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 .-