Friday, December 27, 2013

Latin America economies: Some key facts about 2013

Looking back into this “almost done” year 2013,there are some important facts to take into consideration, when it comes to evaluate Latin America economy performance: 1.- Important reforms for its scope and implications, took place in key sectors for Latin America economy . The inter American Development Bank (march 2013),has said that whether all Latin American countries carried out reforms for boosting economic growth by an average of 1,5%, , the spillover effect would allow an additional growth by 2,4% (y/y).- 2.- The boundaries of social tolerance, get narrower concerning to politicians decisions . The experience of Brazil and Argentina, have showed that no matter economic growth, society is demanding more connection with those needs they believe are urgent to fulfill.(inclusiveness ) 3.- Latin América, has become an alternative for investments in infrastructure and the energy resources sector(oil and gas).- 4.- Economic Growth. Even though the forecast were not optimistic for this year, economic growth is still following the trend.- 5.- Lower unemployment .The unemployment rate for this year is expected to be at 6,2%,and it is within the socially acceptable rates. However, there is still the perception that this outcome is not enough, which along with other symptoms ignites higher standard of insecurity. 6.-The expectations gap, get wider between those countries which believe in economic growth to solve poverty, and those who believe in the State to be more involved into the economy . 7.- The Latin America equity market decoupled, from those ones of developed markets.(the Nikkei index has been the highest with 55% economic return for this year) The explanations for this situation go from the expected normalization process of monetary policy by the Federal Reserve, up to a price correction process on some local companies.(30% in the Chilean case, source: El Mercurio ,Friday 27th).- Thus, 2013 was not that much a bad year !.Let expect 2014 to be better

Friday, December 13, 2013

Ben Bernanke and its legacy: The foundation of a new global macroeconomics

Although it is still a matter of research, as time goes by and history says its word, the financial crisis of 2018 will probably be considered a benchmark concerning the relevance of Banks regulations for risk seeking behavior, and the role of Central Banks to save the economy from the worst: a lasting painful economic depression. The Chairman of the Board at the US Central Bank, Mr Ben Bernanke( 2006-2014)and his decisions, were crucial to change the course of the recession. Those decisions will be considered at the core of policy lessons arising from this event . It is quite different to make decisions for keeping inflation within the target, and to make decisions aimed at solving a financial crisis of global scale.. The first decisions back then(2006), was to follow up the underway normalization process increasing the interest rate, which was still well below the range of 4-6% for the 2004-to 2006 period, suggested by the Taylor Rule. Thus, it was necessary to move on adjusting upward the interest rate. Higher interest rate took its toll months later, on mortgage payments and default rates, and the second part of the history began. The worst financial crisis after that one of 1929, started off in the final quarter of 2008. The Federal Reserve had to switch to a recession mode. In December 2008, the interest rate was set at the range of 0-0,25%.Thus, less than two years after being in office, there was a unprecedented change from moderating inflation, to save the financial system from collapse. Soon became self evident that Conventional Monetary policy, was not enough to solve the liquidity problem , while there was still pending a solvency issue . Too little too late was the sentiment among key analyst at that time. A new path was open to try unconventional monetary policy. This meant a monetary Policy looking beyond inflation rates, and focused on the financial system as a whole, and markets expectations, coupled with a new ability to manage both at the same time (communicational skills). So, it was done with some principles (to select carefully interventions, safety net for controlling panics reactions , keeping a minimum above zero for interest rate) ,and a variety of instruments all based on diversification which included different time span, assets types, institutions, currencies, collaterals alternatives. It was like to implement an strategy designed to attack the systemic risk, step by step dismantling its main sources to a smaller fraction of it, in such a way to improve the chances of controlling the overall situation as a preliminary condition to manage expectations .- The different markets reacted each one favorably at its own time :equity(business value), labor,(unemployment rates) goods(consumer sentiment).They all started to consolidate its initially fragile gains .Economic growth has getting better traction, inflation kept below target, and now it is near the beginning of the exit strategy from unconventional to conventional monetary policy. A new macroeconomic is in place for the global economy. The economy got out of a severe financial recession sooner than expected, and five years later it looks back with a sense of relief for what could have been worse than 1929.-

Friday, November 29, 2013

Guidance Forward policy : Central Banks new approach for Monetary policy

After the Financial crisis of 2008 rolled on , it was clear that conventional policies would not be capable to work the crisis out. Conventional monetary policy was somehow displaced ,by the fact of financial markets under stress, and the real economy with its fundamentals in a weak position (government debt, Fiscal policy restraint, low expectations for investment projects unemployment and consumption decreases).- Given that financial crisis, means weak Banks (Some analysts characterized them as “Zombies Banks”), and disconnected from real side economy requirement ,it take longer than usual for the period of recovery to take place. Besides , this time coupled with institutional flaws concerning the ability of Governments to address more efficiently its countercyclical role , made expectations more important than policies.- Therefore, Central Banks best policy instrument, is not the interest rate (actually almost at zero nominal level, and negative real level ), but how to shape these expectations concerning its next step ,and then the expected response on the real side(Employment, consumption ,and investment).- Thus, Central Banks are in an unknown territory, where learning is by doing, the chances of mistakes are high, the quality information is key, and the path of corrective decisions implementation, has not previously being proved . What signal on the real side is the more reliable : Unemployment rate?. Consumer confidence?, Real assets prices?.Actually, the policy of quantitative easing, has boosted the financial side of the economy. Does this mean that the real side indicators, are also biased because of these approach?.- In these circumstances, one thing is also for sure more decisive : the communicational skills and policy. It might be look strange, but Central Banks are currently evaluated for the effectiveness of this policy .-

Friday, November 01, 2013

Better news for the Euro Zone and the EU

Recent reports on unemployment, economic sentiment, and progress in the Spain economy, helped to improve the mood of investors. The world economic projections show that the EU is moving out of the recessionary territory, although still far away from normality. Unemployment dropped in Germany to 6,5% in October, although a more detailed analysis, reflect the impact of migration from other weaker economies. Adjusted by seasonal effect, unemployed in Germany increased to 2.97 million people. On the other side, the economic sentiment according to IFO(Institute for economic research) fell slightly from 107,7 in September , to 107.3 in October which shows some doubts concerning the pace of economic growth for the near future. However, for the European Union as a whole, the economic sentiment of investors and consumers improved by 1,1point to 101,8 points; with stronger performance in industry than services sectors. Industry has still idle capacity to recover, which support the expectations of higher production levels in months to come. In fact for the Euro Zone, it is expected to have 0,5% of economic growth new year. Germany has the growth engine for their partner in the EU zone, and consumer moods to spend more ,seem to suggest better results for those which export to that country. Spain has the first indicators of Improving its economic situation .It has been declared technically out of the economic recession, which started three years ago. Unemployment and economic growth slight advances are signals for moderate optimism looking into 2014 to get out of the recession definitively. Tradable goods (exporters) are on the lead to sustain the recovery. Layoffs rates has slowed by 25- 30000 a month, indicating that unemployment might have been reached its bottom (www.roubini.monitor). Italy has made the fiscal adjustment in terms of structural budget, and it is on track for reducing the debt to GDP ratio required under the Euro+/ Six pack accord ,(3% each year from 2015). No matter the gains made so far , these seems to be more related with the relaxing of some austerity criteria, and the seasonal effect of summer ,than to structural changes to sustain steady economic growth. Theses structural changes will take some years to come into effect, and so it will to recover the path of meaningful growth.

