Currency adjustments: The way global financial markets works

Currencies connect the economies to each other. On the long run , there is only one price for goods adjusted by parity conditions among different currencies. The Big Mac index is a measure of that unique price, and at the same time any deviation from it .
Those deviations, measure the undervalue and overvalued value of any currency at some point in time, in other words ,its deviation from the unique price long term price.. Thus, while an hamburger actually cost in the USA U$$ 3,22 , in the euro zone cost the equivalent of U$$ 4,06.It follows that at current price parity conditions , the euro would be overvalued by 25,65%.The same exercise applied for the yen show that this currency would be undervalued by 27,95%. These mismatches currency values, implies portfolio adjustment against the dollar. Considering the dollar and the euro , the trend has been in favour of the euro . However,since 2001 up to 2006, productivity in the euro zone has been stable, while the euro has appreciated on average by 14,3% . Therefore, somehow the current high euro value,(appreciation) would reflect the port folio adjustment which is taking place among other variables ,because of expectations of further decrease (depreciation) in dollar value.-
Which are the explanations for such expectation ?:
a.- The interest rate differentials between Europe and US are falling. The Euro zone Central Bank , is increasing the interest rate .-
b.- US economy growth, can be affected by sub prime housing market correction, deeper than expected. (Sub Prime represent no more than 15% of total housing markets credit)
c.- Current account unbalances in the US economy ,which is expected to be up to 5,9% of its 2007 Gdp.-
d.- Portfolio adjustment in favour of the euro issued assets , and carry trade transaction.
Whatever the reasons ,dollar depreciation has effects on global economy. It push upward raw material prices . Most of Latin America economies strongly orientated to primary good exports ,are ,getting an external boost for their growth performance. It also means increasing risks for further inflationary pressures.-
On the other hand, some European countries are started to be worried because of the euro might be getting close to the danger zone, risking loss of competitiveness for exports .A strong Euro, has a positive impact in those economies with high productivity levels, but as long as there are differences in productivity levels, some of them get a better share of the benefit than the others, and some are left behind .At the same time, an undervalue currency (yen) is also risky because it is away from macroeconomic fundamental.-
At present ,it is important to have some perspective. Over the short run, financial flows are more important than trade flow to explain exchange rate fluctuations .It follows that unpredictable financial markets movements, are more important as an explaining factor of currency fluctuations ,than real variables. However ,in the medium and long run it is possible to substitute traded goods, and exchange rates are determined by real forces that influence their relative prices.( A fair exchange?: Theory and practice of calculating equilibrium exchange rates .IMF /WP/ 05 /229.Bayoumi,Faruqee and Lee).
So, it seems that we are looking at the sensitivity and worries of global financial markets , concerning the fundamental of the global economy. Overreaction is a short term phenomena .The long term course, will be determined by the chance of a coordinated adjustment policy between different global currencies.- Whichever these forces is stronger it will mean more or less volatility in financial global markets.-

Priviledge Information: The new ethics for Chilean business man (II)

The following question is the key one :What is considered to be privilege information? No matter the different definitions available , there is one in particular which is quite clear to stress the nature of the privilege : Privilege information is the one which is known by just a few , and it might have an impact on financial markets valuation. In other words, it might help to any of those few potential investor to get higher economic return than it would be otherwise .Thus, the problem arises when such investor are from inside the firm.-
Privilege information includes: future investment plans, financial statement to the public authority, merger approval and the like. In all this cases ,the market value of the firm might go up or down depending upon the nature of such information. For instance, the approval by the executive board for new investment plans, which will impact positively the stock market valuation of such a firm, is the typical example of information shared by a few. Any internal potential investor , would benefit buying before those plans are made public . However, the same opportunity should be available for anyone from the public ,with that information so they can buy stock options and expect its return to be higher in the future. The problem is that it is not always so. The same case apply , whether anyone know the financial results which might show an increase in profit .It is possible to make a profit buying before those results are made public. The ethic dilemma arise because of the gap between those who have the information , and those who do not, or have to wait for it to be public before making their portfolio decisions.
These situations are considered as market failure ,and privilege information is a negative externality , which arise because of the nature of business decision in competitive environment .In this kind of environment, nobody want to give up their privileges of being the first, in favour of their competitor. The social benefit of information is higher than the private benefit, so less information is available and few people have more information for their advantages instead of society ( potential investors).
What is the role of institutional framework?. As long as there are property right concerning information clearly defined; which from the financial market valuation stand point, means that there is a legitimate owner of certain level of key information. Therefore, the issue is to get control of how those owner use that information, without affecting the chance of other investors to benefit also from it, specially if the firm is depending on stock market as a source of financial resources . So, it has been established the black out period, which imply that nobody within those few with access to privilege information, will take advantage of that information .Those who do not fulfil that requirement exposure themselves to heavy fines, usually a proportion of the total transaction. The black out reduce the social benefit of information, because somehow there is no information available for anyone ,therefore nobody can make business transaction with some specific , while the new information is not available yet. As a result, when the information becomes available both private and social benefit are similar ,as long as everyone has the same chance of making profit with it .Another alternative is to increase private benefit arising from information ,making it available on firm ´s web pages as soon as it is useful for market transactions.-
The last question: what about a politician with business interest ,trying to get a higher profit because of its position for getting better information?. In this situation, it is more an ethical problem than a market failure. Therefore, sanctions should be higher .-

Priviledge Information: The new ethics for Chilean business man (I)

Ethics has not always been on the core of market decisions .In fact, business are not ruled necessarily by ethics standards unless they are clearly set by laws. This is so , because self interest maximization assumes no restriction other than the impact on others people´ s welfare, which by itself would be a kind of ethic boundary to business, settled down throughout the institutional framework. This aspect of market behaviour, has made market economies , ethically stronger than other alternatives for society to solve the allocation of scarce resources. Markets are neutral. On the aggregate, the self regulated ethic works well, as long as wealth creation get through to everyone ´s benefit.-
This issue has also been considered as a core one, on the debate about the application of new ethics standard on business decisions ,after some high profile cases (Enron and recently Siemens).As long as the benefit of wealth creation, is concentrated on just a few it deserves a penalty whether it is founded on priviledge information .Some would argue that with such approach, there is the risk of overregulated the market with fees and sanctions ,such as the markets based on self regulated behaviour, would have a competitive advantage for financial transaction.
Chilean finance market regulators , has been working hard in the last ten years, to improve the quality of ethics standard for business decisions. Mergers, strategic alliances, hostile take over operations, and higher market concentration have driven them to be alert. New laws and regulations have been part of that effort. However, one thing is to have the law ,and another one is to enforce it.
Chilean business culture, has historically been based on informal networks closely connected to family ,friends ,political and social ties. Laws are not designed to be obey but to be bypassed one way or another . Therefore , any attempt to move ahead to change that culture , have a lot of difficulties concerning market reaction, news media coverage impact on foreign perception, public opinion evaluations and the like. Even more complicated ,when it comes to impose sanction on key political leaders who at the same time are also very active on business activities.-
Some key questions are useful. Is politics by nature, in conflict with business ?.Not necessarily. A lot of politicians have strong ties with business activities ,without being considered it as an unethical situation, as long as there is a clear division between both. On the other hand, politics might be inspired by business consideration, or the other way around as well. A couple of examples. On the first case, politics inspired by business is “ The initiative for the Americas, to foster trade and investment” in the nineties, and on the second case, business inspired by politics ;the “Venezuela Oil supported Bank of the South for Latin America” .It follows ,that at the aggregate level business and politics might have go along quite well, however at an individual specific level , it is a different matter . Politics as a first motivation, deals with the art of what it is possible to serve society expectations; while business first motivation, deal with self interest . From the Political point of view, it does not seems to be the best approach to motivate other people beliefs into any politician project, to concentrate efforts working on self profit maximizing behaviour, above community needs and priorities, worst of all, when there is suspicious of using priviledge information.-

Eastern Island Civilization collapse: An economic point of view (II)

Is it global warming and climate change an accounting problem?. Unfortunately it is not an accounting problem. Environment accounting , might help to register the losses on the environment arising from economic growth ,but it does not solve the core issue of degradation resulting from human intervention on ecological equilibriums . Brazil, has done a lot of progress taking into account the accounting of environment damage , but of course that it is not neither the whole problem ,nor the whole solution. Real prices of environment damage, are higher than the prices economic agent (consumers and producers)are currently paying, so there is over consumption . It follows ,it is rather a market failure which requires a different institutional framework.-
Third lesson arising from Eastern Island experience, is the fact that weak institutional framework for environment protection and policies design, can be as much harmful as it is the human intervention on environment . When societies do not have the proper institutional framework to cope with any challenge coming across to their survival , it is harder to overcome the consequences of it. There is no tools which to get hand on, therefore no possible solution to count on. Eastern Island civilization, did not have such an institutional framework because at one point in time, they probably did not realized how important was the environment, but when they did ,it was too late.-
Actually, there is not a global environment institution, as it is for trade (WTO), world peace (UN),education (UNESCO),labour (ILO) and the like .The UN, has been trying to move forward on the issue based on a political “good willing” approach , but it seems that the time is for deeper commitment which involves new friendly environment technologies, reduction of dioxide carbon emissions , better incentives for “green bonds” trade markets , permanent dialog on the issue and the like. All of these challenges are, quite demanding for any organization with objectives , different to that one connected exclusively with the environment protection.
Fourth lesson. There is a moment for thinking , and a moment for solutions. When the right time is over, there is no way to get it back. It is interesting to mention that even though we can borrow everything we need in excess to current available resources, including time when we extend our life span throughout scientific progress , we can also borrow time for environment purposes. The green bond markets is an effective mechanism to borrow time for environment protection.
The Eastern Island civilization ,realized too late that the time for solutions aimed to avoid the environment damage , was over. Therefore , they moved to a different set of solution. How to make the proper decisions to survive , minimizing the cost of destroying themselves?. The decided to chose someone , capable of imposing the rules under the new conditions .That was their “solution”. Ours ? . It would be to ask for new global environment institutions.-
The Stern report and the recent UN report ,are clear yellow lights indicating that we are at the right time to implement solutions concerning environment better protection. If we do not work for solutions , what would be our legacy left for posterity? .. Eastern Island civilization ,at least left behind the "Moais" (stone made monuments).

