The real price of drinking a glass of water

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

Doha Trade negotiations talks

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

The economics approach of new European immigration policy (II)

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

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

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

Environment protection and private incentives

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

Fiscal Policy Efficiency in Latin America (II)

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

Fiscal policy efficiency in Latin America (I)

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

Labor day: Time for a reflection (II)

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

Labour day : Time for a reflection (I)

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

Supply side economics : An overview (II)

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

Supply side economics : An overview (I)

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

The economics of internet (II)

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

The economics of internet (I)

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

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The next decade Dilemma for Latin America economies:Distribution or growth

After the nineties most of the Latin America countries, followed a turn to the left, probably searching a new path more socially inclusive to guarantee Governance and democratic stability,not necessarily because of markets failure but more so because of lack of adjustment in the instituional framework to allow markets to work properly.
Governance and social inclusion are legitimate objective which come out not only from the left, but also from the right( Compassionate Conservative approach). The difference lies upon the means to achieve it. While the Latin America left, quite differently to their moderate European counterparts, believe in distributive policies based on more taxes, subsidies, and regulations, in short a bigger State to get better living conditions, the moderate right believes in the ability of individual choices throughout markets both based and within the proper institutional framework, to get such objectives. Given the fact that leftist Government in the majority of the cases, have followed the traditional old fashioned paradigm of trying to replace markets instead of cooperate actively with it, few countries like Brazil, Peru, Uruguay ,and Chile arise like the pragmatic exceptions, to counterweigh the more ideological approach of other Latin America economies. But Chile´s experience of focusing too much on distribution, is currently showing its limitations as well, because of the negative impact on the rate of economic growth.(This year, with copper price above U$$4,02 lb, the Chilean economy is expected to growth at annual rate of 4 -4.5%,half the average rate of the nineties).-
Thus, the dilemma for the next decade is already settled down: Latin America must decide the proper economic path to improve its living standard. Distribution based on the State means more poverty, because the State is political by nature, which means that Social problems like poverty and inequality, are constrained to political realities,(poor people can wait the next election), and it is not in the State ´s interest to solve it other than to save face. The link between the State privileges, political interest and power concentration on those who run the State, mean that they need “customers” to survive. Therefore,without any reforms on the colonial State, the real path is to focus on growth , free trade agreements with the new arising markets and more flexible approach to private initiative.

Politics and Economics In Latin America:The 2000 years experience (II)

It seemed like everything changed, to keep everything as usual. The State is still considered to be the champion of social welfare and protection. It has kept for itself the monopoly of such values, applying high entry barriers to private sector in case they want to go into those areas. Let take some examples, Public health infrastructure, public transportation (subways),and Education are considered as the “natural“ business of the State .The nature of public goods of such services however, reinforce such notion, given the wrong impression that there is a first best alternative(the state), for good institutional framework, to let markets and the private firms works properly. Chilean experience shows that it is not necessarily the case. Huge amount of money poured since early nineties, into education and public health, have not improved the system, or even worse have not improved its quality at all.
It fallows that to correct market failures, does not imply that public sector by itself will do the job better. At least, not within its current institutional format.
Thus, the reforms done in the nineties, did not ventured deep enough into the roots of most of economic and social problem in Latin America: State intervention in the economy, and those who carried them out, which were also in charge of running the State: politicians, bureaucracy managers, and special interest groups(Labor unions). They protected their own business with a self constrained reform!.Business man, intermediate business associations, regional leaders, intellectuals ,were left out of the process.
Why they did so?. One Hypothesis could be that because they believe their own values, are better that those arising from individual preferences and freedom of choice. A second hypothesis, could be that they depend upon the State protection and privileges, specially the political parties , such that they no longer could afford any substantial self reinforce reform of the State based on decentralization, as part of such process.

