,but also the best of endowment talents, to move on to try a better future . It is also a self reinforcing circle. On the other side, Entrepreneurship generates positive externalities, as much as it implies less government dependent citizens, capable of making it on its own, when it comes to decide what to do with a set of natural talents we all have available. The latest GEM (2011) reports, measure the score of Entrepreneurship factor conditions(EFC),for different countries grouped within three categories( Efficiency driven countries, natural resource driven countries, and innovation driven countries), to differentiate the impact of each variable on the conditions for entrepreneurship. The EFC index (1-5scale ) compares the importance of such factors for entrepreneurship. It measure nine variables, (Financial support, Public policies -Regulations ,Government programs, Primary and secondary education, R&D transferences, Commercial and Physical infrastructure, Internal market (dynamism , openness),Cultural values ). All of these categories primary education, ranked as the lowest average(2/5).Then comes financial support, regulation and R&D transferences with 2,5/5. Almost 60% of all categories, are within the range of 2,5-2,8, which means that 55% (roughly) of them, do not get a score better than 3 out of 5. The more complicated outcome, comes from the low score for primary education. This seems to suggest that education, is not designed to enhance natural entrepreneur abilities, but it might goes in the opposite direction instead. Chile and Mexico, included as efficiency driven countries, have on average of 1,8 and 1,9 respectively .However, theses scores are not different from the ones some European countries (Germany 1,9.France and Spain 1,6) get. The difference becomes important, with countries which have made of entrepreneurship a key variable for economic growth , such as Finland (2,3/5),South Korea 2,1/5).- What are the implications?.Whether “opportunity taker” or “opportunity creator”, entrepreneur talents might be strengthened from the beginning of the education process. Those educational systems which start up at earlier stage to work with entrepreneurial abilities and its potential, have a higher chance of being a positive variable to influence decisively entrepreneurship .Besides, it allows to get better and more efficient result (lower cost) from public policies designed for entrepreneurship. So, when it comes to entrepreneurship ,a good education system designed for it , is the first step .-

Friday, August 31, 2012

The nature of entrepreneurship (I)

One characteristic of Global economy is (believe it or not), the wide variety of new opportunities available for entrepreneurs. Let check some examples out: Do you want a birthday card to someone in Europe , USA or Buenos Aires?.What about a book?.Flowers? These days, it is possible to be in touch more often with those we care about , because new means are available . Small businesses have gone further their local markets, taking advantage of connectivity options arising from internet , social networks, smart phones and the likes to establish market positions as it was not possible to think of , a few years ago. (4,6 billion people have access to mobile phone). There is a story of a Mercedes car driver, who has a problem with the engine somewhere in Europe , and it get the problem solved in less than 24 hours ,even though it is more than 800 kilometers away from the main Mercedes supplier How come? Well, a combination of logistics, technology (GPS, and supplier networks),and small business , ready to do the complementary job dealing with the solution. Small business(labor intensive), are the perfect complement for big business , usually capital intensive. The UK government has recently released figures ,showing that the number of graduates leaving university on a self-employment route has soared by 46 per cent over the last six years.( .- Thus, technology and global markets, have allowed to generate new opportunities for entrepreneurs which to take advantage on. Because of the scale volume, and low operational cost (some cases it is needed few laptops, and above all an agile mind), entry cost in global markets, are lower for small business and entrepreneurs.60% of new business in the global markets, are related to entrepreneurs and small business, because of their abilities to move resources from one low productivity use, to another higher productivity alternative, faster than big companies do. But, not all entrepreneurs know these opportunities, neither not all opportunities are captured by entrepreneurs . Entrepreneurship and business opportunities are a matching process, which depend on transaction cost , economic policies ,and entrepreneurs abilities and competences .However, because of its nature (related to individual ), when it comes to support entrepreneurship activity, it begins with economic growth based policies, flexible regulations ,clear and stable rules ,flexible markets ,which add up to set a framework of strong incentives, for new business. Therefore ,too much government intervention , mean fewer opportunities for entrepreneurs. On the other side ,how come that the business opportunity and the entrepreneur match one another?. Is it a matter of entrepreneur “opportunity taker” abilities ?, or is it a more complex process which includes self stem , network quality, and market knowledge, which allow entrepreneur to be an “opportunity creator” as well?. It follows that it might come down to the entrepreneur ability to create their own opportunity given a framework of incentives. The later , is The Babson College approach, which support the idea of entrepreneur as the “opportunity creator” instead of being just an “opportunity taker”. In fact, the latest GEM report (2011), shows that the perception of new business opportunities, decrease the fear of failure, which induce entrepreneur to go on to create its own opportunity .-

