Sunday, December 28, 2014

2014: The year a lot of things changed

It is time for everyone for making balances.So it does happens with the economy, politics and other fields .We are less than a week away from begining 2015. What can be considered to be the outcome of 2014,wether positive or negative , depends on the side each one is on: either Optimistic or pesimistics.- From the optimistics side, things do not look as it was expected.Thus, the pesimistic ones are those who have the last word. However,2014, was a year of mixed outcomes.Let take a look at it: a.- From the global economy side, there was important progress in the USA economy as it moved along to a sustainable recovery.Whereas ,The European Union is still struggling to get into reliable economic growth path,increasingly difficult as the geopolitics take its stake on it. China is also in its way to find the proper economic growth path, taking with it the prices of commodities. b.- Latin america economies did not make it better.Most of these economies grew below the expected.Unemployment had a good perfomance, which is expected to reach near 6%, below 6,2% of 2013.- c.- Oil prices went down more then previously thought, and the trend is to continue that path because there is no evidence to have reached a bottom level.Less so, while there is no reduction in production level. The effect of this new prices are still to premature to say anything,except that those countries which depend upon oil prices have problems.- What to expect for 2015? It is not hard to say, that it will not be an easy year either.Global economy will face the situation of normalization in monetary policy in the USA while still struggling to get away from deflation, weak economic growth and geopolitics risks.- It will probably be a year for politics and diplomacy.-

Sunday, December 14, 2014

Are free markets ideas strong enough in Latin America?

Economic backgrounds in the last century in Latin America economies, was built mainly based on the notion that the state has a key role in the economy.Throughout years, the markets approach was in a secondary place.The import substitutions strategy followed in the second half of last century,the Dependence Theory, and the North -South focus of world order ,were all based on the supremacy of the State . However,after the external debt crisis, (the lost decade of the eighties) ,such models collapsed. The Washington Consensus of the nineties , was an attemp to get a better framework for free markets policies.However, actually there is no elected government in key latin america countries,(aside from Colombia), which could be considered to be center right oriented.Most of those candidates with such profile ,were defeated in recent elections.(Brazil,Uruguay).- Are free market policies a weak approach to improve the quality of economic performance?.Is there some structural weakness in the leadership of free markets policies?. The first question speak by itself.Most of the richest economies in the world, have followed free markets policies with the state as a reliable complement.The worst of poverty ,is not in those economies based on markets mixed with the State as partner .In Latin America those economies which are doing better, are the ones which support markets as the driver for economic growth.- What about a structural weakness in the leadership of free markets ideas?.Perhaps this would give some explanation. There are no many Latin America intelectuals to be considered a fan of the market outcome, as there are those who can be considered to be fan of the state inspiration .This does not mean that someone is correct, while other is wrong, but the fact is that most of the intelectuals in latin america, are less prone to individuals , than what they are to the State, as the main brain of society.Thus, those who believe in freedom and individuals as the brain of society , become shy about it because it seems that there is no strong intelectual room for it.Besides there is also the permanent risk of dogmatism,as current leaders feel there is no easy way to build bridges between different positions.The outcome is that average voters, feel unconfortable with the prospect of getting rid of anything(policies,programs), which can offer them protection. So, it follows that the strenght of free markest ideas,even with no strong intelectual support, goes on the line of pragmatism.This means , markets alone are not enough.Markets and the State complementary role do matter, because they are a necessary condition for economic development.-

Sunday, November 30, 2014

About Reforms and its conditions for successfull implementation

It has beeen usual to ask for economic reforms, every time economic results do not match expectations.Besides, as an aditional input, past reforms has a limited life span; which call for further ones, such as to make possible the economy to move on, further beyond what the previous reform did, before the economy get weaker.Reforms has diminishing returns so to speak, which require a complementary set of policies every time a new framework arise, otherwise its impact will vanish in the political inertia.- But what is the problem with focusing only in the demand for doing reforms in some areas?.Aside from the complementary policies requirement , is the issue of political support any reform also need to be succesful.So, it implies a lot of political skills to get that support ,and on the other side to make them tunning with the proper time.There is also the right time and the right field contraints, to do reforms. The premise should be, do not change what it is working well,and do change what it is not working along with to get strong allies before going forward.- But above all, the ultimate source for sucessfull reforms ,is related to the instituional frameworks which it is based on to take place.Any refoms means change and with it ,the unexpected . Strong institutions make the difference, as long as it represent the supply side. It is not the same to do changes, within the context of the rule of law,economic police rules, and Central Bank autonomy, than to do the same missing any of those . The demand for reforms must match the supply of resources for it, otherwise as the traditional demand and supply tools indicates,the price of implementing the reform will get higher.- What includes this price?: a.- Political Uncertainty and with it weaker economic expectations b.- Unneccesary widening the Conflicts area, overcoming the specific scope concerning the focus of the reform c.- Higher risk of failure because of misscalculation about the proper deepness of the reform d.- Political desillusion concerning not fulfilling the expected outcome e.- The reforms are left out of the negotiation zone d.- Financial sector volatility It follows, that it is not only to ask for reforms, but also to wonder about institutional conditions characteristic it requires as a key input.- Some examples: a.- Can any economy with high level of corruption,be capable to get a positive outcome with reforms dealing with more private sector involvement into public investments.? b.- Can any economy with the State heavily involved into the citizens life ,to get the most of any reform dealing with more entrepreneurs?. c.- Can any economy with the business sector out of the negotiation table, to get full political support for reforms dealing with labor practices?. Finally, the best way to evaluate the chance of successfull reforms is to have very clear where it is headed.In other word, what a difference does it make the situaion without and with the reforms, given the supply side variables. That is the real meaning of politics, to work out the gap between what any economy have, and what it needs to move forward.

