Market signals and market failures (II)

Let assume that the value of the stock in a firm depends on observable signal (s),and unobserved random variable (e).Thus ,the value of the stock is given by v= s + e. Therefore the effective (expected) price is p = v .The better the signal the higher, the price. Besides, price itself must include all the information available.
Now consider a market with two types of investors: well informed and uniformed ones. Those uniformed investors , keep attention on prices to get the signal they need. In such a case, the market itself provide all the information about the value of the stock and its equilibrium range.(Varian ,1978).-
The problem arises because it is costly to get those signal, and the rating agencies have the task of reducing that cost .So, informed investor will pay the price (hiring financial advisers, consultants ,lawyers, accountants ), but , uniformed investor, who I assume do not have the same capability to get information on their own, depend upon the rating agency to make the proper decision. This heterogeneity ,will lead to information asymmetry with not market efficient equilibrium, as long rating agency on the other side has a profit seeking strategy which is a quite different goal , respect to the one most important for investors: to provide risk evaluation.-
Whether the rating agencies fool or mislead uninformed investors, the outcome will be inefficient allocation of resources ,because their portfolio will have riskier assets, than the investors consider representative of their preferences for assets risk . As a result, market might get into a risk bubble whose final outcome is not other than downward price adjustment once it burst, and both the investors and banks which support them with finance assistance , end up worse off. The raring agencies, might not be in such a trouble , given the fact that they manage a variety of portfolios none all of them equally risky.-
The insurance industry, is also a good example about the implication of information asymmetry .When a customer get an insurance for theft bikes ,the company has no way to make sure that the customer will behave properly to avoid his /her bike, to be stolen afterward the insurance has been signed up. As a result, the insurance company find itself losing money. In this case, to avoid such a loses ,insurance company offer deductible policies .Consumers pay a share of their insurance, which induce them to have a more cautious behaviour .However, what is it the optimal level of care on personal behaviour? .If consumer get too cautious, it is not worth to waste money with insurance programs , and on the contrary if it get too risky, there is no cost free insurance policy. Thus ,even with an average behaviour consumer end up worse off because they end up paying for higher risk than they effectively engage on.-
What all of this means ?. It is not impossible to prevent bubbles developing and its outcome , as long as there is information asymmetry among market players which is not corrected at the right time .Thus, to avoid such outcome, it is important to have the proper institutional setting to make sure that information asymmetry does not mean a systemic risk threat. This consciousness, will imply regular oversight about the risk level the system is undertaking. It follows, that full information about the quality of assets involved ,is key on this approach as much as it is necessary a review of Basel II accord.-

Market signalling and market failure (I)

There is a discussion about the implications (the day after),for the future of capitalism , of the current financial crisis. There is the notion that whether it was a failure ,it was only a Government one. This way ,seems for some analyst specially in Latin America, the best one to protect the future of capitalism .
No matter the intentions ,the fact of the matter is that both markets and Government fail. Government has failed systematically in Latin America , with some exceptions, to provide better health care , education and environment protection and it does not seems to be a big deal for politicians, who are the main responsible in charge of Government. Markets have a risk propensity which is in the nature of profit maximization. For that purpose ,it is a necessary condition an institutional framework to clear the way for price signals ,basically in terms of the quality of information . Otherwise, those signals do not have the proper information for both the best decisions, and efficient allocation of resources. In such a case, welfare level fall. as a consequence of the wrong ,inefficient decisions. Ackerlof called the market for lemons. In the lemon market model ,economic agents have no way to get the information about the quality of the good ,except by observing the average quality available in the market. In the current financial crisis, that information did not came properly from the risk evaluation agencies .Besides, the market can not correct by itself such a problem, and the result turns out to be to acquire a lemon. The problem in this case, was that such huge amount of lemons exceeded the necessary to heal the cold.
Markets fails to overcome such a distortion ,and like a computer program with a virus into its software, it will a result but it will not be the best one. Fail also means that market are unable to solve, what it is other institution failure, in this case government. This the way capitalism has worked all the way since the eighteen century .The empirical evidence suggest that such a failure probability, can be reduced ,by optimal regulations based on efficient institutions.
Capitalism like democracy ,are not among the best alternatives ,but they both work among the whole available . They are the first best, compared to other combinations such as dictatorship and state controlled economy. So, capitalism does not need distortions about the nature of market behaviour , to get protected from those who do not believe in markets forces to create wealth.. It needs a clear understanding about the way it works and the role of information ,its quality and institutions design with a clear sense of what it is expected from them .
Markets also fails in a variety of situations, standard in the microeconomics books . Let just mention public goods, asymmetry of information(insurance industry), externalities, common property goods and the like. In all those failures ,markets can not solve by themselves ,what it is wrong about price signalling (given an institutional framework) , and that is the reason because they fail to get resources used in the best alternatives to improve welfare levels. Markets works on the assumption of perfect information , homogeneity ,zero transaction costs and values (institutions),on the side of producers and consumers. Most of these conditions are hard to find in real world, therefore on the aggregate, it means that only after trial and error , markets get a higher welfare level for society. Thus, after this mess melt down, it will become clear the relevance of better regulation ,not necessary more, and better global institutions , for global economy to get into the path of growth and prosperity.-

Current financial crisis: A preliminary approach (II)

