Policy effectiveness and Covid-19 restrictions

These days the Covid-19 pandemic is still within the risk zone (Higher than expected number of COVID -19 new cases).The so called second wave of new cases in most of european countries, is growing at an alarming rate.In the Americas the daily cases, indicates that there still a long way before getting the pandemic under control.More so,the projections of Covid-19 related deaths for the coming months set this desease, as the priority target for public health authorities. This brief description, is the setting which policy makers have to deal with, when it comes to think about solutions.Given that this Pandemic meant a negative shock on both suply and demand, the first macroeconomic policy decisions, were aimed at providing to the economy with external life supporter, as it also went into the intensive care units with severe consequences in unemployment , consumption and investment.The sudden stop was in place and its impact was developing further on.The outcome so far,to get a recovery look better than anticipated(World Bank,IMF). In the meantime social distance,contact tracing,washing hands, wearing mask and early testing , were a useful complements to get the R0 (basic reproduction of infection cases) below 1.Any R0 vaue >1, meant the virus was spreading to someone else.Besides, some preliminary available data for R0 value, were in the range between 2,0 (Re=2),up to 5.0(Re=5).So,the initial infected individual (R0), was able to spread the virus within the range of at least two other people, and at the most to five more. The problem has been to avoid what at such a rate means a collapse of the health system. Just before the the summer season, Germany was able to get R0 <1, but as soon as the restrictions relaxed a bit ,R0 was again above 1(R effective Re=1,2)).Thus, it is obvious that to get R0<1 is a challenging task.(Pandit,J.Managing the R0 of Covid-19:Mathematics fight back.2020, https://doi.org/10.1111/anae.15151). The combinations of stimulus fiscal package, monetary easing, and social behavior recomendation,was the proper path to the expectations of getting things back to the new normal soon, while the vaccine was in process to become available. Given this new social- economic covid-19 setting, some macroeconomics models, projected a decrease rate of new covid-19 infections over time, although with important distributional effects(Volante,G. The great lockdown:Macroeconomics and distributional implications of covid 19.Priceton University. 2020). However,a constraint to be aware of, is the impact of the underground economy,and those who work under the book because they are undocumented inmigrant, and they do not have any chance of getting access to the solutions that the system provides, whether it is either economic or sanitary.Thus,these people are out of the system,and they becomes the missing variable in modelling analisys, which make harder to get the virus under control as far as the policy recomendation is concern.(Spain and the USA).In fact , while there are illegal inmigrants, the virus spreading will stay active no matter the lockdowns, which assume that all of those who should goes in, are the same who later goes out.But illegal inmigrants cannot go in, they stay out doing the best they can on transitory jobs, and if they indeed go in, it make the "indoor staying" an additional source of contagious and spreading the disease.In this case,Social distance and wearing mask,(basic measures), are also necessary for those who stay inside their homes to avoid "indoor staying implications" ,as an additional source of contagious.It follows that to get full control of this pandemic, it should be added up some domestic rules of behaviour applied to those who share their home with illegal inmigrants, along with an emergency policy of mandatory testing of those who are out of the system.In the meantime, the economy is on its track to a recovery and the vaccine is close to be in place.But it will take time to get it done to all at risk, with illegal inmigrants probably the last one on the list.

The Chilean economy at its hardest time (II)

As its has been the case for all the world economies , chilean economy has been hardly hit since March 2020 because of Covid -19.But before that, there was also underway the effects of the worst social unrest in years which started out in october 2019.So within a six months period (October 2019 -March 2020), the chilean economcy had to cope with emergency policies twice.So, the requirement is also that much of a complex.In both cases, public expenditure has been on the rise,increasing external debt and risking the standing of its credit rating.GDP long run potential growth has decreased to 1,5%% (down from 2%), real unemployment (counting people under labor law protection),is at the level of 1982 crisis,and the risk of loosing ten years of poverty reduction gains, is right in front of policy makers.So, it is still unclear the lasting social impact of covid 19, in terms of higher demand for better public health policies,infrastructure needs, as well as reshaping social policies. What is is becoming increasingly clear is that the economy will evolve toward a different format, the one based on higher service technology whether it is consumption ( on line demand,delivery logistics,e-commerce), work (remote working),leisure (wider range of cell phone aplications),firms (both automation and automatization are on the rise),value added (digital networks).All of these transformations almost against the clock, will require flexibility, innovation flows, adaptation and cooperation from every one involved.Thus, the question is how the current status of the chilean economy, match this expected scenario?. It is useful to check what was the situation up to the beginning of 2019. Chilean economy GDP per cápita was USD 26.000 (IMF,2018) with expectations to get in 2022, closer up to 60% that one of Spain, and 80% that one of Greece , (measured a purchasing power parity). The institutional macroeconomic framework, has been a benchmark to sustain long run economic growth signals, (low inflation, financial sector lined up with Basel III agrements, and a reliable monetary policy), such that to keep expectations of getting back economic growth, as soon as the covid-19 worst effects are under control.However, the problem is that the only way to get fully of such control, is with a vaccine.In the mean time, the prospect for a recovery to be sucessfull will work on a step by step format.This means that the level of deterioration in productive fundamentals (investment, employment,) will have adjustment lags to get back to its full recovery status. Thus, given its macroeconomic fundamentals, Chilean economy model, is still plenty of potential. In fact with poverty rate still among the lowest in Latin America, it reinforce the middle class relevance, which is considered to be a stability factor, especially about the implications of the upcoming event of a referendum to be held next october 25Th, concerning the approval or not of working out an improvement in the constitutional framework set in 2005. The key problem for the chilean economy is in its microeconomic foundations. This was the main input which led to the civil unrest of october 2019.When these foundations are weak , it is like to drive a car with at least one of its tires almost flat. Sooner or later, the trip will stop either when the passenger or the driver, realizes that something goes wrong.In the Chilean case, the passengers realized faster than the driver, that the trip was not even close to where it was expected to be.