Sunday, November 16, 2014

Productivity gains: A Necessary condition to boost economic growth

The average rate of economic growth in the last 50 years (1964-2014), has been 3,8%, and half of it because of productivity increases, with information technology playing a key role since the mid nineties, to recover productivity trend up from the falling direction since the seventies (McKinsey Global Institute (MGI)September, 2014). The issue of productivity has been a main concern for economist, although not all of them have focus it, beyond the orthodox approach based on good (free markets)economic policies, rules instead of discretionary decisions, strong institutions ,markets flexibility ,market competition and openness to world trade. However, recent research done by the MGI, gives new clues about what It may be missing to improve the understanding about how to get more productive economies, especially when structural forces (lower population rate of growth, and less employees ), may affect the pace of future economic growth, to lower rates, or in the pessimistic side of the matter, stagnation. Beyond macroeconomic variables, productivity gains also arise from microeconomic ones. This is the reason economist usually ask for reforms, aimed at the microeconomic side of the economy. Thus, improving efficiency of public sector organism, logistic and productive services, becomes relevant and necessary. However, management models and its decisions framework, are not considered, given the fact that most of the economic analysis , is based on the assumption that business are always efficient because of markets competition, which leads to optimization and maximization of return in specific sectors, where the benefit are the most related to other alternative ones . Ronald Coase , made this point quite clear when stressed that the transaction cost of organizations, should be lower than any competitor to justify its use of resources , otherwise the firm is out of the market, because other more efficient ones take its place. But, what about management style which is applied on business?.Lack of productivity improvements ,also arise because of low quality management practices. Management take decisions about the use of inputs in the proper time and quantities, it coordinates its use and make possible value added throughout the whole production process. It develops the incentives for innovation and it is the last responsible for efficiency in the organization and the maximization of profits. The problem is that management practices, usually fall short of that requirements , and failure of management decisions, turns out to explain differences in productivity across countries(R Solow, MGI, September 2014).It also follows that whether management do not add up to productivity the way it is expected ,it means that somehow competition may not be the driving force of business practices as a whole ,which instead is focused in making sure some share of the rent arising from imperfect markets. So ,when it comes to productivity gains, it is not only about effective market competition, but also about better management skill, especially in those areas where productivity gap are higher.

Sunday, November 02, 2014

The Berlin Wall fall: It was not the last one to get down

These days, Berlin is booming with its investment in real states properties. Berliners, enjoy their city in coffee shops and restaurants (shopping malls close on Sunday), riding a bike around the city and its parks ,walking by near historical places or learning more about the past visiting their museums . At night, it does not make a difference for offering interesting alternatives for tourists such as walking by Brundenburg gates,or staying at Alexander Platz.Besides ,artistic and music shows(usually sold out) give a chance of knowing new trends about life style,arts and innovation. All of which, make of Berlin the city which does not sleep. 25 years ago, there was a different story the week before November 9th.The wall which was built in 1961 , was in its last week of existence , but who could know that in advance?.Who could predict such exact outcome?.It was hard even to imagine its fall. But, anxiety of eastern Berliners, was mounting high that week ,after such a long time of keeping them in a place which was very much like a concentration camp. They wanted to become Germans again!.- There has been a lot of stories written about “The Berlin Wall” (Pink Floyd wrote a song about other Wall), much of them related to its humiliating nature which offended the dignity not only of Germans, but also that one of human being and the whole world. World leaders said their thoughts about it, with brilliant speeches keeping them tuning in with history.- The Wall was conceived to stop any chance of getting rid of the dictatorship from within, or from outside, because as much as it was an exit barrier , at the same time, it was an entry barrier as well. Its political purposes was to impose a totalitarian view of society, based on the rule of fear. However, it follows that the feeling of fear, was in the minds of everyone living inside the new boundaries set by the Wall.- At the heart of all, it was the decision to live up with fear as the driver for human behavior , denying the opportunity to feel what is like to live up to whatever the talents any individual may have, and how those talents make the difference between economic progress and poverty. At the very end of such experiment, the bill was paid by the wealthy West Germans. There are a lot of lesson to be learn from this experiment.Perhaps just tewo are enough for current times: a.- Freedom, is stronger than fear as a driver of human behavior.- b.- Although the Berlin Wall does not longer exist , there are still others one in place, which arise because of lack of good quality education, inequality and poverty ,which keep people out of the best of opportunities available and force them to live in the other side of a different wall, but not less relevant to delay its end .-

Thursday, October 16, 2014

Income inequality, a pressing issue of this time

Income inequality get the attention of everyone involved in the challenging task of designing and implementing effective policies to reduce inequality. The implications of inequality goes beyond the scope of economics , it also deal with sociology, anthropology and politics , which means that inequality arise and stay on because a variety of factors. Thus, inequality matters because : a.- It diminish the legitimacy of economic growth . A recent report of the International Development Organization , (IDO)March 2014),shows that 85 of the wealthiest people in the world, own as much wealth as the poorest 50% of total world population. b.- It make weaker, the social contract and democratic values ,that any community need to get along within diversity and usually biased opportunities. From the politicians point of view, inequality imply voters willing to support policies which they would not be willing to support otherwise (lower inequality). Thus, inequality allows voters to get captured which is also a threat to democracy.- c.- It is a cause for instability, as long as social issues becomes in charge of the inefficient State to be solved. Most of the countries with higher inequality( Gini coefficient above 0,5, leaving aside Africa, (IDO report ),) are from Latin America,(11 countries) where the inefficient State, is still considered to be part of the solution for this problem. Thus, it is also a threat for economic freedom and growth.- d.- The increase in inequality in the last 30 years , has been driven by the top1% of wage incomes,(The Equality Trust Research Digest: trends & Measures, (ETRD)2011),who get the highest return on their human capital endowment. This means, that there is an additional explanation for inequality, dealing the quality of education and the access to it when it is restricted only to a few. What is the best approach to solve inequality?. Given that inequality may move up or down overtime, empirical evidence suggest that: a.- Countries with more economic freedom have lower inequality(Western and Eastern European countries, USA ,Canada and Japan) ,but those with lower economic freedom , have higher inequality. This is the situation in the majority of Latin America economies. It follows, that more economic freedom is a necessary condition to reduce inequality. b.- Although a necessary condition, economic freedom seem to be insufficient to solve by itself inequality. Economic growth may create jobs, but it does not guarantee that all of them to be the “better pay kind of jobs”. Efficient Complementary policies are also relevant. UK income inequality, increased by 32% , and in the USA increased by 23% between 1960 and 2005 ,however for the same period, decreased by 12% in Sweden which applied such complementary policies. (ETRD)2011).However, the same study show that after 1980, all three countries experienced increases in inequality. So , those policies also requires evaluations.- c.- The first best approach to reduce inequality is better quality of education, coupled with wider access to such a quality ,to all qualified students( Japan, Finland), because it helps to reduces the loopholes between growth and good quality jobs.-