The current financial unstable situation will last some time , as its effects on the real economy will become evident in the months ahead. However, much of the discussion about its long lasting impact has already begun. On this regards, there are some key important issues which might be important to keep in mind:
a.. This crisis is not the first ,and it will not be the last one ,following the capitalism rules.. In fact, crisis are at the core of trail and error characteristics of markets forces. Since 1970 up to 2007 there has been 124 banking crisis (IMF WP 08/224. Systemic Banking crisis: A new database. Laeven and Valencia 2008),almost 40% of them concentrated between 1991 and 1995..There has been 208 currency crisis, spread out in different periods ,although 58% of them concentrated in the nineties decade (1990-1999). Therefore ,while the economy becomes more globally interconnected, crisis represent a sort of adjustment (trial and error) to the new global economy framework, whose main characteristic seems to be more risk averse.-
b.- Despite the Asian economies crisis of 1997, there has not been a clear understanding about the way global economy works. In the past, domestic economic unbalances in industrial economies , mattered only for internal design of their policy stabilization . Its international effects, were restricted to the ability of the coordination efforts of few countries whether it was needed . From now on ,and specially in the bigger economies, domestic unbalances matter for the global economy more than it was expected , thus each economy must consider its own means as the primary source of expenditures, specially because the stabilization effort framework, must consider global coordinated efforts ,which impose additional transaction costs to the necessary adjustment .
c.- Deregulation works better with oversight policies. There is an optimal level of regulation, beyond which economic growth become slower and at some point it start to decrease. It follows, that there is a decreasing relationships between regulations and economic growth. However, deregulation by itself is not enough to improve growth expectations. In those nations with important economic power , it requires better supervision policies to cope with global systemic risk . This time , the IMF (heavily criticized during the Asian economies crisis), passed the test, so it is properly qualified for a broader role on the global economy. However, a key point is that when the IMF speak, the world economies should listen.
d.- Capitalism as such is far from being responsible for this crisis. Based on its instinct for risk, it depends on the risk filter of those entities aimed at improving the information flow for better price signals and a more efficient decision making . Those entities, should improve their management standard otherwise they will not get back market confidence. On the other side ,it is a fact that market fails, but those fails are related to weak institutional framework. In this case, it is required a better global financial framework .The global economy ,can not depend either on one economist or one institution, to anticipate crisis ,it seems necessary to have a more often and transparent analysis of global economy condition .-
e.- Government has the right to intervene as the lender of last resort. In other words, it must face its failures. It can not run away from them. Socialism instead, is based upon restricting people freedom in exchange for expected fairness, which means that the State is in charge of everything , most of the time without excuses .Thus, the real issue is that Government as well as markets fails. Both failures can not be corrected without Government action.-

Current financial crisis:a preliminary approach (II)

Since mid September, the financial markets has been under severe stress , due to the uncertainty arising about the lasting impact of the mortgage sub prime markets default in the US..
Although expected for some , and unexpected for others (unfortunately the most), this crisis ( the most severe since the last depression (1929), will teach quite a lot of lessons concerning key variables concerning global economy equilibriums.
Economic History is already rolling on , and the analysis about the implications and consequences of this default, crisis has already begun. Thus ,it is important to review the underlying causes of this situation ,as a first step before going into deeper implications. Causing factors, can be traced back to both macroeconomics and microeconomics.
Macroeconomics factors :
a.- Liquidity surplus in the banking system due to lower interest rates starting in 2001, fuelled later into this decade by “oil dollars” ,which Banks (investment and commercial ones), had to recycle into the markets, which allowed a massive allocation of mortgage loans ,to those considered by traditional financial standard , risky customers, the so called NINJA segment (No income, no jobs, no assets).
b.- Twin deficits: current account and fiscal deficit, which implied sooner or later an adjustment either by dollar depreciation , or expenditures reductions throughout interest rates increases. This unbalances ,were considered since the mid of this decade , for many organisms (http://www.imf.org/ ) ,and economists (http://www.rgemonitor.com/ ),to be a source of risk for global economy.
This initial condition(a) , created the first round of effects on the demand side, specially housing markets and other goods as well. As demand for houses went up, so it did its prices, which reinforce the second round effect, because this higher prices (between the year 2000 and 2006, houses prices doubled), backed higher demand for loans and credits, to increase consumption expenditures.
Microeconomics factors:
a.- Deregulations in the Banking industry ,which did not take properly into account the systemic risk , as a prudential restriction.
b.- Financial Management models, based on short run profit, therefore high risk portfolios .
c.- Lack of scrutiny, on the side of those organism aimed and acting as a risk filter for the whole system to be accountable.
d.-Speed of financial innovation which left the existing regulations outdated.-
This microeconomics factors , were the incentives for the creation of new financial instrument backed by those Ninja mortgage assets(collateral), which were rated as a secures ones, such that investment banks trade them all over its world branches and commercial partners. Along the way, financial gains artificially increased, and paper made wealth , looked as a substitute of real wealth, therefore the bubble was on .
As it is well known among economists ,macroeconomics has its microeconomics foundations .In this case, it meant both conditions matched to one another, to amplify the magnitude of the impact on aggregate demand. Thus ,It was a matter of time, for this bubble to burst .