Friday, August 17, 2012

Friedman¨s legacy and the Chilean economy

Almost six years after his death ; for most of the Chilean economists listed on the center right political spectrum ,Milton Friedman is still a prominent icon of free markets policies and freedom. His legacy on monetary policy, is also revisited in the USA ,to evaluate the current approach and implications, for the purpose of a better monetary policy design and results.( Friedman´s monetary policy in practice. Edward Nelson, Federal Reserve Board, Washington D.C. April 2011) Two years ago, an article (How Milton Friedman saved Chile.WSJ march 2010),stressed the contribution Friedman did to laid out the new foundations of the Chilean economy ,following the failure of the state based experiment (1970-1973). According to that article, these foundations were specially tested with the consequences and implications of the earthquake of February 2010 which took place in Chile.(An earthquake of 8,8 grade (RS), with capital losses estimated in U$$ 30 billion. Was this earthquake a good measure to such evaluation?.Maybe, but I do believe it was not. Since the sixties, Chile has strict rules for building constructions .Therefore, it was not because of Friedman concern that Chile had implemented such a framework. Perhaps the article would have gone on a different direction, analyzing the cost of not following Freidman prescription of small Government because of its risk of inefficiency, or the contribution to freedom arising from a more political competitive system. No matter this considerations, after two years, the percentage of the reconstruction effort, has a wide range of achievement percentages starting at 11% ( NGO watchers), up to 47%Government officials). Whatever the real value, there are still 50% of the reconstruction job still pending .- How come for this economy, which claim to be on track to become a developed nation?. Friedman supported decentralization as far as market transactions, works better and more efficiently that way. Price signals allocate resources, in a way that any government action cannot replace. Government can not substitute the nature of wealth creation. Having said that, although with a share of 22% of GDP, and better evaluated that some European countries (France) ,Chilean Government still has a centralized model of public services(Housing, health, education ), which make harder to implement fast solution to demanding problems arising from regional economies, or from reconstruction needs. Besides, it has not solved yet the local Government requirements for different management model and financing, which make centralization cost even higher, because of bureaucracy and corruption. Thus, solutions are far away from the problems. Friedman contributions to Chilean economy , were partially applied as far as decentralized government and more competitive political model is concern. Chilean economy has become an oligopoly, and its political system a duopoly. Therefore, the main characteristic of this economy is not that much the efficiency ,as it is the rents it creates for those who are able to be part of the game. Entrepreneurs are making its way, but with important restrictions. More than 60% of them ,are in the secondary markets (not formally included in the system).

Friday, August 03, 2012

The Austrian Business Cycle theory:The alternative path

After two years since the Financial crisis of 2008 began, it has become clear that traditional macroeconomics policies has failed to match both, markets and entrepreneur needs. This failure goes into two lines : a.- It did not anticipated the outcome of the housing bubble : The financial crisis of 2008, the subsequent stagnation , and the Euro tragedy . b.-It did not have the proper analytical framework to face the crisis ,(lack of microeconomics foundations), which is an essential reference for policy design .- Although it is possible to discuss further on about the two previous points(specially the second one, for example taking into account the importance of politics ; very much closer to economics and policy decisions), current expectations are no substantially better than a year ago, even though the QE (quantitative easing) has been applied, austerity measures have been implemented (Europe),and Banks have endured three years of adjustments to take control of l solvency and liquidity problem . It seems that something it is missing in the whole framework of analysis. A recent article written by Joseph Salerno (Quarterly Journal of Austrian economics, Vol 15 Nº1l 3-44,Spring 2012) is quite clear about this missing variable: It says (page 37): “Entrepreneurs have discovered that their spectacular success during the boom were merely a prelude to a sudden and profound failure of their forecast and calculations to be realized. Until they have regained confidence in their forecasting abilities and in the reliability of economics calculations ,they will be understandably averse to initiating risky ventures even if they appear profitable”. Negative real interest rate, send the wrong signal for new ventures as long as it distort the adjustment process to realign the productive structure . The reallocation between those with high time preferences (consumers), to those with low time preference (capitalist-entrepreneurs), is badly influence by such a low interest rates.- Besides, let recall that learning abilities area heterogeneous , and it comes along at a asymmetrical pace. Thus some of them will learn faster than others, but any action which interferes with this learning will make it even slower, and the entrepreneurial spirit necessary for any full and robust economic recovery will shy away longer than expected.- What are the implications?: a.- To accelerate entrepreneur learning and adaptation to new scenarios, leaving aside wrong and disturbing signals and shifting up business expectations.- c.- Monetary interventions ,seem to have a decreasing marginal impact to improve conditions for new business .It was helpful at the beginning, but its usefulness seems to be decreasing over time.

