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 .-