Latin America and the USA economy:Looking ahead of 2009 (II)

The nineties were years of a very active economic compromise between the US economy and Latin America ones. NAFTA, (1991)which included Canada ,Mexico and the US was a breaking point in the long run trend of dependency , as much as for the first time in history , Latin America was considered a trustable official commercial partner, allowing these economies to waking away from the traditional countries - dependent status. This time was up to the Latin America economies ,to take advantage of such trade opportunity, with lower tariffs and better access to a high income markets . Unfortunately, it was not that easy to get the necessary conditions for growth. Mexico in particular, had to overcome its second shock on the road(the previous was in 1982). The “Tequila crisis”, in 1995 proved as strong were the new commercial ties between these partners. Former President Clinton Government, supported Mexico with an economic aid package (U$$ 50.000 millions),to solve the financial crisis in that country.
Thus , back to the nineties, the US was a genuine commercial partner , to go further along with free trade ties in the years 2000 as planned. As a matter of fact, it made its way through with smaller economies like Chile, Uruguay, and Peru .However, for all these cases there was a new framework. The year 2001, set a new parameters for the main concerns in the US .No doubt about it. Commercial ties fell down on the list, to give more attention to security matters.
Latin America also changed after 2001, because of the whole debate about what to do next the year 2001(the Terrorist attack on WT center in New York),it could stand politically on their own. As a result , in some countries there was a return to ideology ,which although it represented a new leadership profile, it was not on the right side of history. Free trade and investment , were no longer the issues .State intervention in the economy , (widely proved by empirical evidence to be insufficient to overcome inequality, poverty and corruption),became a threat , rather than a complement for private investment , undermining the foundations for economic growth. On the other side, there were the pragmatic economies , those which want to look up for a better future of prosperity based on private initiative . Therefore, these days there are two lines of approach to what Latin America economies stand for. However, it stills prevail some common purposes about integration, energy shortage and regional trade. Anyway ,Latin America has become more independent because of:
a: The high prices for its raw material export, supporting investment and growth (average 3% in this decade)
b: New strength due to its new macroeconomic setting,(lower inflation, fiscal responsibility, better institutions (autonomous Central Banks), freer trade with a new partner ( European Union),surplus on its external account(average 1,5% (roughly) of GDP on this decade).-
c.- Remittances from abroad which count as an alternative source of capital, reducing its exposure to external debt.
So, what lies ahead of the year 2009?.It is not just about trade and investment, it is also about education, innovation ,entrepreneurships and technology programs. Social needs go beyond the traditional approach of “give them a fish”. This time, it rather goes as how to get a fish.

Latin America and the USA economy:Looking ahead of 2009 (I)

Like most of the fellows of my generation ,I grew up with the notion that the economic condition of Latin America was strongly influenced by the USA economy outcomes, as the main engine of regional economic growth, but also as the main source of Latin America economic dependence . A big deal about it, (I mean the dependence issue ,not my belief), was the motivation of politicians and economists to pursue a different model of economic growth, the so called “Import substitution strategy”, applied since the fifties aimed at reducing that dependence. In fact, this model was targeted at getting these economies, more independent from the economics fluctuations in advanced economies, focusing strongly about supporting the domestic market and industrialization . The Argentina born economist, Raul Prebisch made the most from it, with his theory of dependence which stated that the “center” (USA economy), and the “periphery”(Latin America) were driven by opposite interaction. According to his theory, the Center benefited from cheap raw materials, such that they had no interest for these raw material exporter countries ,to get a higher stage of economic development based on higher industrialization. Therefore the States on each country, should take that objective on its own throughout industrialization programs. The result of that approach, although not that much bad in terms of economic growth, (average of 5,5% between 1950-1980) , was less decisive to solve social problems such as poverty, illiteracy, lack of good nutrition and above all, to fulfil the expectations it created among the intellectuals, policy makers and regional politicians, eager to cope with the inherent instability of the former approach. Thit growth ,was based on capital intensive industries performance.
On the other side, external debt started to accumulated since the seventies(current account deficit climbed up to 6% of GDP), reaching its peak in the following years when the international financial system , had huge amount of cash at its disposal to be lent to supposedly solvent countries . Later on (1981),because of the high interest rate applied to repay those loans, the whole continent was at the end of the eighty facing the lost decade, if not about the lost century .At that time, I realized I was wrong. The problem was not the dependence from the USA economy, but lack of comprehension about the real nature of growth. Somehow, the whole continent was trapped in its own fears, looking for State “protection” which was the real dependence problem. We really were dependent from the State, unable to cope with market forces challenges.-
At the end of eighties, the main concern was to solve the external debt problem. This meant to get support from the United States but this time ,not for social assistance (1960),or trade (1989); but to repay the debt. The “Initiative for the Americas” , of former President G.H.W Bush ,was a serious historic attempt to solve structural weakness in Latin America economies. Its main objective, was to support investment, trade and debt renegotiation (Plan Brady), such as to improve the fundamentals for economy growth, more so with the implementation of a FTA from north to south of Latin America, which was complemented in the early nineties, by the “Washington Consensus”, which made a case of financial reforms, free markets driven economies, privatizations and free trade ,as a necessary condition for growth Later it was proved not to be a sufficient condition).It is hard to find in the whole twenty century, such a kind of compromise .Some annalists wondered ,what were the gains with this “new” partnerships far beyond its historic path?. Of course there were gains for both sides: export “made in USA “to Latin America increased, investment flows also increased, as further steps were undertaken in the mid nineties with Chile on the list to become a direct commercial partner.