Sunday, October 12, 2014

October the 12: a Note about its meaning

Every year, New York watch the hispanic parade on october 12.It is the day Latin america citizens celebrates the discovery of this land by Christopher Columbus. This time 8000 people showed up with their traditional dances and colorful dresses. The hispanic community has become increasingly important in the United States in the latest years,which it is clear in their voting share (30%)as a proportion of total voters .This share may still be even higher in the future following the birth rate trend. But, what is the meaning of October 12?.Well, 522 years later , two civilizations crossed its destiny in this land, to build up a new world, specially for all those who came later on in the XVI century. In the begining, there was not many chances for anyone in here other than to produce for the Spaniard Kingdom at that time.The State ,was built for the unique aim of managing the rents arising from those productive activities which were more profitable.Some researchers have written that to set the model for the State to do its task, it was followed the same model the natives had before they were displaced by the new conquerors.It did not provide incentives for entrepreneurships activities ,and it has the same hierarquy, which became known centuries later as bureaucracy.- Almost two hundred years later ,in the north ,first Irish inmigrants ,then british,germans and all of those who wanted to live inspired by freedom, also became part of this new world.They spread the seed of freedom to the colonies in the south, which started to claim independence, after their neighbors in the north got its own . What about the State? Unfortunaletly it did not work the same process.In latin America there are still strong beliefs about the State ability to manage growth and economic progress, but not that much because of its efficient actions , but because it represent the source of power some groups hardly would quit. There is a question not to often mentioned concerning to how come that those starting 250 years later in the north, became wealthier and powerful than its southern counterpart with such disadvantage?.They did not have engineering heritage,neither a culture to look up to.A probably difference is in the different role theirs founding fathers gave to the State.- October the 12 should be an inspiring day to reflect about the difference does it makes, to be really independent with no other limitation ,than the one which set the boundaries with others´s will within a community, instead of being independent but with a constraint, the one which is set by the state and its framework , to impose its will on a community.This is the case in education programs,public health services,and in some Latin America economies, it is also still the case about its economics policies.- The evidence suggest that those economies with more economic freedom ,are capable of getting better income distribution, than those which have less economic freedom.

Sunday, September 28, 2014

The non profit society:Chile at a crossroads

It is surprising to say the least, how come that the old justification approach to ethics ,is becoming these days the inner support for public policies in Chile . Let begin with some explanations about "the justification" approach for ethics.It means that individuals , business , and any economic agents, should do what it seems right ; because that is what society expect as a common ground for its citizens living together .Thus,some key values like honesty,fairness,saving , become shared values by everyone as a source of interaction and exchanges.However, this approach consider society as a unity ,centralized and focused in those areas related to culture,self improvement,religion ,arts ,social engagement and economic activities based upon exchange .This was the case before modern times, when the whole society boundery were shaled by he Church and Kings. Todays´s society is more dicentralized,diverse,dynamic ,focused in a variety of issues,with money facilitating transactions,and business as source of wealth.It is Functionally structured and it goes beyond social constraint.People become relevant not because of their social backgrounds, but because of their abilities and skills necessary to get productivity and competitiveness gains , or to do good actions for the benefit of others. This change, means a different approach to ethics: the one called "the implementation". In this approach, ethics means to validate actions widely accepted by society, because of its positive effect on its welfare.For instance, Social responsibility,profits on business activities,transparency, accountability,wealth cretion, are the values which society care the most as the rules for individual and business behavior.It changes the focus from justification (the morality of what it is right), to implementation ( the morality of the way the facts are) .Thus, it moves from what it is expected, to what it is accepted. So, following the explanation, let move to the the key issue.Can any society pretend to rule out profit as an incentive for productive activities?Or can any society to rule out the purpose of creating wealth?.In fact it can, but in the process society become somehow constraint by moral laws ,instead of institutions . Is Chilean society and its economy, moving toward that direction?.Is there in the proposed reforms a new fundamentalims applied to economic and productive activities to replace markets laws and institutions ?. The fact of the matter, is that the (legitimate) reforms proposed in Chile, rule out profits in education,and in private health,and apply higher taxes on business profits,(green taxes were postponed). Although higher taxes justify its implementation, because of redistributive goals( lower inequality),it looks like profits has become a moral burden for the chilean politicians,(right and left) and important segment of chilean society as well. However, if it is for moral concern, in Chile there are also other moral issues such as: 80% of child born out of legal marriage,abortion exist although there is not legal authorization for it,few people get the most of better opportunities, the State do not fit eficiency standard to complement markets for wealth creation,and people still have to wait at least two months for public health . Profits are legitimate as long as it comes from legal activities, and as long as does not get a rent from consumers surplus like monopoly and oligopoly do.But in these cases, there are institutions to care about it, applying tough laws and imposing heavy fines. The same should apply in education and private health programs, whether it becomes the case that profits do not match quality and service expectations or any other indicators designed for evaluate the outcome of organizations realedt to those activities.The ratio quality(service)/ profit should be greater than one. But pretending that profits mean an inmorality, it looks like both chilean society and its economy are moving backward. The right approach, should be to improve the quality of accountability and transparency, which requires stronger and better institutions and laws designed to measure quality and services standards,which are possible to get on the side of organizations only if there are incentives for it. A society which self impose a penalty to wealth creation,It may become sooner or later, not more egalitarian but poorer.

