Special interest ´s groups and economic policy

Economic policy is not neutral when it comes to analyze its distributional effect. A policy designed to reduce inflation ,in the short run might benefit some groups and hurt another. Those who get higher interest rate for their banks deposit are the “winners”, but those who lose their jobs because of unemployment increase are the “losers”. However the overall effect in the long run of such a right policy, is to increase the welfare level for all, because low inflation support economic growth. The same distributional analysis applies with taxes, exchange rates and fiscal expenditure.
These days ,there is a debate in Chile concerning the current level of the exchange rate level .The higher copper prices ,plus the interest rate differential between US and the Chilean economy(almost 100 bsp),has created such excess of foreign currency (dollars), at the rather small foreign exchange rate market, than the local currency (peso) has appreciated by roughly 6,5 %throughout the year 2007. There is also a similar situation in Brazil and Colombia.
Since the year 2000, the Central Bank has applied a “clean” flexible exchange rate policy ,allowing exchange rate instead of real variables and domestic activity, to absorb the effect of any external shock. However this free floating approach, means that sometimes exchange rates appreciates ,and sometime it depreciates.
When it appreciates consumers can get cheaper good from abroad , besides they can take more foreign vacation program. Producers can get capital good also at a cheaper price. On the other hand, the appreciation of local currency hurt exporters specially those who concentrate their export to markets in the US, assuming they export product with high price elasticity, which means substitutable products. Therefore there is a distributional effect which is no neutral because while one group win (consumers),the other one (exporter) loss . While consumers get the benefit ,exporter get the cost of the appreciation. Thus the local authority confront a cruel dilemma, which group should they support? . either one have their own weight for GDP growth , consumption on the one hand, export on the other hand. This is the reason because free floating exchange rate policy , develops the so called “fear of floating” , because there are no minor distributional effect with such fluctuations.-
But that is not the end of the story, exporters are better prepared than consumers to speak out . They are fewer than consumer, therefore they have lower transaction cost to get organize . So, they are in a better position to try to influence authorities to intervene in local markets to push exchange rate to depreciate. But if local authority do so, then economic policy is designed by special interest ´s groups, because any group with strong media influence to get their message across, will try to do the same . In such a case economic policy becomes discretionary, which no one will be in the position to anticipate, increasing the risk level for long term investment and for the country as a whole .-
What it is important in this case is to understand the overall issue. The Chilean economy is growing at a steady pace ,such that it induces to appreciate its local currency because it worth more. In fact on the long term trend ,the exchange rate has been moving downward as the economy get higher GDP level. It follows that ,the real issue is how far is the current exchange rate level form its long term trend ?.Available data suggest that it is not that much further away.-

is Inflation back in Latin America ?

Recent annual inflation rates in some countries in Latin America: Venezuela 15%,Argentina 8.5%,Brazil 4%,Chile 6% .Still the average rate of inflation for the whole bunch of countries, was 5,4% in the year 2006,quite below the average in the nineties,263% in the first half of that decade, and 17% in the second half of that decade. The trend in the years 2000,concerning inflation rate in Latin America, has been downward . Therefore it is not the case that Latin American economies are moving backward ,but it is the effect of cost pressures arising from foods and energy prices increases .Whether it is transitory or permanent is a different matter. However, it is probably the new price setting for the mid term period of time. It is going to take a while to develop new capacities to cope with world wide increasing demand for foods, very much so, when the expectations is for a steady increase in such demand. Advanced economies do not face the same kind of pressures because foods do not represent that much expenditure weight on consumption basket . The same apply for energy consumption ,and new sources of supply.-
The important issue is that most of Latin America countries in the nineties, implemented reforms in their Central Banks to give them more autonomy and independency. It follows that Latin America economies have the proper tool to cope with this prices challenge. But, a different issue is how to use this tool, and the willingness to admit that there difficult trade off to deal with along the way.
To which extent is it worthy to sacrifice economy growth with restrictive monetary policy ,whether there will be inflationary impact arising from cost pressures anyway?. Cost pressures arises from the real side of the economy, which means that it is more time demanding to cope with its impactand solution. Productivity increases are a mid term target, and it requires additional reforms which might take more time than available . Labour market flexibility, is difficult to improve in the short term .
There is one option which can not be left out. Central Banks need to be even more autonomous than they are. The evidence indicates that the more its autonomy, the lower the volatility of inflation and so the volatility of output. Thus, the most serious problem, lies on the political side of the equation. Politicians like to threat Central Bank autonomy ,because it reduce their own influence to manipulates economic growth with more government expenditures pressures.-.