The Chilean economy at its hardest time (I)

The Chilean economic model implemented since the mid-seventies, is under the critical attention of those who have considered it a benchmark and; of those who have been its critics. It should be take into account that in those years (1975-1980), Chile and many Latin American economies were in the last phase of an import substitution model, which through tariffs and exchange controls nullified exports as the source of expansion and growth. Without an increase in exports, it was not possible to get the aim to reduce the foreign dependence. The outcome was the External Debt Crisis and the Lost Decade (1980-1990). For that decade, Chilean economic model had already corrected the key flaws of the import substitution approach, applying the new fundamentals: increasing the role of the private sector and markets as the tool for allocation of resources, coupled with the openness to the world and international trade. What were the nature of these new fundamentals?. The most important one, relates to the fact that it was the people and not the state, who based on the signals of the price system and free markets, can solve what it is better for their welfare increase expectations . Besides, the comparative advantage theory, suggested that a better use of resources was possible with higher trade flows with the rest of the world, instead of focusing only on its small domestic market. Each one of these fundaments have its particulars characteristics on its own. Thus, aside its primary task with the price system, and the efficient allocation of resources, free markets became the source for services like social security, health, education as well as the provision of natural resources like water and energy, opening up a space to develop further the private sector, on the premise that to reduce poverty , it requires as a necessary condition to increase wealth.The State get involves only in what is left out of the reach of the private sector. MACROECONOMIC POSITIVE OUTCOME In the 1990s, with the return of democracy; the participation of the private sector moved forward to granting of public infrastructure services (roads, ports, airports, reservoirs, telecommunications) co-finance of university loans, and in the 2000s, it was extended further to the construction of hospitals and state prisons. The impact was decisive to increase the potential output, and productivity in such a way that in the period 1986-1997, the average rate of economic growth was 6,7%(y/y). The golden decade of the Chilean economy, became the benchmark to follow for other countries of Latin America. The goal of development, was at sight within a few more years of pursuing the same policy mix and economic growth path .- Figure N°1

Social implications of Covid -19

In its recent report (may 2020) the ECLAC organization focus its atention on the social impact of covid 19.So far, the priority has been the sanitary side of the pandemic as the key primary risk of the Covid 19 to deal with properly.But this is the short run impact of Covid -19, which may be positively solved as long as the pandemic is getting under control and some time into the near future a vaccine is ready to be implemented Howeever, the long run social consequences are still to have its full impact .- The ECLAC report provide alternatives scenarios all of them leading to higher poverty and extreme poverty , inequality and unemployment levels. Thus, with the expected fall in global economic growth, and the projected reduction in 2020 regional GDP, at about 5,3%, and a fiscal policy on its limits to financing all these expenditures, the social situation does not look promising at all. The areas most affected by the pandemic are labour income, employment,mental and physical health,nutrition ,access to basic services, education, intrafamily and woman abuse. Some data are important to support the argument .Latin America as a whole will increase average poverty rate from 30,3% (2019) to 34,7% (2020,Middle range scenario,ECLAC Reporst). Besides average Inequality index measured by Gini Coefficient will increase in the range of 0,5% to 6,0%. Unemployment will also rise with more than 11 million additional workers out of jobs.Labor market in Latin America are below standadrs with high level of informality(53,1% (2016)), especially among women (54,3%),(International labour Organization,2018),which lead to dual labor markets which means a mix of opposing realities given that in informal labor markets there is neither legal protection , nor contribution to the pension system.So, it reinforces the poverty trend and in times of pandemic make harder to focus the public help because those people are not legally registered as workers whose need are regularly complemented by government policies such as minimun wages, subsidies and other social services.- Accordindg the ECLAC report, the social assistance has included cash tranfers USD 38,83 billions(0,7% of regional GDP in 2020),food provision, supply of basic services,social protection to both formal and informal workers ,tax reliefs and morgage payment adjustments,covering a wide spectrum from low to middle income levels. Furthermore it also make a call about the risk of loosing another decade ,this time due to the unexpected sanitary shock and its consequences. Taking into account a time span perspective , the report shows that the external debt problem in the eighties required 25 year (1980-2005) to get poverty back to its previous level,14 years to recover regional GDP ,and the latest financial crisis(2008) had a setback in poverty level equivalent to 13 years. The whole social- economic- political equilibrium and its stability prospect for democracy to be up to the expectations is a stake. Therefore, it seems that a comprehensive action is needed in a join effort arising from the private sector, government and international organizations to work together with a long run prespective .- It would be a tragic outcome if society is able to get out from the sanitary pandemic, to fall into another social one.