Wednesday, October 16, 2013

BLOG ACTION DAY Human Rights: 65 year later what has changed?

When the UN set the declaration for Human rights in 1948, recognized the failure of all institutions and Government at the time, to properly guarantee them. It was necessary to propose a contract which every country in the world, should be committed to. Besides, itself also reflected a society in need to restore basic respect for civilization. A few years before, WW II had a devastating effect on key values of civilization, which it was necessary both to rescue and restore.- As time moved into the fifties, sixties and seventies, it seemed that economic progress made its way to get a wide and strong support for human rights all over the world. As Amartya Sen has said, “rights” requires first the capabilities to use them properly. Therefore, economic progress brought better living conditions, freedom and with it better access to services , goods, social mobility and upward trend in income levels. It improved the capabilities to make rights something real. After all, ignorance is self excluding concerning some rights (voting, Information, quality).- However, economic progress was heterogeneous .Some countries got an high share of it, other were left behind ,and others came on board at the end of the cycle of industrial expansion(1991), just before starting the new wave of technological development, which has lead us to the so called knowledge society.- Thus, the lasting impact of the 1948 UN declaration, could not overcome completely the political will of dictators, authoritarian regimes , nepotism and ideology. Considering the whole time span between 1948-1991, it seems that economics did better than politics, to make sure a better conditions for Human rights protection across the world. It lifted the world out of the misery of the war, poverty and indignity all over the western world . It also gave to the citizen a stronger senses of self esteem a key capability for human right claiming . With the economy transformation from industrial , manufactured production, to technology based services structures , focused on the global scale, with environment concerns on the rise, and global terrorism threat, a second stage of human rights protection is needed, and with it , an institutional framework better fitted with this century challenges .- Let check some of the up dated human rights , following this technology based society a.- The right to global sources of knowledge available in internet, twitter, and global TV.- b.-The right to have objective information and transparency, from government , non government organizations, or private entities.- c.- The right to live in a sustainable planet .- d.- The right to more reliable social networks e.-The right to good quality goods, and public services(education ,health and safety on the streets) f.-The right to have good government policies, and better institutions for markets performance.-

Friday, October 11, 2013

Global economy growth projections

The mood among analysts looking into 2014 ,is not that much optimistic about the prospect for global growth. The IMF report (October 8th, 2013) is cautious on its projections for 2013 (2,9%), and 2014(3,9%). Besides, it warns about the implications of shifting the growth sources from emerging economies, to advanced ones.- Emerging economies, although with a strong growth performance,(4,5% for 2013 ,and 5,1% in 2014) it is expected to become weaker as the round of easing monetary policies, is about to begin its normalization. Besides , there are other structural constraints such as infrastructure, labor markets rigidities, and lack of investment , which set the boundaries for potential growth for those economies. Latin America economies look not that bad. Brazil is expected to growth flat at 2,5% rate both 2013 and 2014, well below its partners of the BRIC groups .Mexico instead , will growth 1,2% in 2013 but picking up in 2014 (3,2%) .- Statistics are one thing, economic –political analysis is another. All of those projections will probably be revisited as long as the US monetary policy start its normalization path,(assuming by the way it also solves the current stand off about debt ceiling and budget ). In other words, those projections evaluations should consider the risks surrounding any 2014 growth forecast. In fact ,IMF officials have made clear this issue, warning that global economy will face in 2014 a transition period to both different financial conditions and different sources of growth. Other analysts, (, have warned about the Euro Zone chances of keeping on its current recovery mode without solving key issues .- Thus, what is left out of those projections?. The global economy ,is still on its way out of the worst recession so far in this century. It will go on to match its long term growth potential, as long as policy makers deal properly with the requirements associated with it: keeping the pace of reforms, both in the euro zone and emerging economies.

Friday, September 27, 2013

Emerging markets on the path to a new crisis?

As some key analysts had announced , the Fed postponed any change in its QE program at least up to December, while the USA economy get traction to a more robust pace of recovery , with the unemployment performance closer to a sustainable level .- This decisions meant relief for anxious markets operators, who worry about the consequences of such a change in US monetary policy. Some questions arise about the ability of Emerging economies to get over with it.- A recent article by Satyajit Das (, September 25th), suggest that although some of the critical vulnerabilities for facing external shocks(fixed exchange rates, low foreign exchange reserves , and foreign currency debt ), have been addressed , the fundamentals of Emerging economies do not look strong enough to endure the impact of the expected change in monetary policy stand, on emerging economies (higher interest rate , capital outflow , currency depreciation and foreign reserves loses ),taking into consideration that the IMF is still focused in the EZ own crisis .All recent data (growth performance, Debt level, Current account balances, foreign reserves levels),support the hypothesis of a fragile situation for these economies. However, this weaker stand for emerging economies, also deals with unsolved structural constraints, lasting two stages of economic growth periods, so far : (2000-2008) with China as the growth engine, and (2008-2012), with massive credit availability as the driven force of growth. As a result of this reforms lag, the so called BRIC countries which looked as a new source of global power, is getting closer to be part of those economies which will face troubles arising with the next round of policies for the global recovery.-

Friday, September 13, 2013

FED Monetary policy : Exit strategy and its impact on Latin America economies

It is well known that Monetary Policy makers are evaluating about the timing of Normalization. It is also well known that financial markets have started to anticipate such a policy step . What it is unknown, is the path Emerging markets and Latin America economies, will follow after this adjustment is in place and its impact rolls on across global economy. Let remember that for these economies, the Fed normalization means on the one side capital outflows , currency depreciation and higher interest rates, but on the other side, it also mean a better balanced US economy growth. Thus , the expected impact goes on depending upon the proportion these economies exposures are connected with the former or the later variable.- On September 6th , the Roubini Monitor report ( , proposed the Fed Normalization indicator, which is a useful tool to get a better understanding of what come next, concerning emerging markets performance after the FED normalization start. The indicator is done on the basis of two categories : Vulnerability to high external borrowing cost, and Exposure to Improved US Growth via trade channel . The outcome of the analysis is quite interesting for Latin America economies. Leaving aside Mexico and Colombia considered to be positive outliers,(high trade links ,and low exposure to higher interest rate), It shows that the less vulnerable Latin America economy to expected Fed normalization is Peru. Next, it comes out Chile and Brazil , both in a similar position for vulnerability for external borrowing cost , but with different trade links: Chile with more trade exposure than Brazil to US Growth.- Fiscal policy performance is not included in this indicator, because it is based on linkages variables(interest rate and trade) among economies at a global scale. However, from the domestic stand point , it also play a role to evaluate the net impact on the economies as a whole. A fiscal policy focused on growth , help significantly to what monetary policy has to do when it comes to confront capital outflows. The expected currency depreciation, mean a challenge hard to solve for monetary policy alone. How to cope with the expected interest rate increases , and its contractive impact on domestic economy ?. A countercyclical fiscal policy approach, can mitigate this impact. Whether Interest rate goes up, and currency depreciation take place, a countercyclical fiscal policy can compensate the contractive effect on domestic private expenditures ,by spending past accumulated saving, reducing output losses .This alternative is even more relevant if exporters have a high propensity to save .Therefore the net impact of FED normalization on Latin America economies , will depend as much their exposure to external as internal unbalances, and how both it constraints its ability to react.-