Tinbergen Rule :Instruments and targets (II)

From the Tinbergen rule point of view, economic goals should be connected with the expected welfare level society might try to get , such that target and instrument connect to each other , in such a way that society can fulfil its welfare expectations. Mundell has suggested that ,in order to get that expectations done, those more effective instrument to get the target, should have a greater weight on the policy function ,such that it maximizes its impact.-
On the other hand, some times there is not sufficient instrument for every target (reduce inflation, increase employment),so there is no other alternative than to make a trade off ,which means to minimizes welfare losses. It is also feasible to have more instrument for each target. For example to reduce domestic expenditure, and current account deficits.
Uncertainty also have an important role on policy design. It is not possible for the economy, to work with real time data , to know in advance the precise value of the parameter in the reaction policy function , or the effective transmission mechanism for monetary policy . In the stabilization effort done after the Asian economies crisis rolled over, Chilean economic authorities at that time, could not anticipate the magnitude of the impact ,that increasing the interest rate would have on investment and GDP.-
Rules have the advantage of allowing markets ,to know in advance what the future economic policy course would look like given some set of assumptions .It allow to minimize the efficiency losses arising from the unexpected ,and it creates an institutional framework which support long term investment decisions plans.-
Discretionary macroeconomic policy decisions, try to get the best of every chance economic authority might intervene into the economy, without any prior optimization target to minimize welfare losses.
Rules are better than discretionary economic policy, because it reduces inefficiencies, macro variables variability and volatility .On the other hand ,rules must adapt itself to new conditions arising from the dynamic of the economy forces. Some fixed rule like that one stated by Friedman, that money supply must growth at the same pace than product growth, does not take into account the endogenous variables which influences the money demand, such that money supply might growth without getting inflationary pressure to get its way through.-
Latin America economies, are still far away from having a set of rules for macroeconomic policy stabilization purposes. Inflation is back in some countries, as long as fiscal expenditure moves forward. Thus Central Banks have a difficult task, when it comes to get back on track the macro fundamental.-

The Tinbergen Rule : Instrument and targets (I)

For policy maker, It is usual to confront macroeconomics problems with the dilemma of choosing properly the instrument such as it match rightly a defined target(for example increase in investment or reducing inflation) . The success of stabilization macroeconomics policy depend upon the decision about the right instrument which to work with. This issue is very important in cases study related to reducing inflation programs, which has been a problem in many Latin American economies. Although empirical evidence suggest that keeping inflation under control is the job of monetary policy, some textbook experiences ,like Chilean stabilization program applied in the mid seventies and nineties, used a different approach based on exchange rate policy .The assumption was that as long as exchange rate was fixed or within certain range of value, it would allow to reduce inflationary pressures allowing authorities to get the inflation target. In both cases, the result was a failure although for different reasons. While in the seventies the assumption was that the real economy was more flexible than it really was, in the nineties the assumption was that inflation was mainly a cost push phenomena, ignoring the role of a demand pressures and how important is to keep control of them.-
Both cases are “good” examples of not following the Tinbergen rule. In the first case fixing the exchange rate meant to make monetary policy ineffective, so the task of reducing inflation was an endogenous process depending on moderate fiscal policy , but fiscal policy is better aimed for short term product goal. In the second case monetary policy capability, was artificially limited with a semi fixed exchange rate system , supposedly complemented by moderate fiscal policy. The target were confused with the instrument, fiscal policy was not moderate as expected (minimum wages law were approved, and fiscal expenditure increase over the whole period )) . The wrong belief was that inflation reduction program , did not required strong monetary policy, as the key instrument. Instead ,It was thought that exchange rate policy was better instrument for doing so, confusing cost pressures as more important than demand pressures as a cause of inflation .. Recent development in normative macroeconomics, have made quite clear that it is monetary policy the instrument to consider when it comes to get inflation under control, so much so that these days it is applied following a rule ,the well known “Taylor Rule “ which set a framework for a more effective monetary policy to get inflation target. On the other hand, the pass through coming from cost pressures is limited to ability of Central Bank to control inflationary expectations.-
The current concern about global financial market volatility, is a good opportunity to take into consideration the Tinbergen Rule. This market volatility is due not only to the subprime housing market crisis itself ,but much more so to the way authorities will react to its consequences . Both factors are complementary variables in the same equation, which means that the timing for reaction is as much important as the choosing of the proper instrument . This means that as long as this crisis is expected to roll over as a solvency crisis, the proper instrument is the discount rate .(the rate at which the Central Bank allow banks to ask for loan).The interest rate (The rate at which banks lend to each other) is the instrument for inflationary purposes, mainly to keeping demand pressures in check with potential output .