The Post Globalization: unknown path

The Corona virus has made in four months what it last 30 years and two recessions (1997,2008) to build up as a global framework for trade, investment,production, supply chain, and jobs mobility. Besides,quite extraordinary is the fact that nobody expected the new rules of global links interaction to be written with the global economy in a sudden stop situation. Rather the issue was for how long the global economy GDP would be able to sustain the stress of the two largest world economies reviewing the trade,investment and production links, as well as the spillover effects in the others developed and under developed economies.- The current situation has changed all the parameters to design economy policy other than the conventional approach to deal with usual crisis. However, this one it is not an usual crisis.It will take some time before the fundamentals are back again on track to speed up a fast recovery. "Fast recovery" meaning to get back everything the way it was before March 1st 2020 .Instead it may turn out to be a step by step recovery based upon some guidelines to follow for firms, domestic economies and governments ,for the sake of public health requirements .In other words there is no choice and so the recovery will probably has a priority setting framework . How come?. a.- Firms top priorities begin with its employees and their health, then its consumers target, next its suppliers and finally the communnity.None of this steps will show results quickly. Besides the way firms solve eacch one of this relationships, it will influence its long term pattern among key economic stakeholders. A Fundamental questions will arise. Will firms hire again their former labor force? what about technological solutions aimed to replace and relocated jobs?.What will be the situation of supply chain settings?.What about consumers and its net incomes disposal for spending?. Not to mention the financial situation of firms after months with no regular cash flow. Some firms will make it while others will not. b.- Domestic economy will become more relevant. Its top priority will be to recover employment level supporting labor intensive firms.This means to support domestic production, with global trade links on hold while the new sanitary conditions are set in place post corona virus.It means the global pandemic is over.- c.- Governments will also need to set priorities. Domestic jobs will be on top of the list after assuring the necessary sanitary condcitons in every public place possible . Thus fiscal policy will be an active support for infrastructure, and public investment,and labor intensive technologies(services) , very well complemented with monetary policies in charge of keeping the stability on the financial system and the payments chain.- The international trade as a driver of global growth will probably be replace at leasts in the short run by domestic production, and proteccionism to make sure domestic production increases solve the unemployment quickly. Thus where do all of these variables leads to?.It will take some time before the globalization will be back again the way it was known. Maybe that globalization will stay in history books. Whether it is so, the post globalization will require new rules. Morepver, it could arise new dimensions of globalism such as glocalization which will become more relevant as cities,local economies and firms with good prospect for business expansion will need new opportunities to recover faster after the corona virus shock is over leading to higher demands for decentralization to explore on its own different chances of doing business abroad.-

What to expect next?

The COVID - 19 has made through the core of business activity and daily life of million of people . So, Uncertainty is the new status for the economy and for everything else in months ahead.On the other hand, prominent thinkers, philosophers, economists gives their thought about what it is happening and its implications, but without knowing for sure any chance of getting the Virus expansion trend in a downward path.That means all of them are driven by hope that all of this episode will melt away sooner. Hope is the one and only feeling who may keep alive people expectations about any improvement soon . However, according with available data coming from consumer sentiments, business leader,economists,analists,journalist and International Orgnization like the IMF, all of them anticipate a tough scenario for the global economy in month ahead. Even with fiscal aid packages assuming the economy will restart again soon ,it does not seems to be clear that the health care system is strong enough in each country to overcome the situation and let that expected economic outcome happen, before it collapse.In such a case the restart would be later stressing the economy system to its limits. So will it be necessary another aid fiscal package?.In emerging economies there is not such a possibility given that most of these economies are with limited fiscal policy options,given its limitations to expand debt levels further. So, The current situation goes on within extremes: The risk of a massive collapse of the health care system,no matter the effort to tuckle the threat to avoid so, coupled with the high risk of a massive collapse of the fundamentals of the economy, no matter the poliicy responde so far. .The outcome may be worse than a greater depression.There is an ethical dilemma which must be solve by political leaders However, the question What to expect next, goes beyond the crisis. It is hard to believe that the expected new normal situation will be the way it used to be before COVID 19.The effects of this pandemic will last for years to come reaching out the economic system and its fundaments(for instance more sate in the economy ), as well as how people do their daily life obligations( better sanitary condtions at works, home , public places,and transportation).Besides, the tracking system on any individual to get control of any future cases,will change and modify the boundaries of privacy and freedom. It look like it is not just the econoomy which will have severe consequences,increasing the risk of proteccionism further , but also how democracy works in the future and how it improves its proximity with their citizens needs.

The global economy sudden stop

The world is still under stress by the coronavirus outbrake, and so it is the global economy and its remainings.Hard choices for global leaders, but also for the economy policy makers.They both face a completely unexpected situation which for economist is out of any economics text books.In fact , economics as a science rose to become a core on new knowledge concerning society behavior(right or wrong), based upon productive uses of scarce resources and its alternatives allocations.That is what economics policy issues are all about.However, now there is a huge challenge under way which does not have a proper match with the economic text books and policy response, other than to be prepare for the worst and hope for the best.- In a usual situation , most of the policy decision deals with the economy working at a certain level of productive capacity, even in a recession with low levels of activity, there is always a minimun capacity ready to be used. But now, that capacity shrink to almost zero when most of the productive force on the one hand, and consumer on the other hands must stay at home in both developed and less developed economies.The economy get the status of a global sudden stop. - Given its consequences (Severe recession,coupled with high social cost), the sudden stop scenario has been a key subject of macroeconomic research,Calvo (1998), Agosin,Maureira & Karnani (2017),such as it has been posible to set a signal to prevent it: Look at the correlation between inflow and outflows of capital.Wheher it is high , there are fewer chances of a financial account sudden stop.Agosin, et al (2017).- But now the situation is different , part of global economy has become like a global Hospital,and it may stay that way before a fully recovery take place because of lagged response to both fiscal and monetary policy action. So, what are the tools the economy has available to deal with this situaion in the short run?. At its best just a few, at its worst None. Fiscal policy lag is shorter than that one of monetary policy.However, the issue it is matter of sanitary policy which is far beyond the reach of macroeconomic policy framework which assumes both healthy and rational labor force, consumers and economic agent.- The COVID -19 pandemic so far, has hit the global services sector (50 million jobs) ,and the manufactures process as well, through he supply chain disruption(global production chains) . Air lines,(10% drop in past months schedule flights ) tourism, hotels, food industry all face a very difficult situation ,and the expectation arising from the vacation season to get it over,are probably gone. In the south Hemisphere the prospect of a winter more severe than previously expected will increase the burden upon sanitary facilities.So there is a simultaneous collapse of both suplly and demand which may lead to a deflationary recession ,and while the key productive forces are in quarantine either on the hospitals or at home , the policy makers are unable to do anything with real inmediate impact on the path of keeping the economy stable.So it looks like we will live for a while in the Zombie economy which has fear as its key driver.- The Zombie economy will work through the network connecting consumer at home and business capable of dealing with delivery process through drone .Those doing their job using telework or net working, will keep the economy on wait and survive mode.Internet will replace the physical usual transaction chanels as never before,so there will be a huge transformation the way economic agents used to do business. The probably outcome following the Zombie economcy may be a stronger Virtual economy with an higher share of real economy transactions than before reinforcing the pattern of shifting places away from public shopping malls .A lot of traditional business will be replaced by virtual (internet) alternatives.Firms will have to redefine the way to apply sanitary policies and how to care about its talented people , so it will in the tourism industry as a whole.- As a bounded optimism approach it is important to take into account that nothing is worst than do nothing.The scientifc community is working hard to overcome the crisis with a Vaccine, the necessary condition to make the economic policy tools to work fully again. The sooner the better.-