Friday, August 30, 2013

Natural talents and economics: Dreams make the difference

Economics is a science which quite different to others, such as Physics and Chemistry, do need people to make its case. Economics deals with the improvement of welfare level of a community ,counting on every one´s talent and abilities , more so whether we consider that such improvement, has to be achieved with scarce resources . Thus, people abilities and talents ,compensate for others resources scarcity . The new approaches of economic development and growth, stress the role of endogenous factors such innovation, creativity and all of those forces linked to motivation, compromise, character and attitude. This means that economics do not rule out, and cannot rule out, the contribution of anybody. It widen the boundaries of the production frontiers The only resources which is supposedly available with no restriction whatsoever, are the individual talents. Julian Simon(1932-1998), believed that population growth was a source of those talents . The innovations flows, come from individual minds, the quality of education, the family values and the external factors , which set up the conditions for creativity and inspiration . Without this flows, it would not be possible to solve the scarcity constraint. Malthus propositions , (over population growth and food supply restriction), were overcome because of these factors , just like the current global warming threat , is going to be solved because of individuals abilities to overcome challenges , when they are pushed at its most. Talented people make the difference in economics, to make it more humane, and closer to everyone needs and expectations. Economics need the individual talents .as its main source to boost the engines of wealth creation. Going deeper into the argument, dreams also count. Dreamers made capitalism the driven force of the past two centuries , to create wealth as it has never seen before in the history of mankind .Furthermore, the collapse of the state, was more the triumph of individuals and their character, than just the expected failure of a wrong policy .- So, It is in each person the seed for something better, even beyond what can be imagined, for the society as a whole. The outcome of this interaction between economics and individual talents, is to have a path for a better society without depending of Government policies , but on individual willingness to be in charge of their destiny.

Friday, August 16, 2013

Economics policy coordination: Looking for higher policy effectiveness

The financial crisis which started five years ago (2008), has challenged the main stream of macroeconomic policy and new paradigm are on the rise. In such a cases, it was used to think that each policy,(monetary or fiscal policies) properly focused on its target , would get the economy back on track. However recent experience has shown that it is not enough to implement economic policies. When it comes to implement such a policies, It has become more relevant to take into account the timing, coordination with other policies, spillover effects, expectations changes, complementary reforms, all at once!.- In its august 1st report , the IMF urges concerted policy action to reduce risk to global growth ( In fact ,concerted policy action to avert the risk facing global economy are estimated to have saved 2-5 % of global output, and if world ´s largest economies(“systemic 5”),could improve policy coordination, they would lift global GDP over the long run by as much as 3%., The larger volume of trade and financial linkages in the global economy, makes spillover effects more evident for implementing policies. Besides ,the current situation which has been characterized as “unstable disequilibrium” ( , requires more than just policies: It requires to go beyond the mechanics text book cases, it requires more inclusive approaches . Let takes the case of the quantitative easing (QE) applied so far. The evidence (IMF report mentioned above), finds clear evidence of positive growth spillover, but it also make clear the risk attached to the exit of such a policy : Too soon would impact growth negatively , but too late would induce asset bubbles and imbalances .In Europe, concerning the design of structural policies ,the chances are for more integration or fragmentation. Thus, there are also dilemmas attached to policy options, which demands for complementary reforms whether these policies are really to become effective .- What are the implication for global economy?. a.- In the short run, policies coordination matter. b.- In the long run, structural reforms improve the effectiveness of policy coordination(Besides, It boost stronger positive spillover effects).- c.- Macroeconomic policies isolated are not enough for effectiveness purposes. d.- The spillover effects, are important constraint for the design of economic policies. e.- Game theory has something to say about policy design(

Friday, August 02, 2013

The Pope Francis and the Economy

In his first visit to Latin America, The Pope Francis, who lead the 26th World Youth festival held in Brazil, gave an homework to economists : To pursue a Human economy. It was coincidentally in Brazil a decade ago, at the First World Social Forum , the effort to build up a Human Economy began. What about it? : It deals with questioning the supremacy of free markets and command models which do not consider citizens concerns ,but only statistical parameters to draw its conclusions and policy prescriptions . The risks of this “statistical approach” ,is to give a superior stand to the outcome of these models, even above citizens needs and values, to solve critical dilemmas concerning for example socials demands or cultural preferences .Reaching such a stage means somehow that the economy lose its sight .It make people´s needs to fit economic models and policies , instead the other way around : economy policies and models to fit people demands and expectations. Markets as an impersonal tools to solve the allocation of resources problem, substitute the value of human judgment to set economy priorities. Markets solve the allocation problem based only on economic considerations. Thus, key variables of human well being ,such culture , arts, literature, sports becomes commodities with prices which make them available only to those who can afford to pay for it, therefore excluding the meaning of for example a cultural policy . It becomes self evident that what The Pope Francis request set a pressing demand for such transformation to be applied for current social and economic problems, whose scope I may suspect ,goes beyond Latin America economic policies . On the other side of the issue ,Economics is a Social science which does not have the chance to work alternatives economic policies out ,based on laboratories conditions to prove what it does works or does not . Both Mathematics and statistic ,becomes useful tools to help economics modeling to represent reality in more simplified way , but in the process it get closer to miss about the essential ,if not in some cases to forget at all: Economics is a Science like other ones, to serve the well being of mankind. It follows that the outcome of such a models ,cannot substitute human judgment.- Therefore, to rely heavily on models which do not represent but a fraction of relevant variables, with the remaining ones left outside as error terms, is a risky situation as the 2008 global financial crisis has made clear. Those who were able to predict properly such a crisis, did not based their analysis but in their own judgment.- Is Human economy necessarily self excluding with both the main stream of microeconomic framework or normative macroeconomics?. Are free markets policies, contradictory with Human Economy?.I guess that it all comes down to better institutions and policies .This means to go beyond the simplistic representation of models , to stand up above it with ethic leadership . When Adam Smith (Moral Philosopher)supposed the presence of an “Invisible hand”, to solve allocation of resources , probably did not exclude faith, trust , the value of promises and hard work, honesty and honor to do business .Human values which in modern societies , laws transformed some of them in institutions. Thus ,Pope Francis is not asking for something unusual for economics , but just to go back to its roots and not missing its focus .-