Politics and Economics in Latin America:The 2000 years experience (I)

Where Latin America economies are headed to these days ?.This question seems quite relevant after the adjustment process following the eighties lost decade, and the subsequent “Washington Consensus Policies” in the nineties. It looked like the “new economy” finally arrived to Latin America, so it was the expectations with Argentina, Brazil even Venezuela after its own experience with the effect of expansive fiscal policies following oil export income increases, in the seventies. Thus, with the first decade of the XXI century closer to the end , and beyond the favorable current situation with higher commodities prices, economic analyst, business man and politic leaders, start to wonder what is it next for these economies?.Chile was for quite a while, the reference to work out the new path. Market orientated economic policies, complementary role of the State , flexible regulatory framework, and stable macroeconomic policies and reliable institutions, seemed to be the first best approach. Unfortunately, there has not been that much sense of a leadership purpose ,in this successful experience. In fact, actually ,Chile looks somehow isolated within Latin America, trying its own economic path, which by the way, is the one (supported with further microeconomic reforms),upon which sustainable welfare levels increases are feasible .
However ,the fact of the matter is that most of the key Latin American economies, still rely on the State to pursue economic development. Argentina and its new Government first 100 days, seems to validate the traditional State intervention paradigm. Private sector depends on the state policies for transport infrastructure, urban development, macroeconomic policies design(inflation is controlled throughout special agreement with private sector).Refreshing views about either a modern more efficient State, or stronger private sector role in the economy, are out of the daily debate. So it is in Brazil, and Venezuela, although with different degrees. Brazilians authorities, have been far more pragmatic, than their ideological counterparts. They have followed a moderate approach, and as a result President Lula ´s support, is among the highest in the region,because of the results in terms of growth and poverty reduction.

New management rules for the CEOS (II)

Wealth creation means the ability to take risk sucessfully , but what are the price of those risks?.Benefits (returns),are the first measure of risks´price . The higher the price(risk) the higher the return .That is Tobin analysis of the relationship between risk and return for an individual investment. A different thing is to manage risks on behalf of others people´s interest, like firms do.
Milton Friedman said in the seventies that the only justification for business is private profit ,which means that firms should ruled out any sense of social compromise , other than with shareholders. From this point of view ,risks are justified upon the ground of seeking short run profit, thus it does not matter the risk price ,whether there is a reasonable chance to get the highest return ,measured at the end of the year accounting balance and dividends . Following this behavior, it is usual to find opposite interest between management and owner. This is so ,because in the process managers get a pay for the results they get, the better the result the better the pay. Therefore ,short run seeking profits decisions, are vulnerable to conflicting interest, more than long run strategies, because in the short run ,CEOS do not have limits other than the expected positive result .If they fail, their retirement bonus will fix it all.
What about a long run strategy?.Any strategy has different and particular support upon which stand,(market share, increase in sales, segmentation, innovations and the like),but no matter its justification, it allow to define a set of values complementary and sometime necessary, to the proper implementation of those strategies .In the long run, social values such as compromise with community , employees and markets stability, match quite well with the profit seeking strategy. This is what empirical evidence shows since the nineties .In other words, Corporate social responsibility fit better than exclusively short run result ,the right combination of management values other than simply to earn money. It follow that the best way to match different interest within firms ,is based on a long run shared view of what each business is about. Profits seeking by itself ,do not guarantee neither stable and sustainable firms growth.-

New management rules for the CEOS (I)