New threats for global economy

The current situation arising from the coronavirus risk of spreading out to the rest of world and its implications for global economic growth, is a signal of the kind of new threats which global economy must be prepare for. Most of economist and analists think that such a virus may affect growth on the one side through trade channels and tourism ,and on the other throughout restricting the supply chain value because of preventive actions leading to stop productive process, as a practical alternative to reduce the chance of furhter cases of corona virus , keeping workers away from their job places especially in China.- This virus is 80% similar to the SARS which arose in 2003. At that time there was also concern about its impact on global economy, but it was not such as to get an high alert status as it seems to be the case this time. The question now is How fragile is the global economy to deal with this threats? and others such as Cuyber attacks, natural disasters and the likes (effects of climate changes)? For a long time it was a paradigm for economics that nature was outside its boundaries.Nature did not matter for economic growth.Instead all what it was a matter of concern dealt with macroeconomic policies and its proper design.Thus either fiscal expansionary policy or Monetary expansionary policy, were the main focus of threats to keep economic growth within a stable path.That does not seems to be the case anymore. Low inflation is a characteristic of global economy, as it may be so for low unemployment as well due to better opportunities arising from deregulation and its implications of higher mobility of jobs opportunities. Actually, Macroeconomic setting look more stable than before to be considered a source of risk for global economic growth.The risks are on the microeconomic side which deals with the way people and economic agents shape its expectations . There is no method to make sure that expectations will always be positive.People behavior is more complex than economic modelling may expect, because some key features of human behavior are unexpected, such as fear,distrust,anger.So, expectations do not follows a clear well anticipated path, which leads to make that uncertainty arises not necessarily because of wrong policy design, but because of people limitations to deal with all information available to shape expectations faster and properly as economic fundamentals demand. So, the Corona virus and other similar cases in the future, are not usually included into the economic growth policy models, which lacks the abilty to design the proper reaction , hurting the expectations about the final outcome, before getting back the traction of economic growth. Thus, error terms in any modeling make them less accurate .So, it become more relevant to take into account a wider variety of situations and variables which may be key for shaping expectations properly along with economic growth perspectives. Any economic growth forecast should have a probability scenario dealing with expected risk arising from human behavior considering either wrong policy design or, wrong policy reaction.In this case, any unexpected event is previuosly considered into the process of shaping economic agent expectations.Therefore, this would provide a better control of risks and uncertainties along the growth path.

2010-2019: The decade of failed expectations

Latin America economices are well endowed to become a magnificient world player. It has a market of 640 million people (2016), and a combined GDP(PPP) of USD 7,5 trillion(2014).Its GDP per capita is USD 8335,00 a 54% below world average(2012) which measure the potential for further increases.So it started the past decade with positive expdectations,GDP growth was 5,9% in 2010,but since 2013 the latin american economies has reached a stagnation stage with GDP average growth of just 0,8% meaning lower real income and harder effort to reduce poverty(still within the range of 30%) and inequality . However, since 2011 commodity prices index decreased and according to some estimations it is expected only in 2020 to get a more stable condition (www.indexmundi.com).Both Lower commodity prices and unstable markets, is a negative mix for pursuing social goals within a path of steady progress.What it is gained in some stage it is loosed in the folowing one.Social goals target like poverty and inequality reduction becomes cyclical.This means that public policies fail to get a steady advance; so it arises the question about the best approach to get faster progress to eliminate those social bads.- It follow that the decade 2010-2019 in Latin America , did not get too much of the initial expectations. However, there also have been sign of progress both in political and social issues: Let check them out a.- There have been an upward movement from poverty to middle class segments in many Latin America countries. Although it may still look like a fragile achievement, the fact is that the incoming decade mean an opportunity to consolidate a stronger middle class segment.- b.- Service sector is becoming increasingly more relevant, so it may be in course of replacing raw materials as the main sources of economic growth.- c.- The key role of good macroeconomic policies is well assumed by policy makers,With few excwptions inflation is non loneger a social constraint for policy design,external debt is within the range of control,and integration into the world markets is also within the target of key Regional economies with free trade up dated agreement including both commercial and financial sectors(Chile, Peru Colombia).- d.- No less important is the fact that most of these latin american economies have stronger democracies than before.It may not be perfect ones but it has the positive side of trying every 4-6 years some alternative approach to move forward, instead of a unique one to get backward. However, there also still some negatives heritages from the past: corruption is on top of the list.For the first time it had a wide scale to become a threath in such a way that it tried if not really captured the State of at least four countries . e.- Following from above (d), the decade 2010-2019 wittnessed in Latin Amwerican economies a better than expected judiciary system, which protected the States in such way that saved the institutions role to be a guarantee for development.The rule of law in Latin American economies become quite clear even in cases of nationalization projects. Thus the decade just gone give a better chance to look forward the next one with new challenges withih a positive framework .Some of them are a.- Demography gap.Younger workers do not match up the demands from older ones on retirement.Social secutiry issues is more than a challenge. b.- The risk of populism is always alive,So the state must assume the need to endure reforms.