Eastern Island Civilization collapse:An economic point of view (I)

The Eastern Island, is currently applying as one of the new seven wonders of the world. Located 2500 miles west from South America southern Coast, it has become a subject of scrutiny the real reasons behind its civilization collapse.
A kind of small triangle in the middle of the south pacific,(120 square kms ), Eastern Island itself , was not naturally designed to be a different place other than just one more island among thousands of them across the ocean. What made it an interesting place to visit ,and its civilization legacy , an important subject of analysis and study, were the lessons which have arisen to explain the real causes of its collapse .-
Conventional wisdom ,(Jared Diamond´ s book: Collapses of societies, and http://www.tch.tv/ ), emphasizes the fact that the inhabitants of the Eastern Island, did not make the right decisions concerning the environment protection. Its idolatry to theirs ancestors, was the leading force to build up those volcanic stone statures known as “Moais”. However, in the process of moving them toward a different place to the one where they were built ,required a lot of rolling trees such as at the end of the experience of making more than 900 hundred oh them, the whole wild forest was eliminated, such that the ecological equilibrium which kept the island alive, was broken up , and the whole civilization somehow extinguish themselves. It was the “tragedy of the commons “ case.
Because nobody had clearly defined property right on those forest ,nobody cared too much about the risk of deforestation and the subsequent collapse of the environment. But ,the argument for the Eastern Island civilization collapse, might also goes in a different way. Although environment damage was a sufficient condition ,it was not a necessary condition for the Eastern Island civilization collapse. The necessary condition was the lack of trade flows with other areas , because the Eastern island inhabitants , did not have the resources needed to build up transportation means for navigation .Given the fact that they already had exhausted all the wood available, Eastern Island inhabitants got themselves trapped in a deadly autarky situation, which it was probably too late when they realized about it , to make corrections. Their destiny was inevitable. The result was a struggle for surviving the impossible, with no enough foods for the whole population (20000 inhabitants at the highest point of its development), and no trade flows to get the additional food supplies to the one which came from fishing.-
What are the lessons arising from this experience?. First of all ,it is quite appropriate to study this cases because there is an ongoing concern about climate change and its impact on our civilization. There is a risk of transforming environment protection, into the new ideology which by itself might become even more dangerous than the potential damage on environment on their own. However ,the other extreme of not caring enough about the risk of environment damage ,is fatally driven to the worst.-
Secondly :Environment and economic growth, seems to be complementary instead of substitutes .There would not be a trade off between environment and economic growth. In other words, more growth does not necessarily means worsening the environment. It follows that the current global growth coupled with environment damage, is in fact a negative real economic growth .The global welfare ,is moving backward instead of forward.

Income Distribution in Latin America: How to take one step forward? (II)

In practical terms ,Education seems to be complementary with other goods, such as social background, social network, and quality of jobs rather than the other way around. It follows than the true nature of education is connected to be s kind of screening device to keep some quality standard at society level, whatever that standard might be. To understand this statement, let us ask ourselves the following question?. What is the real chance that a student with weak social background ,and an average education level ,can get to the top of a business management?. For this matter any student in such a situation ,will have a lower chance than another one with a better social background ,and above average education level . In this later case ,the screening device mechanism works better than in the former. Therefore, the impact of education on income distribution ,even assuming equal talent endowment for all, will be negatively affected. So ,because of the talent for education is distributed among few people, or because of high quality needs for the screening device , education by itself in Latin America, would not be sufficient to get substantial income distribution improvement.
On the overall aggregate impact, education is important to improve economy competitiveness, as long as it improves the qualification level for different jobs , and productivity is higher. However, the overall impact of education on income distribution is somehow conditioned to complementary policies designed to get better quality of jobs accessible for every one, or a better quality of entrepreneurial programs within the education curricula. .-
The other alternative is to support entrepreneurship among young people ,specially those who have entrepreneur potentials. When we are born, all of us have a potential for learning and adventure. In Peru, 50% of its population is engaged in business activities which require entrepreneurship abilities, so does Colombia with 30% of its population,(Global entrepreneurship monitor , june 2007). Traditional education though ,somehow neutralize those potentials because it is not designed to do anything different than to prepare people for public management kind of jobs, whose basic characteristic are to be stable, predictable , self disciplined by fear .- Therefore, it is important to have an educational system designed to improve those potential, instead of nullify them.-
After the new educational system does its job for improving the entrepreneurial potential, those entry barriers for new business should be eliminated or reduced .To start a new business in Chile requires more that 10 days of waiting time for different approvals, and more than U$$ 500 in legal procedures. Some preliminary research has shown that at local communities level, more than 50% of the total financial resources needed for a new business ,comes from requirements arising from the State involvement on different aspect of any new business, such as sanitary requirement, safety standards and the like. The argument goes into the idea of promoting a kind of “ownership society” different to the concept of “income dependent society”. Every one should be able to get a fair access to property, throughout entrepreneurial activities , as a way of getting personal prosperity, which will pave the way to improve income distribution. The idea it is not a recent one. In the eighties, Chile started out a program of promoting the access to ownership ,throughout the so called “popular capitalism program”. Within this program, in those companies which were privatized ,it was allowed to ordinary citizens, to buy a proportion of its stock options, supported by State subsidised loans, payable with the annual return coming from those stocks. Moreover ,those who bought those stocks had a tax credit as an additional incentive.Unfortunately, the program has not been implemente again.
We need more owner than workers,becasue that way , capital accumulation will allow its benefits , to make its way through for everyone, not just a few..

Income distribution in Latin America:How to move a step forward?(I)

Income distribution, is a sensitive issue in most of Latin America countries, not just because of its relevance for social policy design, but because this region is among the more unequal income distribution in the world.-
The usual instrument for measuring income distribution ,is the Gini coefficient. This coefficient has a range of value between zero (0)and one (1), with (0) meaning a perfect income distribution, each person get the same income, and (1) meaning the worst income distribution, with one person getting the whole income generated in an economy. Thus while in the OCDE countries the average Gini coefficient is somewhat below 0,30,in Latin America is above 0,3 and close to 0,5 with an average of 0.41. Some countries like Brazil, are on the top of this range, and others ,like Uruguay and Costa Rica are on the bottom of it.
The available empirical evidence suggest (south east Asia Tigers, and Chile after the mid eighties recession ,Panama and Guatemala since 1990 up to 2002) that, economic growth is the first step to improve income distribution .
As long as that growth meant higher employment level, the overall impact of such growth was to improve income distribution, because the fraction of labour income over total product was higher. However, the underlying assumption is that labour services markets were flexible enough to support employment opportunities .-
Usually it is more often to have labour services markets with income bias, which means that labour laws and regulation make the labour service market less flexible, because it protect income instead of employment. The paradox in this case, is that firms do not have any chance different to that of laying off people ,or substitute people for capital when it comes to adjust themselves to different market conditions. Either way , the connection between higher economic growth and higher labour income share , get weaker. It follows that the economy might get higher growth , and keep its former income distribution unchanged. That was the experience (in the same period) for Argentina, Paraguay, Venezuela, Equator, Nicaragua and Brazil).-
It has been suggested ,that education is the second best tools to improve income distribution. The south east Asian economies experience of investing in education , has lead that beliefs to be like the driving force on the issue, leaving aside some particular aspects of Asian experience, such us the strong sense of commitment and compromise, Asian people had for getting a better education which by the way, was strongly connected to highly qualify job opportunities in theirs global firms networks. Thus, it was not education by itself, but its complementary nature with high performance kind of job. On the other hand, education achievements are strongly related to individual natural talents, which are not that much evenly distributed in Latin America. In fact, because talented people is scarce, education might have the opposite effect to the one which is expected: To deteriorated income distribution !. Better talented people concentrate the best education opportunities, allow them to get the higher paid jobs(including bonus compensation, stock options) widening the gap between them and those less talented.
In fact , since 1990 Chile has invested huge amount of resources in education ,and income distribution has not changed substantially in the same period ,although its trend is to improve slightly although not exclusively because of education.
Therefore, two of the classics tools for income distribution improvement seems to have some weakness to cope properly with the issue .-