Central Banks ,inflation and economic growth (II)

Because of its role and its influence, most of Central Banks are both independent and autonomous from political interests .The degree of independency , varies among different countries depending on their experience with past inflation. The degree of autonomy depends on the ability for pushing aside government pressures. Available evidence(Measures of central bank autonomy: Empirical evidence for OECD, developed and emerging markets economies. October 2006. WP06/228 :Arnone, Segalotto y Laurens), indicates that autonomy and independence have increased in a ten years period ranging from 1991 up to 2003. They use the GMT index ,and a revisited version of it based on Cukierman approach, for a smaller sample. Autonomy in particular, has increased in emerging economies and developing countries ,as much as economy autonomy. This improvement follows a three stage approach :
S1. To laid down the political fundamentals of Central Bank ´s job
S2. Operational autonomy development
S3. Central Banks get further autonomy in terms of policy formulation and appointment of senior management, due to changes in. Central Banks laws such as to increases its autonomy in the use of instruments.-.
OECD countries also have had an increase in political autonomy (setting of objectives such as price stability) as a consequence of European Central Bank converging to the Bundesbank model . Economic autonomy also has increased ,specially since the 1990,allowing to have a lower dispersion among different Central banks economic autonomy index.
Thus, no matter whether it is OECD or Emerging economy, there are a deeper sense of connexion and causal relationship ,between both economic and political autonomy and higher macroeconomic performance. The trend is for higher economic and political autonomy. Countries with high autonomy level can be found in Perú, Mexico, Brazil, Chile within the group of emerging economies.
Concerning political independence ,OECD CB ´s countries (45,4%of all cases )are more political independent than those CB from emerging (28,6%) or developing ones(26,0%). As far as economic independence is concern, OECD(36,2%), developing (32,7%)and emerging countries (31,0%),are evenly distributed..
Very much of all of this discussion is important in the current scenario of global markets volatility which means strong pressures upon Central Banks reaction function, to make quick and precise moves. According to the available data, Central Banks are in a very well endowed position to handle properly the current situation, away from political pressures, and keeping the risk balances properly between achievements in inflation and stable and not recessionary growth. However, the current volatility it is not just about CB interventions , but it is also about a credible approach to avoid a recession ,in the middle of a monetary program to reduce inflation, settle down the risk perception of massive default.. Which is the best option? .It is important to make the difference between fighting inflation (macroeconomic real setting),and avoiding a systemic crisis due to insolvency in housing markets (microeconomic financial setting ). Reducing the interest rate, might not have the expected effect upon a crisis defined by microeconomic parameter, rather than macroeconomic ones. Worse of all ,it might imply to risk the gains made on inflation control so far, such that sooner or later it will have to be raised again .Besides, with lower interest rate, Banks will not make a difference for debtors unable to pay their mortgage, because it has not changed their risk profile. Reprogramming debt program under special financing conditions might allow a better effect,even continuing adding cash to the financial system it is not a weak approach.-