The real price of drinking a glass of water

It is usual for most of us to get fresh water any time we need. A plain glass of water, seems to be most basic action at no monetary cost. We have not realized yet that such a simple need ,is also in danger of become very expensive. Would anyone imagine taking water pills?.
2500 scientist, politicians , and delegates from 140 countries ,are debating about the rational use of water. Rotarians ara also very active about this issue. Despite the fact that society is becoming a knowledge society, it lacks basic understanding about the proper use of water resources. 97,5% of the water available in the whole planet ,is too salty to be suitable for human consumption, and only 0,26% of water for human consumption is accessible for such a purpose ,because the rest of it, either it is on the poles, or deep underneath the earth.250 rivers ,some of them trans frontiers, cover 40 % of world water demand. Thus , It seems feasible and not far away the chance that water might become a source of conflict, just as it has become oil.-
On the other side, 1200 million people, 20% of world population ,lacks sufficient water supply.200 million get diseases close related to shortage of good quality water ,and 3 to 4 million people die because of that. Besides, 6000 children (part of world human capital)die because of the same reason .All of this means a very high social cost for wasteful water consumption, so high in comparison with private cost( almost zero),that a feasible alternative to improve the rationality of our daily water consumption pattern, might turn out to be a proportional tax: the more water people consume the higher the tax, to induce more efficiency in the use of this increasingly scarce resource. It is a paradox, that a tax ,supposedly inefficient, would comes out to solve an inefficiency. Of course ,It all depend about the purpose and the expected outcome.
Although I do not like too much taxes, this one can be unavoidable, because it is the way to solve what otherwise would imply very transaction cost ,given the fact that there is not clearly defined property right ,on the current sources of water. Therefore, as a matter of fact nobody (scientific asides),cares about the over consumption!.
In Latin America, 125 million people live without proper water networks which affects the quality of life couple with health and sanitary conditions. It follows ,that those people who lacks water, get diseases which are a kind of avoidable ones. These diseases, competes with other normal diseases arising among the population, pressing and increasing the demand for public health, to such extent that it fails to cope with the expectations in terms of quality and scope. Some people do not get public health attention. There is some research available, whose results are very clear: for every (1)euro spent on better water facilities, it is possible to save cost up to 34 euro, because of lower demand for public health .-
On average , consumers use up to 125 lts daily of water , but we are not paying the real cost of such consumption, which become higher for those who get higher levels of water consumption . So , what is it the real cost of a glass of water?. Guessing hardly less, than 35 euro!.

Doha Trade negotiations talks

The evaluation of the recent Doha Free Trade talks outcomes , the winners are: Governments, farmers, Protectionism policies support. Among the losers are: agricultural exporting countries, less developed countries, industry, services, and cotton producers. Thus, at first glance it seemed that the chances for account that the cost of failure(more losers) was higher than its benefits(less winners). Maybe a lot of the expectation about the Doha talk, has been driven by such cost- benefit failure analysis, measured by those directly involved in the issue. In other words, key sector of global economies, and key emerging economies trying to get over their differences about trade, with good chances for getting an agreement.
However, the real measure for evaluating this 2008 Doha Round incentives, should be the impact on global economy as a whole. On that regard, a positive result of this last round ,implied annual windfall of U$$50 billion to the global economy, plus U$$ 100 billion(over a ten year period),because of tariff reduction. What is the meaning of these numbers? .Actually, World economy GDP is about U$$ 50 trillion. Therefore, the global economic benefits of any accord,(roughly around 1% of global GDP in a span of ten years),was not higher enough over its cost, which it was to keep things the way they are, with global trade (tariffs for poor country exports are 3%),and resources mobility, giving opportunities to all, although to a less extent agricultural product . Thus, there was not strong economic incentives to go further on with negotiations , based on deeper mutual concessions.
On the other side, it is the relevant issue stated by public choice theorist, which emphasizes the lower transaction cost of small homogeneous groups to join themselves around common goals(the previously defined as the winners), related with the higher transaction cost facing the larger heterogeneous groups (previously defined as the losers),which it made a lot more complex the process of negotiations ,because of the election time in USA ,and opinion polls tracking Government performance both in Europe and USA, in time of economic slowdown. Thus, the timing was not free of political pressure, for critical points. The implications are both: a.-Future negotiations would be better based on small groups, sharing common interest dealing with problem of high impact on their own economies. b.- The political background with more big players on the negotiation table, suggest a tougher path ahead ,for agreements at a global scale.

The economics approach of new European immigration policy (II)