Friday, July 19, 2013

Latin America and the new stage of global economy recovery

It seems that a new round of adjustment is under way in the global economy. Concerning the emerging economies it considers Lower commodity prices , capital outflow , and lower economy growth rates in the BRIC country group (4,3% on average, down from 5% for 2013)as the more relevant variables of what such a new stage look like. Besides, advanced economies have different growth paths. While the USA economy keep moving forward, with 1,8% expected GDP growth for 2013, and 2,4% GDP growth for 2014( ,the EU economy is still deep into the recessionary territory, (-0,6% for 2013,IMF )while Japan is pushing hard with its three arrow strategy for improving its growth prospect (2% in 2013,IMF). An Interesting feature in this stage, is that among the top ten higher economy growth for 2013, seven economies are from Latin America. It follows ,that this continent is doing what just a few expected it would be possible: Making the role of the main engine for global growth. Having said that some questions arises also: ¿Did Latin America took advantage of the first stage ?,¿ Is it over the chance of getting healthy economy growth rates with lower commodity prices?. a.- Fist the first. Latin America and the missed opportunity hypothesis. There is evidence which suggest that such hypothesis do not fully apply to the case. In its May 20th report, the IMF ´s global economy forum have an article (Adler y Maqud “ Saving Latin America´s unprecedented income windfall), which shows that the recent term of trade shocks (2000), while important has not been more so than the one of the seventies (1970).What it is different this time , deals with the use of those resources: More investment in capital equipment , less investment in foreign financial asset as saving for changing conditions in the economic cycle, and more consumption (Chile, Brazil). In the Chilean economy case, to keep the pace of the current public expenditures level with lower copper prices than current ones, would have mean an VAT of 23% instead of the actual 19%. On this regard, Brazilian economy has been on the critical watch because of its higher consumption bias following this windfall income effects, but it is important to keep in mind that Brazil has additional sources of incomes other than just commodity prices. For example new sources of oil supply in the Atlantic ocean and its expected higher revenues. Thus, it looks that overall there has been stronger preference for improving potential output and future higher rates of economic growth, instead of a passive approach of wait and see.- b.- Is it over the chance of moving through with lower commodity prices?.Latin America´s growth over the past decade has been driven by Physical capital and labor. Productivity has increased although below other fast growth regions. In the years 2010-2013 labor and capital accumulation contribute 3¾ percentage points to Latin America annual GDP growth, while total productivity Factor contribute by ¾ percentage points, therefore the chances of sustainable GDP growth goes along with higher productivity, (Werner, A , after a golden decade, Can Latin America keep its luster?)May 6th 2013 IMF direct),fiscal saving and structural reforms to improve competitiveness. All of which is not out of the policy makers priorities , at least in those economies which so far have the lead.

Friday, July 05, 2013

Foreign direct investment: Its impact in the Chilean economy

Foreign Direct Investment has been an important source for economic growth in Latin America and other countries in the world. Whether it is in services, banking, mining, information technologies, manufacturing, retail or transportation, FDI have important advantages such as the access to new technologies, new management models, “know how” for productive process , and a better approach to R&D in private firms. Some Latin America countries, have made huge progress in the competitiveness index, because of foreign investment in new technologies (Costa Rica),or financial services (Chile).- The implications of FDI are wide and relevant. A recent research done by the Chilean Ministry of Economy concerning the impact of FDI in the economy ,got interesting results: a.- Firms with foreign investor participation ,pay wages 130% higher than their national counterparts.- b.- 15% of higher employment rate between 2009-2011 , was because of FDI incoming flows c.- 18% of GDP increases and 30% of investment (2009-2011),was because of FDI flows into the Chilean economy ( due to the global financial recession, the Chilean economy GDP growth was -1% in 2009, and 3,6% on average in that period).- So , It is in the best interest of domestic economies to support policies and the institutional framework aimed at keeping the incentive to invest in Emerging economies . FDI is link to more and better business opportunities, higher employment and welfare increases.- The expectations in Chile is for further FDI flows in the near future. The average GDP growth expectation of 4,5-5% for the next years ,imply a strong incentives for investment opportunities in energy (the environment protection requirements should definitively be clarified soon) , infrastructure, private health, and banking sector. In Latin America, there also good opportunities in those economies whose GDP expectation is on the rise, such as those ones working out the transpacific partnership agreement .

Friday, June 21, 2013

Water week in Latin America: An opportunity for better water management

There are many agricultural zones in Latin America, which currently faces water scarcity . At the same time, water demand is increasing because of mining and energy sectors investments, and human consumption. The implications goes beyond supply and demand. Actually Mining investment in particular, have to be based on desalination process of sea water to cope with its water demand which compete with other needs. This change of water sources from natural to sea water, has increased mining production costs. Those agricultural product highly water intensive, cannot be produced in areas with water scarcity. Thus, Tomatoes (3237m3/acre),and Onions (2670m3 /acre) production ,requires a lot of more water, than lettuce (1668m3/acre), and carrot (1214 m3/acre). The expected prices of tomatoes and onions may be higher than anyone can anticipate. On the supply side, there is also a lack of management model of water. In Chile for example, 80% of water available fade away into the sea. Therefore, a better water management model is required. There are already some alternatives available, such as WEAP (Water evaluation and planning),SAWP (State wide agricultural production), and a combination of both the so called EconWEAP implemented in California, USA. These models are related with the improvement of decision making process, concerning the use of water in agricultural activities . The EconWEAP approach for example , provide water supply simulation to cope with water demand preferences in each area, taking into account any specific year and its characteristics, to build up a model for optimization and maximization of profits, taking into account social cost.- Last March, the First Water Week in Latin America ,was organized in Santiago ,Chile. 40 countries, 500 attendants and 40 speakers, represent a strong commitment to discuss the issue of water scarcity , trends and opportunities. The preparations already started for the next event to take place in México in 2014.- But is it this problem just a matter of Firms and Governments? .What about the consumers behavior ?.It is obvious that consumers must change the current consumption pattern. In Chile, there is no water scarcity, but a mismanagement of it. The south is plenty of water, while the north is fighting the draught and its consequences. Some have suggested the fantastic idea of a water highway,(water pipe line) which means to transport water from south to north. But other countries and areas do not have such a chance, but to face a critical problem and to solve it. So, Governments need to set new policies about water. But , Consumers are a very important part of the equation. Each one of us, consume daily at least 100 hundred liters of waters (showers, Washing hands, drinking. laundry and so forth). But also we waste a lot of water (Car washing,garden maintenance and the like).- Wiser use of water is not a matter of just better Institutions or Government policies, or business practices and Social responsibility criteria .It is also a matter of improving awareness about the importance of protecting water.Otherwise, the price we will have to pay for water consumption , will rise far above what we usually pay.