Central Banks,inflation and global economic growth(I)

These days ,Central banks are on the market attention because of the way their reaction to the current issues of food prices increases, and the sub prime housing markets crisis, will impact the global economy.-
First of all it is important to say that Central Banks are in charge of monetary policy to keep control of inflation, aimed at the goal of getting price stability, which means they set interest rate(fund available for customers), discount rates (funds available for banks).To decide interest rate level, Central banks follows the “Taylor Rule”. This rule means that as long as effective inflation deviates either upwards or downwards, from a target value, interest rate might go up or down respectively . It goes up when inflation is above target ,and it goes down when it below target. The uses of this rule has decreased the volatility of inflation ,so it has decreased the volatility of GDP which reduces efficiency and welfares losses.
On the financial side of the economy ,Central Banks can carry out open markets operations, which means to sell and buy financial instrument. .Besides, Central Banks are the lender of last resort ,which means that they are the one which banks expect help from when there is a credit crunch and they might transitory run out of cash. Then ,a key second role for Central Banks ,is to keep stability on the financial sector , which means to keep the payment chain in motion and Banking sector liquidity .On this task ,there is no rule except that one arising from avoiding the risks of economic depression ,and a proper judgment of the macroeconomics conditions that financial institution are facing at some moment in time. For instance ,the current global volatility due to the housing sub prime market crisis in the USA, required Central Banks to support financial institutions ,which otherwise were close to run out of cash , which would have a subsequent impact on markets expectations about macroeconomic performance.. While it has been on the financial side, Central Banks have been able to cope with the requirements of a markets with higher risk aversion than before. What if it goes beyond the financial side of the economy? .-
Central banks also needs some complementary policies to get a better results and impact coming out from its decisions. On the aggregate macroeconomics side, fiscal policy should be closely coordinated with monetary policy.
Price stability and financial stability ,are the key contribution Central Banks can make to foster economic growth .Therefore, economic growth is not out of Central Banks ´s concern. In fact it is its third, although less visible, main concern. There is no sustainable economic growth with high inflation and financial instability . Some Central banks have this goal very explicit on their responsibility list, whereas others includes this concern in a less explicit format. Either way, there is no Central Bank chairman who is not aware of the implications for economic growth ,arising because inflation might be above target. On the other hand, the uses of rules have made Central Banks more reliable and credible because that means less volatility ,and future conditions are better predictable .
Because of its Importance and influence most of Central banks are independent .The degree of independency varies among different countries .-

Ethical wages and the Catholic Church in Chile (II)