Sunday, August 31, 2014

The state once again:Is it part of the problem?

It is a paradox that those Politicians who sustain their proposes on a more active State, and interventionism in the economy , have the more complex situation in terms of public opinion approval. Next Presidential election chances in Brazil (October 2014),and Argentina (2015),do not look well for candidates prone to more State in the economy. How come that citizens expectations, are not fully represented by those who believe in the state as the solution for better opportunities and welfare improvement?.As always there are a lot of answer , but these days citizens are more aware about choices available for them because of connectivity , better information, and a keener sense of what they deserve. Thus, it is not just the discussion about more or less state, but it is the issue of citizens more empowered what make the difference, to get acceptance and validation or not .Therefore, politicians face a different kind of citizens, and the sooner they realize about it, the better for changing their proposal.- Latin American citizens do not want more promises and experiments, they want solutions. They do not trust in the state because it is associated with corruption, mismanagement ,nepotism ,and lack of principles. It is hard to find a Latin America economy, whose State qualifies as benchmark for private business, or alternatively a State driven by Social responsibility criteria, like increasing number of firms do .Everywhere in Latin America, there are complains about the quality of public health and education, politicians out of touch, lack of effective and efficient public policies, and bureaucracy . Thus, it looks like the state is part of the problem, instead of being part of the solution. The difficulty with this reality is that markets and private firms, needs complementary policies, reliable institutions ,strategic orientation and forward guidance , which should be provided by the state. If it is not, then it is necessary to modernize it. Keep in mind that markets can fail, but this failures may be avoided or corrected ,by efficient institutions and well designed policies. So, the real problem is that the State is still well behind both markets needs and citizens expectations. It follows that what it is needed is a better state, no more state. It is interesting to mention that a better state, means by association a better markets, which make both a guarantee for stable economic growth and prosperity .Markets do not reject the State, but it rejects its rigidity and its lack of fast adaptation, to changing and evolving scenarios. This lack of adaptability, arise because the State is captured by special interest, no matter which sector they come from. But once they get in, there is no connection with the citizens, policies, and welfare needs . It only matter, the rents It provide to those who are in charge.-

Saturday, August 09, 2014

From globalization to geonomics?

Those who thought that globalization was the starting point for a new stage on both commercial and financial global ties, are probably thinking it over. It looked like economics by itself, was strong enough to get together no matter whether it was countries, cultures, and life styles .So, it was believed to be matter of time, before the whole world would become an huge market for economic growth and global prosperity. Perhaps, history has not said its last word yet, but the fact is that geostrategic interests of key global players, are somehow reshaping that premise. Economics variables on its own, seems to be not strong enough, to set commercial connections and new financial boundaries between countries.Growth prospective, investment, prosperity, consumption and employment , seems to be not enough to create incentives to foster cooperation and partnership between economies, beyond what they share as central values and principles as the driven force for global relationships .- In other words, Globalization seems to takes a secondary stand against Geonomics and Politics . The difference between globalization and Geonomics, is that while the former deals mainly with economics, the later deal with strategic politics. It does not mean that globalization did not take into account politics, but it gave it a pragmatic touch: Politics inspired by business ,instead of business inspired by politics. Obviously the former look stronger than the former . Is it too early to claim that outcome as the lasting implication from current events,between western economies and Eurasia?.It may be so. But the trend will not be easily modified. The key question is what kind of politics?.The one based only on a static and rigid ideology?.It is unlikely so, because there are new areas which expand the boundaries for a new approach on global politics, such as different sources of energy, environment, religious beliefs ,climate changes and global warming, education and health, infrastructure . A different matter would be that all of the mentioned, become the new ideologies, but that is to go too far on the discussion. Let the time to do its job.-

Saturday, July 26, 2014

Free Trade limitations:Beyond theory

From 1990 up to 2008 free trade grew twice as fast as global GDP. However, since then the pace of free trade growth has become slower. Following the financial crisis of 2008, new protectionism demands have been increasingly stronger, especially in those countries with competitiveness constraint to compete with foreign goods. Some people believe that Globalization based upon ever higher trade flows, seems to be under threat, so it does globalization itself .(, Adair Turner July 18,2014). This situation state some key questions: a.-Is globalization linked to always increasing free trade flows as its source of expansion? b.-Is there somehow a limit for free trade? a.- Globalization roots are more related to the return maximization of financial capital, than trade flows. Globalization is the way to seek that maximization ,because otherwise they would be lower .Trade is the positive externality of that purpose, as long as new ventures with high capital returns become real, boosting the production of goods. Having said that , the next step is to determine whether trade flows have high income elasticity to sustain its growth pace such as to make globalization more trade dependent. The fact that economic growth is biased toward the services sector, which are within the non tradable goods, seems to pose important doubts about it. Services sector, are becoming more important as a share of the GDP in the majority of advanced economies. The USA economy recovery under way, is well based on the service sector as well as service consumption resilience. Income elasticity of foreign average quality goods, is probably less than one. So, globalization is unlikely to be driven uniquely by trade flows. The implication of this assessment, may be provocative: In the margin, Protectionism is not longer a threat to globalization, as long as trade liberalization get decreasing marginal advantages. So, this outcome becomes a limitation to the pace at which new trade agreement may be signed, unless it goes into more complex issues. This leads us to the second question. b.- Free trade was thought to be based on comparative advantages, factor prices equalization forces, and high incomes elasticity for foreign goods. However, as trade flows involved more sophisticated goods, because of technology intensive production and automation, it required higher mobile and better human capital endowment, along with higher capital mobility, so factor prices differences become less of an incentive for trade growth .They converge as knowledge is also mobile, and although competitive advantage becomes the new source for trade, as long as incomes level convergence take place, trade growth rate may get its stationary status or even become slower. All of these arguments do not mean that free trade is either negative or unnecessary for the well being of mankind.Low income countries may still expect to get gains from trade, but the trend over time is to make those gains lower. Massive internet availability will make virtual trade the new source of global flows as long it get an higher share of total transactions.-