To live up to ours fears (II)

The key question is : Where do fears comes from ?. Of course there is no easy answer. Maybe it should be a matter of psychology, maybe. But, I do believe(my hypothesis)that it is matter of education and beliefs .-
1.-It is matter of education. Fear of freedom.Traditional education emphasizes discipline, obedience and standardization behaviour among young student, such as any one who get out of the line must be punish. Moreover, education was suited to match a production system requirements, based on physical productivity and standardized production. It was not necessary to think about anything . Thinking was others ´s privilege, mainly those on the top of the management, whether it was private or public. From the public management point of view, it was necessary to do just the minimum . Public management in Latin America, has been inspired by its colonial foundation, which was based exclusively on tax collection rather than promoting local business or entrepreneur behaviour. After independence the tax collectors were replace by local authorities, who of course did not want t make major changes on the way the State managed the economy.
On the broader view, our education system in Latin America is far from been competitive , just because by its nature it is not designed to foster self independent spirit ,character and competition .-
2.- It is matter of beliefs: Fear of democracy. Chile, .wanted in the mid eighties, to have a “protected democracy” so it was its constitution ´s inspiration(1980) . The current constitution (reformed in the year 2004) has a different kind of “protection”. While legislators, and politicians kept their tenure in the Senate, and in the lower house of legislation (8 and 5 years respectively), the Presidency was schedule for a four(4) year period, instead of the previously settled in 6 years . What does it means ? ..-
Fear of private business .In the eighties ,Hernando de Soto (Peruvian economist) wrote a book which might be described as the “fear to private enterprise”. To start a new business , it was necessary more than 360 days to match legal requirements, and to spend more than U$$1200 .The State with such a high entry costs ,made people to believe, than private business was something to be afraid of . Chile, currently considered a model for economic growth, in the period running from 1995-2007,has set tariff protection for some products (11), leading the trend for protectionism in Latin America.
3.- It is a matter of Attitude . Fear of risks.It is easier to be protected than to be on our own. Latin America cultural values ,are basically characterized by some sense of vulnerability, which lead people to seek protection in terms of always looking for other´ s certainties instead of our own uncertainties . In most cases ,the State assume that protecting role Alternatively ,it might be the social network instead of personal credentials .-
Once upon a time, some Latin America countries had such a huge amount of public employees , as it was the case in countries with bigger population. So, The State is deeply rooted in Latin America history and tradition.. To understand the nature of our fear ,is to understand the nature of the State: Self protected on the basis of fear.-

To live up to ours fears (I)

It is widely known that there is no economic progress when the state intervenes in the economic activity beyond what it is needed. This means ,to go further beyond what the State do better than the private sector. It follow that the key point is not to get rid from the State , but how to improve the state performance. At the same time, to limit State intervention does not mean to give a blank check to the private sector, because by nature it also need some level of orientation ,which frequently comes from different sources, among them those which arises from the states policies.
The only source of pure private initiative ,lies upon the individual desire to be free ;to take advantage of all new opportunities ;and to get the benefits of freedom at personal and community level. Individual by themselves guided by the self interest , barely feel some fear when it comes to make decisions based on freedom to chose. The economic approach to welfare improvements, assumes no fear to get the best possible combination of different goods to get the highest benefit of living within a community, throughout voluntarily exchange and well informed decisions, otherwise the is no way to get such optimum . Fear mean suboptimal decisions .-
Society as a whole might have space for some fears because it is bounded to more restrictions than those human faces, such as :regulations, , accountability, news media and environment However ,as long as society is open enough to allow the individual energies to reshape what it is outdated , the whole community get the benefits from it as long as new and wider boundary appears on the process .It is like an open system , which has the proper level of feed back to avoid entropy, even though must fulfil its own restriction .
To avoid that entropy ,it is important to have enough information provide by different means, which is the support for optimal and efficient decisions. Any restriction on information means that society become restricted onto its own boundaries ,it imply no feed back and therefore it imply entropy. That was the experience of east Europe societies in the second half of the twenty century. It has been the experience of any state inspired revolution ,and so it will in the future. .State inspired revolutions; are no better than individual inspired revolution. .Fear within a society mean entropy.
Unfortunately, Latin American societies have been for quite a long time a sort of close societies based on fear ,ruled by different kind of groups whether they are institutional (political parties),dictatorial ( long tradition of military coups) or economics (state intervention),all of them one way or another represent their own interest whether it is to protect democracy , to save the nation or to improve equality and justice respectively. The vital contradiction is that no matter their justification ,it is implicitly founded on fear. Instead of relying on the individual, as a natural source of energy for economic progress ,Latin America societies are not founded upon the individual expectations,(freedom) but upon those coming from special interest groups expectations (fear).As a result ,Latin America is lagging behind the most dynamic areas of world economic growth, still depending on raw material highly volatile on prices , with limitations to private enterprise ,weak institutions and corruption .It seems that this is the continent of fear and worst of all, maybe we live in a continent in fear.-.

Air Line services:The Smaller the better

Last week ,I travelled from Kelowna (Canada) to Seattle (USA) in a cultural trip on Alaska Air Lines. A few days earlier , it was known a recent survey which indicated that South West airlines was among the best rated by usual travellers . None of these air lines are among the biggest ,but they both have good service on board. I travelled once in Lot Airlines from Frankfurt to Krakow ,and it was the same experience, good service.
Bigger air lines usually becomes trapped in the “scale problem”. So big, so many passengers, that none of them count more than a full seat , with your seat belt on. Big numbers might get quality services out of control, because it might imply a captive market. In other words no matter what you do, you have clients waiting. On the contrary, Smaller air lines might get closer to every passenger in such a way ,that it look that you are the one and only. They have to fight for every passenger to convince him or her to become its usual customer.
What is it the economics explanation for that ?. In a small airlines, with narrower coverage the probability of repeating the travel is lower than on big airlines, which because of their wide coverage ,it has a higher probability of getting the same passenger again in a different route and flight. As a result , on big airlines they have the chance of getting back each passenger ,no matter how they attend them, therefore they can afford to have good quality of service in some flights, mixed with regular quality of service in another one ,no matter that the outcome will be an average quality of service, quite below the good quality services small air lines apply on every passenger based on the reasons mentioned before..
What usual travellers can do to improve the average of quality service ?.The common answer would be to change to a different airlines, but that imply some transaction cost because of the different schedules, check in facilities , flight connections and the like. A more practical solution is to avoid asking for services on board ,whether this is not good enough .Every passenger who reject a bad quality service ,is a signal for the whole service on board . To say no in a flight which is supposedly to be relaxing , is a strong signal to change service behaviour .But what about the price of the ticket you already paid? Well, when it comes to fly the most important thing is to arrive on time, so you pay for being there no sooner nor later, than what it was informed when you decided to buy an air line ticket. On board service are not include on ticket prices, unless that you travel on first class.
What to do then to improve the quality of standard on board service?. Get more involved on details concerning the crew. How are they doing?, How many hours have they been flying?. My hypothesis is that air lines on board services it requires the two to tango.With some exceptions, it has worked so far.

