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.