Friday, July 20, 2012

Too big to fail and moral hazards

Since the financial crisis began in 2008, it has been usual for policy makers to deal with the issue “Too big to fail”. What is the meaning of this threatening sentence?. It refers to what to do with those financial institution which face either liquidity or solvency problems, and its influence is so wide and deep into the productive and financial sector, that it is not possible to let them fall , because it might transform a bank failure ,into a systemic failure with huge social and wealth cost. As a matter of fact , it has been said that after Lehmann Brother made public it will go broke(2008), global financial market went wild, and the subsequent economic event four years later, are somehow still being influenced by such a monumental collapse . Thus, it is not just a case for additional research the implications of this bankruptcy .It is a matter of fact which support the implications of big banks to fail. Going deeper in the correlation so to speak, between financial stability and economic growth , it is well established in the economic literature, the key role the financial sector has as the engine for economic growth. Literally when it fails ,there is not engine running ,therefore there is no growth . In the whole analysis and evaluations of the issue, it is assumed that Banks are managed by strict rules, precisely because it cannot afford to be even close of such risk .Besides , the cost of supporting banks in trouble pass through to society ,but not to the Bank itself because it is crucial to keep it on going. Somehow ,it is expected from Bank managers some level of social responsibility, equivalent to the one policy makers face, when they decide not to let a financial institution to fall. Some important assets like credibility , integrity , prestige, are expected to have a key role when it comes to managers decisions. However, recent events in the financial community ,( Interfering in the Libor level in the UK), indicates that such manager responsibility do not apply . Some reasons as follows : a.- The moral hazard, which deal with riskier conducts and management decisions, given the umbrella of protection which arise from the “too big to fail “ constraint for policy makers decisions. Moral hazard can goes further on, up to the point of breaking the law and betraying market confidence. b.- The so called dilemma between the “managers “ the “shareholders”, and these days ” the “stakeholders”. All of them might have different , even contradictory approach, to get the expected targeted profit. What are the implications ? a.-The first instinctive reaction, is to get tougher regulations. But regulations might work for some time, because sooner or later, it might become obsolete given the dynamic nature of financial issues and banking sector. Besides, regulations do not deal with the issue of principles . This does not mean that lack of regulation, or self regulation are better alternatives. It is just a matter of having the effective regulation- b.-Perhaps a better option would be, to adhere to some management codes of responsibility. Banks should be socially accountable, just like firms dealing with environment are. The ISO 26000 or a different standard one ,is waiting to have the Banks inside.

Friday, July 06, 2012

Global economy risks and economic policies

The ECB, has decided to set the interest rate down to 0,75%, for the first time below 1% , since the euro era began some years ago. China Central Bank, also has move down its interest rate by 0,31 percentage point to 6%. With normal circumstances those decisions ,would have been evaluated by markets and analysts a corrective ones within some adjustment range. But, in these days of uncertainties, markets and analyst wonder whether it is too little too late for the global economy ,to avoid a down turn. China is the second largest economy (behind the USA), while Europe is the first economic bloc of the world. Thus , undoubtedly both have a strong effect on the current expectations about the global economy for the second half of this year. The signals are clear enough in one direction : decreasing economic growth. Markets have become more pessimistic as long as they anticipate such outcome. What are the implications ?: it seems that any country or for this matter any economic bloc, is not capable of doing on its own ,what it requires a broader and coordinated approach. Isolated Economic policies, have limited impact to change expectations . Perhaps the same some implemented jointly with other Central banks, would have gone further concerning expectations .- The second implication, come out from the fact that in time of economic crisis, economics and politics are closely connected. Thus , Economic policies without a political component(for instance all Central Banks acting at the same time) do not work well . It becomes less effective, because in these cases, it is expect something different or even unusual.