For better or worse, the Catholic Church in Latin America, has a long tradition of involvement on social issues ,since it started to modernize its beliefs concerning ethics, philosophy, politics and economics in the late XIX century . The Pope Leon XIII, wrote in 1891 the “Rerum Novarum” letter; which emphasizes the concept of “fair wages”, private property and labour rights. Ninety years later , the Pope John Paul II wrote Laborem Excercens, somehow as a follow up of the “Rerum Novarum”, but with a different approach to the meaning of work .In this modern approach, work means to be participant of the wealth creation process, rather than a kind of punish ; in fact capital is seen as the result of previous accumulative work, it follows that both factors are not against one another ,but they are complements instead .However, John Paul II made clear that individuals are more important than capital ,and improve Human dignity should be the main focus of the Church.
Some critics of Church involvement in daily life affairs , might argue that ethical wages it is a matter for politician and firms. Besides ,they would like to listen the Church ´s critics focused on different issues such as corruption practices, environment and a stronger approach on moral issues such as the involution in marriage institution. On the other hand, there are sceptics who believes that this new focus on ethical wages , will end up in social unrest .
The fact of the matter ,is that more people is starting to feel that their basic needs of education, health, and working conditions are well behind their expectations, very much so when it comes to share the benefit of growth.. Chile ,is still among those countries with highly unequal income distribution .Therefore, the real issue is not the Church involvement on the ethical discussion about wages and incomes, but its scope and lasting impact on current social –productive status, with a lot of small and medium size firms, which struggle to survive competition.-
Keeping those issues in mind , The President Bachelet invited 45 experts to participate as members of a National Commission to discuss the issue from the social justice point of view , which is expected to present its conclusions on March 2008.. What are the expectations for this working group?. All of them are highly qualified ,and they should be able to put forward concrete proposals to move ahead on this matter. Taking into account that this kind of initiatives has been set on the table before (In the mid seventies, it was called the Social and Economic Council), it is not he first time there is a serious attempt to make corrections on wages inequality .Part of the legacy of those first attempts ,it was to settled down the foundation for the national labour- firm accord at the beginning of the nineties .This time the goal is more ambitious , because it deals with society as a whole and its ethics standards .(The commission did not include labour and firm delegates) So there are two probably outcomes :Some guidelines to establish a national labour -firms relations policies, along with some guidelines to reinforce new instruments and additional resources for supporting social programs like food, education, health care, services subsidies (water, and electricity consumption) and transportation .-
Beyond the intention of doing something about it, it is important to consider into the equation, that the current model of public management for social programs available in most of Latin America ,is outdated with the current requirements .This means that any real effect on social and ethic standards, also should take into consideration the quality of the model designed to apply those recommendations and new policies. After all , poverty and inequality in Latin America stilll exist because it is in the State ´s interest, to have “customers” claiming for State help.

Ethical wages and the Catholic Church in Chile (I)

In the last couple of weeks ,there has been an interesting discussion concerning the Catholic Church proposal to improve wage conditions for those who earn below U$$ 300.Average Latin America low wages are probably below U$$ 200 or even less than that amount.-
The issue itself has two different angles . First the Catholic Church role within the Chilean society, and secondly, the real dimension for firms of being efficient ,and at the same time being fair.-
Catholic Church has been decisive in modern Chilean history and Latin America as well. The `1964-2005 period , has been quite active for Church involvement in daily life affairs .In the sixties and the seventies, it supported social changes, in the seventies and eighties fought against human rights violation, in the nineties tried to protect key values such as family (divorce discussion)and life(abortion discussion).Although a brief look ,it is sufficient to realize the important role Catholic Church has had in Chilean society. Therefore it is not a new situation that politicians, economist and business leader, must listen the Church on these matters. On the other hand, on environment protection issues ,the Catholic Church role has been less decisive.
It follows that the Church preferences are toward living conditions and human dignity ,no matter whether it is from the material or spiritual point of view. On this regard there has been a strong emphasis on the influence of different actors on Chilean economic transformation process, but few attention has been given to the way the Church also helped to shape it. Somehow the Church feels it is their right to speak out, when it believes must do so.,
Secondly. The issue of the real dimension for firms of being efficient and its implication for wages. Marginal productivity theory says, that each firm will hire inputs (knowledge, labour services, capital flows)up to the point where its contribution to production (productivity) is equal to its cost (payment). Firms pay wages according to productivity .The higher the productivity ,the higher the wages paid That is the market ethic to solve the problem of hiring one applicant, despite others ready to work in the same job. Therefore from the ethical point of view, an ethical wage is the one connected to productivity otherwise, the firm is not longer capable of keeping the pace of competition. Thus , the problem is how to improve productivity, as a condition to increase wages
On the other hand, given the fact that not all of the labour force have the same abilities and skills for the same job , there will be productivity dispersion ,and so a wage dispersion. Those with lower productivity are the ones part of the problem , because their wages could be below certain minimum level, such as that to avoid this effect, most countries have a minimum wage law. Empirical evidence, however shows that such minimum wage laws means higher unemployment for young people, women and the elderly looking for job opportunities.
Thus the real issue is to raise ethical income level. From the firm stand point , training opportunities, production goals bonus ,and performance bonus are the way each worker can increase his incomes to a higher level ,but it seems that to get an ethic standard is more an issue and a moral obligation for society and its values as a whole.. Increasing facilities for starting new business, better education, unemployment insurance, labour market information ,helps to creates a better condition for improving living conditions This is so, because society must apply public and social policies aimed at improving the standard of living, but at the same time without hurting the proper incentives for economic growth . Otherwise , this would mean an ethical failure for society .-

Poverty reduction : Is it the battle impossible to win ?