From the economic point of view, there is a theory(agency theory) within the field of organizational economics ,which explains the opposition between the CEO´s management interest, and those of the shareholders ,employees and community. This is more obvious when it comes to risk management, because in case of failure the burden cost lies upon shareholders and the community (employment losses),but not necessarily in CEO´s pockets, because they might claim their retirement bonus ,unless they face justice to clear up their responsibility, when such a risk turn out to be a business failure.-
On the other side, Management models have tried to deal with this issue, throughout the so called Contract Theory, which says that because firms is so widely considered like a network of different and some times conflicting interests, there is no better way to internally regulate those one, than with the help of contracts. These contracts, might be the kind of either short run or long run periods contracts , depending on its scope and level of application. Thus, on daily operations these contract are the kind of well done job contracts, with penalties for failures (for instance low quality,) and bonus for results achievement (productivity or profit). On the strategic level, (CEO´s field) these contract, are the kind of a long run focused time span, although with strong emphasis on short run financial results, which becomes like the monitoring board, to evaluate the application of strategies .-
Whatever the focus of these contract, the fact is that risk management is hard to assess, mainly because of the nature of new strategies which the CEO´s are responsible for. New strategies implementation, means to undertake risks anyway, thus the question becomes what kind of risks failures are they accountable for?. Risks are within the core of business and wealth creation, therefore too much control about risks, might imply to introduce additional constraints to the whole decision making process, and profit seeking strategies. Double check procedures, and rotating risk involvement decisions among team members instead, within the frameworks of performance contract, seems to be a valuable instrument ,to get the proper equilibrium between those interest linked to short run profit seeking behavior CEO´s job) ,with those linked to its long run sustainability (shareholders ,employees and community ).

Weak dollar hurt Latin America export:Its implications

Most of the Latin America economies exports are highly concentrated on primary products, such as agricultural products (wheat sugar, coffee),mining products (copper, silver) and, few countries export gas and oil within the energy sector. Manufacturers products also are in export supply but they have a smaller share of total export. On the other side,15% of Latin American economies GDP are concentrated on USA markets. It is widely known that the USA economy is under a slowing down process, which means that as long as American income GDP ) decrease, the total demand for Latin Economies export also decrease. Additionally the weak dollar also affect the exporting sector ,because it make more expensive good coming from those economies.
The local currencies of most Latin America economies ,have appreciated not just because of more foreign investment, or incoming capital flows ,but also as a consequence of dollar depreciation.. Thus, the Brazilian real has appreciated by 25% against the dollar, up to October of the year 2007.Brazilian economy though ,is more diversified with its exporting markets.-
According to Latin America Economic Commission, current account balance worsened in 14 out of 19 Latin America economies. Colombia (-3,9% of GDP), Uruguay (-2,6% of its GDP)Mexico (-0,8% of its GDP) .Argentina and Brazil have more diversified its export markets toward Europe ,China and India. In the Argentina case , exports to the USA economy , represent only 0,3% of its GDP , ranked in the third place after South common markets association, and Asian economies.-
The solution is far from an easy implementation, because primary agricultural export got subsidies from European economies which make their prices cheaper than otherwise. It follows that the dilemma for these agricultural exporting economies lies between either high prices because of local currency appreciation ,or low prices , because of subsidies in European markets for some of its primary exports. Therefore these economies are more vulnerable to any change in world economy conditions.
Some sectors of Chilean exports have also been affected by dollar weakness ,although the annual volume for the year 2007 was positive, because of copper export volume ( 60% of total exports),which had a very good price throughout all year. Private Exporters though, have complained about this situation because peso appreciation has led the sectors to important losses of competitiveness. High labour cost, have affected additionally exports performance ,in such a way that world producers like Dole closed its production operation, concentrating itself only in products marketing.-
All of these issue means, that it is important for Latin America economies, to pursue a different and more diversified export strategy, to improve their management model focused on efficiency , productivity and value. All of those exporters (Germany ,Japan , South Korea are good examples) which has made of quality its trade mark, have been able to overcome the cost of its currency appreciation against the dollar.-