Why do people emigrate ?. There are some key non economics factors which explain migration flows. Let take a look at them:
v Social factors. It refers to the desire of migrants to break away from domestic constraint whatever they might be.
v Cultural factors, It includes the safety net provide in most advanced countries, which give a better sense of protection and better living standard than the one they have at home countries.
v Physical factors .Recent migration from south China because of flooding, is an example of migrations flows due to natural disasters .
v Transportation facilities. It is easier to travel now than what it was before.
Following the Todaro ´s model (Economic Development in the third world .Second edition 1981),there is also an economic explanation for migration flows. People do migrate because of expected earnings, between sectors in domestic economy. This expected earnings, are measured by the difference in real incomes among different sectors, and the probability of a new migrant of obtaining an urban job at his destination point .Thus ,the model explains rural urban- migration, regional migration ,and it can also be applied to international migration.
International migration above a certain level of natural flows due to transitory causes(relatives who goes back to their own countries ,and the like),could be hypothesized as the outcome of wrong designed domestic policies , as long as the income gap is wide enough against domestic work places. In such a case People will look foreign work places, even with imperfect information or without information at all, about the probability of finding a job. The perception of that income gap to be permanent, will induce people to take riskier actions, because the expected benefit, is perceived to be higher than the current permanent cost .
In short ,migration can be explained by rational considerations related to benefits and cost, mostly financial, but also psychological. It follows that better domestic policies, would decreases the benesfit of migration .But what are the incentives for such a better policies?.Moral hazard and free ride for policy makers, applied fully when the destination countries do not take actions aimed to decreased such a benefit of migration which includes the legal framework and immigration policies.
To make the argument clear, in a global economy migration flows are a necessary condition to complement capital flow specially the services arising from those high skilled worker, which is the kind of migration with positive externalities for the host countries , and the one they prefer most. The problem is with the migration flows of both low skilled and illegal migrants, which becomes a competitors with domestic citizens for social benefits.In this case ,low skilled immigration flows are linked to negative externalities,which market forces can not solve because it fails to define the property right of domestic jobs.Therefore ,it is necessary for governments to step in,like in any other case of such externalities.It follows that the real issue should not be the new European immigration policy,but the new seeting which it imply ,for those countries which depended on former facilites to migrants, such that they should start to improve the design of domestic policy, heavely focused on redistribution and less on economic growth.

The economic approach of New Immigration policy in Europe (I)

Although Latin America Immigrants are not a key variable of the problem,(8 million of illegal immigrant in Europe),it has been quite a shock for policy makers in Latin America, the new immigration policy framework, set by European authorities mostly concerned to both North African, and eastern Europeans illegal flows. However, Latin America immigrants in Europe represent a good source of foreign income through remittances, which in some Andean countries might be meaningful .
History teach us, the value added by immigrants to the land they arrive. Latin America itself is a continent made of immigrants(Germans, Japanese, Italians, French, Portuguese, Koreans ,Jews and others ethnical groups, were a constant flow from Europe to Latin America since the eighteen (in some cases even before) up to the twenty century). The economics to justify for such immigrants flow was clear, the expected economic benefit on their new land, were much higher than the cost involved to settle them down . Much of them, helped to create and consolidate new countries. Somehow, Latin America benefited from European nations ,as much as those immigrants improved its fragile initial human capital endowment .
However, even with those additional better qualified human resources ,and quite on the opposite to others successful immigration experiences, wrong domestic policy design in the twenty century, lead to higher poverty (40% of Population) and inequality (the worst income distribution in the world),in Latin America, such that migration to different places out of the continent,could be considered a natural consequence of such failures.
Thus, the first issue to be addressed, is that such a migration represent the failure of domestic policies. It is not efficient to design domestic policies, with such an “implicit guarantee” that if something goes wrong, there are plenty of “volunteers countries ” to cope with the failure, instead of the domestic policy designers, who would get a free ride. Both, Moral hazard and free ride , would lead to endless flows of immigrants to host countries.
A second implication would be that Latin America would become a poverty exporter continent . In such a case, the real cost of immigrants for host countries , is much higher than the expected benefit.
It is not the best qualified resource who seek new opportunities, which creates the problem ,but those who heavily depend on social policies, which turns out to be competitors with local citizens needs ,which feel they are left behind in time of trouble. A different matter, is the implementation of the reform, which no matter the timing, should also take into account humanitarian criteria when it applied.

Environment protection and private incentives

It is usual to read comments concerning the environment conservation ,concerning the way people should behave or feel ,in such a way that the positive externality of either behavior or feelings , turns out to be an higher self consciousness when it comes to deal with the challenge of improving our understanding about environment.
Most of the key players on the issue, agree that it is crucial to keeping the pace on environment conservation ,with no further delay, specially at the level of government level policy design. However, individual efforts are also important, in fact it matter a lot to have a global community well aware of the magnitude of the threats which is upon us. Thus, world celebrities on different fields (fashion, sport, global media, movies),make a strong contribution on this regards. So, they are very welcome.
The key question though is: What are the incentives for ordinary citizens to follow such impulse?.The first and obvious one, is admiration of what those celebrities are capable of. Unfortunately, it is not enough , and it is necessary to consider more direct incentives for ordinary citizens .
Economics teach precisely that: Incentives moves people decisions, to get their highest welfare level. It is well known that there are already alternatives both for firms and individuals to use better and more friendly environment source of energy. Green bonus, is a market mechanism to induce firms a more active role to protect environment, in this case based on profit they can get for not contaminate. But is it enough?.These days, tax deductions should be applied taking into account, the kind of policy firms have toward environment protection. On the other side, Individual also needs those kind of incentives .Let consider the case of a family who want to have their house with solar energy panels. What do they get in return?.Sure lower energy bills, but do they get a tax deduction on other expenses ,because the energy they are saving means supporting environment protection?.Therefore, taxes as an incentive for growth ,should be planned to do so, considering environment as a key variable, as a fist step to get sustainable growth .-

Fiscal Policy Efficiency in Latin America (II)