Wealth creation :The way it works

Last friday I was at Central University of Washington (Ellenburg,Washington State)where I gave a lecture concerning the wealth creation process.Some key ideas about that were :
The role of institutions,policies and rules.The basic premise was that bthe State do not create wealth,instead it redistribute it .So, the fisrt question was who has the responsability of wealth creation if the State by nature does not.The answer was, that the private sector(business firms,people motivation and self interest among others )and markets forces,are the key factor to start out the process of wealth creation.
But private sector and market forces, do not works well when there is no institutions, policies are wrongly designed, or there is no stable rules.Most of the empirical available evidence indicates that there is also a kind of right combination to get the best results.
The lecture was related to the Chilean economy experience about the process of wealth creation ,so I emphasized how the local authorities at that time (1975-2000),made the proper decisions.
It is widely known that there is no economic growth without investment,but it is also widely known that there is no investement without economic growth.Therefore both are connected to one another,mainly because they are affected by the same variables.Chile started out in the mid senventies a process of modernizing its economy focused on those three variables.
Let take a look at them more closely.
a.-Institutional variables:it meant to change the emphasizes away from the states and more focused on markets and private firms.To become an entrepreneur was not a negative option, like it was common to believe in the sixties .A privatization process was implemented to get back all of those business in State hands ,to their owners. At the same time , new laws were approved to support market forces to do their job.Markets start to set prices,and this meant that busines decisions were made on the basis of markets signals.Therefore new productive sectors started out its productive process headed toward exports.Consumers were also important so there was a new institutional framework to support their rights.
b.-Policies variables. The so called macroeconomic fundamentals ,started out to be applied.Responsible fiscal policy, keep inflation under control ,a strong private financial system were the new polices framework,such as it created the necessary conditions to support economic growth.
c.-Rules variables. The new rules set energies in favor of markets forces.Every new project had to have financial resources available to be implemented ,so there was no printed money available to finance any kind of project.Prices were all set by markets,so there was a clear signaling process for business decisions.The rule of law was widely applied in economics activities .
All of these allowed the chilean economy to overcome the economic mess of the seventies.Because to finance investment it is also nedded some saving,in the eighties there was a second wave of reforms, to support saving throughout the privatization of pension funds.This resources were aimed at providing fresh resources for new investement opportunities, otherwise it would have been very difficult to implement them.At the beginning (1980), they were unsignificant,but at the middle of the years 200o they represent near 70 % of chilean economy Gdp. Moreover, these funds has made the chilean economy less dependent on foreign capital and more reliable for long terms investment project which requires a lot of new and fresh resources.
In the beginning of the year 2000,there was a key second step in favor of private sector.The State no longer had the monopoly for public investment.The same principle applied before to health,education and pension systems,was applied this time to public investment.Those traditional projects like high ways, port and airport facilities,were assigned to private firms throughout a bidding process.This mechanism allowed the chilean economy unfrastructure to improve its efficiency supporting the exporting sector to get competitive edge.
It is clear that all of these reforms process, were related to have more private sector in the economy and less state intervention.The income percapital grew form about U$$4000 in the beginning of the nineties to roughly U$$ 9000 in the year 2006.(Some measures indicates such income level to be U$$12000).Of course each economy has their own experiences,realities, and framework setting but there is something in common.All of those economy which followed this path ,are among the first on the list of economic development.Markets forces creates energy which under the proper institutional framework, improves wealth levels.This idea was not clear until the mid nineties,when the all project got to a higher level of maturity,such it was all needed to make new reforms.
But reforms have a short life span without new and complementary reforms.The big challenge at this moment is to move deeper into modernize the state.The current public management model is not longer able to support private requirements.-

The new source of power:The economic analyst

It has been common that any economics events or shocks, might have three kind of impact on economic activity :
a.- The impact the shock itself induces, which is evaluated by its own nature, for example a decrease in oil prices, an increase on interest rates ,a drop in unemployment and the like.-
b.- The second impact ,comes along the interpretation of such a economic or political shock. This interpretation is usually done by experts well in control with the implications they are trying to communicate. However, this is when the other side of the story begin ,because it is hard to find two expert who agree on something . Different judgment about the scenario surrounding the event, might explain deep differences in opinion and confused guidelines for markets. The so called mixed data, make thing worst to get the right interpretation. when it comes to explain to the markets the expected effects of any of such shocks. The quality of judgment, matter to make the difference.-
c.-Markets reaction , make the third line of impact when an economic shocks occurs. But markets reaction are strongly influenced by expert judgment about what it is happening with some key macroeconomic variable. This experts` judgment, means information wrapped in such a way that improves its value, for investors and decisions makers.-
There is a book (The twenty fist century Capitalism) which analyses this new source of power , arising because of the necessity of information on real time for markets to make the best decisions .He (R Reich) called them the “Symbolic analysts”. Who are they?. Well educated people ,usually with high level social capital , highly committed to make clear the differences between them and others. It is like the new global source of power in the sense that “opinion(judgment) is money”, besides they are everywhere with the same capacity of focusing on global events, given that economic information flow freely ,which make it accessible at lower transaction cost to elaborates reports which shapes markets moods .-
A current Latin America President made some comments about this analysts ,saying that some decisions are not constrained by others` judgment ,but by its moral justification or its necessity. Sure, sometime it is so powerful the effect of any comments of this analysts, about expected effects for changes in policy priorities, that it seemed political leader might also have a new source of control to their economic acts. In this global economy , with quick moves between different profitable economic options, it is not free to be left outside of such options just because an analyst suggested that the economy is getting out the line concerning its risk level or macroeconomic performance.-
The recent event when global stock exchanges got into a “volatility zone” because of remarks made by Former USA Federal Reserve Chairman , reflects quite clear what this discussion is about. His judgment of 30% of chances for the American economy to go into recession, was enough to ignite the wide spread reaction against stock prices . Nobody wanted to be left outside of the winners, before the market face the assumed road of a recession .However, was that probability a real one ?.Probably not. Some later clarification suggest so. But the market reaction did not wait for such clarification.-
This new source of power, comes along the continuous flow of information that market has to assimilate in a short period of time to shape its expectations. Any one capable of doing that analysis will have the power ,because of being the first , the others will follow.-

Free Trade agreement: Chile - Japan

A new free trade agreement is next to be sign up between Chile and Japan. Up to know, Chile has a lot of such free agreement, each one with its own significance. This one means something like a quality certification :Japan is well known because of his tight, some how close internal market for foreign products. Japanese themselves, are quite conscious about what the quality products means. On the other hand ,they have advanced the consumption technology far enough to make the selection between different products, a very sophisticated process .-
With its more than 120 million high income consumers, Japan markets represent a very interesting alternative for more value intensive products, which Chilean economy exports currently lacks, because more than 60% of its exporting sector is concentrated on mineral resources, (2006) while industrial export is no more than 30% .-
The agriculture sector is the one which gets the highest benefit form this agreement , because 53% of its export to Japan will be freed from tariffs immediately , while the 35% will have privilege access to Japanese markets . By the same token, 90% of japans export to Chile will have privilege access to Chilean markets.-
But this agreement do also have geo strategic importance, because it allows to have a business platform for trade flows to Asian markets , transforming Chile in a place of new investment opportunities.
Investment behaviour in Chile , has been rather weak in the last couple of years , reaching close to 25% of GDP, a little below what it is needed if the purpose is to have stronger economic growth, than the current level (4% in the year 2006).-
Beyond the good faith inspiration of all of these agreement, very much of its impact depends upon complementary policies to support new sector to move on board, specially in the case for medium and small size firms . Chilean economic authorities are working about it, trying to implement new set of policy recommendation related to improve competitiveness. Therefore, this agreement comes along in the proper time to take the most advantage from it, which by the way will positively aggregate the accumulative effect of previously free trade agreement ,because of economic of scale.-
The key question now ,is whether the Chilean economy by signing these trade agreement ,has reached a point such that any additional one will have a decreasing marginal effect on trade . This means that due to the marginal decreasing return principle, with the current productive structure, each new agreement will imply a decreasing impact on trade. Each one add up less to trade than the previous one ,so the overall impact might be below expectation.. It follows that the dynamic of these trade agreement, requires new economic incentives(for example more decentralized decisions) for productive purposes, to keep its trade gains moving steadily upward.-.

Water supplies:challenges ahead

Thursday ,March the 22 nd , was the water`s world day .It looked like everyone of us, as usual ,were on our daily basis activitiesl. However some few people has already started to worry about water conservation and water supplies .Why?, Because it is one of the key natural resource next to become relatively scarce . While demand increase at a pace of 2-3% a year, the supply does not increase at such pace.-
No more than 2 % of current available water ,is suitable for human consumption, and more than 90% of water useable for human consumption is underground, which means that it is going to require heavy investment to cope with the increase demand of water. Besides, more than 70% of water available for human consumption ,is used as an input to produce foods, and Mining and agriculture must compete with each other to get the same resource: water.-
Actually there are some communities which do not have water at all, which imply high rate of diseases because of the lack of water. In fact, 1,4 billion people do not have access to safe water and more than double that amount, do not have proper sanitation conditions because of lacking water.3800 children die every day ,because of lacking of proper sanitary conditions related to insufficient water supply.
Some additional data relevant to this discussion make the problem even more complicated: Up to 60% of human body is water, the brain is composed of 70% of water, lungs are 90% of water ,our blood is 83% of water ,and like an engine; human body needs to replace 2,4 litres of water daily. While the reduction in oil reserves can be solved by replacing it, for different and alternatives means of energy ,to keep on moving the engine of growth, water can not be replaced as the main input in human body . As a result of this, if there is no water available for human consumption, that will means higher mortality rates. Water is the essential to make human body to live, like fuel is the essential to move a car .-
The challenges is twofold (www.rotary.org) : To reduce wasteful water consumption, and to provide safe water to those who actually lack the supply of it and whose lives depend on it. At the same time, these two challenges, mount to a new model of water management .
Concerning the first challenge( source :USGS)
a.- Nearly ¾ of water that comes to our homes goes down the drain.
b.- A faucet that leaks at the a rate of one drop per second, wastes five gallons of water per day, and 2082 gallons a year.
Concerning the second challenge:
Some key world organization are working on projects aimed at a better access of water, in communities with insufficiency of water supply, most of them in Africa.-
What about the new management model?. From the economic point of view , a scarce resource, must have a price which is equivalent to its scarcity level. Therefore ,those activities highly water intensive, should paid the price for it ,or use alternative source of water, like the one coming from the sea .Therefore ,the new model imply a different prices for water, such as to reduce its wasteful consumption and its misused in productive purposes, and new technologies aimed at take the most advantage of sea water, such that more water will be available for delivering to those communities actually lacking this resource. Finally, global warming and water supply shortages, looks like a global nightmare. Well,that is the challenges the human specie is more suitable for.-