Friday, June 07, 2013

Chilean economy Model : Between skepticism and doubts(II)

In the last thirty years the State in Chile ,has changed its profile to become a complement with the private sector. It has done a magnificent job working to widening domestic market , throughout Free trade agreements (more than 60, with equivalent number of countries). It has improved the availability of public infrastructure, throughout private sector participation to build up high ways, hospitals. and other public infrastructure facilities. But it does not have yet a new identity, such as to make it the reference of last resort so to speak, for private sector and the economy as a whole. This lack of identity have some implications. Let take some few examples: a.- In the public health sector, the State do not pay its suppliers promptly. It delays payment by 120-140 days. So, the private sector do not have a clear policy of paying its suppliers promptly either .In fact it also takes more than 4 months b.- Concerning the labor relations issues. Public employees, do not have the right to negotiate or access to ruled negotiations(arbitration included), and wages are not linked to performance. Civil servants are not considered to be relevant in the achievement of competitiveness. So, the private sector, do not use negotiations the way it should ,and do not consider labor unions as strategic partners. The Chilean economy as a whole in this case lose competitive edge. c.- The quality standard for all of the State´s services do not match expectations. The consumer protection laws, are far from being effective when it comes to deal with the services the State provides. For instance, in public health hospital, people in needs, must wait for 12 hours in the emergency room before getting a bed for treatment. On the other side ,the reform for the judiciary system in the year 2003,asked for more than 1200 public attorney, but no more than (roughly)700 were finally approved.. d.- Thus, the state do not have a Social Responsibility Code to sustain its actions. So, it is not a reference for wider Social responsibility codes on the private sector.- How did this adjustment lag happened?: It seems that there is a lack of understanding about the complexities of economic development within the framework of globalization and glocalization, the wider scope and impact of the social networks , and how it influences the State role ,the community involvement, the relevance of strong local government and better focused social policies. Within the globalization framework, the State is a service provider and as such, it is a competitiveness factor. What about the “new identity” of the State?.In the XX century the State was considered as the brain for social development, citizenships and nationality. It was the driven forces for better democracies, education and self esteem. However, these days those paradigms, are no longer self reinforced. Thus ,the issue is not for more State, but for better State. Besides, this does not mean a weaker State.- Actually the world is connected throughout trade networks of goods and financial capital flows. Cultural diversity creates new links for citizenships, other than conventional and national values. Social networks also support new ways of engagement between people, and their authorities. Democracy works more in real time, (not every four or five years), and demands need to be solved quicker than before. So, trade networks, cultural diversity, and social networks create global citizenships. Therefore, the new identity of the Sate arise from the fact that it is not longer the brain of society, and it depends upon a better connection with the people needs than before. The Community needs a friendlier State, capable of being both the articulator and the coordinator between markets and firms, between growth and development. People want the State to be a good service provider, a guarantee for the rule of law and local institutions, a competitiveness factor, and a facilitator not an obstacle for people achievements. The Chilean model might not be at its final hour yet, as long as it still has space for improvements. That it is the pending task for the coming years.

Friday, May 24, 2013

Chilean economy Model : Between skepticism and doubts (I)

The model of market based policy applied in Chile (1980-2013),has been an engine for economic growth and prosperity. A key feature, was the state as complementary not a substitute of the private sector. Because of higher economic growth(an average of 5,0% between 1990-2009,and percapita gdp growth from USD6455(1981) to USD14331(2009) , tax revenues increased so, It financed higher social expenditures (Wagner law). Poverty decreased from 37% in 1990 to 14% in 2010, Half of this reduction (45%), came about because of economic growth. Health conditions improved (life expectancy, nutrition levels, child diseases coverage), and education became massive.(more than 1,1 million student are within the college educational system). There is ongoing discussion about inequality .But there are also different approaches concerning what it is within lower income bracket (whether it includes or not government bonus, subsidies , other social programs).Based on this different methodologies, Gini Coefficient in Chile, is actually between 47 -52, even though Fiscal Policy has been focused more on growth, than distribution. No matter the positive outcomes of this model , does not means that it is perfect. It must be up dated. It needs some fine tuning to be capable of matching expectations, which by its own dynamics has ignited, otherwise it will fail to cope with them. These days, there is a sense of a widening gap between what it is needed, and what people get from this model. Because of that gap anxiety and social stress are on the rise. Therefore, the questions is what to do: is it enough with some adjustment, and what are these ones?, or is it enough with the model, and it is the time to get rid of it? . The answer do not necessarily goes on the “all or nothing” solution .There is room for middle ground approaches. What are this middle ground solution ?.Let review some issues a.- The institutional setting for markets allocation of resources, must fit with the consumer rights as the driven force of market outcomes (innovation ,quality, value, post sale services). Given that the Chilean economy is an oligopoly, it is important to prevent its rents are not to be paid by consumers. Recently, has been implemented a wider scope for the law aimed to protect consumers, taking into account financial transactions. (Credit cards, Commercial cards charges consumer loans, mortgages charges).- b.- Consumer protection goes beyond goods. It also includes education, health, and services(safety, transportation, Communication, energy) .Some few examples :Education as a whole ,do not match quality expectations yet. So, the students think that in such a case, it is better to have education for free. Health programs, must still deal with inefficiency and low productivity.(In the last two years, public hospitals productivity have been 45% lower ).Besides, the State seem to underestimate the social demand for safety in the streets and at homes. (There are more private pay guards, than police man).Public transportation, do not match quality standard either. c.- It is needed to reduce centralization. The Chilean capital (Santiago) has a 44% share in the GDP, while the next two most important regions combined , do not have more than 8% share. Thus , the demand and uses of resources both private and public, concentrate , despite regional demands specially in infrastructure and services d.- Political reforms are also relevant to improve the outcome of the model. The broader the political representation, the better the political model will fit with community needs and expectations. Otherwise, the current duopoly working like an iron circle to collect the rents any duopoly provides to its beneficiaries , make them more disconnected with those they suppose are called to serve.- So, the oligopolistic nature of the model, requires to move forward to a more complex stage of development. What about the Sate and its role in this more complex model ? In the last thirty years, the State has been a complement with the private sector. It has done a good job working for Free trade agreements. It has improved the availability of public infrastructure throughout private sector participation . But it does not have yet a new image on its own to be like the reference of last resort so to speak, for private sector.The state role changed to a different status,the one which is the guarantee of the model.But is it?