Monday, July 14, 2014

Malala Day : A girl stronger than her own time

More then 60 million of girls in the world are still without education. Education is a right for everyone, no matter race, gender or cultural background.Malala´s effort, will provide the chance to a lot of those girls, to become what their capabiities allow them to get in regular education programs.Otherwise it will be a waste of a precious resource: Human talent. There was an economist called Simon , who thought that education is not only a source of human capital, but through its endowment widely spreaded ,it is also a source for innovation, creativity, entrepreneurships, and finally it is a chance for improving the well being of mankind.To denied education is a huge social cost for mankind, just becasue it deny the opportunity to take advantage of those potential talents that only education can develop and improve further.- Besides, without education there is a lower chance of getting good standard of living, whether it is material or spiritual one.The ability to study and reflect is provided by education. The world need today more than ever reflection and peace, which are more feasible to get by educated people .Ignorance is the source no only of poverty, but also it is a source of displacement from any oportunity to become free as individuals, men and women. Freedom is the last justification for better education for everyone.- Malala seems still a young lady.What a challenging effort she has began!.She can not do it alone.Even at her birthdays, she asks not for happy birthday,which of course she deserves, but instead she ask for other girls´s destiny such that to make it brighter than currently is.-

Sunday, June 22, 2014

The economics and social side of Brazilian world cup

These days soccer fans are at their most.The long waited 2014 world cup is under way in Brazil , and from time to time every one from any place in the world, stop by at the TV set to watch for their team outcomes.Americans, Japaneses , Germans ,Italians, Argentinians ,Chileans,and so on keep their atention to the matches and its last minute goals, missing chances , great goal keeper catchs, and the like. Brazil has gone through it own nightmare to get this 2014 World Cup done. Most of Brazilians ,realized that it was unclear the justification for the amount of money spent on stadiums and facilities.Besides the whole process of construction had fatalities to be sorry for.Nine workers died ,and some of the stadiums were close to be finished just a few days before the inauguration ceremony . However, it is expected that 600.000 fans from differents places around the world, will visit Brazil and those cities where there are world cup matches. This will mean between USD 2500- USD 3000 million in revenues for the brazilian economy, which may boost the GDP by some percentage at the end of the year.Brazilian GDP has been decreasing from the 5% level, it had a few years ago. Some people, may wonder about the reason why Brazilian authorities thought the world cup would be a good idea, or whether they expected such a violent demostrations because of it.Brazilians love soccer ,as much as they do with their beaches,their food,dances and their music and women,which make Brazil a very interesting place for tourism. But no matter the expected outcome , and the nice people Brazilian are,this time has been different.The traditional easy going brazilians,went out to the streets to claim about better ways to spend public money When Brazil got both the World cup (2014), and the olympic games (2016), those were years for hope. A new government led by President Inacio Lula Da Silva, was in place ready to move foward with the legacy of stability and economic progress left by the previous President Fernando Henrique Cardoso. Today,the real problem is in the social debt Brazil still has ten years later with its own people . Education,health care facilities to mention the usual claims, are lacking of enough resources to be at a better level.Inequality is still high. In the fisrt decade of this century,Brazil had a huge sucess to lift up from poverty up to 30 million people, who became part of the new middle class.But at the same time , Brazil did not realize the expectations those new middle class people would soon have about key services, and how the would demand for it to be fullfilled . It is clear that there was a missmatch between social development, politics decisions and economics changes.The triangle of economic, social and politics variables did not work as expected either. But, Brazilians are smart enough to take into account that after the world cup is over, they will have to reset their priorities.

Sunday, June 08, 2014

European Central Bank Hard choices for difficult times

The decision to move forward with its own quantitative easing (QE),was not an easy one for the European Central Bank(ECB).It was not an easy one because ECB was born as the guardian of stability,with limited tools for what it was necessary for such a purpose. Besides the fiscal policy contraint of -3% deficit for the European Union countries,somehow forced ECB to keep monetary policy on the restrictive side to get close supervision and control of inflation and its trend. But actually the issue is deflation,and who may have thought about it in the nineties, before the euro was in circulation?. The fact is that rightly the ECB dropped the interest rate down from 0,25 to 0,15%,and will increase the money supply by 400.000 millions of euros, available for banks in the next months, to support credit and consumption.So far the inflation trend was in the deflationary direction from 1% to 0,7% for 2014.- Now the question is whether will it be enough?: There are some considerations to answer that question: a. It is very important the so called "Forward guidance policy", to be applied.Markets have to be guided about what the ECB want them to do.Communications skills are decisive to make the impact of these changes in monetary policy stronger. b.- The institutional framework which contraint ECB, do not allow to be too much prone on expansionary experiments.Would it be possible to go on with a QE-II, in case this QE-I fails?.As long as Martes get the answer as positive ,it will help to find the seeking path for stronger and faster recovery.- c.- Will the euro depreciation be effective to generate inflation?.Depreciation ,is a change in relative prices between tradeable and non tradeable goods.Besides it increases both imported inputs cost, and consumer goods, but by the same token, other costs such as domestics one, in relative terms goes down.To become inflationary it has to be that its main impact is strong and persistent throught all the productive chain,such that all cost end up to be higher. At first glance, it seems that the ECB has found the right moment to make this decision,and of course that it is a good signal of awareness about the real conditions of the Euro zone economy.As it was the case for the USA economy in 2012, to get the economy back on track it is more a matter of judgment, to decide to right time to apply corrective policies, than policies it self.