Market volatility and global economic growth

There has been a lot of up and downs on markets in the last weeks, and economist are wondering what is the explanation for such a sudden change , considering that the world markets have somehow assumed the oil prices increases shock, higher geopolitical risks, and some global disequilibrium. As always, in economics matters there is no easy answers. Like human body, what it fail at any moment, have an impact beyond its natural sphere , even though the health condition are good enough ,to overcome difficulties.-
The global economy looks pretty robust taking into account some of the available forecast. The IMF (preliminary draft) is expecting to have a global economic growth of 4,9% ,although at a slower pace than global economic growth of the year 2006(5,3%). This slower pace is founded upon the current adjustment in the USA economy, and the lingering question concerning its impact on global economy .It seems that such adjustment will moderate global growth, but not enough to reduce its dynamism. In fact the USA economy , according to the same IMF report, will have a GDP growth in the year 2007 of 2,6% ,somewhat below the 3,4 of the previous year, but Europe and Asia economic growth expectation, do not look fragile at all . So, it is plausible that the global economy is going through a slow down adjustment ,to a more sustainable long run economic growth.
All of the previous subject, are exogenous data markets , already considered by investors in their portfolio analysis, because of all the information currently at their disposal for investment portfolio managers. However, markets also include speculative forces; those who are trying to get the higher benefit, at the lowest risk possible . Therefore they follow not just the exogenous variables, but also the endogenous one before making profit maximizing decisions.
Which are the endogenous variables affecting markets ?: on the positive side it is creativity and innovation ,which allow for new product to shape market trends. This have been the driven force for quite a while on global economy, with new global players boosting global trade throughout services , technology and quality. But this positive factors ,coexist with negative ones such as rumours, worse than expected data, contagious pessimism about current situation ,political changes impact, and key economic sector expected performance(housing, construction ,manufactures).Both variables exogenous and endogenous, make the balance for the overall markets expectations and investor `s subsequent decisions . With rational economic agent ,which collect all the information necessary to make decisions, .this balance will always clear. However the path which it follows it is not without cost ,because not all the speculative investors have the same risk prone behaviour, some of them are more risk reluctant ,so they react more quickly and get the market forces behind them .-
In short ,markets behaviour are more independent from the fundamentals of the economy ,because they also considered this endogenous variables , given the fact that its adjustment velocity is faster than the economy as a whole. As Paul Samuelson has said: Stock Markets has anticipated 10 out of the four economic recessions. Therefore, volatility is part of the risk in markets behaviour. The market mood has high sensitivity to everything which might change the expected profit. In the process, it allows to correct those prices overvalued and those prices undervalued.-

Latin America as a political asset

Some times it looks like Latin America still depends on foreign attention to pursue its own guidelines concerning democracy ,economic growth and social progress .Sure ,we are part of a global network which make every country permanently connected to each other. Therefore, it is very important to know what its natural partners thinks about new developments on different issues, to move along upon the basis of consensus. The world has changed. It has become smaller, and self connected ; new global interests get closer what in the past were rather apart. Let take some examples. China is steadily increasing its economic ties with Latin America, because it provide raw materials and foods supply .Some Middle east countries are also getting closer to Latin America, because of the need of energy resources common policies, due to the expected decreased oil reserves. At the same time, Latin America has also worked out alternative energy supply sources, like ethanol which arises as an option to control the global warming trend. On the other hand, remittances from relatives abroad has made Latin America economies less vulnerable to foreign aid fluctuations, and although sharply questioned, the “Washington Consensus” has made its way through to impose better designed domestic economic policies to promote growth , investment and trade . This overall picture, despite some pessimism , has generated upbeat expectations for improving the political position of Latin America on regional affairs. In other words, these days Latin America have become mostly on its own, a more valuable political partner which to do business with.
What make the differences?. Latin America has its natural allies and friends, which stay well above short term political calculations. Latin America has worked hard these last ten years to find its own way to development and growth, and it does not need permanent advice either. However, there are winds which are blowing to move back economic history clock, what former Prime Minister from Spain Felipe Gonzalez ,call it the “regressive utopia” .Latin America has made strong improvements on democracy, human rights and economic conditions for growth, but there are still pending social problems such as poverty and inequality, which demand attention with a new approach, but not a regressive one .It also needs technologies assistant for non traditional source of energy supply, along with a reform to the state; not to get rid of it ,but to make it better, more efficient and connected to their own people ´s needs, and capable of providing effective solutions .-
What can be expected from all of this ? : The more obvious one should be that it is not the moment for turning back the economic history clock, there is still a lot of progress to do on social issues, as well as on trade practices .However ,there are some views , who believe that to solve these problems , the economy should be managed by the same policies which are responsible for what it was the worst economic depression in the eighties, widely known as the “lost decade”.
Above all, Latin America needs to complement growth with more effective social policies ,a modern state and institutions ,so that key values like democracy, private firms and markets instead of the state , prevail as the engines of economic growth. Following this path will improve even more its political value.-

Gender Income gap: why women earn less than men?

It is widely known that women earn less than men for the same job. Academic research, it is also extensive enough to support the notion that any income difference between men and women ,can be explained by different factors and variables ,each one of them related to one another such as education, family obligations, social backgrounds. But there is one key variable which count deeply in any prospective analysis for future on the job performance, and expected productivity: men can compromise themselves with the labor force more actively than women, because very much of the burden of raising a family( to have a child, initial years of mother attention) looks like a women task, at least those nine months that nature impose upon them to sustain unborn child life. It follows that in such a case, employers discount that expected on the job productivity difference against women(lower for women )usually paying at most one third (30%)less than men .The theoretical support for that decision is in the Marginal productivity theory, which states that expected return for hiring a productive factor must be equal to its cost ,leaving all others variables constant.
No matter the economic justification, the first question arising is :Is it fair for women being paid less, just because the expected productivity is lower when there is a period of time she is out of labor force ?; after all, she might recover that productivity losses by extra working hours. The problem still to solve, is that it is hard to find perfect matching between the worker abilities who is out with the worker abilities who is in, and even though there are head hunters agencies to do the job of finding the best worker alternative, it imply additional cost for firms, such that women must paid that cost with lower wages. In the men ´s case, they paid that cost with variable wages.-
Thus the real issue for women fair wage, is on the greater flexibility of women jobs. This means that they can work at home, which with technological support currently available is quite sure is the way jobs are going to be designed in the future. Alternatively, they can have part time jobs, flexible enough to make sure productivity levels are not severely affected while they are absent . It is all about more flexible labor market.-
Unfortunately , labor market flexibility discussion, has been focused exclusively from the wages levels point of view, specially the wage earned by men. Women wages ,and women labor condition ,seems to be aside of the matter. How can be explain that bias ?.
In European countries, women labor force participation is well above 60 %, So it is in the United States. Advanced countries seems to have become equally inspired, concerning jobs opportunities. In some Latin America countries, women are still considered for domestic activities and the labor force participation is below 50%.These differences, also count as an explaining factor for the bias in the labor market .Women are a minority with a weak capacity of organization and representation, which make them more vulnerable. The measure of that weakness is the income gap .

The new global uncertainties:Defining globalization frontier(II)

The key question is why such global uncertainties do not affect global economy growth, or why defining globalization frontier does not affect either global growth , even though it seems that the global politics is currently not well connected with global economy .
Although It is hard to find answers to these questions I will try some of them :
a.- There is a trustable global trade institution ,capable of dealing with tough issues such as protectionism ,agricultural subsidies and unfair trade practices, such that global free trade will be applied sooner or later ,all over different kind of products .
b.- There is strong perception that capital flows are free from restriction, around the emerging markets economy .At the same time, the most important financial places count with a new currency (the euro),such that the portfolio diversification allow for greater investment opportunities and higher investment volumes. This higher investment level, push upward global economic growth prospect.-
c.- There are new players (China and India),on key productive and services sectors on the global economy, capable of maintaining its growth leadership at least for the five years to come,(average economic growth above 6,5 %)
d.- There is transition going on from an oil resource based economy, to a knowledge based economy, which can sustain economic growth while oil prices are above historical levels.-
e.- The eurozone is moving ahead to be the dynamic partner global economy needs, which means global economy growth (new players included)opportunities ,are somehow rotating from the US based industrialized economy type of growth .-
If all of the previous factors apply ,it follows that global uncertainties are not economics one by nature , but rather political and geopolitical . Thus the interesting thing, is that almost nobody doubt about free market global economy model as a viable alternative to induce global growth ,which by itself move growth expectation and investment upward . Sure, this could be considered to be the right interpretation of recent economic history But is it enough?. After all we have the challenge of global warming, which might also affect economic growth like a new constraint .
A second line of reasoning might goes this way: There is a lot of global endogenous factors arising from the greater availability of global information throughout internet, and global news media . Higher level of business opportunities information ,specially market trend information, make possible to take business decisions with a better risk scenario analysis, which may compensate all the other variables still unsolved .In other words, the five factors previously mentioned have created a set of special condition, such that creativity and innovation forces might goes on their own ,no matter the political and geopolitical implications of current state of affairs .-
The implications of this line of reasoning would be that we have global economic growth despite new global uncertainties, no just because of the new big players coming in, but because of more information available to detect business opportunities in such way that it would not have been possible without internet, fostering global endogenous variables to take an active role to explain global economic growth. It seems that there is a combination of exogenous and endogenous variables, which can explain global economic growth even with the new global uncertainties. Does it implicate that it does not matter how the new global uncertainties are solved ?. Quite on the contrary, it means that the implication of such global growth is still unknown , the dynamic of growth is one thing, the direction is another ,beacuse the is no global frontier defined yet ,therefore this is the challenge to cope with.-