Friday, May 10, 2013

Institutional setting for growth. What matters more than policies

It is usual to think on economic policies as the isolated instrument for economic growth, such that the impact of policies becomes a matter of evaluating its proper design and timing . Thus, there are good or bad policies according they get the outcomes they were designed for. However, these outcomes might be far away from what it was intended. A good example is the questioning of monetary policy applied by the Federal Reserve between 2001-2004 in the USA, and its implication for the beginning of the housing bubble and the crash of 2008. It is clear that although there was a mix of factors for that bubble to take place, the conclusion has been that it started out because monetary policy was too soft for too long. The surrounding conditions which influence policies effectiveness are left out. Let mentions some of those relevant surrounding conditions for other policies, for example : redistribution policies without quality standard for services, environment policies without institutions and leadership, financial policies without proper regulation and transparency, and state involvement in the economy without efficiency criteria, make a short list of cases which deals with those variables outside of policy makers chance to reach, but decisive for its final outcome. What do all of these means?. Policy effectiveness goes beyond its design .It is also connected with the conditions and characteristics of the setting upon which they are implemented. Out of date laws. weak institutions, short run minded politicians, special interest influence, inefficient state intervention, regulations flaws add all that up to a different real setting hard to assimilate into economic models . As a matter of fact, the financial crisis of 2008, was not anticipated by any of these models because its lack of consistency with the real setting. Thus, a lesson from the financial crisis of 2008, is that the meaning of timing should be far more inclusive than what usually is.- An alternative line of reasoning goes on a different approach. Let say, to focus on the necessary conditions for better effectiveness of policies, leaving aside the design issue, but focusing on the strengthening of timing conditions. Since the beginning of the nineties, Latin America has done huge progress on this regard: Better institutions, (autonomous Central banks) broader consensus,(integration to the world with social inclusiveness) pragmatism based reforms,(financial sector improvement qualifications), have increased the investment profile of some countries, as long as it all fit with the necessary conditions for more effective policies. Sure, we do not need to wait and see for the same wall to fall twice. As a result, it has created a positive expectations to reinforce the virtuous circle of investment and growth. It would be desirable a more homogeneous standing of all Latin America countries on the timing issue, to take advantage of current opportunities, because the actual lag will might become persistent and sooner or later, it will make clear the difference between those countries which were wise enough to move toward the path of prosperity, while others chose to be left behind with not many chances of catching up those on the lead.

Friday, April 26, 2013

Copper price trend: Some clouds in the landscape

Copper prices have moved steadily in upward direction in the last 11 years, from U$$/lb 0,60 in the year 2002 to U$$/lb3,15 on April 24th this year. Thus , it has increased by five times since then, and the question now is whether this trend has come to an end. The answer to this question requires to know the variables which push its prices up. A short list about it includes: a.-. Strong demand from China which count for 40% of global refined cooper demand. For instance, in 2012, world usage of refined copper grew by around 3,1% as compared with 2011,mainly due to China demand.- b.- Lack of supply capacity at the beginning of this cycle (2002),compared with copper demand increases, and its slow pace of adjustment upward due to higher production cost. c.- New and different uses of copper. The average car contains 1.5 kilometers (0.9 mile) of copper wire, and the total amount of copper ranges from 20 kilograms (44 pounds) in small cars to 45 kilograms (99 pounds) in luxury and hybrid vehicles.( d.- Dollar depreciation since its peak in 2002.Between 2002-2008 the (inflation adjusted)trade -weighted dollar exchange rate depreciated by 25%(18% against the yuan), at a pace of 3-4% annually. Following a short appreciation period (2008) ,the dollar began to depreciate again between 2009-2012 and fell by 16% through mid 2011(CRS Reports for Congress, ).Despite some forces on the contrary, the dollar value trend,is closer to further depreciation. Of all of these variables, (a) and (d) influence short run and mid term(2014) movements in copper prices. Looking ahead into 2014, because of local government debt adjustment, China is more likely to decrease the pace of its expected economic growth. Some analysts believe China economic growth might decrease to 6,5% next year (, April 22nd) . Without, compensating demand increases from other markets , copper price might move downward the current level. On the other side , Copper Supply grew in 2012 in most of the global producers,(global supply capacity grew from 80% in 2011, to 82% in 2012). Thus, there is already in place a higher copper supply capacity which will push inventories upward ,as demand turn out to be weaker than expected. Therefore, there are strong reasons to believe that Copper Prices might fall down next year further its current level. Is this situation the end of high copper price cycle ?. The cycle has transitory(adjustment in demand) and permanent(innovation flows, substitution alternatives) sources of volatility. In the copper case it has relatively lower transitory persistence partly due to the impact of the short lived shocks on it. Therefore what matter for the cycle fluctuations are the permanent sources.( Energy economics 30 pg606-620).Thus, current copper price changes, seems to be part of normal volatility, with prices adjusting toward new lower levels,but still within the cycle at least for now( more cautious approach is needed to be applied beyond 2014.

Friday, April 12, 2013

The Iron Lady: A woman of her time

Former prime Minister Margaret Thatcher legacy (1979-1990),will be hard to forget as times goes by. Although she did not focus too much her attention about Latin America, but after she decided an unnecessary war with Argentina(1982), with it, she sealed her vision about the British role for years to come. Quite remarkable is that she probably did not expected to get that outcome in that way. How come? a.- The seventies were rough time for Great Britain. The old fashion socialism of Former Prime Minister Harold Wilson(1964-1970,1974-1976) ,led the country to a self diminish path which required strong leadership to turn things around. Those were years of ideology, and as Guy Sorman has said “ideology get to more ideology ”, which what Ms Thatcher message was about. To confront the threat on freedom arising from an increasingly invasive State , the answer was stronger markets. The weaker the ability the markets to solve the allocation of resources and the improvement of the welfare community, the stronger becomes the state which take its place. For this purpose she had Strong allies, like Ronald Reagan President of the USA(1981-1989)and clear mind inspirer like M Novak. Deregulation, more flexible labor markets , privatization and competition were the key to what became a counter Keynesian revolution. b.- Free markets policies in Europe in the mid seventies , looked like very unorthodox approach for improving welfare levels. Europe created the welfare state, based on high taxes , fiscal expenditures ,subsidies, regulations and generous programs for public health. Those were the years of Olaf Palme, Willy Brandt , Aldo Moro ,Francois Mitterand. In such scenario, to try the alternative path it was like moving backward the history clock . However the unexpected happened, and It was even claimed early in the nineties that the end of history had been reached .Free markets policies seemed to settle down as “the “ alternative .- Did it all worked out the way it supposed to ?. The outcome is not that much negative. Since 1990 UK economic growth was higher that its European partner, and unemployment is currently lower than the average rate for the EU(12%) .Besides, in the years 2000, Germany made reforms to reduce the distortion of the welfare state, to improve the incentives to look for jobs . The winds of prosperity has arrived to new places throughout globalization , which is the direct result of private sector expansionary strategies. Latino America did not stay either away from the wave of reforms. Following its external debt lost decade (1980-1990), deep reforms were made according to the new policy framework: The private sector instead of the State as the engine for growth. The outcome so far, does seem to fit the minimum higher growth, less unemployment and poverty, unthinkable achievements in the beginning of the nineties. Latin America economies look forward to what come next, instead of feeling sorry for what it did in the past. Does all this means that free market policy and Reagan- Thatcher legacy, has definitely become the new paradigm, like they dreamed ?.Not necessarily so. The Financial crisis of 2008 indicates that deregulation is that much dangerous as it is regulation, specially in the extreme sides. There is a middle ground between them, which is the challenge of policy makers to find out. Furthermore, markets energy need an institutional framework to get its way through for welfare improvement , otherwise it can be very close to become self destructive.