Friday, June 22, 2012

Rio +20 Summit: the expected outcome

Brazil is a nice place to visit, Brazilians are nice people to meet. Rio de Janeiro has nice beaches and touristic attractions. It is all add up to the expected outcome of the Conference on sustainable development , held this week in Rio: No real progress to deal with the implications for global warming, of economic growth without environment restrictions. Because of their upbeat mood ,Brazilians are the only ones capable of getting involved in events like this one, with no expectations of meaningful outcome .It was the same in 1992 (just coincidence?), when the world was anxious about the new expectations arising from the new scenario ,after the collapse of east Europe regimes. Twenty years later Dioxide of carbon emissions have gone up by 40%, and there still no deep rooted consciousness about the risk of doing nothing about climate change. However, each event means a step forward, although the issue of climate change, will not be strongly addressed ,because there is no incentive to be the first, whether the next one do not care about it .Global climate is a global public good , which like many public good in economics end up in market failure. It means its overexploitation and destruction. The only way this failure might be fixed, is with a global institutional framework with the proper tools to deal with the implications of breaking the universal environment laws. The ones which says, that as the inputs apply over a fixed resource, the outcome will diminish. It follow that there is also a technological variable to take into account to deal with the problem. Faster Technological progress, matter. It will allow not only cleaner production process, but also to capture dioxide emissions. Thus, the problem of global warming have more chance of decisive action, when it come to individual action dealing the application of the new technologies, mainly those ones environment friendly. It also helps to get further progress, to have new international laws for market exchange mechanism of green bonds, or to consider environment protection into the productive process . All of these is hard to get by, with massive deployment of opinion. It might work better based on case by case approach.-

Friday, June 08, 2012

The euro perspectives: A Matter of cost

The alternatives for the Euro zone debt countries, has been progressively narrowing to the evaluation of two cost: a.- The cost of keeping the membership in the Euro club (I) b.- The cost of walking away from the Euro Club (II) The lower any of these costs ,decide whether it is better to stay in or to stay out. So far, it seems obvious that the second kind of cost, has been higher than the first one. Thus, there has not been a clear and explicit intention of leaving the euro zone .This the case of the smaller countries, which do not have the capabilities to deal on its own with the consequences of breaking apart from a framework which even with its weakness has been useful to improve the chance of collapsing and panic.- But what about those countries which do have the capabilities to deal on its own, with the consequences of leaving the Euro. Besides , these countries might have the resources to master the immediate effect on the financial sector and expectation, of a decision of such magnitude. With no clear policies to maintain the membership ,other than to adhere to strict rules few countries can afford, the euro at this point is no longer what it was expected to mean: A mean to get together the diversity. Instead it has become a burden for the recovery following the impact of the financial crisis of 2008, specially in the case of smaller countries of the euro zone. What comes next?: a.- It is unfeasibly the massive implementation of the Eurobonds. At most it might follow a selective approach. b.- Those bigger size countries of the Euro zone, still in trouble because of the heavy adjustment under way to keep the membership ,might decide to leave the Euro as soon as the cost (I) is higher than cost (II).- c.- Given the current probably scenario of breaking the euro apart, it is more feasible the implementation of the two speed euro zone. Thus , even within the euro framework and its rules, there would be the chance to allow those countries capable ot moving at a lower speeed, to works in some areas (specially the trade sector one) , with its own currency at an euro exchange rate , given by the European Central Bank.- d.- The austerity approach , is not longer a substitute for growth. The German engine running, is a guarantee to go further beyond austerity.-

Friday, May 25, 2012

Global economy uncertainty.The Unsolved European debt problem consequence

The still unsolved European debt problem, is charging its fee on the global economy current prospect.It seems that a global economy slow down, has become unavoidable. Policy makers are preparing theirs best tools to deal with it.Latin America average economic growth expectations, close to 4% a few weeks ago, might also be hit.However, quite to the opposite to previous experience, this time Latin America has better and more effective options to overcome the impact of such slow down.It has an healthy external financial credit,a banking system isolated from the the risk exposures of other global banks, and policy makers capable to coordinate policy response, in case it is needed. No matter the good economic stand Latin America has to face the current uncertainty , the key issue is still related to the real impact the European events, will have on the global economy as a whole.European zone is still in a recessionary mood ,and it perform like a brake to the global recovery dynamics. Whether the Euro zone is capable of dealing orderly with Greece economy weakness, it can make a difference.After all , it is not just up to the Greek Government to decide on its own, what it has no way to get control of.Either, to leave or to stay with the euro zone ,would probably be a joint euro zone and Greek Government decision. This means that in case it is decided Greece is better off out of the euro zone , it will be based on a plan to mitigate the cost. The critical issue would be if it happens the other way around.With no guide line plan,no clear path where the Greece economy is headed to, after such a move. In time of uncertainty, there still some room for trust in the quality of judgement of global leaders , politicians and Global financial institutions.