Economic Freedom index: The relevance of the Heritage Foundation focus

The Heritage Foundation has announced its Economic freedom index 2007. Chile is at the global level in the eight place, above United Kingdom ,while at the regional level is in third place ,behind Canada and the USA.
The Economic freedom index is built upon ten categories: trade, fiscal policy, monetary policy, investment conditions, financial policy ,labour policy ,state intervention, property rights, and corruption levels.-
What is it the importance of Economic freedom? .It is important because there is no way society can live without it : Let briefly review why :
a.- Given the proper institutional framework, it allow markets to make their way through for better allocation of resources, which means they get the higher return considering all other economic feasible alternatives, maximizing society welfare.-
b.- Freedom is a condition for welfare increase within a community, as long as every one of its member , have the chance to try freely their best opportunities available. The twenty century ,has shown that all those societies based on freedom, are better off than they were at the early years of that century.-
c.- Freedom allow energy to go across where it is needed, like electricity allow the light where is needed , to clear the way through. Freedom have been the seed for major achievements in mankind history, although it might had carried out some cost to preserve it. But no matter the cost, there are people ready to live up to get the freedom level they believe it is necessary.-
The opposite to freedom is labelled with state intervention,(at the extreme, totalitarian regimes) whether it is into the economy or society as a whole. In other words, more freedom is associated with a smaller State .But this smaller State, does not mean to get rid of the State whatsoever ,but in G Sorman ´s word it means “a better State”. Freedom match quite well with a better State, as well as a better institutional framework. Both, a better state and better institutional framework, complement freedom in such a way that, it creates the most favourable conditions for growth, which means more freedom .
Unfortunately ,in Latin America people still live up to their fears instead of their freedom. There is a strong dependence from the State. Historically, the state has been involved in most of the activities these societies lives for. Education ,health care, economic policy have strongly been based on State egalitarian principles , which is the opposite to personal talent principles ,which freedom is based upon. Thus, it is not a surprising that relative younger countries like the USA ,has surpassed most of the older Latin America countries. More devastating the comparison, if we take into account than in the middle of the fifteen century, ancient civilizations were already using technologies for water irrigation, road constructions, infrastructure developments, education and public management model( based on tax collection). The conquerors, did not change that model, and in the process they could not support new entrepreneurial initiatives, losing the opportunity of taking advantage of all what it was available: land, water , technology and expertise .
So, lack of freedom is not trivial for society, even more if you get to the core ethics of it: Freedom allow people to reach happiness ,just because it is every one own choice, to decide what they want to stand for ,just because it allows to get the higher expectations mankind might have as a whole, but above all, because it allows us all to survive. Therefore the higher the economic freedom index the better, keeping in mind what relevant is the proper institutional framework. Latin America countries not only fall behind other countries freedom standard, but also they do not have a modern institutional framework to expand opportunities ,which is the other side of freedom .-

Driven poll events: What if the poll is not accurate?