The new global uncertainties:Defining globalization frontier (I)

From the economics point of view, uncertainty is lack of information about future events . From the entrepreneurial point of view, uncertainty is a situation which characterize itself because there is no control of key variables which influence events. How to deal with uncertainty ?. The best way to deal with it ,is to improve information levels ,and therefore be able to getting a better control of key variables. It has become usual that firms need information about consumers, competition, regulations and the like, such that they transform an uncertainty scenario into a risky one. Business man works with uncertainty to transform it into a risk. However, one thing is to make decisions at the business level, let say to implement the new market strategy or the innovation policies, under a risky conditions, which means to have all the necessary information to get a better control of it . But what about the global economics scenario, which do not have a single decision maker, but a network of multiple connected small decision makers, which add up a new network? In this case it arises multiples uncertainties.
What do I mean by multiple uncertainties?. Basically three concepts ,one related to the other :
a.- Uncertainty concerning the global economics effects on the world order: The rise on global trade share of China and India, along with the financially stronger Europe , means a new economic and markets reality, which may allow to some extent a decoupling from the USA economy growth .But at the same time, it means higher risk of protectionism .
b.- Uncertainty concerning the leadership capabilities and global institutional framework to deal with these new challenges .-
c.- Uncertainty concerning the geopolitical lasting impact of these new scenario and its expected tensions.. New countries are moving toward Latin America Markets, but more so to its natural resources endowment . What are the implications of these new players expanding their influence?. .-
These multiple uncertainty setting is not a new one, (1973 with oil shock,2001 with religious terrorism) ,except that this time the world has become flatter, which means it has become more horizontally connected .Therefore it is about every one´ s best interest to look for integrated solutions to global problems, which means more coordination among key players on the global networks. However, like the game theory suggest, with no clear incentives, each one looks for their own solution, no matter that there is a gain waiting had it implement a cooperative coordinate option.-
But is it just a coordination problem ?. From the Latin America point of view, it is clear that ideology is still alive , as the globalization institutional frontier has not been defined yet, after all there are winners and losers in the process, therefore there is plenty of room for different multiple projects either inspired by ideology or pragmatism .Let say for example, among the ideologist inspired, the so called “hard leftist ” groups(Venezuela, Bolivia, Equator, and Cuba) , on the other hand , there are different Free trade agreements projects among the Asia Pacific countries, USA and Europe or Europe and China, which are good examples of the pragmatist point of view , or the so called BRIC group of countries,(Brazil, Russia, India and China).
Coordination policies among Latin America economies might be limited by ideological reasons .

Does socialism fit into the market globalization? (II)

The key question, whether to stay inside or to move out from global trend, was somehow solved in the mid seventies. Europe lead the way with visionary leaders which anticipated the change lying ahead to build up the new paradigm: Government was part of the problem instead of being part of the solution, so the State should do its job without interfering markets but complementing them .This plain but powerful statement, opened up the door for the Germany reunification ,Spain rise to the new condition of European union member, and England renaissance out if its economic crisis .It was the so called “Third road”. Socialism can coexist wit markets, such that it replaced the hard line view of getting rid of markets , therefore leaving aside the totalitarian notion of State Socialism. From the rightist point of view , it was the renaissance of the market and its capacity to creating wealth .Therefore, from both sides of political spectrum ,there was a transformation which allowed the market globalization to roll over such as ideology was gone , pragmatism was welcome.
Latin America has not been immune to this new trend. The year 2006 was an election year for the majority of its countries. Although the results, suggest that the leftist approach has taken over the control of the economic agenda, it is not the traditional hard line leftist which represents the current real preferences of voters. There is an alternative path which has taken into account the European influence :Chile , Brazil, Uruguay ,Peru even Argentina represent the modern view of the world from the leftist point of view, which is not apart from Europeans leftist views, such as current Prime Ministers of Spain, Italy and Great Britain.
This convergence between market and the state is good for economic growth, poverty reduction, and inequality corrections. It is also good for being part of globalization and its positive side, while at the same time allows consensus to face its negatives bias . Ideological Isolation is not the best alternative to a pragmatic integration. The proposition of more State to fight poverty and inequality, has been ruled out by history, In today´ s world represents the wrong solution. Latin America paid a very high price to overcome the State failure to solve the problem of lacking hope and expectations. It is not just a coincidence that in the seventies, the dictatorship as an alternative for democratic government ,was spread out as the “solution” for creating more favourable conditions for growth . What it seems to fit better into the current trend, is to modernize the State to make it more efficient, and better focused on urgent social problems , keeping as a top priority its complementary role with markets. This is the mix that has allowed Spain to become an economic advanced country in less than twenty years ,and it is shaping the way for more economic integration in Latin America .Private business has done more economic integration, than the Latin America traditional State did in half of a century. New jobs opportunities arising from private investment in Peru, Brazil, Chile, Colombia, Mexico, to mention a few, means that those people can have hopes not because of the State ,but because of private firms.-
On the other hand, the proposition of fostering growth leaving aside high income markets for exporting products is not realistic. Domestic markets do not have the income potential to sustain demand at such a pace, to justify the exclusion of foreign markets.
Latin America leaders must have the wisdom to identifies where is the right path and its main characteristics. One thing for sure, it is not about ideology, it is not excluding private sector, it is not about the traditional colonial State. All of those “solutions” were proven to be wrong. It follows it is about pragmatism ,it is with the private sector ,it is with a modern State.-

Does socialism fit into the market globalization? (I)

At first glance it looks like socialism does not match very well with globalization requierments. In a deeper focus it becomes a fact. Socialism and globalization does not match to each other. By definition globalization means the chance of getting access to better business opportunities, higher economic returns and profits throughout a global allocation of resources ,taking advantage of greater capital mobility to move into places with the more convenient input prices. As a result, people chances of increasing their welfare improves, as it has been the case in the last four years for Latin America, which it has benefited from strong global demand for natural resources allowing an economic growth of 4% on average.-.
On the other hand, Socialism means to restraint opportunities only to those one the State can afford . Therefore, it rules out any chance of getting advantages of the best opportunities, because the State (political by nature) moves in slow motion, it is inefficient to manage public resources, and its planning horizon is a short run span. So, given its nature, any possible action derived from the State depends crucially of the resources available .Whether these resources are not enough, the result will be egalitarian poverty, which means every one will turn out to be levelled off downward. On the contrary, whether resources are high enough even above the requirements, the result will be corruption. Those two options, corruption and higher poverty ,represent the past experience in Latin America as a result of state intervention in economic activity. A lot of Latin America countries has understood this fact, so they have changed their approach to dealing with markets and private sectors ,turning out its policies to a more friendly tone. For instance, although politically is considered a close regime, Cuba is a mixed economy strongly depending on tourism ,which is based on private sector. China has moved slowly but steadily to deeper integration with global economy open up opportunities for private sector.-
At the same time these days, poverty and income inequality reduction does not depend only from the State help. Empirical evidence suggests that it depend more critically upon the private sector capacity to create wealth ,which under the proper institutional framework and complementary social policy support for the more vulnerable , allow to reduce poverty and inequality. But, it also depends , of entry barrier for small investor to go into business opportunities. All of this imply less State intervention in the economy, which do not imply to get rid of the State. This has been the Chilean economic experience at its highest point of success.(1990-1998).-
Considering the precedent paragraph explanation , the world economy and the majority of Latin America economies, have chosen to follow the history trends supporting markets to do their job. To pretend the opposite it is not just the riskier thing to do, but it is to move back history clock.-
But not only pragmatic markets options are available to reduce poverty, unemployment and inequality , Idealism is also available, except that it has a high price. Chile paid a high price for such idealism. Since 1940 up to 1985, ideology was the driven force in Chilean economy ,whether it was leftist or rightist , both experiences represent the risk of ideology when it apply into the economy. Idealism do not solve poverty and worse of all, it becomes fatally linked with corruption, How is it so?. Idealism do not produce financial resources to finance it. . Today, socialism and idealism are closer than ever, but unfortunately corruption, poverty and inequality are its derived product . Therefore do move out of global trend, instead try to manage the best way to take advantage from it.