While in the nineties rich people had thirty times more income than poor ones, actually that difference is even wider:130 times !.1500 million people ( almost a third of world population) live with less than one dollar a day. This is part of the report of 28th Amnesty International council meeting, held recently in Mexico . The preliminary conclusion?: It is highly plausible that the UN millenniums goals, set for the year 2014,(poverty reduction) will not be reached. However, the World Bank economic report 2007, “Global economic prospects”, predicts that by the year 2030 , world population living with less than U$$ 1, will fall by half to 550 million people.
Current global Economic growth pace (2004-2006, 4% - 5%) seems to be insufficient to allow deeper progress in poverty reduction. On the other hand ,new business opportunities closely connected to information and knowledge as the main inputs, creates incentives specially for talented people, making the gap between those on the lead and those on the back, wider. Sure, poor people are among the worse talented on the talent distribution.
What to do about it?. The answer requires a clear understanding ,of the characteristics concerning the economics models applied in those countries which poverty is more concentrated on. At the same time it requires two necessary premises as a working tools:
a.- Economic growth by itself , is not enough for quick poverty reduction unless it is supported by complementary social policies : Since 1990 up to 2001, average world economic growth was roughly 3%, and global poverty felt from 28 % to 21% respectively. This seems to suggest that good social public policies , might imply that whether economic growth is not that much high as it is needed, it is possible to get progress in the battle against poverty.
b.- Additional resources for poverty reduction programs must be allocated properly, supported by control measures against corruption .-
It seems that the second condition, is more difficult to fulfil than the first one. Some of the assistant programs previously implemented for poverty reduction ,ended up in corruption or misuses of such resources . The microeconomics of poverty seems to be more restricted ,than the macroeconomic of it.-
Africa has the highest percentage of world population, living with less than one dollar a day. There is a strong challenge under way , to shape new economic and social policies in that continent .Africa is behind the new emerging economies, making that challenge even more pressing. There is also important levels of poverty in countries like India and China. However ,these two countries are growing at a very fast pace ,which means that they might be able to cope with the problem, as long as they keep the momentum for economic growth, and design good social complementary policies. Latin America also has important levels of poverty (40% of total population),although in the last ten years has made important progress to reduce that percentage because of economic growth .
Poverty as a moral problem means questions and challenges which requires answers , and willingness to overcomes difficulties ,however there is no easy way to get out from it. Poor people themselves are also part of the problem ,instead of being part of the solution. This is so, because there are incentives which they are not aware of, to keep them in such a level of living conditions, to justify an active role of the State in the economy ,but without giving too much attention to the risks of corruption involved, which make the poverty reduction effort more difficult to be successful .-

Food prices increases and inflation (II)

