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.