Friday, May 11, 2012

Latin America : Looking forward for its best alternatives Although it might seem unusual, Europe with its debt problem is in an alike situation to the one America Latina had in the eighties.Is Europe next to also have a lost decadae.Maybe so. The point to address is what America Latina has learned from the past. 1.- Ideology is not the best path to solve the social problems 2.- The State is not an efficient partner to complement the private sector 3.- Private investment need clear and stable rules 4.- Inflation does not pay off 5.- Property rights matter for goods exchange and investment decision 6.- Financial markets ,needs regulation up to the point necessary to be in charge of systemic risk, but no more than what it requires to do its resource allocation task.- 7.- Markets flexibility helps to get more competitiveness advantage All of the previous conditons one or another, have been presents in the current pace of economic growth of Latin America economies.Those closer to them , have better performance regarding those more distant from them. The question is what comes next?. It seems that the option goes in one direction, to pursue the path already done. Thius does not means to deny some corrrections, specially when it comes to unequalities and key services (education and heakth). But the core of aditional progress, it is hardly different to the one proved.-

Friday, April 27, 2012

Economics and the rule of Law
Most of the economics analysis of markets behavior , assumes a frictionless world without transaction cost . In the real world, there are transaction costs, the most important of them arising from legal requirements, because at the current technology level, perfect information is probably fully available, although it does not necessarily imply zero transaction cost because of different learning abilities. Thus, what about the legal costs?. When it comes to either good or services exchange, or for this matter any kind of exchange, economics is all about transfers of property right . Markets are an instrument to do so, in more efficient way than public authorities. Exchange and capital accumulation, work while there is a well designed framework, which protect those property right .Those countries which walk away from this “rule of law condition”, hurts the core of capital and wealth accumulation. Nobody will dare to invest, where there is no protection for the benefit of that investment .The premise that those wealth loses ,can be recover by the action of the state has proved to be false. Corruption and mismanagement, replace the efficiency, and there is no way this substitution might be considered neutral.- The Peruvian economist Hernando de Soto, has analyzed the correlation between the legal setting , business transaction and capital accumulation , concluding that those economies which work without such a proper legal setting , have significant wealth losses. Therefore, the rule of law, is a necessary condition to support wealth creation. Those countries which have made its way through up to the developed status, have been guided by key principles and a legal framework to facilitate the capital accumulation. Latin America ,do not have a strong tradition of being driven by the rule of law. Most of its tradition, deals with the role of the State in the economy, and the influence of those who control it who have made of the law a caricature : the law is accepted , but is does not imply a compromise with it. These days, we live in an interconnected global economy , with instantaneous mobility of financial resources, which walk away from those places with no legal framework. They compare transaction costs, and sure they will chose those places where those costs are the lowest. As long as Latin America need more private investment, it is not the time to move back to a situation which indicate to foreign investors they do not have a guarantee for the risks they assume by investing here to create more wealth.

Friday, April 13, 2012

The new global macroeconomics and sovereignty : A Narrower boundary

The current interconnection between different economies, the market scrutiny and the analysts surveillance of economic data, have transformed quite a lot the scope of the sovereignty issue. Just a couple of years ago, when the discussion about the new rules for global financial transactions took place , it was clear that there would be important losses of sovereignty , if there was any chance of making significant progress on the matter.-
The Free trade agreements with all of its benefits, in some cases also imply losses of sovereignty . Let take the case of Chile, which for the sake of getting the Free trade agreement with the USA, had to quit its option of unilaterally impose control (taxes) on its capital account. Greece has been able of restructuring its private debt, within the umbrella of the euro zone and its terms. The same apply for other European countries which within the Euro zone framework, had to quit to both its own monetary and fiscal policy .-
Thus, it seems that global economics is moving toward the so to speak, Global Governance based on global rules, coordination ,information and power sharing , which beyond the specific domestic rules of each country , becomes a necessary condition to facilitates trade and financial flows . If not, market will say something about it.
Is the global economics also evolving toward a Global Supra State?. Maybe so. But what kind of state?.Certainly, not the Keynesian one. On the other side, some leaders have questioned this “market interference”, on each country right to do whatever seems appropriate. Well, that might be the cost of technology spreading everywhere. Besides as long as we live in a flat economy, it is easier to check each other out.
Actually, It is hard to think of a country alone to be able of solving its own economic problems. Let take the debt situation in Europe, which has undoubtedly an impact on the recovery of those economies ,which are complementary because of financial and technological links, and at the same time ,on all of those economics which are depending on Europe economic growth, because of the kind of good European consumers demand. Latin America economic performance, is importing more goods from the USA and Europe, which turns out to have a positive impact on the prospect of economic growth as well. So, in such a case each economy is losing its ability to apply autonomous policies without affecting the natural flows of goods and capital. Argentina tried to do so with the implementation of restriction on foreign trade, and nobody felt indifferent about it.
What are the implications which arises from this link between more chances of benefit from global growth, but at the cost of the less sovereignty?. Some preliminary ones: The State, have to be more responsible and less discretional. Policy makers, need to act with more and better coordination among themselves.The power share buttom, is not off anymore.