Sunday, May 25, 2014

Employment , economic growth and poverty

Economic growth prospect for 2014 in Latin America economies has moved downward from those rates above 5% some few years ago(2010). The current forecast is to have a rate of economic growth of 2,7% this year, but depending upon the pace of normalization of monetary policy in the USA economy(tapering).If it follows a smooth path, Latin America economies may get the projected rate. Otherwise, growth rates for these economies may be even lower. The implications of this deceleration are twofold: a.- It will affect latest employment gains. In fact ECLAC estimates , it will be hard to get the level of unemployment of 2013 (6,2%),even at the optimistic expected rate of economic growth for 2014. Employment is the first step to solve poverty. b.- It will threat the progress made on key social indicators such as poverty level and , inequality, because the States will not have available the same amount of financial resources coming from commodities high prices and economic growth .- So what does it comes next? There are higher risks of populism, fiscal expenditure above the available means, important capital outflow , currency depreciation and a probability of a sudden stop . In some countries interest rates may moves up, in others may moves down, depending in each case of the expected inflation rate to move up or down as well. Besides, there are some concern about the chance of hard landing in the growth prospect in China, which would affect harder those economies with stronger commercial links whit that country. Therefore, there are troubled waters ahead (2015),although not necessarily out of control for these economies, which have important foreign currency reserves , low levels of debt / gdp ratio, and its financial sector is fully capable of supporting the economies requirements. Close to get half of the year away, the expectations for this year to be important in economic outcomes, look now weaker than at the beginning of 2014. The pace of economics and politics, are not always at the same speed. In fact, taking a deeper insight, the variety of alternatives and scenarios depend on this relationship. Those countries which politics have taken charge of economics ,are worse off than those ones in which politics get along well with economics.

Sunday, May 04, 2014

Poverty and inequality in Latin america: New developments

A recent report (may the 3rd),done by the digital newspaper based on data gathered by the SEDLAC (Social economics data for Latin America and the Caribbean),focused on the poverty level in Latin America. There are two countries Uruguay and Chile, with poverty levels below 10% (12,4% and 14,4% respectively).The remaining ones, are Brazil (21%) , Costa Rica (24%),Venezuela and Peru (close to 25%).The continent as a whole, has a 34,6% rate of poverty level, almost ten percentage points, below the level of the nineties.- Poverty is a complex issue which depends upon a variety of factors and variables. Among factors, there are cultural and sociological ones such as either lack of ambitions or a weak sense of achievements, limited self esteem (Todaro 1982). Some variables, includes human capital endowment, low quality of education programs at basic and secondary levels, inefficiency in social policies, low wages, and an institutional framework not strong enough for steady economic growth. Poverty and inequality are not equivalent . While Poverty refers to those who do not have the ability of getting a basic set of goods, Inequality ,refers to how the total income is distributed among the total population. Thus, high poverty levels means that an important share of the population cannot get the basic goods with their earnings, while high inequality means that a small percentage of that population, get the higher share of total income. The Gini coefficient measure the inequality levels. It goes from “0” (perfect equality, everyone has the same income) to “1” (perfect inequality, one person has all the income).Most of Latin America countries are among the most unequal countries in the world with Gini coefficient in the range of 0,40-0,58. However, this coefficient has some flaws because can be manipulated throughout transitory bonus programs, which increase income levels for the bracket people belong to ,moving them upward and reducing the Gini coefficient while those bonus are in place. A better approach, is to have higher taxes which allows permanent increases in income levels throughout social programs. In most cases the empirical evidence indicates that the Gini coefficient decrease (improves)after taxes. However, in Latin American economies, this does not mean a decrease in poverty level. It may be the case that Gini coefficient improves, while poverty index deteriorates. There are few cases which have gotten both inequality and poverty ,moving in the downward direction (Norway), which means an effective and efficient social programs. Thus, higher taxes may be a necessary, but it is not a sufficient condition by itself to get at the same time, both a better poverty index and Gini coefficient . It follows, that it also requires on the one side, efficient complementary public policies, and on the other to become an effective tool for investment and growth. In other words, taxes (either low or high),must equilibrate efficiency with fairness.