Opinion Polls represent a kind of summarized information about society ´s mood, concerning some specific issues. From the economic point of view, it represents the reduction in transaction cost, which authorities can count on in their decision making process .Thus, if anyone want to discuss abortion, divorce, environment, political preferences, regulation and the like ,opinion polls show a convergence path about them, to reduce the chance of mistake for any policy design.
However, what is the real relevance of this opinion poll?. Well it depends upon both the quality of the sample, and expert´ s judgement to explain its results. Let take an example: you want to know how people would react , in extremes case such as an alert of tsunami. You guess that between stay in a shelter or running away, at leas 90% would run away , whereas other expert might think that 50% would spilt between running and seeking for shelter. You decide to do some research about it, so you ask randomly to 25 people about what the would do in case of a tsunami: Assume that 10 people of this sample cares about tsunamis ,and 70 % say that they would run away from it, while 30 % say they would seek some shelter around. Both answers imply a public policy requirement either to build up proper shelters ,or to set a proper signalling mechanism for those who would run away. But is that it?. From the public policy point of view, it is important to use efficiently scarce resources, therefore it is a better approach to improve the information about what it is at stake: If you spend money on the basis of poll results, it might end up to be a waste money, because we do not know the probability of occurrence of each one of such event. The next question is , Taking a sample of those ten people ,what is the probability that seven of them, would run away in case of a tsunami threats?. Applying statistical tools, the probability would be 0,0574. What about staying at a shelter? .The probability would be 0,117. Therefore, it is more feasible for people to look for a shelter, than to run away ( 5,7% probability in the former, against 11,7% in the later) . Thus, the correct policy option should more be in favour of building up shelters , instead of concentrating on signalling equipment . Quite the opposite, if the decision would have been based on the first poll result.!. Beware that this conclusion is sensitive to the sample size. It means that whether 8 instead of 7 people run away ,the probability changes.-
Something similar it might happen in a political election: Two candidates go on a very tight race, although one of them have a slight lead. Is that enough to conclude that the one with the slight lead ,would win? .Recent experience shows it might be not. The result depends upon the probability for voters, to keep up to their preferences. Thus , it can happen that the probability of keeping their vote in favour of the one who is leading the polls, is lower than the probability to change their votes, of the other candidate´ s supporters. It means that the one who is leading the poll , has more volatility in his voters preferences, than the one who is behind .In such a case , if you rightly consider the probability scenario as a complement , you would have more information to take a better decision.-
Most of the time, opinion polls show the event in absolute yes/no terms. However, modern times offers citizens a lot of more options to look upon for additional information , which at the same time allow them to shape in a better way their preferences, affecting deeper than expected the probability of changing them. In the information society , instantaneous event make preferences more unstable.-

Some guidelines for the year 2008

It is a tradition among market watchers , to make announcements about the new year economic prospect and expectations. This is a very hard exercise ,which can also be highly risky if you get wrong with your assessment, specially feasible when events which nobody can count on , appears along the way. Even so, it is an interesting experience try to assess what it might become the key event of the new year. My own record ,by the way, it is not that bad .However, I will try to give some guidelines ,instead of specific projections, based on my own judgment of current global economic events.-

1.- Environment will continue to be the key issue for all this year, hitting its peak at the next Global Warming conference to take place in Istanbul ,Turkey on next July. Previously to that event, more than 20 conferences world wide, will keep that issue on the spot light.

2.- Global growth might be a slower pace than the previous two years , because of inflationary pressures due to both oil and food prices increases, and its subsequent probabilities of interest rates increases ,besides the high probability of slowing down in the USA economy growth , and the impact of more than usual, natural disaster such as hurricanes and flooding. Inflation will be the problem to take care of.-

3.- Women will be on the spot light throughout the whole year, because of politics, economy, environment, diplomacy, and sports with the Beijing Olympic games. They might consolidate their influence, as a new source of change.-

4.- Oil prices will be higher following its long term trend, as long as inventories fall after the winter season, dollar depreciation goes deeper , and supply constraint due to geopolitical tension coupled with speculative forces, make their way through to push prices upward .

5.- From the financial point of view, it is expected that important adjustment will take place, specially from those firms anxious to get rid of sub prime market losses. There will be a reshape of financial services industry.

6.- Other industries to keep an eye on, are the automobile and aviation ones ,both connected to the top issues of environment and oil prices . In the automobile industry, Toyota should continue to move ahead with its goal to become the number one in the USA markets and in the world, within the segment of fuel efficient cars. –

The year of the environment is almost gone

Next to finish this year,there are three elements which has made the difference between what it was expected and what it was real.:
1.-At the beginning of the year 2007,there was some doubts about the importance environment issues would have.March 2007,marked a turning point when the "Unconvenient thruth" documental was awarded at the Oscar ceremony.It ignited a new focus on a subject most of the time, left for bureaucratic atention,instead of ordinary people and global media concern. It began the new focus, based on world public opinion now pushing hard for new policies and agreements.The Nobel prize award made the whole issue a matter of piece.Therefore, in the next months ,both Europe and the USA,made important contribution to move forward faster than expected. New emerging economies also stepped in, to a global consensus for a different approach on environment,following the expiration of Kyoto Protocol.