Friday, March 30, 2012

The Life Cycle of economic reforms and Economic policies

A key constraint to the effectiveness of economic policies, might be the fact that most of the times, it requires complementary economic reforms of different nature to be implemented , before any evaluation concerning its outcome can be done. In other words, in many cases without such reforms ,there is no way economic policies will work its way through to get some goals which it was designed for. Just to mention a few cases: Increase employment: labor reforms to make wages more flexible, More Small and medium enterprises :Financial reforms to make credit more effective, Higher competitiveness level :state reform to make it more efficient ,Better innovation flow: educational system reforms to improve human capital quality, and so on.-
The problem with those reforms , is that not always match the timing that economics policies need. Thus ,it arises a lag between the right economic time ,and the proper political time . Besides, the political nature of the approval and implementation process creates a gap between what it is needed and what it is available for economic policies to be really effective. Even more, reforms have a life cycle, which imply that its stronger impact melt away sooner or later. Therefore, economics policies must be reviewed permanently, such that the new round of both necessary and complementary reforms are clear enough about its scope, timing and implications. Recent events, seem to validates the connection between economic policies and reforms to get the most of policy design.
This is a learning process, in a world without perfect rationality and market conectivity keen enough, to keep the atention on the whole process.
Those countries which lack a path of reforms to adapt themselves to changes and market turbulences, reduces the effectiveness of any economy policy designed to deal with it. At the time, it reflects the limitations economic policies have on its own to cope with the expectations to solve complex problems, without the support of politics. Economics and politics are closer than much of the main stream economist think.
A case study about this is the Euro experience. After more than ten years as a common European currency ,the Euro zone is still working on the require “fine tuning” reforms to be truly a monetary union, such that to make the euro what its founders expected to be : A strong currency to get closer the diversity.
The same might happen in Latin America, whether their leaders believe that with the reforms made in the nineties, has been enough to make all of the current positive result happen and staying steady. There are high expectations for few policy options, unless more additional reforms are implemented. What is in the first place?: The State reform.

Friday, March 16, 2012

The greek reestructuring debt: The (suggested)next step

The recent restructuring debt held by the Greek Government has important implications:
a.- The Greek economy can orderly default its privately held debt, without leaving the Euro zone .-
b.- The “ End of the road Dilemma ” for the Greek economy ,either to stay or not in the Euro Zone , from the economics point of view , does not longer exist The Euro Zone offer an umbrella type of framework . Greece on its own, is not capable of getting what it has so far: the expectation that after all things can be better .Moreover, actual Euro zone macroeconomics setting ,has not being designed to overcome the consequences of Greece leaving the Euro Zone.
c.- The substitution between private debt and public debt, does not solve the core of the problem, which is to adjust the country to the reality of being in a zone with severe rules to get the benefits from being part of it.-
d.- The question these days , deals with the willingness of the ruling Government and their politicians , to implement the necessary and proper reforms which are complementary to the successful restructuring debt program of March 8th . Public spending represents 48% of GDP, quite high for a country desperately needed of more private investments which requires modern and efficient public management procedures, to go along before it gets done. Besides, tax evasion practices, make such a spending proportion, a heavy burden for current scarce resources, because it creates a competition with any new resources available, which otherwise have more productive alternatives.
e.- The necessary competitiveness gains to stay within the Euro Zone, might also come from , focusing on what the Greek economy might be better suitable for . Greece has a good quality Human Capital (comparative advantage). Therefore, the Greek economy, should focus its human capital stock, in those sectors with better potential to transform a comparative advantage in a competitive advantage.-
f.- Greece has tourism (18% of GDP), and other sectors which use intensively human capital. High quality Human capital, means higher productivity (the other side of cutting wages).Thus, the Greek economy should pursue a focused strategy on all of those areas with important competitive advantage potential specially those ones related to services.-
Finally, the Greek economy is currently following a path which like a marathon, needs a strategy to look over the burden of debt. The most of the benefits from the proper reforms will be collected, whether those reforms are implemented sooner than later.

Friday, March 02, 2012

Labor Markets reforms: What really matters with it?

From the general equilibrium point of view, markets works propely when they are flexible enough to allow its equilibrium.Mosts of labor market reform, work toward that direction given the fact that unemployment is considered a disequilibrium.
The current global economic do not necesarily is founded on that premises.Unemployment might be part of a search process.Of course this search is the result of job expectations.If there is not such expectations, people just get out of that search process, and out of the labor force as well.
The point is that labor market reforms, usually take into account the first approach.It deals with lower entry cost to the firm, throughout lower exit cost.The lower this exit cost, the higher the chance of hiring someone.But it does not consider the training qualification variable.Firms need labor whichs is complementary with capital.It is not just any kind of labor. The better qualified the labor is, the more effective such a reforms might be.
But as usual, that qualification is not good enough, thus it might be insuficient to solve the problem a labor reform only focused in the entry cost.
Labor market reforms should incliude the training factor,just because people and firm search for training match and training qualification respectively, which can sustain labor services flow with high productivity. No matter the low cost of hiring , firm will not get into its productive or management process, people not qualified for it.Therefore, some complementary incentives to improve on the job training ,works in the right direction.