2007 :Some thoughts

The year 2007 has just began. What can we expect from it?. As usual, the new year includes some remaining events from the previous one. On this regard, it is highly probably that the year 2007 will be at the beginning a sort of follow up on issues such as oil prices, USA economy slowdown, and the decoupling from it from the rest of the global economy .
However, some key questions shall be solved:.
a.- The most important one, the USA economy slow down process and its either soft or hard landing and its expected effect on Latin America economies.. At the same time ,the so called decoupling from the USA economy arising from the rest of the global economy .The answer to this question will make a difference for Latin America, and its prospect for keeping its current rate of growth. The expectations among analyst, is for the USA economy to have a soft landing ,which means a transitory slowdown in economic growth, not strong enough to have a negative impact on the economic growth for Latin America economies. Additional data will clarify definitively the situation probably in the middle of this year.
b.- Oil Prices will continue to be on the head lines, just because it is still the key energy resource, but also because its price trends will signal the transition from the oil energy resource which the industrial economy was based on, to a knowledge based global economy capable of changing its energy matrix toward new energy sources. The faster this transition, the lower the long run oil prices will be. But it is unlikely that the speed of such transition ,will be fast enough to push oil prices sharply down below its current trend given considering a normal scenario, which means oil producer cartel react to the lower oil price, and there is not disruptive geopolitical forces in motion. Therefore it is feasible that oil prices are going to be on the range of U$$ 55 to U$$ 65 the barrel.-
c.- New energy sources, will continue to move further ahead on the global energy matrix. Wind power as energy source ,solar panels among others ,will continue to be an alternative solution . It follows that environment, will also continue to be on the spot light ,specially on issues related to energy sources. This is nothing new except that the current institutional arrangement (Kyoto Protocol) will be under stronger pressure to be left out, to clear the way to a new protocol.-
d.- Market mechanism for environment contamination will also moves on upward , as long as there is increasing information about its benefits and expected gains. The price of such financial instrument in the secondary market, the “green bonds” markets, will continues to move in the upward direction.-
e.- The local stock exchange markets will be a good alternative for investment ,specially the retail sector which still has a wide area for further growth. In Chile it has been the star sector in the last five years , and there are strong expectations for higher return this year. Its share on the stock exchange index price has increased from 2,07% in 1997 up to 22.92 % in 2006 ,which reflect the increasing volume of business related to consumption expenditure, key characteristic of a growing economy .-
So, it is time for moderate optimism. Some caution on commodity prices and global economy unbalances adjustments and its impact on the dollar value deterioration .-

The year 2006: Some notes before it goes away

The year 2006 is close to its end and it is appropriate to make some balance for Latin America economies , although not a detailed one, but emphasizing some elements which can be part of new trends. Let take a brief look to some of the most important on the list:

a.- The year 2006,was an election year in Latin America: Brazil, Mexico, Nicaragua, Perú, Equator, Colombia . No matter the political environment and its tensions , it looks like each of these economy went through quite well in terms of its overall perspective to continue growth. Venezuela is a different case because of its oil resources endowment , it can take the risk of some luxuries.-
b.- Growth has reduced poverty and Unemployment in Latin America in the year 2004, 2005 and 2006, so Growth should be the first priority for the year 2007 ,to get further gains on both social illness .It seems that a majority of Latin America countries , believes in the power of markets to create wealth .-
c.- Quite on the contrary to some pessimism at the beginning of the year 2006, this year, was very positive in terms of promoting free trade, as one of the key condition for growth .Uruguay, Peru, Equator ,Colombia worked hard to get through a Free Trade agreement with the USA economy .-
d.- It follow that the Latin America economies, are ready to pursue further steps to complement free trade and Growth ,moving forward to a higher stage of economic performance, throughout additional steps like reforming the still heavily centralized colonial State , and open up new opportunities for private sector throughout microeconomics reforms such as those related to the entry barriers to begin new small business ,or greater flexibility to participate on public infrastructure.-
e.- It is also clear the increasing pressure for a greater social balance to distribute the benefit of growth, specially towards those more vulnerable to be left behind. Poverty reduction requires constant policy effort, simultaneously orientated to both: short run and long run . Growth by itself is not enough, the trickle down policy ,is far away from being the right policy in Latin America economies to reduce poverty. Chilean economy experience is quite useful on that issue.-
On the negative side, it is the attempt of moving backward the clock of economic history , when national leaders try to fool their own people with old solutions to new problems. The Traditional welfare State is on its way over to a new Services orientated State, which provide training, information, financial support for productive purposes , good quality of public education and public health, and lower entry barrier for new small business. Price controls, State intervention on the sphere of private sector, weak institutional framework, make a very dangerous policy mix. Two key countries like Brazil and Mexico ,have already settle down the way.
The Spaniard Chamber of Commerce has given its forecast for the year 2007.The expectation is positive, no matter the risk of a slowdown in the USA Economy. This might be explained because Latin America is well integrate to global economy ,and at the same time has an interesting flow of capital resources coming from migrants from the advanced economies, which make the continent less vulnerable.-

Milton Friedman: The Professor and his Global influence (II)

What was the real influence of Professor Friedman in Chilean economic experience?. To begin with ,he was not comfortable with the idea of fixing prices like the exchange rate, or for that matter any other price, which the Chilean economic authorities at that time did to reduce inflationary pressures. At the same time, he was critical of restraining political liberties as a justification for implementing market oriented policies. There was an unquestionable and clear connection between democracy and free market policies, he said; so that there was no way to get success with markets oriented policies without the support of democracy values. It follows that his influence was more on the ideological side, rather than on all of the practical matters related to policy implementation .However, there were some areas where his ideas were the inspiring foundation, such as education throughout the subsidy to demand programs, and privatization of retirement of labour force account and the expectation hypothesis and the Phillip curve (the acceleracionist view). On the other hand, Friedman seemed to be more distant from the argument which connect markets functioning with institutional framework, than Douglas North, so that his beliefs were strongly shaped by distrust of regulators and above all regulations. The empirical experience though, suggested that it existed an important relationship, between institutional framework and market policies results, such that it was possible to implement market policies within the frontier of a set of clear rules and institutional arrangements. If government had to intervene as an unavoidable effect of uncertainty , it had to be following certain rules .
At a global scale Friedman influence was decisive in the eighties helping to shape new macroeconomic policies ,and above all the new concept of the government intervention in the economy ,and its relationship with its citizens. The Keynes proposition that government was part of the solution, turned over to the other way around to become considered as part of the problem . As long as Government was identified as part of the problem, it was important to design the future policy scenario. The fall of the Berlin wall and Soviet Union collapse, was also part of the new paradigm concerning government role in the economy. Ireland , New Zealand followed the British economy experience ,to become later in the nineties the new stars of the Europe unified . They reduced government intervention, in such a way ,that it allowed those economies to get strong gains on economic growth and welfare improvement.
In Latin America ,at the beginning of the nineties ,following the debt crisis, there also was a new consensus about the principle that Government was part of the problem instead of the solution. So ,Latin America economies started out privatizations, deregulations, openness of markets to international trade ,and private firms were supported as the key leaders of wealth creations.-
A couple of final comments about Professor Friedman global influence. It looks like his was more political economist than most of his other colleagues, like E Phelps (Nobel Prize winner in economics, 2006) , or Alan Meltzer. However , the trade mark of Mr Friedman legacy ,is also related to his belief about intellectuals and professors ´role in modern society .While politicians and military shaped the twenty century, intellectuals and business man will shape the twenty one century. On that regard ,Milton Friedman was almost a century ahead of the rest of us.-

Milton Friedman: The Professor and his Global influence (I)

While the relationship between knowledge ,sciences and the current wisdom is fascinating , the most of it comes out when the right man fit with the right time, to make an old paradigm to change. Keynes and Friedman´ s point of views , were quite apart from each other ,however they both fitted well with the economic history clock.
Friedman was critical of Government intervention, because it was not upon its interest to work out policies well founded on economic stability principles. By its own nature, government looks ahead for the next election, which means to satisfy preferences of voters no matter its effect on economic incentives. Therefore , Government is not more efficient than private sectors ,to allocate public resources on behalf of community .It is safer that you have control of your pocket, than to trust it on someone else according to Professor Friedman ´s reasoning .
Markets works well when they perform with the proper institutional framework. They do not need Government to replace that framework, because most of the time it will make it in the wrong way. Traditional Government intervention in the economy, means economic policies associated with inflation, corruption, special interest influence, and lately even the chance of being captured by those who are expected to serve people.. It follows that the lasting effects of Government intervention, beyond eventual some short run gains, is a long run welfare losses .-
Professor Friedman believed ,that markets flexibility and information was the sufficient condition to solve disequilibrium, whereas its Keynesian counterpart believed that it was needed a more active Government role because of rigidities which imposed heavy cost to society in terms of unemployment.
The end of the twentieth century was characterized from the economic point of view, by a clear dominance of markets orientate policies, and Governments facing the challenges of reengineer itself according to global economy requirements. It might look like a triumph to the one who fight on that direction.
A second line of supporting markets functioning, was related to institutional framework and political liberties, as a necessary condition for economic liberties to allow proper markets allocation of resources .In other words, democracy was a substantial ingredient for individual decisions .Whenever the markets orientated polices, worked out well, there was behind a strong democratic values .It was not clear the direction of the causality-effect relationship, whether political freedom preceded to economic freedom, or the other way around. When Mr Friedman visited Chile in 1975 there was an academic discussion about it to explain what it seemed a contradiction between Professor Friedman beliefs and his actions. Chile experience of markets policies implementation under the rule of an authoritarian regime, did not fitted well with conventional wisdom . But Chile was not at that time the first country to pursue so. So it was Taiwan, South Korea ,even China (1978)with its doctrine two systems one country. The interesting thing was that, market functioning had the ability of adapting itself to different conditions as long as the fundamental (Relative Prices as the guiding light for resource allocation decisions), stay in the right track. Government could also act as a facilitator for markets ,and not just as substitute for it. Of course this does not mean that democracy is substitutable ,but what markets needs can also be granted by government if it wants to.-