Is it the State some how the enemy of well being of society?, or is it the case that the State ,has been capture by special interest groups ?.Who are these groups? Politicians?, public management staff who serve their own interest, rather than those of the one they should be serving? .These questions, are at the core of the issue of efficiency of fiscal policy.
Let give more attention to it. Fiscal policy is political by nature, it deals with Government ability to pursue the improving of welfare at society level, which is evaluated depending upon the type of preferences voters have, about checking out what the Government is doing. Some countries, evaluate that performance every four years, while others do every six years. However, it looks like such a period of time is too long to have the sense of control fiscal policy need. Therefore, the first issue to improve the efficiency of fiscal policy, deals with better and more often participation of voters, (decentralization),or better control mechanisms ,to avoid both the fiscal resources to be captured (for instance too many organism doing the same and trying to get the same objective), or the worst of the inefficiency about fiscal policy: Corruption.
A recent Corruption index 2008 survey ,done in Chile by the Freedom and Development Institute, shows that the highest level of corruption is found at the government organisms level. On top of the list are Municipalities (5,7)and public firms(6,0).Next are the Justice system, and different Ministry (5,1),closing the list are regional governments (5,0).Besides 50% of those executives included on the poll (411),thinks that corruption is higher now than last year. It follows, that fiscal policy inefficiency seems to be explained by the purpose deviation about its nature,done by those groups who capture teh State for their own interest .
A second issue to improve fiscal policy efficiency, is related to up grade the academic credential of those in charge of public management, along with a modernization of the public management practices. This means to change the political profile of public management, for a professional one. Additional progress on this matter in Chile, has not been fast enough,although the number of executives selected by political preferences has been decreasing, in favor of those based upon professional credentials.-

Fiscal policy efficiency in Latin America (I)

According to Latin America economic outlook 2008,tax and transfers reduce inequality by 15 Gini points in OECD countries while in Latin America, it reduces the equivalent of just 2 gini points. On the other side, fiscal induced reduction in inequality is eight time smaller in Latin America than in Europe. These are some of the key ideas mentioned recently in an article signed by Javier Santiso and Pablo Zoido, in the magazine The Globalist.(April 2008)-
To give a better insight of the issue let considers some additional statistics, (www.emol.com ,Pablo Oregon 2008) Buenos Aires with 14 millions of inhabitants has 365000 public employees , whereas New York wit almost 20 million of inhabitants has 270000 public employees .Argentina as a whole has 1,5 million of public employees, Chile has 185000 public employees . Google (our boss in this blog),does not need more than 11000 to run such a giant internet services provider.
The efficiency of fiscal policy ,is undermined because of the level of rent it needs to collect ,just to support those who have captured the state for their own purposes. Thus, Brazil with a tax burden of 37% as a share of GDP, has currently a public sector which is increasing at a faster speed than ever ( more than a thousand a month) . Therefore very much of those taxes, are not designed to solve social problems, but to finance the new bureaucracy which has nothing to do with the effectiveness of any policy design. In fact Mexico with a tax burden of 15% as a share o GDP, has the same low level as Brazil in some key social indicators. It follows that perhaps half of tax collection in Brazil, is just to finance bureaucracy.
Tax collection is not the only variable on the equation to solve poverty and inequality. It is also important the efficiency of social programs which requires to be better focused ,but also better complement by a staff capable of doing their jobs with low transaction cost (it means low bureaucracy level).The state has become so relevant to provide public employment, that it has distorted its real meaning , which is to support those who are in danger of being left behind, not to providing them exclusively with assistance, but with the proper tools to overcome their constraints with creativity, imagination, self assurance.

Labor day: Time for a reflection (II)

Between the years 1990 -2000, wages increased faster in high skilled occupations, than low skilled occupations. Therefore there is a widening gap between those two labour skill segment with further implications, such as increasing inequality, higher pressure on educational system to improve its ability to respond to labour market requirements, and social tensions between the winners and losers of globalization .-
On the other hand, free trade agreements make capital good, relatively cheaper than labour services, inducing both capital-labour substitution, and deepening the higher skilled labour demand. New technologies are knowledge intensive.
Thus, a side effect of these free trade agreement should a higher productivity level, but higher risk of greater inequality if the proper policies to improve labour skills are not implemented . More so, if we take into account the fact that low wage economies do not necessarily mean a threat to high wage economy ,precisely because the productivity gap associated to skill differential, therefore it is not easy to correct the wage imbalance throughout global market forces.-
A complementary approach ,could be to focus the attention upon the services sector ,and its job creation prospect, assuming that its skill requirement are not too high, compared to the capital intensive sector. In both western Europe and North America, the services sector has experienced the most robust growth ,both in terms of value added and employment. Between 1991 and 2003,for every 1% percentage point of growth in the services sector, employment increased by 0,57% in North America and 0,67% (Global Policy forum, KILM report 2005),in Europe ,which reinforce the labour intensive technology used in services activities, or at least the complementary nature of labour and services activities.-
Women are improving its share of labour participation, getting close to that one of men, although this does not mean women can get to the same jobs - equal wage, mechanism .There is still a wage gap between men and women, which might not be solve in the short run. However, new technologies available will make its way to reduce that gap, as it allows women to compensate time spend at home, using her own firms internal networks support ,to keep the paced with her jobs.-

Labour day : Time for a reflection (I)

