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.