Friday, February 17, 2012

Small and medium size enterprises: The road to more jobs (II)

The global economy needs to create more han 600 million jobs in the next decade.Three quarter of them because of population growth..-
The pice of capital goods is decreasing because of the scale factor at the global economy level, technological progress, and free trade.This lower prices induces a substitution from labor to capital specially in the manufacturing sector ,which might imply slower rates of employment gains in the that sector.Besides ,current unempolyment levels in ost of the advanced economies , make aditional pressure on the employment gains side.
Therefore, the goal of creating more jobs have some constraints other than those related to labor policy desing.
Thus ,the question is where those jobs will come from ?
The answer to this question is the importance of SMZE to the issue. It means that policy makers have to focus on those incentives more suitable to let the SMZE enterprises to do what it can do best : Create jobs, and support innovation. On the other side ,much of those new jobs need to be more quailified , given the fact that these kind of jobs are complementary with capital goods.-
The whole design of SMZE policies is a new challenge for the traditional macroeconomics setting, quite fiited to aggregate variables, but not that much prepared to understand the new dinamics of the mix economics (micro and macro at the same time).
Some of those new policies might include.
a..- Tax incentives
b. On the job Training facilities
c.- Closer link with educational entities (Univerisites)
Better market flexibility might help, but not that much if it does not considers more qualification and trainig needs.-

Friday, February 03, 2012

Small and medium size enterprises(SMZE): The road to more jobs (I)

SMZEs have been considered in many countries ,to be the core for economic dynamism and growth. When these firms get its market target and become well positioned to compete, it creates not only additional jobs, but also are a source of innovation .
Global economy characteristics have important implications for SMZEs: It increase connectivity, it increase markets size ,it develops new market segments because of fragmentation, it foster innovation and value added.
On average , 98,5% of total enterprises in Latin America, are SMZEs. The remaining 1,5% are in the upper size category .It is well known the impact SMZE have on employment: 75%(roughly) of employment in Latin America economies arise from SMZEs. Leaving aside Costa Rica which has the highest level of employment arising from big enterprises (45%),,the percentage goes even higher (almost 80%).These data are not accurate enough to draw a definitive assessment , but it make clear the relevance for the social outcome , the SMZE have for the economy. Even though they do not have a strong performance in the exporting sector (15% in Argentina,2% in Brazil,4,8% in Chile, less than 20% in Mexico ,and 2,2% in Peru, Source: Center for the promotion of SMZES ,R Servat. Peru, 2005), the main positive externalities of these firms, are jobs. In 2011, unemployment in Latin America was 6,8%,probably because of SMZEs employment gains due to economic growth.
In fact, the road to employment is within the SMZEs area, no matter whether they are from the services or productive sectors. However, it is not a wise approach to take them for granted , because SMZEs also have weakness ,which can be decisive in times of economic crisis to fulfill its expected job creation capacity. Let review some of them :
a.-Limited access to financial sources, which is an important constraint when the economy is in recession. The Chilean experience on this issue (1997 ,2009),shows that SMZEs access to stable credit for cash flow ,does matter.
b.- The quality of management is behind the best practices .Most of Latin America SMZEs, do not have a standardized procedures and quality standards .They survive with informality , which it turns out to be a constraint for the capital accumulation process.
c.- Low level of networking support for its operations .In Chile , only 35% of SMZEs(roughly) ,have internet connection,(the area of services instead (commerce )with 44%).Thus, without the internet support, productivity is lower than otherwise, market information is available with delays and lags which means loses of business opportunities.
All of these weakness, do not mean that SMZEs lack of strengths. They do have the ability to get innovation flow, they do have flexibility to adapt itself to new market conditions as well. More than 60% of global business come from SMZEs. In fact, because of theses strengths, these kind of business is the one which have benefit most, from global economy growth.