What make inflationary expectations control so important?. First of all Central Banks are in charge of Monetary Policy, which means that they are responsible for keeping inflation stable. Each Central Bank has autonomy to do its job, although it might have different complementary macro variables aside from price stability itself, to focus on. It follows that monetary policy as the main tool to get inflation under control ,it is not that much applied in a kind of homogeneous textbook style. Some Central Banks keeps focus also on growth and employment, another Central Banks keeps focus just on inflation , and others keeps its focus also on price expectation .-
Inflationary expectations are an important component of economic information, as part of the decision making process to allocate resources. Economic agents ,want to know in advance what the inflationary trend looks like , to avoid being caught in the middle of a transition from low inflation to high inflation ,or the opposite. Either way mean both efficiency and welfare looses. Consumers and producers makes their decisions on the basis of the best information available including expectations. Inflationary expectations by itself, might validate an higher inflation rate, whether the monetary policy is not credible enough to convince consumers and producer, “not to take inflation on their own hands” by charging in advance higher prices .-
Thus, food prices increases might imply higher price expectations, as long as demand expansion goes along with it, because in such case all prices moves upward.. It follows that to keep control of aggregate demand expansion, and effective GDP(Gross domestic product) and potential GDP gap, is a necessary condition to keep inflationary expectation under control. A second condition is to have credible monetary policies.-
A different questions arise again and again: Why is it so important to keep inflation under control, even up to the point of keeping attention upon the price expectations?. The economy needs information to allocate resources(right prices) ,and inflation means a distortion in that process ,because it changes prices signalling ,it give a higher price to activities based on rents, specially those best protected against price fluctuations (real state) , and away from productive ones such as investment. Nobody want to risk huge amount of resources which are going to be devaluated by inflation.
On the other hand , inflation means a tax which is paid specially for low income people who are badly protected from inflation .In other words ,inflation has negative social effects because it affects stability at society level. In Latin America, very much of its economy instability in the past has, been strongly related to inflation and its consequences. In advanced economies high GDP volatility because of inflation , also have welfare effects. Therefore, inflation hit the rich and poor economies.
These days monetary policy has made a lot of progress to confront inflationary pressure coming from different sources and its associated risks. Inflation has become less volatile ,so it has the GDP and economic growth has become more stable and persistent in time as well . Monetary policy Rules have allowed to have a more effective tools to fight against inflation. So, the fact of the matter is that these days in the global economy, for any inflationary pressures there are better monetary policy instruments available.-

Food Prices increases and Inflation (I)

A United Nation report has said that food prices has increased in 2007 on average by 13 % .The explanation for this situation is strongly connected to higher demand from Asia emerging economies, but also due to higher amount of these food used to produce alternative energy resources.
Quite on the contrary with the oil prices increases which led to a substitution away form oil toward cheaper energy sources, food are not possible to substitute as part of the nutrition component. The alternative would be, a kind of a heavily criticized transgenic food (genetically manipulated food) . Leaving aside the controversy surrounding this kind of food, this alternative would prevent to have higher inflationary pressures for some time in the future .This the typical cruel ethical dilemma which might arise in the global economy. -
The current problem is different. .After all global economy means lower inflation ,as much as the global supply grows faster than demand. Transportation and communication cost has decreased sharply since the nineties, because of the bigger business scale concerning to global markets. But, to what extent food price increase can have a strong impact on global inflation ?
This an old discussion between inflationary experts and researchers; concerning the difference between cost pressures ( price shocks) and demand pressures as a cause of inflation. The main stream of analysis, consider that any cost increase pressures can be counterbalanced by other relative cost decrease forces .In other word ,inflation arises from demand increase pressures, which imply all prices increases in some period of time at a persistent rate. .In this case food prices increases, would be counterbalanced for instance, by transport and communication cost decreases keeping global inflationary pressures stable. In fact inflation in US is decreasing, and it is in check in Japan and the Euro zone economies . Actually , effective GDP and potential GDP gap in industrialized economies, is decreasing which means more stable inflation behaviour in coming months .
Therefore, inflation would still be a matter of Central Banks ability to keep inflationary expectations and demand pressures, in check with the macroeconomic fundamentals.(potential GDP). It therefore means, the ability to make the proper balance between growth (employment) and price stability. If there is any relaxing on monetary policy adjustment curse to get price stability, food prices increases might indeed become relevant because of its dynamics of a faster pace rate of price increases than other goods prices .-

Currency adjustments: The way global financial markets works

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

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

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

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

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

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

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

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

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

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

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

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

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

To live up to ours fears (II)

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

To live up to ours fears (I)

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

Air Line services:The Smaller the better

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

Wealth creation :The way it works

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

The new source of power:The economic analyst

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

Free Trade agreement: Chile - Japan

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

Water supplies:challenges ahead

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

Market volatility and global economic growth

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

Latin America as a political asset

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

Gender Income gap: why women earn less than men?

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

The new global uncertainties:Defining globalization frontier(II)

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