Thursday, March 28, 2013

Latin America Transpacific partnership: The road to prosperity

It has been long settled that free trade is necessary for growth, as a condition for improving the welfare of any society . These days , it seems to arise new calls for protectionism. The so called “currency war” looks like the first step, before going further on with restriction on trade to compensate any loses of competitiveness arising from exchange rate variations. Latin America learnt also long ago that inward looking kind of growth, leads the economy to dependency and inequality . Since the latest reforms applied in the nineties, and those one later on, trade has been quite relevant for Latin American economies. Between 2009-2011, total trade (exports + imports) grew by 54% . However, intraregional trade is somewhat behind the trend. Between 2011-2010 the intraregional trade share was barely 19,8%, with Mexico and Chile as the countries with the higher share among all Latin American economies, with 30,1% and 26,6% respectively. It follows that there is space for additional intraregional trade and investment growth. The Trans- pacific partnership comes out to reinforced the trend focused in what it is considered the trade theater of this century : the pacific ocean. Since 2010, there has been negotiations to shape a high standard agreement to deal with the complex issues of trade (such as property rights ), within the new global scenario which has lifted up the status of Latin America ,to become a global partner for trade and investment. Originally stated in 2005 by a few countries, aimed at liberalizing trade within the Asia- Pacific region, is currently moving to deeper commitments. Just a few days ago Mexico, Chile Colombia (in process to become a TPP member)and Peru, set a framework to liberalize 90% of their trade flows. The significance of improving intraregional trade flows ,goes even beyond its shot run impact on export and import volumes . Because the higher mobility, it also support better allocation of resources within intraregional areas, such that it increases specialization, innovation , infrastructure investment all of which create competitive edge and endogenous sources of growth .

Thursday, March 14, 2013

Lessons from Venezuela experience: between the ideology and pragmatism

History deals with facts , but not that much about the variables which surround those facts . Almost at the closing time of the XX century , in 1999 a strong mix of religiosity , patriotism, wrapped by both ideology and populism, took the Government of Venezuela. All at once in one man at his charge .The explanations of such outcome are lengthy .It involves the main stream of a nation. No matter this considerations, there is a single question of practical implications worth to be asked: Is there any lesson to be learn from such a combination to become the driving force for 14 years in that country?. Let get into that complex issue, focusing only in the political economic side of the story. a.- The Greek roots of democracy, are in the weakest within society, who validated it as a political model to solve problems arising from scarcity. Therefore, democracy becomes weaker and vulnerable, when it does not match the expectation of its people, but it does only that one of politicians, and those who are in the position of getting the rents arising from their privileges. Poverty and inequality living side by side with corruption, create a moral dilemma, hard to solve by market forces alone, whether politicians do not care about it. b.- The State replace the private sector, but at a cost : Any welfare gains have the risk of being transitory and unsustainable. The State does fit better with the combination distribution-taxes, instead of growth-incentives. Therefore, the sources of sustainable growth disappear. Thus, Ideology becomes the driving force to solve what otherwise it might be so by rules, good policies ,smart politicians and consensus. c.- The fundamentals of any economy are not beyond its own boundaries, unless it expands with more investment, innovation, technologies, and better human capital . Even in the case of natural resource rich countries , any attempt to surpasses those fixed boundaries , sooner or later will exacerbate inflation, fiscal deficit, speculation on secondary markets .Without corrections, it might all end at the same stage it began (corruption , poverty and inequality). d.- Ideology do not serve the cause of prosperity and growth as much well as Pragmatism does. Ideology by its own excluding nature ,make democracy even weaker, breaking down the self sustained balance of power. Any economic-political implication from the above? :There are some which it is interesting to be aware of: a.- The pending challenges for Latin America in a globalized world, is a matter of a new generation of pragmatic politicians, focused on people expectations and needs, but also friendly enough with the requirement for growth . b.- The State do not need to excludes the private sector to get its social goals. Distribution and growth are not necessarily self excluding, as long as there is a proper balance to keep incentives working.

Thursday, February 28, 2013

The sources of growth: Latin America and its growth expectations (II)

For the purpose of economic growth explanation, the state of mind issue is considered a cultural variable. It is based on Motivations dealing with needs, values and expectations. Within economics development literature, there is a school of thoughts, which concern with this factors as the source of growth. According to the so called Cultural thesis, there are industrial values which are key to unlocking the economic potential of poor countries. These values includes hard work, responsibility, punctuality, and achievement .Most adherents to this view, believe that these values can be inculcated through a deliberated effort, let say education and improvement of human capital endowments. (Excerpted from Development and Underdevelopment: The political economy of global inequality, 4th edition. Seligson, M and Passé –Smith ,J.2008). Thus, the success of Asian countries in the last decades of the XX century, has led some to believe that there are cultural values found there; which boosted Asian economies growth and which jas been labeled as the “Confucian ethic”, a variant of the notion of “Protestant Ethic”, and its relevance for the success of immigrants in the USA, and the post WW II experience in Europe . Following this approach, in the Latin America case, it should be important to clearly identify the “Catholic ethic” and its impact on the incentives for economic growth, quite below expectations for a long time. The same would apply in other regions struggling for economic progress.However,this would wrongly suggest that these later regions, have in its cultural values a constraint. The first implication of overemphasizing this variables, might be to hide the negative incidence of other ones, like the impact of the State and weak Institutions,short run minded politicians,corruptions and the like . But,in Latin America,(XV century) quite the opposite to the USA , two hundred years later (the XVII century), the State was not defined to support individual achievement and entrepreneurship. Instead, it was conceived as an instrument to collect taxes and manage rents, not much different as others cultures did before. Therefore, the complementary nature of those cultural variables with institutions,and good public virtues, did not worked properly in Latin America, at the time of the Birth of Plenty (1820). It was only in the last decades of the XX century, coupled with efforts to modernize the State, when this cultural values have become more relevant in its complementary nature from the economic pint of view. Now, is the time when the state of mind matter most, as long as there is a wider space for individuals to seek for achievements, whatever its inspirations,as long as Latin America has engaged itself in pursuing a better and moder State. However, a second implication,(perhaps a key one) deal with the “Catholic ethic”, and the timing for the “Birth of plenty” in Latin America. My hipothesis is that Latin America is whithin the timing for plenty( by the way this timing might be fifteen years or so), but Does the Catholic ethic add up to this current timing?.I guess the answer goes beyond economists.