Institutional variables and Economic Growth (II)

From time to time there has been allegations concerning the role of religious beliefs and cultural values, on economic growth. Religious beliefs are important because represent the moral approach to issues such as wealth accumulation, and a moral guideline to important untouchable assets like tradition, trust, authority, individual initiative and faith. Religious and cultural beliefs could be the energy flow any society needs to sustain the requirements of growth.. However, it could also mean a state of mind which keep individual static throughout time ,unable to decide any action because of lacking of rational instrument beyond God ´s wishes , to solve any of current global challenges .
Let take the global warming issue. What is the answer from the religious point of view?. Economist, scientist, journalist share a common perception about the necessity of giving key attention to its expected impact, such that to make economic growth sustainable. But Is just faith good enough to overcome the threat arising from global warming? . If it is not , because of the cost of waiting is too high, what is going to be the future role of religious values, if they are not inside the whole discussion? Maybe the religious point of view is the missing variable in the effort to reduce the global warming, although I do believe it is more a matter of economic incentives which are at this point already under way ,such that the invisible hand will start soon to show how it works in the global scale.
Clearly, religious beliefs can not be left out from the analysis because of its cultural impact. In the environment issue, If people do not care about God property (the environment)protection,there is a tough road to follow before any action start to take place.-
Cultural variables are also important for economic growth. Thrift, hard work, and willingness to take risks, are the essential fuel for the engine of growth. It allows innovation , creativity ,saving and investment. When people get the fish instead of the tools for fishing, it is the beginning of the state of mental laziness the first condition for leisure and passive behaviour .It follows that People loss its ability to decide on their own what it is the best for improving their living conditions. Therefore They get trapped on the State machinery of selling services, which it charge a fee for(corruption).
Cultural and religious beliefs are interdependent, besides each one influencing to one another. The critical question then is what is the magnitude of the cross effect they have upon each other? .If religion emphasizes the importance of linking faith to what anyone is able to do, rather than to what anyone can expect to happen, there will be a huge difference in terms of the attitude for getting more than just surviving level of living condition.
The second critical question is: what is the relationship between religious beliefs ,cultural values and poverty?. Is it that poverty stay longer in those areas with values which might become like a cultural constraint?. After all it was just at the end of the twentieth century that the Pope John Paul the Second ,settle down the controversy between capital and labour with Laborem Excercens, later reinforced by Sollicitudo Rei Sociallis which recognizes the individual right to pursue his own economic initiative as a condition to improve common welfare.
Previously to the Pope JP II clarification, Latin America witnessed sharp criticism to private firms even from religious point of view with the so called Liberalization Theology. On the other hand, more than forty years of State intervention, undermined the importance of wealth creation. It also prevailed a social mistrust about private firms , because of its maximization purpose supposedly against people welfare. Is it just coincidence that private firms in Latin America(Chileans ,Braziliens,and Mexicans) has been growing and getting more influence to generate wealth since that John Paul II blessed it ?.

Institutional variables and Economic Growth (I)

Economic theory has different explanations for economic growth, in particular economic development models have stressed in their statistical and econometric estimations, the key role that capital accumulation, technology advances and human capital quality (endogeneous variable)have on economic development. But recently there are a growing interest in what it is called the instrumental variables ,and its effect on economic growth, let say for instance quality of institutions, cultural values and religious beliefs.-
The issue becomes more relevant ,when it is important to have explanations for the steady efforts made since the eighties, to improve growth performance in Latin America, and the outcome measured in terms of poverty reduction ,income inequality corrections and social mobility prospect leaves still some questions .
Before going into the roots of the problem, what if we ask ourselves the following :Who benefits most from the current level of poverty and income inequality?. Most of the policy orientated to fulfil economic growth goals ,are based on the importance of the private business, deregulation, property right protection, the rule of law and the like. However , there is not too much attention about the barrier entry an entrepreneur has to overcome to begin a new business. In other words, the whole idea of market economy functioning is based on the abilities of current business man and entrepreneurs to create wealth ,but without taking into account the barriers they might have to face to get into business and out of the state dependence. It looks like it is part of the State business to keep some portion of citizens as captive costumers for its free services(public education ,health, security, and so on) so to justify its bureaucracy and expenses levels.
Entry barriers to start out new small business , seems like the protection the state needs to keep alive its social network The more people go into the chance of trying its own way to do a better living condition, the less they will depend upon such state services. In fact, all of those who succeed ,would be able to pay a better education for their children , a better health services , improving their welfare beyond what it is case while they are depending only on the state. It follows that in this situation ,those who do not succeed will really need state support ,but as long as the amount of such people is less than before ,the quality of public services would be higher because the same amount of financial resources would be shared by fewer people than before.
Therefore, to improve the quality of public services it is not necessary to have higher public expenditure, but to allow more people to try their own way facilitating their access to new business opportunities .
An additional implication of such state services dependency is that the bureaucracy, charge a fee for it, merely corruption .Each step people has to get over for starting new business, means the chance of charging such a fee. In fact ,corruption is higher in those places where the State has a stronger entry barrier for new business opportunities to be available for anyone. The incentive to keep the current level of state dependency, is about the chance of charging such a fee which has not a cost as long as control mechanism are soft . These cost are low or zero, when the mechanism of control are rather light , or they do not exit at all.
So, given that the effects of free market economy policies ,fall on those who are inside its borders of participating of the business opportunities available, the ones who are left out are those who will be kept inside the state own borders.

Latin America ´s economy reforms: Some facts and myths (II)

Once the myths are melted away, it is more obvious that Latin America has gone too far to move backwards again. The New leaderships styles currently on charge in most of Latin America governments, means the people ´s call for further steps in the direction of finishing the job for this continent, to have its chance of taking advantages of new opportunities arising on the horizon. Although it might be debatable, about its contempt and scope, most of these further steps are focused on the manner the New State will be connected with its citizen and the economy and how each Latin America economy fit the best it can this people demand.-
To have a better understanding of the whole issue ,we need to move further to take into account some fact .Following J Zettlemeyer paper ,fact are classified in two groups: the first one are the well known fact settle down by the research already done in the past, and the second one is the result of new research.
Fact 1: In the last 25 years Latin America economic growth, has underperformed relative to other developing country economies ,such as East Asia pacific , and South Asia.
Fact 2: Slow GDP growth in Latin America, has been driven by slow TFP (Total factor productivity) .This means the overall efficiency of allocation of resources is below the desire levels, taking into account institutional capacity.-
Fact 3: Latin Americas economies shows similar growth patterns until the eighties, but more recently there has been large cross country differences in growth performance. External and internal shocks makes their way through with different patterns, according to each country weakness and strength.-
Fact 4: Business cycles in Latin America are both more volatile and more protracted . Volatility has changed over time, decreasing to its historical levels in countries like Mexico, Brazil and Chile in spite of a much higher capital trade and mobility. This is probably the expected result of applying rules for macroeconomic policy decisions.
Fact 5: Latin America and Africa has suffered more frequent output collapses (falling in output for more than two years resulting in a total output loss of at least 5%) than other developing countries. This means a strong vulnerability when it comes to faces external shocks.
Fact 6: Period of high average trend growth, have been shorter lived in Latin America, than in other developing countries. A possible explanation for this is related to the on and off between economics and politics ,so that as long they do not move together in the same orientation the outcome will be more unstable growth.
What do all these facts means ?. It is not easy to have precise answers or even more difficult to have the last answer ,but it seems probably that like others authors have mentioned on their research, there are institutional traits in the lower than average economic performance in Latin America . The nature of the State role in the economy and its relationship with its citizens is at the key for explaining these facts. The quality of political institutions, the protection of property right, the control of corruption, the rule of law , and the quality of bureaucracy are all relevant to explain different economic growth performance . However, the result available indicates an improvement on these issues in Latin America, but there is one key restriction; the nature of the centralized state which can affect the true democratic nature of its performance. In this situation, there are strong incentives to capture the State by political and special interest groups for their own purposes.-