Friday, January 20, 2012

Germany at its best hour: Leadership for european economic recovery

Some economic agents might be surprised about the recent downgraded by ratings agencies, of European countries, Banks and even stability funds, but perhaps much more from it, because it did not hurt (at least in the short term) too much the market expectations about European economy prospect , to cope with its debt constraint . .-
Well , maybe an analogy might help.It is like you drive in a Dakar-America rally, or for this matter any rally . It is not just about the driver , but also about the engine. There has been criticism about the driver in the Euro zone economy , whether it is the European Central Bank, or Politicians, but the engine (German economy) has been strong enough to keep going. The markets expectation concerning Europe, might well be also shaped around the German economy prospect to keep the pace on growth .-
Thus, no matter what the ratings agencies said, markets look at the performance of the main engine of Europe economy ,as the key force capable of getting things back to normal , including the credit worthiness. However, it is not only about the German economy(the engine), but also about the required reforms to keep the pace. Let go first to the engine , then to the reforms.
As a consequence of the financial crisis , Germany economy (GDP) shrunk by -5.1 % (2009).It was the deepest fall in more than sixty years. but the two following years (2010, and 2011), the German economy made strong gains in economic growth (3%), which allow it to have an healthy fiscal position due to tax increase by 6% because of growth (meaning 1% deficit, well below Euro zone average), and public debt under control.
Although German economy is considered to be an export driven economy, (40% of its GDP comes from exports),consumption and investment ,made its way through in 2011 to increase up to 1,5% , the highest in five years (, 1/12/2012).
Besides, German economy was leading contributor (2010) for intra EU share of trade in goods, services and foreign investment which is more than 50% of total .Moreover ,Germany rates of Exports growth kept a steady pace (16% in 2010).Thus ,Europe expectation to deal successfully with the debt crisis implications are linked (at least 50%)to Germany economy performance. Will it be enough to avoid the risk of recession in the euro zone?.It will depend upon the complementary strategy, Germany and its allies apply to support neighbors´ economic growth.-
Although the consensus forecast 2012 for Europe, goes into the direction of slower economic growth with 50% probability of a recession, the strength of the German economy engine, might play a key role to get a better performance for the euro zone economy, such that the recovery comes along sooner . However, it all comes down to the implementation of proper reforms and policies specially those aimed at supporting growth (medium size enterprises) and competitiveness( higher efficiency on States programs). Therefore ,It is not just a matter of austerity ,but also of economic growth. The German made engine,is still running.-

Friday, January 06, 2012

Macroeconomic Policy and Central Banks: The Financial variables are key
Most of the economies which have autonomous Central Banks , might count on it as a key tool for price stability .Latin America in the nineties started off with its own experience on the matter ,and the outcomes so far are pretty satisfactory. On average, Inflation rate has been steadily going down , up to a one digit level , something quite unusual a few years ago. Between 1972 and 1987 the average rate of inflation in six countries (Brazil 166% , Peru 2789%, Chile 802%, Bolivia 602% , Mexico 3710% and Argentina 257% ), was 150% on a year by year basis !.
On the other side, while in the year 2010 the average inflation rate in Latin America was 6,6% , during the year 2011 it is expected to be 7,7%. The inflation rate for this year, is going to be a main concern for Latin America Central Banks. The path of strong economic growth ,and the risk of inflationary pressures which comes along with it, becomes the issue to deal with it.
In this case the usual (textbook) approach, is for Central Bank to increase interest rate. Another matter is the speed and the magnitude of such increases, which depends on each economy particular situation. The fact is that before the global Financial crisis (2008), this kind of decisions was based on inflation gap ( The difference between the spot and the long run target inflation rate), without any consideration (aside from the output gap),other than to get inflation back on track.
The financial events of 2008, made clear that Central Banks must also include within its policy options the financial sector exposure to systemic risk. As interest rate goes up, Banks begins to feel the impact on its loans performance. The probability of default rate might increase. At the extreme (2008), it might get the whole financial system with it.
The contractive nature of increases in interest rates, impose an additional restriction. After all, as the economy cool itself down , the inflationary pressures also goes down calling for slowing the pace of interest rate increases .Besides , all of these chain of events works with lags, therefore in the mean time the issue of credit access to overcome the slower demand, with higher expected default rate, become critical. Thus, the financial sector enter into the optimization rule twice :
a.- Its risk exposure, which might be a threat to the whole financial system as the interest rate goes up.-
b.- Its flexibility to work counter cyclically, to financing the cash flow when firms needed it most, mainly those labor intensive medium size firms.
It might be the case that when condition (a) and (b) are so to speak, less than 0(high risk exposure and low flexibility to finance cash flow), Central Banks might turn out to impose unexpected efficiency loses on its effort to get inflation under control. The Chilean experience in 1998 and 2009,suggest that the Central Bank approach ,misses out the integration of key financial variables into the macro policy decision model. In both cases, the Chilean economy got a mild recession (-1,5%) following a previous steady pace of economic growth.