Fiscal Policy Rules (II)

It has been argued that Free capital flows, exchange rate regime and autonomous independent monetary policy do not fit well along the economic cycle. In fact, those targets cannot be achieved simultaneously .Sooner or later,one of those variables has to be modified for keeping monetary policy effective enough such that the aggregate economic activity stay stable. This is the impossibility triangle, based upon fiscal policy fully effective with fixed exchange rate, and monetary policy fully effective with flexible exchange rate, ruling out the chance of both a coordination and complementary policy mix. If an economy want to achieve an autonomous interest rate policy, and stabilize the exchange rate at the same time, it has to introduce capital controls. Mundell(1963) But what a difference does it make the Budget Surplus rule ?.Capital flows have an impact on exchange rates in smaller economies. From the financial point of view, keeping everything else constant, exchange rate fluctuations depend on capital inflows(appreciation) ,or outflows (depreciation). These exchange rate variations are not neutral. Leaving aside distributive effects, these variations have an impact on both those firms with heavy foreign currency debt after the depreciation,and the competitiveness of the exports sector due to appreciation. Thus ,given exchange rate fluctuations,the monetary policy should change the interest rate to cope with its implications, but as long as it lacks complementary fiscal policy, it has to deal with key constraints which affect its independence and effectiveness. Given floating exchange rate regime, the options are increasing interest rates(exchange rates depreciation) or reducing interest rates(exchange rates appreciation), and along with it the risk of deeper aggregate demand contraction in the former case(increasing interest rates), or an over expansion of aggregate demand in the latter case(reducing interest rates).In both cases, external surplus adjust itself to the new foreign relative prices . But monetary policy, is constrained in its ability to reduces volatility on aggregate demand sector arising from exchange rates fluctuations, so the magnitude of interest rate adjustment must be evaluated beyond its target of external balance, to deal with internal balance or domestic economic stability which is the scope of Fiscal Policy .- In a case contractive monetary policy(higher interest rate) is applied, a fiscal policy rule (Structural budget surplus rule) can mitigate the impact on domestic economic activity, because it allows self-stabilizing factors to take place,allowing monetary policy to focus only in its own target. Previous public saving are available for countercyclical spending, reducing the impact on domestic activity of higher interest rates and along with it a better risk control of a recession.In the other case (lower interest rate), the rule of saving the excess of income over the cyclical adjusted expenditures,compensates the expansionary pressures in aggregate demand, allowing such a countercyclical action to keep internal balance. Therefore, with this fiscal policy rule, monetary policy has a back up for more flexibility and autonomy to manage the effect of capital flows fluctuations. The argument can go even further with the “sudden stop” scenario. Calvo (2003).The expected reaction of monetary policy in such a case, can be complemented in the short run with the Structural Budget surplus rule, softening the impact on growth. Piasecki & Wulf, (2013) The Chilean evidence,support that the fiscal policy became less correlated with the economic cycle after the structural budget surplus was applied, decreasing from 0.77 (1990-2000) to 0.57 (2001-2011). Therefore, a countercyclical fiscal policy ,complements properly monetary policy in such a way that output volatility decreases (Larraín, 2011).Furthermore, it make work the three variables of the triangle: exchange rate regime, the capital flow and the independent monetary policy, in such a way that it ends up reducing the welfare loses arising from unexpected capital flow fluctuations. In the Chilean economy, the gross debt/GDP ratio,decreased from 23%(1990-2000) to 9% (2001-2011). Besides, a responsible fiscal policy demonstrated public commitment to stability. That reputation for responsible fiscal policies ,translated into the ability to borrow money at favorable (lower) rates, since lenders look at the overall health of the economy, and its ability to manage its resources wisely as a proxy for lower risk level.(Frankel ,2011).In Chile, between 1999-2011 borrowing costs, went down from 7% ( 1999), to 3.35% (2011) (Larrain, 2011). Furthermore, Fiscal policy rules improves international credit worthiness as long as it decreases risk level of the economy. .(Graph 10 below country risk,Chile ;Latin America and EMBI).In fact when fiscal surplus was 4,5% , the EMBI for Chile was the lowest(2005) ,while with fiscal deficit of -4,2, the EMBI was the highest (2009) with a correlation coefficiente of -0,63.(Graph 11 below,EMBI (Blue line) ;Fiscal deficit/surplus Red line).This correlation coefficient is higher, than with those other variables,such as Debt/ GDP,International reserves or economic growth. Salas (2018) From the above, it follows that within the Mundell –Fleming framework, fiscal polciy may get external funds at a lower cost, instead of internal borrowing to finance an expansionary stand .This means that quite on the contrary to what that model expect, domestic interest rate do not rise up, as well as neither the external rate .The external rate of interest stay the same level, because in the international financial markets a small government borrowing, means a tiny amount of financial resources with a small share to have any impact on that rate within trillions of daily transaction. The interest rate parity conditions do not change,as well as it does not the exchange rate.It follows that the fiscal policy expansion impact positively on output.The foreing borrowed funds into domestic foreign market couple with those which normally outflow. Besides the channel of impact arising from higher output(everything else constant), may adjust downward the magnitude of output increase but still on the positive side. Thus with structural budget surplues rule, fiscal polciy may have an impact on output even with flexible exchange rate.So in this case, policy makers have a their disposal both policy instrument, allowing the Tinberger rule to be fully considered, and the monetary policy to have more autonomy . Finally, following fiscal policy rules fully pay off over time.It fits better with unstable external conditions both financial and real ones , and it disminishes the welfare losses arising from volatility in economic growth.-