What is the meaning of labour day , in the XXI century?: Well, perhaps May the 1st, means much more today than it has been usual to think about . Globalization has been mainly driven by capital accumulation, which seek lower cost to get higher capital return. The economic foundation of the globalization process is quite clear ,as it is the fact that the necessary complementary labour skills have also changed. More and better qualified skill, are necessary to get a better share of global income growth. The problem is that these skills do not increase at the same pace, to improve labour share, as it does capital productivity in production process. On the other side, lower skills, imply lower labour productivity and lower wage.
The overall picture looks worrisome. The Global Policy Forum and its key indicators of the labour market (KILM- 2005) says that :“half the world´s workers still do not earn enough to lift themselves and their families above the U$$ 2 a day poverty line”. Besides the report says for million of workers, new jobs often provide barely enough income to lift them above poverty line, or are far below any adequate measure of satisfying and productive work. In fact ,almost 50% of global employment (1,38 billion people),down from 57% in 1994 ,live on less than U$$2 a day. This means that although employment might increase, the quality of those new jobs is far below the acceptable. Low productivity Women and men, are working long and hard, for very little because their only alternative is to have no income at all (KILM report 2005).-
Employment and economic growth relationship, has also changed to reflect what it looks like to be, the capital intensive nature of globalization. For every percentage point of additional GDP growth, total global employment has grown by only 0,30 percentage point between 1999 and 2003,a drop from 0,38 percentage points between 1995 -1999. Moreover between 1990-2000,wages increased globally faster in high skilled occupations, than in low-skilled occupations . Therefore the challenge of our time, is to solve the productivity gap, which arise among others reasons, because lack of good education, centralized state which creates a culture based on social assistance, rather than individual effort, which deteriorates the key potential for growth, creativity, innovation, and entrepreneurship.-

Supply side economics : An overview (II)

It is true that lower taxes reduces the incentives(benefit) of not paying them, which imply that tax payers have to pay higher cost for not paying lower taxes. As a result tax revenues increases because of better tax compliance. However, the question whether lower taxes really means increases in tax revenue , also becomes a practical matter concerning the management technology , the IRS or for this matter any tax authority, apply to the process of tax revenue collection. The better the technology support on management, applied to collect taxes, the higher should be tax revenues. Neither Laffer, nor Paap and Takats paper (IMF WP 8/07), give too much importance to such issue(technology and tax collection). In fact Paap´ s paper, works on the assumption that there is limited enforcement capacity , and auditing for tax payers randomly determined .-
The conclusion of that paper though, make clear the point about the ability of tax authorities to get tax payers on line, such that those cases with weak tax collection system, might benefit more from tax cuts than those with strong tax collection system. But there is no mention about technology applied on tax collection, let say throughout a transaction networks, which automatically get the proper tax with each transaction.-
The question about the real impact of lower taxes on economic growth, and the expected higher productivity level arising from private uses of resources , will also depend on the institutional framework ,which means that tax cut , requires complementary policies to get the best of its effect on welfare.-
Tax cuts might have a stronger impact on economic growth, when they are complemented with better incentives to tax exemption , better service for tax payers (customer profit approach ), and better allocation decisions for fewer resources , which should be focused on those areas with the stronger impact on growth.Tax cuts on its own, is just the minimum of the economic growth- incentives , equation.-

Supply side economics : An overview (I)

Supply side economics although controversial , it was supposedly to be a key development on macroeconomic policy design .Was it so ?. Most of the policies analysis and applications in the second half of the twenty century, has been a kind of solving aggregate demand problems. Keynes, Friedman, Tobin, among others XX th century economist, were all aggregate demand economist. The first two, focusing on the fiscal policy and monetary policy side respectively, of the problem. Tobin with his income policy approach, making supply side engineering.-
In the early eighties, following rational expectations macroeconomic revolution, came out Supply side economics as an alternative explanation for economic growth and market behaviour . The book “Wealth and Poverty” , (1983) by George Wilder, made popular the notion of markets driven by supply forces , as much as demand ones.
One of Its key arguments ,was about the importance of tax policies to modify incentives in the decision making process, specially labor supply and investment decision. Although there is evidence about the positive impact that lower taxes have upon economic growth in the long run (World Bank papers) ,there is not too much consensus about its short run implications .A recent paper (IMF, WP 08/7 Thomas Paap and Elòd Takâts :Tax rate cuts and tax compliance :The Laffer curve revisited, January 2008),analyzes how tax rate cuts can increase revenues. It apply the argument to Russia tax policy which cut income tax to a flat 13%, replacing a tier tax model of 12,20 and 30% previous rate. Tax exemption increases, reduced further down the tax burden. So, Personal income tax revenues grew by 46% in nominal terms , and 26% in real terms during the following year. Besides, Personal income tax(PIT) share to the GDP, increased from 2,4% up to 3,3%.Maybe it is not enough and conclusive empirical evidence, but it suggest some guidelines about microeconomic side of tax policies effects.- However, Supply side economics foundations; goes deeper than tax cuts. It says that private allocations of financial resources, get higher productivity than public allocation (Government) of the same resources, because the opportunity cost are different: Higher for the private than the public sector. Having said that, tax cuts might or might not increase revenues, because families and firms have different views about what the highest productivity of their financial resources are .Families and individuals, might save the additional resource into their pockets, such that the final impact on tax revenues, will depend upon the tax applying on saving .Business might decide to invest more, but the effect of additional investment on tax revenues ,will depend on where that investment goes to.