2.- The global economy has been stronger than expected to cope with unstability conditions.While the oil price is close to U$$ 100 a barrel,the 2007 year global growth is expected to be within the range of 4%- 5% .This does not mean to rule out complications ahead ,due to the implication of sub prime markets crisis.But the global economy has been resilient so far, which indicate a positive sign of strenghts.-

3.- The economic growth prospect for Latin America economies has improved, after the new Free Trade agreement between the USA and some countries such as Peru and Uruguay, (not considering Central America).However,Free Trade agreement effects turn out to be positive, as long as there is a proper institutional framework ,specially designed to take advantage from it,specially in the case of Medium and small size firms. Although inflation is back because food prices and energy cost increase,the reforms made in the nineties heavely focused on the macroeconomic and financial side of the economy, suggest it will be a transitory situation.

The Asian economic crisis: Ten years later (II)

It might be helpful for current uncertainty about the lasting effect of subprime market crisis, to keep in mind how important expectations are, and how relevant speculative forces are, to set the pace of adjustment path. Once there was well supported doubt, about the real value of each Asian economy exchange rate ,speculative forces were in charge of market behaviour. Any analysis on exchange rate fluctuations at that time, illustrate the magnitude of this speculative effect. R Dornbusch called overshooting , J Keynes called the speculative nature of business behaviour. Indonesia currency felt dramatically from 2,909 (1997)up to 10,014 ruppies per dollar(1998) , Korea currency moved from 950 won/dollar, (January 1997) up to 1600 won /dollar,(January 1998) , and Thailand baths from 31 (January 1997 ) up to 50 (January 1998). With all information available, speculators made quick decisions to move away from an increasing risky scenario. Somehow, speculators care very much about the real conditions of the economy, round the clock gathering information such that they are able to move quickly in case their expectations are not consistent with the fundamental .
It follows that speculative forces (suden changes on capital flows)are like a warning light ,about what is going wrong in the economy .Of course speculative forces by itself ,are not enough if they are not complemented by institutional weakness and misplaced focus of monetary policy.
a.- Institutional weakness. Reckless loan policies by private banks in Asian Economies, led to a sudden increase of loans which were not capable of matching its payment schedule .Bad loans, exacerbated negative expectations which reinforced the depreciation round, because everyone wanted to get out of that market to avoid further losses.The process of large gross intermediation of capital inflows and outflows through the banking system, implied that the domestic Asian bank increased their foreign short term liabilities faster than their foreign assets.. In the South Korean economy case, liabilities increased by U$$ 56 b between 1993 and 1997,while the gross assets increased only by U$$ 19.8 b. As a result, the net liability position of Korean banking system went up from U$$20,8 b in 1993,to U$$ 57 b by 1997,(U$$90b liability against U$$ 33b assets)(Roubini 1998).It is obviously a moral hazard case, which arise because of expectations of Government promises of bailout. Very much of domestic loan , were driven to finance speculative demand of existing fixed supply asset.
Another lesson from the Asian crisis, was that monetary policy must be rightly targeted to keep expectations under control. In most of Asian economies at that time ,it was focused on the wrong target .Instead of reacting to the speculative forces ,it underestimated the magnitude of such forces .It was more concerned with keeping stable the exchange rate throughout foreign currency markets operation, than constrained the aggregate expenditures level throughout higher interest rate which would have also allowed to slow down capital outflow and further currency depreciation . When it realized that such a correction was on top of the list, it was too late to stop the speculative waves.
Quality of information for a proper allocation of resources and economic decisions, was not good enough to guarantee stable economy growth and to avoid the recession in Asian economy by the end of 1997. The investment boom took place in the wrong sectors ,and speculative forces reacted faster than authorities attempt to control the damage. As a result, the whole event were driven by speculative behaviour adjustment , with no chance for macroeconomic policy , forces , to mitigate its negative impact.