Fiscal Policy Rules (I)

Fiscal Policy in Latin America for most of the twenty century, was the first hand government tool-kit, for winning elections.So, the fiscal deficit arising from it, implied negative consequences for the economy, as long as it fostered conditions for disestabilization forces such as, volatile economic growth and lower credit worthiness which sooner or later, become also a threath to democracy and its values.Lozano (2008). Besides, the implications were not just inefficiency and instability .Given the Tinbergen policy rule, the fiscal policy became the missing policy for macroeconomic targets, which none policy makers could count on, other than to sustain deficits. Somehow, policy framework were constrained by steady fiscal deficit to display fully its economcis tools. It follows, that in such a case, fiscal policy failed to fullfil its main focus : Internal stability. Better coordinated economics policies becomes a goal very hard to get, whether one of the key policy, was not elegible to fit in the coordination framework, which is non neutral for macroeconomic targets as long as assuming a fiscal policy more rational than it really is generates a target bias. It is usual to consider fiscal policy, as an autnomous exogenous variable, but politically willing to move toward stability,therefore capable of adjusting itself to macroeconomics targets.A good example of this approach, is the fiscal policy rules implemented by the European Union, which set a limit of 3% for deficit, which monetary policy can count on.But in Latin America,the situation was different, becasue there was no limit to fiscal deficit, which measured it againt tax incomes ,it usually was well over that percentage range.Therefore, changing the focus of fiscal policy away from short run interest, to focus more on long run purposes,become a matter of either gains or losses of welfare (Gavin, Michael, and Roberto Perotti. “Fiscal Policy in Latin America.” NBER Macroeconomics Annual, vol. 12, 1997, pp. 11–61. JSTOR, www.jstor.org/stable/3585216.). Thus, on the other side of a coin, fiscal policy based on budget surplus, has implications and consequences for the policy mix and output outcome,specially in a small open economy with free capital flow.Piasecki & Wulf (2014). The surplus policy, allows higher spending as a countercyclical resource without additional debt, which keep credit worthiness within the range of country risk measured by qualifyng agencies . So, it allows Governement to count further on foreign sources, as substitute to internal borrowing, for financing expected domestic spending. In Latin America Economies, Chilean economy has the most relevant evidence about the impact of such a policy: It became a public surplus country, and net creditor.This led to improve Chile credit worthiness, and made fiscal policy, more effective than some economics model anticipated, for a smal economy with flexible exchange rate and free capital flows .(Piasecki ,2014 et al. On the other side, when government debts increase, interest payments goes up as a proportion of the country’s Gross Domestic Products (GDP).Moreover, the interest payment, imposes an additional burden on the country’s risk level, and the fiscal balances. Besides, it does constraint monetary policy decisions, when it needs to use interest rate as a tool for stabilization purposes.A rise in the interest, means that an higher proportion of government revenues, will cover financial costs, rather than being used for the country’s social and investment needs. The consequence, is a reduction in the economic growth potential.Furthermore, it leave monetary policy in the situation of self inflicted damage.

Latin American economies are staying below trend

As the 2019, get into the second half, it starts the performance evaluation about real economic growth, and the one expected at the beginning. Most of the GDP growth forecast had to be revisited downward . IMF expected 1,4% and now it is adjusting it toward 0,6%. ECLAC was not too much different from an initial estimation of 1, 3% for 2019 to an adjusted one of 0,5%. This percentages are below the global GDP growth of 3% expected by the United Nations for 2019 and 2020, and the 3,2% expected by the IMF. This means that while the rest of the world keep the pace of steady economic growth despite trade negotiations and geopolitical risk, Latin America economies are staying behind.- What it may appears like a transitory situation, it has become a permanent one. Some data illustrate this statement: Between 2014 and 2018 Latin America economies growth were on average 0,6%.Since 2000 up to 2016 , economic growth in Latin America economies were 2,8% ,almost half the economic growth in the same period , for 56 emerging economies excluding China . The decade 2010-2018 does not show anything but disappointing outcomes, it was just 2,3% with low interest rate for most of that period, and steady global economic growth. Thus Latin America has a long run trend to lower economic growth, while the rest of the world, seems to keep its stand in a better shape.- When it comes to find explanations, the list is not a short one: a.- The most important economies of the region (Argentina , Brazil and Mexico), have not been able to take the lead to boost regional economic growth.- b.- External demand for commodities, have been hit by lower pace for economic growth of its first global consumer (China).- c.- Main primary export prices have fallen , reducing export incomes for those countries (the majority) whose export are heavily concentrated on commodities. In fact according an ECLAC study (2015), income elastic of exports to China and the rest of Asia is 2,3 which mean that higher incomes level in Asia, has a relevant impact on Latin America exports response. So , a drop in China economy incomes due to lower economic growth, means an important negative effect on those economies whose exports depend upon that country.- What about options? a.- It seems clear the Latin America has to move away from exporting just commodities. More so whether these depend of the economic growth pace of a kind of a monopsony consumer. Latin America economies, should move to become a services facilities provider such as, housekeeping, environmental services, and janitorial services spanning health care, hospitality, education, governmental, and many other facility sector, (www.ieha.org), Floor care, carpets maintenance, emergency cleaning, Window cleaning and so forth(www.latinamericansvc.com ).Insurance and micro finance sectors, also has a relevant potential to take into account. b.- To support foreign investment in those key areas which are inputs for both strategic commercial and trade links between the Atlantic and the Pacific market, such as Central America, or those economies with high market potential, such as Brazil, Mexico , Argentina, Colombia , or those ones better endowed with services facilities to connect east and west trade flows (Chile ,Uruguay and sooner than later ,Peru) . c.- The problem with (b) is that of all those possibilities, the real ones are just a few. However, there are some positive signal in Brazil(109 out of 190 economies with better facilities to do business).Mexico is finding its way out of the neoliberal experience, which means tough choices when it comes to deal with investment needs to overcome inequalities. This investment flows, come from private sector. Argentina is at its own cross road. So it looks likes the past has a stronger appeal to decide what it is more convenient.- So , the problem it is not that Latin America economies lacks options, but rather which are the ones to be considered.-