The economics of internet (II)

Internet is expected to have a lasting impact on society, but we still do not know the full strength of it. However, one thing for sure is that any way to limit its effect, will means costs higher than the benefit. Let analyze this assessment in more details. So far, both global society (global village) and global economies seems to move, pretty much up to the pace internet has settled, in terms of information flows, communication channel, and transaction facilities. With TV soon placed massively on internet, conventional TV will become not just global, but instantaneous and so it will its influence. Therefore ,any attempt to restraint this dynamic looks like trying to stop the unstoppable, in what it is an useless effort .The rate of increase of internet users is more than 100%.
Ronald Coase said some years ago (1971), that the market for ideas, is not that much different than the markets for goods, such that both are accountable for regulation. The implication was that as long as there was regulation for imperfect competition ,so it was necessary to apply regulation in the markets for ideas. But how can be possible to apply such regulation ,to what has become a global multimedia source of new ideas?. Society needs all the information available to make the best decisions about different issues concerning their welfare level increase. For example, if had not been by internet , the environment damage caused by human intervention, would not have gone so far other than the daily news ,which means that the global warming issue would not have been more than a debatable topic for scientist and expert on climate change. Internet has made it not only a debatable topic , but also a priority because every one connected to this network has the chance to make comments, suggestion , critic and evaluations ;pressing the world organizations dealing with it, to pursue a more active role. As a matter of fact ,this year there are planned more than 26 conferences related to the global warming issue, all of them possible to track by internet. Physically it is impossible for anyone to attend them all , however internet allow to all who want to participates to register on line. On the other side, there are a global community worried about the environment, based upon internet facilities, which made possible for the year 2007 ,to become the year of the environment. Thus, because society has better information, key element to develop a deeper consciousness about the complexity of such challenge, these days the environment issue is on top of the agenda , and the expectations are to make further progress into the near future. In short ,in just a few years it has been possible to move forward on the environment dilemma, at a faster pace than in the previous decade .On the other side, information flows allow the global economy a quicker response and adjustment to random shocks at lower cost than otherwise. Any restriction on these flows, would mean welfare cost for global community.-
Blogging is the new wave of internet communication. More than 30 million of them live in the cyberspace, and it will become more relevant in the near future ,as each one person´ s point of view will matter in a more fractionated global society. The willingness to reach out other people, exceeds any attempt to impose limits and control . Chile has been working very actively on the internet platform for public services(education, health), privates firms, services,(financial, job seeking opportunities), and news media (comments segment),in what it looks increasingly like a virtual society although. with real effects. It is one of the leading countries in Latin America on this issue. However, while most of Latin America newspapers, have been moving forward to allow their readers a broader space to shape public opinion, some Chilean news papers seems to restrain their connectivity with its readers.

The economics of internet (I)

Since it was widely available for world audience a few years ago, internet has had a deep impact on the way of life around the world ,such that it is not possible to assume a situation without it. How can that impact be explained?. Internet is a communication revolution which allow people to be themselves, to speak out their fears and hopes to a world audience with no real involvement, because it is all virtual, therefore it is all imagination in real time, but it looks like real, and its implications are real. On the other side, it is its impact on transaction cost which has a deep effect on a variety of daily events, more so with the new tecnological development(video, voice, images applications) which make its effect more relevant .
Transaction cost represent a constraint not just for commercial transaction purposes , but also for research requirements in terms of both data gathering and analysis. Throughout internet, any researcher might go virtually any place in the world to get the material or data he or she needs, in a way which is impossible to do otherwise. Imagine a flight to the New York Public library, or for that matter to the NYU or Columbia Universities libraries,just to to check some articles, concerning for instance the impact of environment damages, on global economy. Internet induces an exponential increase in knowledge.
For commercial purposes, it facilitates the commercial transaction and decision making process, reducing the time requirement to get it done. Global Corporations ,are connected into global commercial networks which allows them to get quick access ( saving up to two a more weeks )to the best available alternative to buy any of their inputs , supporting more efficiently the production chain with the “just in time scheme”, and allowing important gains in competitiveness. Because it allows companies a better insight about the markets forces trends and expectations they deal with , it improves efficiency in the management decision process as well.
Far beyond global TV impact ,Internet has made the world a smaller place, because it is faster , in fact it is instantaneous. Besides it is available on the computer screen of everyone , reducing any world event to something “usual” and “closer” which "share space" with your own daily stuff. Moreover, it has concentrated both the past and the future into one single observation through simulation. In short, only the present matter, because has become the connecting point between the past and the future. The uncertainty is about the unexpected event, out of the boundaries, not necessarily about the future itself because somehow we have it already with us in our computer screen!.
There is no other revolution of such magnitude in human history , and beware that we are still away from its limits. Having said that, the next question is this ¿why could anyone cut this flow of communication, information and data exchanges? .Internet means improving welfare level at a global scale ,so it improves welfare levels to a smaller scale as well. It means a global democracy, where an opportunity create more opportunities for others. It allow citizen to evaluate government performance on public issues , improving the effectiveness of public polices.-
It follows that any restriction about this flow of information, would be equivalent to freezing time, while it keep rolling on outside the freezing area anyway . In other word , is like keeping fixed our own clock, while others ´s one , continues moving. -

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