ATRAPANIEBLA EN PATACHE - Iquique TV Noticias

This video, shows how important it is to get advantage of nature resources ,without hurt them.The fog trapper curtain, allow to get water (7 lt per square meter/day) which by gravity support local communities productive activities.This is part of a 25 years Catholic University research project.

The Asian economic crisis: Ten years later (I)

The Samsung Economic Unit Research Institute( http://www.seriworld.com) has published a review of the situation focused on the South Korean economy ,after ten years of the Asian economies crisis(1997).
First of all, some background .The Asian economic crisis started off in 1997 in Thailand, when those economies could not get over with the effect of economic growth, based on serious unbalances and disequilibrium. The exchange rate policy applied was Asian currencies pegged to the US dollar, such that while the dollar started to appreciate in 1995,the Asian currencies also had a real appreciation ,which led to current account deficits . On the other hand ,interest rate differential and low exchange rate risk, led to huge amount of capital inflow which prevented currency depreciation. By the beginning of 1997, it was clear that several Asian currencies were overvalued, and that such overvaluation was a factor in the worsening of the current account deficits in many countries of that area (www.rge.monitor.com ). This current account unbalances ignited a series of depreciation in local currencies, which pressed the financial sector ,governments and firms which had huge amount of debt in such foreign currency. At the same time, this depreciations were self reinforced because all of those economies shared the same markets, so they had to protect their exports competitiveness .
At that time ,on November 21st ,the South Korean economy requested assistance from the IMF because of the effect of such a crisis on its own economy, which was not possible for them to carried over. South Korea economy was heavily hit by their neighbourhoods countries, because of the different adjustment of its exchange rate policy. While at the end of September 1997 the average rate of depreciation of Thailand, Malaysia, Indonesian and Philippines currencies, were roughly 33%,the Korean won was depreciated only by 8%,which means that the won was appreciate in real terms. This meant an important loss of competitiveness for Korean economy.
Ten years after the crisis , South Korea economy has fully recovered with some impressive figures. It holds U$$ 260 billion in foreign currencies reserves, and it has a per capita national income of almost U$$ 20.000.Exports has surpassed U$$ 300 billion, specially important the fact IT industry has become much more important on total exports.
The score card for the Korean economy ,according to the SERI report, indicates that in the last ten years firms were reluctant to invest more, reducing capital accumulation. Qualitative growth improved somewhat, because firms enhanced their management models focusing on higher profit.
Some of the challenges which lies ahead includes more labour market flexibility, innovation in small and medium sized business to make them more resilient to markets fluctuations, softer regulations and additional investment in the services industry.
This case illustrate how important is to take the right lesson from crisis time. In fact the South Korean economy, made out an opportunity of that painful crisis, to make deep corrections specially on the financial sector, which otherwise were next to become severe restrictions on growth .-

Public Transportation in Chile : Working with the wrong assumptions (II)