Latin America Banks: The drivers of growth

Ten years ago, Latin America Banks were well off the danger zone , while their world leaders counterparts were right on the middle of the financial Hurricane(2008).Most of the analisys were focused on the way to get through it all, but very few attention was even posibble to consider to look for explanation about Latin America Banking which seemed to be outperformance by any standard within the banking industry.Somehow these banks were consider to be underdeveloped just the way the markets they were focused on.Perhaps that assesment was representative of most banks in Latin America at that time, except for one key fact: these banks had a better sense of covering the systemic risks arising from the drivers of economic growth, specially risk seeking behaviour. As economic growth move up profit expetations, so it also push up risk tolerance. So , those banks with higher risk exposure because of its demographic scope such as to have 90% of population with bank accounts, go along with the sistemic risk. As soon as it comes along a sudden stop in economics growth, so it brings down riskier banks with it. Brussels righlty thought that in such a case, it was necessary to have stronger insurance policies,(higher capital provisions), which was equivalent to make Banks less prone to systemic risk. This meant Banks became like the counter cycliccal filters of the systemic risk , instead of being the cyclical follower of it.That approach imply that while the economy is booming, Banks move cautiously with credit policies.On the other side, while the economy is weak , banks support the economy with more flexible credit policies.It is like the other side of a coin regarding the interest rate movements during economic cycles: High while it is expansive, low while it is recessive . Mc Kinsey & Company (www.mckinsey.com), just released (July 29, 2019), a report about Latin American retail banking markets with interesting remarks, which comes as a reminder that it is not just to arrive first , but also to arrive well prepared. The major findings shows that while ROE (Return on equity), between 2011-2018 was in the range of 8-10% for global bank industry ( in some cases with negative interes rate), Latin American retail banks ROE was 12,8% between 2012-2017 with consumer finance as the leading driver for such outcome. Latin American banks as a whole had a ROE of 14% in 2017. Which are the explaining factors?.The same report explores some hypothesis which are revisited below: a.- Latin american banks have a low risk demographic exposure. Only 30-40% of population over 15 years old, has a bank account. What they lose in terms of scope, they gain in terms of risk control. Banks in Developed countries, have up to 90 % exposure to a wider demographic segment. b.- Growing population in the lower range age segment (25-35 years old), which means new younger workers on their way to get a job with potential rise in earnings. Quite on the contrary to the developed countries Banks which have older workers closer to retirement and looking for saving instead of spending.Young workers represent fresh look for new opportunities most latin american Banks look for. In fact when it comes to microloans , Latin American countries like Peru are among the leaders in that sub markets.- It is also interesting to realize that there are association betwen Banks size with ROE and its variance. Thus, small Banks(43,7% of the sample) , have lower ROE (3,9%) and higher dispersion. Medium (24,5% of the sample),and large size banks(19,6% of the sample), have 13,1% and 13,6% ROE respectively and average dispersion and depending upon revenues, while Leaders Banks (12,0% of the sample), have higher ROE (15,2%), coupled with lower dispersion and depending upon efficiency. However, no matter the positive outcome, there are also some weakness: Mc kinsey report states the following weakness for retaiol banking in Latin America a.- Lower cost efficiency b.- Lowwer asset quality c.- Lower provisions over asset(1,1%) It follows that there is also a consistency between Bank risk behaviour, and the quality of the insurance policy to support it However, the main result is that Latin American Banks will be the growth leaders among global markets banking system through 2022.This means that services sector in Latin America, may become the new driver for economic growth.-