Thursday, February 14, 2013

The sources of growth: Latin America and its economic growth expectations (I)

Within my summer reading list I included this time a book: “The birth of Plenty : How the prosperity of the western modern world was created “ by William Bernstein(2004). Although, I am far from finish the reading, it is quite clear the central argument about the forces which ignites economic growth in western world specially since 1820 up to the XX century. These are :: a.- Property rights b.- Scientific rationalism c.- Capital markets d.- Transportation and communication facilities Some either might agree or disagree with them, but they get right into the core of the capital accumulation process, key ingredient of economic growth: It all comes down to the institutional setting. Other authors, have also stressed key variables to understand economic growth. But “The Birth of plenty”, place them all that out as boosting forces at a specific period of time (1820), which became like an inflection point in terms of a new trend for improving standard of living of mankind. The book focus the attention on “when”, rather than “how”. ¿Why did world economic growth and the technologies progress underlying it, suddenly exploded when it did?. (Preface ,page VIII). Challenging and interesting question. Following that approach ,economic growth is also a matter of timing, and we might be wondering whether Latin America is currently in the “right timing” for higher expectations concerning steady trend of economic growth, sustainable development and its implications. Sure, we move into trouble waters. The phrase “birth of plenty”, suggest something beyond usual economic, sociological or whatever variables a researcher can identify dealing with the explanation of economic growth forces. It is. The “ State of mind” concept (Harrison,Robinson), which deals with emotions, desires, beliefs, thoughts, perceptions, and intentions leading people to cope with higher goals.Thus, What does influence that State of Mind? .

Friday, February 01, 2013

Latin America-European Union Summit: 2013

From January 26th -27th, 60 Chiefs of States and Prime Ministers met in Santiago, Chile, to discuss the future of cooperation and integration between Latin America and European Union. The main purposes is to make it deeper and specially aimed to seek an strategic alliance for sustainable development. Previously it was held in Madrid (2010), Lima (2008),Wien (2006), Guadalajara (2004),Madrid (2002) and Rio de Janeiro (1999). With 1070 million of inhabitants, the two sides of the Atlantic have strong cultural, historical and economical ties which goes as far back as the XV century, when it happened the “Encounter of two cultures”. Actually, the EU is the second commercial partner of Latin America and the Caribbean, the first foreign investor, and an active partner to support integration further . Latin America and the Caribbean are also working toward more integration, to solve challenges dealing with economic growth, economic development, reducing inequality and poverty. Latin America Integration, has been a long distance goal which have endured tough times because of ideology, geostrategic and political reasons ,each one at its own time. The XX century, did not allow strong results on integration, despite the effort in the sixties (for instance the Andean Pact and Latin America Free trade Association ), basically because it was a political driven process, therefore constrained to Government changes policies. Later in the nineties, it began a sort of second round following the external debt crisis ,with a draft of a Free Trade agreement from Alaska up to the extreme south America proposal , which was based on trade and investment as the basis for integration, very similar to the approach applied in Europe by then:”Politics inspired by business” .This approach meant to have the private sector as a key player , with a whole set of economic policies pro markets rightly designed for such purposes, which it was needed as well. This approach did not last too long. In the final years of that decade (1998-1999),It arose ideology as an alternative for integration goals: “Business inspired by politics”. The outcomes looks heterogeneous because while those countries which followed the “Politics inspired by business” approach, have made substantial progress ,the others with the alternative “Business inspired by politics” focus , face more difficulties with the economic fundamentals such as inflation ,public spending, exchange rates, wages, productivity and investment .Thus this Summit was a very useful space for reflection. analysis and evaluations . Based on the current European Union situation, It seems that the dilemma of politics or business as integration drivers ,might complement to each other.

Friday, January 18, 2013

Currency appreciation : Is the fear of floating real?

Most of the currency in emerging economies appreciated in 2012 , specially after the Quantitative easing policy approach spread out to majors Central Banks. Huge amount of additional currency depreciate them and the counterpart, is the appreciation of the rest of trade currencies . Additional reasons for this situation are the capital flow to emerging countries, the less risk averse behavior ,interest rate differential, and better performance of these economies which has improved expectations for foreign investment . Implications : a.- Currency appreciation is good for consumers, inflationary expectation , foreign investment returns, and growth when it is based on domestic consumption. Not that much so, when it is based on exports with high price elasticity .Keep in mind that low price elasticity exports , such as high valued added goods, appreciation means huge profits for theirs exporters . b.- Currency appreciation means an incentive for foreign investment to stay in and reinvest profits, which keep economic growth pace on track. Besides, lower interest rate associated with it, decrease financial cost which boost up economic expectations even further . It follow that Currency appreciation, has a positive distributive effect which is not neutral for growth and welfare level . Then, why is there such a worry with the issue? a.- Exports have indirect and direct effect on employment .It is not just growth what it is hurt by appreciation , but also net jobs.(job creation because of appreciation ,might be lower than jobs destruction because of it). b.- As much as capital flow goes in , it might also either stop suddenly or start to flow out back to where it came from. Either case , mean costly downward adjustment in the spending path. c.- Import growth , increase the deficit in the trade account , which can be a threat for a country solvency status whether it goes beyond some reasonable rate(3-4% of GDP), no matter whether it is because of new investment or higher consumption (Investment might fail, and the multiplier effect of it , take consumption down ), the fact in this case is that Spends Grow rate, is higher than income grows. d.- Domestic currency can get out of its long run fundamental. Thus, over appreciation (Dornbusch effect), might induce a corrective market reaction, which as the Asian crisis taught us can be hard to control and of severe consequences .- Some analyst think that as long as Central Banks partially created all of this, they are called to solved it with some policy decisions which are not neutral, but on the risk balance scenario, in some cases (only in scenario (d)) can be an useful tool when it is properly designed and rightly applied. In such case (d), the fear of floating explain itself.

Friday, January 04, 2013

The public debt restriction

While there is a law for expenditures growth (Wagner´s law), there is no law (aside from Murphy laws),for public debt growth. This difference count quite a lot, because in the first case there is a way to deal with the issue of more expenditures: Increase incomes. Whether it is throughout lower taxes , less inefficient regulations, more flexible markets and the like. The menu is wide and the option is clear: unless incomes growth keep its pace, there is no way to increase expenditures indefinitely . The implications of this result is obvious: to keep the growth machine in good shape.- But in the second case, because of its riskier nature ,there is no other way but to get the public debt under control, which it is not cost free because it takes a bite to economic growth. Thus, public debt becomes a restriction for growth, which in such a case can no longer sustain further expenditures growth. Therefore , the second implication of public debt is that it becomes highly regressive. Europe efforts to solve this problem, has increased poverty at unimaginable standards for European countries. (Spain and Greece have 20% of poverty, the average for Europe is 16,4%.As a reference , Chile has a 11% of poverty level, still better than France, Austria and Hungary).Public debt in Chile is no higher than 10% of GDP, and in the second half of the past decade was an average of 7% . The current status of public debt as a share of GDP in developed countries is worrisome : Europe has 90% ,USA 100% , Japan 200%.On the other side, the BRIC countries have less debt as a share of GDP.Latam has on average of 20% as a share of GDP . It follows (third geoeconomics implication of public debt ),that the better prospect for global economic growth in 2013 , comes from these countries which might become the new engine the global economies needs.