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.