Saturday, April 12, 2014

Latin America and the risk of a sudden stop of capital flows

The sudden stop of capital flow ,is a very well known case study in macroeconomics.It deals with the situation of lacking of financial resources coming from abroad, both important and necessary ,to sustain investment and growth when domestic saving is not sufficient for such a purposes. It happened in the asian economies crisis, in 1997-1998, with severe impact on growth rates everywhere in Latin America. The main problem with sudden stop, goes beyond itself.It comes with the proper policy to face its consequences.So, there two problems at the same time. The sudden stop ,usually happen because of sharp change(negative) in the external risk perception about an economy.So the first policy approach, goes on the line of managing to modify that perception which usually mean to reduce public and private expeditures,moving the economy toward sustainable internal and external equilibrium,which means to reduce growth at a more sustainable rate,that one which it is possible to get the financial resources. The other side of the story, comes with its impact on foreign currency market.Usually it means losses of value (depreciation) of local currency,which can be significant, when the sudden stop make clear the magnitude of the external disequilibrium.This depreciation is not neutral,it also bring along pressure on domestic prices (whether productivity is low),and while export do not react to this change on external prices, the economoy will go on a recession, which can be mild or severe depending upon the abilty to design the proper policies mix. It is expected in the near future,( some estimation indicates 2015), that the interest rate in developed countries , will start its normalization to higher than current low level(0-2,5%).This modification will make more atractive for capital flows, to move away from emerging economies, as well as from latin economies, in a situation similar to the metioned above with the crisis of the asian economies. The key question is about which is the magnitud of such a stop of financial flows, to become substantially negative. The second question is, in what shape are the latin americans economies for such scenario?. Concerning the magnitude it is not clear neither way of the magnitude ( relevant or irrelevant),because there are mixed realities. Probably those economies oriented toward more integration with global economies and reliable policies and institutions,the sudden stop secenario should be moderate.But those economies , with internal disequilibrium (inflation, fiscal deficit),and no clear stand on becoming more global player, will have more difficulties, because the sudden stop may be significant.So , as a whole the net impact will depend upon the overall evaluation about the Latin America economies stand concerning the risk perception, making the distinction between those with higher riks from those with lower risks ,such that it could also be feasible a reallocation , at least of a fraction of those resources, from the former to the later groups of latin america economies. Concerning the second question , again there mixed realities.Those less vulnerable to raw material price fluctuation, are better off than those which depend on raw material high prices.Unfortunately, this is the key weakness of all latin america economies which became short of time to make reforms for improving productivity, and the diversificatioon of its productive areas.Copper,oil,gas ,Coffe,Soja,Wheat are the main export for most of theses economies.This becomes the real problem becasue it is not easy to solve it in the short run .So ,the whole region is in a riskier position whether these prices goes further downward . Thus,it is the combination of a sudden stop ,and further downward commodities prices correction ,which may become the real challenge concerning policy makers decisions.Given even a small probability of such scenario to happen,it could be a proper path to be cautious about supporting and not weakening the chances of growth.-

Saturday, March 22, 2014

World water day.To reflect about the uses of a key resource

Today is the so called “world water day”, which means a world wide call for caring about what we do with water. Some Celebrities and institutions (Rotary International), have made a commitment to improve the understanding about the key role, a better use of water has for mankind. They are right about it, so we should support them. The United Nations set in 1993 this day, precisely to reflect about it. Because of population increase, the demand for water has actually increased by a factor of three, while the supply remains the same, barely 1% of all water available in the planet, which have more than 95% of it, as a salty water. Whether the demand is higher than supply, there is a problem which market would solve with prices mechanism. But for prices to do its job, it requires to solve the property right issue. Water is the kind of common property good: it belong to all and none of us, would voluntarily pay a price for water, unless some claim their property right on it. Once again, markets needs an institutional framework to work properly. Thus, to allocate property right is the first step to set a price. Because its “shadow Price“ is so high, a lot of people would be interested to get such a property right because it would allow its owner to sell water, mainly for agricultural activities by far the most water intensive activity (77%), next come industry (12%),mining (6%),and at last, it is human consumption with the remaining 5%.(Data for Chilean’s economy) However, in this situation human consumption,(the least important of all alternatives of water uses), would have to pay a huge price. Besides, Markets do not take into account the ability to pay the prices it set. The State may complement markets to allow the access to all of clean water, throughout the production of public water at lower prices, just like it does with other services. The alternative option, would be to transform salty water of the sea, into the input mining activities needs, or water recycling for agricultural and industries requirements. In this two cases prices would also be lower, because supply of water for human consumption would be higher. Even so, the challenge to improve the rationality of water uses still remains on. Demand is still moving upward, at a faster pace than supply.

Monday, March 03, 2014

Productivity gains

It is usual to know reports about productivity perfomance, but it is not that much usual to understand the relevance of improving productivity.- The latest report says that Luxemburg workers are the most productive of the world.This outcome come out of the total product divided by the employed labor force in there.It is not a reliable indicator for the "true " productivity, but it says something about the standard of labor force perfomance.However, as any average it hides the details, and somehow misslead what really is the productivity level. The "true productivity " which counts is the marginal one. This is the last worker contribution to output.Inside the firm,It depends on humnan capital, specific skills,management models and policies. Outside the firm, it depends on macroeconomic and microeconmic policies, and the institutional framework which reduces transaction cost (low corruption practices, law enforcement, property rights protection,efficient public administration management). High productivity imply a lot of benefits, such as higher wages, better and more efficient access to business opportunities, better share of global output value added ,and higher per capita income.In other words better living conditions.- Besides, Countries with high productivity levels , become more competitive.Productivity becomes a source of competitiveness . The key question is why with such benefits , there are countries which seems not to care about it?.Well a proposal is that productivity is a long term goal.It is linked to education system, cultural values, and business practices and its management models.-