European Central Bank: Its key role

The ECB started in 1998 following the Treaty of Amsterdam . The European Central Bank came out after the European Monetary Institute (EMI) which had been set at the second stage of the Economic and Monetary Union (EMU), to handle transitional issues concerning the implementation of the Euro as a currency. The European Central Bank (ECB) is one of the seven institutions of the EU and the Central Bank for the Eurozone as a whole. It is one of the most critical Central Banks in the world, and it supervises over 120 central banks and commercial banks within the EU states. The ECB, works with the Central banks in each of the EU states, to formulate monetary policy .- The primary function of the European Central Bank is to maintain price stability and safeguard the value of the Euro. The Governing Council defined price stability with rate of inflation either under or close to 2%. Price stability is essential for spurring economic growth and job creation, which are core objectives of the EU.To ensure the robustness of the banking system, the ECB is responsible for banking supervision in all the EU member states holding the power to grant and withdraw banking licenses, conduct supervisory reviews and set higher capital requirements to counter any financial risks. Beyond ther formalities for any Central Bank,the ECB has a key role in keeping the euro value as the currency set for the world stage, as an alternative to other currencies. This is quite a challenge because for doing so, the ECB needs to have among all members states a fiscal policy discipline , otherwise its main goal goes into the risk zone of weakening the euro. The basic format of the Euro, give to the fiscal policy its fair share for supporting economic activity up to a deficit of no more than 3% of GDP. However, as the crisis of 2010 proved, it is hard to keep that level when social needs arise such that fiscal spending goes far beyond that limit.This creates stress among some members of the eurozone. This when the real importance of ECB take place. How to cope with the adjustment process to get fiscal spending down, while keeping at the same time the Euro as a reliable currency?.- This is the reason because Mr Draghi, now in his last four months in charge of the ECB, is considered to be the one who saved the euro in the worst of the moment for the Eurozone following its 2010 own crisis.- He realized that the euro was suitable to get along with more active monetary policy("whatever it is necessary" in his own words), which was not necessarily on the menu at the beggining of thenew currency. In fact, it was something the ECB was not set for. Open market operations(To buy Bonds), or reducing actively interest rates, was an unkonwn territory Mr Draghi went through sucessfully. This is so, because the euro currency play the role of a fixed exchange rate where monetary policy is supposedly constrained by free capital flows. So , there are good expectations that after the learning process is already done, the new authority will follow the same path and this is good for the Euro zone. Another matter is the issue of a more flexible approach, the so called "two speed euro zone", which some key economies of the Euro zone, are asking to be applied.-

European Union: No neutral Elections

The European Union had last sunday (may the 26th), its electionary process which turns out to be out of the usual. Instead it has become the signal that although european voters are in a good mood about the current affairs, they expect a deeper focus on new challenges such climate change, inmigration and decentralization. The surprise cames along the right wing forces whose leaders in France, Italy and Germany made a strong effort to improve both its parlamentary visibility and influence. This particular outcome , indicates that they have a message which ignited voetrs,and on the other hand, it is time to take seriously this voters preference.After all its slogan is "Europe for the europeans" and at the same time deeply oriented toward better jobs for the average workers. It all goes to have a more "Human Europe".- So, it looks like the European Union current leaders; so far mainly focused on the economics recovery and stabilization programs, need to have a broader picture of what the voters both need and expect. Quite on the contrary to Latin America and somehow in the USA, socialism does not seems to be a project capable of building up a reliable future.This comes out as the natural result of getting the whole European Union integration process close to a mature stage, which mean it can process differences and alternatives to contingency policies,without risking its whole foundation. To understand what this mature stage means ,it is important to keep in mind the goals of the European Union which are(1993): Promote peace, its values and the well-being of its citizens Offer freedom, security and justice without internal borders Sustainable development based on balanced economic growth and price stability, a highly competitive market economy with full employment and social progress, and environmental protection Combat social exclusion and discrimination Promote scientific and technological progress Enhance economic, social and territorial cohesion and solidarity among EU countries Respect its rich cultural and linguistic diversity Establish an economic and monetary union whose currency is the euro. Besides, The EU has delivered since 1993, more than a quarter of a century of peace, stability and prosperity, helped to raise living standards and launched a single European currency: the euro, a key currency on global economic and financial affairs. More than 340 million EU citizens in 19 countries, now use it as their currency . Moreover, the abolition of border controls between EU countries, people can travel freely throughout most of the continent. And it has become much easier to live, work and travel abroad in Europe. All EU citizens have the right and freedom to choose in which EU country they want to study, work or retire. The EU's main economic engine is the single market. It enables most goods, services, money and people to move freely. So, the election outcomes does not means a refoundations of the EU, rather it is a call to check key issues of its goals out, making a fine tunning with actual timwes.-

The economic side of corruption

Economic theory has not been shy about corruption. A social bad of our times, it has evolved towward a more comprehensive ways headed to improve its benefit . Like the second best theory, it has become the alternative path to get control of the sate. The first one is of course throughout free elections, but in this case those who are elected, are subject to the scrutiny by their voters. Corruption instead works quietly to get rid of any vestige of control and scrutiny. So; once it becomes the core of the state actions, there is no way to think about a better state.It goes the other way .The State becomes the throphy which signal the decomposition of a society. Those who failed their promise to their voters, are in the position of getting both huge ilegal profit and advantage positions arising from corruption pratices. At the same time, they get the control of the State such that any action to prevent those practices are not possible. Corruption self reinforce indefinitely . Back to economic theory, Rose-Ackerman (1978) wrote an essay "Corruption: A Study in political economy which argues about two types of corruption a.- Political corruption b,. Burocratic corruption However, recent events in many latin american countries and in other places , suggest a thrid type : the one arising from mixing both political and burocratic corruption. It may be called the "deep state corruption", as long as there is not any guard of last resort .The whole state becomes captured by corruption.- This mixed social bad has serious implications: a.- Undermine the free society and its institutions b.- It becomes the new source of power to influence events, not based upon the people best interest, but their own c.- It confuse the role of those institutions like free press of staying between power and society d.- It affect negatively the prospect for investment and economic growth, becasue it becomes like a heavy shadow tax to be impose on any transactions f.- Finally, society lose its moral stand, its sense of what it means to do the right thing ant to guarantee the fair chance for everyone to get their expectations to become real Worse of all the above , is the fact that these days international public opinion is watching as close those consequences are to the ordinary citizens.