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 NÂș1l 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.