Saturday, February 15, 2014

Reliable measures about inflation

Statistics are always on the spot light , specially when it comes down to key indicators:Poverty, inequality, inflation to mention a few .These social issues, keep the atention of speacilized media, politicians and analists ,every month as a new statistics is published. Statistics provide key information to make the proper decisions.Let take the case of inflation.This is a social tax which generates quite a lot of costs ( missallocation of resources,deterioration of real wages, profits, and it reinforce itself throughout indexation), but there are those who believe it also generates benefits (reduces real public debt, increase tax collection for Government).However, empirical evidence support the fact that costs of high inflation, are more important than its benefits. If there are some benefits , these will arise from moderate inflation , the one which Central Banks usually set as its target for monetary policy. Therefore, whenever there is inflation, it is important to have reliable measures such that it allow both to make the proper decison about it, but also to implemnent the right policies.- Latin america economies ,has made important progress to reduce inflation,implementing responsible fiscal and monetary policy, but it is not equally equivalent its progress in the field to have realiable criteria to measure it. Measuring inflation have two key componentes: The index (Laspeyres Index), and the basket used as a reference for the average consumer. Average consumer, change its consumption path becasue of change in either preferences , incomes or prices.The amount and type of goods include in the reference basquet, have to be up dated from time to time (usually ten years), as long as new products influence consumption pattern.For instance, Cell phones call,gyms attendance,rent of movies, cable TV and the like.If inflation is measured by a consumer basket relevant for the nineties, inflation data will not be worthy for any policy purpose.In the nineties the consumption pattern, was very different to the one today.- The same happens when the index is distorted by the approach used to measure prices. Recently, there have been progress to improve the quality of such measures in Chile ( up dating the consumer basket), and in Argentina(up dating its index calculation methodology). Although, both economies are at different stages of economics performance, it reflect how seriously Latin America economies are working its way to become global partners, as a source of new investment opportunities . These modifications, are on the line to make more reliable the statistics about the economic perfomance, key element for investors evaluations about these investments alternatives.-

Saturday, January 25, 2014

World Economic Forum : Davos 2014

This year the WEF has important issues to be concern about. Inequality, the future of capitalism ,and sustainable economic growth will be addressed by the attendants .They are world leaders, politicians, professors ,chief executives offices, all of whom give some time to reflects abut world problems .- Inequality has become a more visible problem. Globalization mean opportunities, but hnot all have the fair chance to take advantage of them. Thus, it is important to take action about it. Otherwise globalization can be seen as the opportunity for just a few. A recent report , (WEF - 2013)has said that inequality ranks in the fourth place, among a list of factors which can potentially leads to social confrontation risks.- However, these actions should go on the line of better public policies. After all, inequality can be considered as a failure of public policies. It follows that the main responsibility for improving equality is on the side of Governments. But, do Governments have interest to solve this issue?. Somehow it is a matter of votes. The more self reliance and independent people becomes , the less likely they will depend from government´s policies. Concerning the future of capitalism, it is well know that it fit itself to new situations. Global warming is a constraint for growth, but that does not mean that it will melt away the foundations of capitalism. Instead, Capitalism should be more focused on a value added approach .This is the so called “Conscious capitalism” or “ Inclusive capitalism”. Either denomination, it will depend more on knowledge as a source of capital ,and quite contrary to some expectations it will improve middle class welfare.- Capitalism need people´s talents to sustain the “creative destruction”. This has been the case in watch industry in the past as it is in the smart phones industry today. The very nature of capitalism is tied to human capital endowments. The money creation machine, usually overcome the foundations of it. Engineers, bankers, entrepreneurs, business man, seeking to get the best from profit opportunities which arise in their path. So, give education a chance to couple with capitalism spirit.- Davos 2014 conclusions ,will certainly be interesting to reflect about.-

Saturday, January 11, 2014

Monetary Policy : The path toward normality

Since the financial crisis started off in 2008, Monetary policy everywhere, has played a key role to get the economy back on track. It has been widely thought ,that in such a cases it is fiscal policy which should take the lead. The multiplier effect of higher expenditures , make a decisive impact on aggregate demand.- However, Fiscal policy in most of the advances economies (the core of the financial recession), could not work this time the way it should. Public debt and deficit above 3% , along the austerity program, placed fiscal policy in a secondary role in Europe to get over the crisis. In the USA, the debt limit constraint, and fiscal deficit worries had a similar effect. Prominent economists, argued for more aggressive fiscal expenditures programs, based on the traditional view of macroeconomic policies,(multiplier effects). However ,the nature of the crisis (huge mismatch between asset and liabilities), did not make clear the advantages of such an option. The core of the problem was in the financial , instead of the good markets. The loses of financial wealth was of such a magnitude, that it constrained the deleveraging process to the disposal of huge amount of cash, coming out only from Central Banks. Thus, fiscal austerity also played its role in the USA economy. In fact, in the year 2013 it represented almost 2,5% of Gdp, well above that one of Europe (1%).(source Edward Harrison, The implications of this change, was to leave a wide room for monetary policy to get more aggressive into the economic scene . The issue deals with complementary macroeconomics policies. When fiscal policy saved rather than spend, boosted the potential of monetary policy, which could display all of its instrument at full to get an impact on aggregate activity. That is what Monetary policy did in 2012, with the QE3,(purchasing of bonds).The outcome is an improvement in the pace of economic activity in the USA economy and with it, all economies with close ties to that economy, and unemployment rate is again at 2008 level. Concerning unemployment rates, it is important to consider two hypothesis: a.- The global economy has more labor mobility than previously thought. Those who retire from labor force, might go to other places to look for jobs.- b.- There is transformation under way on the key abilities required on labor force, for this knowledge based economy, substituting old abilities for new ones , which induce even higher mobility because of its scarcity. It follows that current unemployment rates do not reflect completely this dynamics, and it might not be a reliable signal to track the aggregate demand recovery pace. In a different scenario out of (a) and (b) hypothesis current unemployment ,could be lower. The interesting thing about this policy mix, is that Monetary policy effectiveness, increase significantly when it has a complementary and not competitor fiscal policy.- Now with the new Chairwoman Ms J Yellen, a prestigious economist graduated from Yale University, Monetary Policy is next to begin the path to normalization. First, gradually decreasing the purchasing bonds programs,( markets expectations are for this program to be finished by the second half of this year).- Second. To increase the interest rate level, actually within the range of 0-0,25% . Markets betting are that the increase in the interest rates will start next year (Probability of 51% by March). But, it could also be possible to start this process even before, although still in 2015.