A couple of considerations about the mass transportation system in Chile , known as "Transantiago".( a better name would be "Transexpress"). First ,Working with the wrong assumptions in the first stage, requires a careful approach on the next stage , which is the crucial one to make it a feasible project , on the mid term time span. Otherwise ,the situation can get out of control. Secondly, precisely because of such considerations, following the House of representatives in the Chilean congress , the Senate did not approve the financial resources neededfor the year 2008, which were asked by the Government .The Senate, in a joint partnership of both sides of the political spectrum; the opposition and the current coalition government supporters, are demanding a new and different law with specific and detailed explanation of every aspect of the working plan of the system, instead of being part of the public budget for the next year, just as one more within of a lot ofdifferent sources of expenditures . Therefore the mass transportation system in Santiago (Chile) which generates losses of U$$35 million monthly , do not have the financial resources at the require level, to keep fee at its current level and to increase the fleet. The authorities have ruled out the chance of increasing the cost for commuter, as an alternative source of financial resources. Thus ,the question now is: What is next? .
Although with the participation of the private sector on technical matters(software design) , and some operational areas of mass transportation, the whole project is a State designed one .This is the critical point, because it seems clear that it is beyond its current available options, for the state to go alone with the remaining phases of the project . Therefore the whole project, not just part of it, should become a joint venture between the state and the private sector. The previous experience with firms which have been managed by the State ,is not encouraging enough to support enthusiastically the request for additional money, at least no without some control mechanism or specific justification for it. This project, the way it is right now, could become in the near future, a permanent high demand of public resources project .
The payment system applied so far, could also require some adjustment sometime into the future , taking into account different options of commuters transportation, such as the express line(faster than average with fewer stop), the frequency of traffic (The more often commuters use the system ,the lower the fee) , and the volume of combinations , ( The more combinations the lower the fee),along with the size oif the market (population areas), (The larger the market ,the lower the transportation fee).The current fee system, is hardly affordable in the long run, mainly because the rate of commuter future demand for mass transportation might increase,( it is supposed that commuter will left their car at home),which will imply faster depreciation of current fleet, and higher operational cost because of oil prices increases,plus higher cost for unfrastructure facilites. Sooner or later, there will be additional requirement for more money, which tax payers not longer can support,speacilly whether the quality of service does not improve substantially. Subsidy to the poor would be an option, to take into account,such that the burden of keeping the system working ,is well distributed among commuters different incomes level.-
The fact of the matter , is that the new mass transportation system proposed, is an expensive one, which sooner or later commuters will have to pay the real cost. Anything different to this reality, would the worst of the assumptions.-

Public Transportation reform in Chile : Working with the wrong assumptions (I)

Can anyone imagine a transportation system reforms, based on the assumption that it will work with fewer but bigger busses ?.Can anyone imagine a transportation system heavily dependent on the subway transportation, without increasing the frequency of the trains?. The questions are long enough to get mad to daily commuters .But, those are some of the assumptions which the new public transportation system in Santiago (Chile)was based upon. What went wrong ?,asked the Washington Post (http://www.washingtonpost.com/) on Tuesday, November 13th .
It is not the first time in Latin America , that a reform on public transportation system is attempted .to carry out. Brazil and Colombia have also tried this reforms in the past, with apparently good results. In the Chilean case, it was a huge effort without precedent, to implement a public transportation system based on a modern concept of environment friendly ,and likeable to commuters .
For many years the old transportation system was on the spot because of a lot of reasons :Pollution, dangerous operational conditions, uncomfortable for commuters needs, which all add up to negative externalities But even with its externalities it worked ,although not that much up to commuters expectations .The new system ,have solved the externalities ,but it does not work as expected !.How come ?. It does not work , because the assumption upon which the whole system was built up, were wrong.
Let take a brief review of some of the key assumption:
a.- Local Subway system, worked for years with less than two and half passengers by square meter .It was one of the cleanest ,nicest and secure transportation system in Latin America. It was assumed that taking as a benchmark the way Japanese did with their own subway; Chilean subway was able to increase the density ratio up to seven passenger by square meter. Therefore ,there was room for increasing the density ratio such as it reduced the sunk cost of idle capacity. The result : The system collapsed and there is no way to use the subway on rush hours (early morning and early evening), because it crowed out.-
b.- How much cash was it needed for the proper implementation, of the new public transportation plan ?.There is an unwritten rule which says that any public plan , whatever it might be, always requires more financial resources than expected . Therefore ,the current cost (roughly U$$800 million),is well above the original budget. Actually there is a discussion going on in the legislature, asking for more than U$$150 million for the year 2008 as an additional supplement .However, the House of representatives, approved symbolically only U$$ 2 !,while it is not clear the way those resources are going to be spent.-
c.- Santiago city is not Madrid ,or New York. It lack the necessary infrastructure to implement a transportation network, the way it works in those cities. Madrid has a kind of ring which surround the city, allowing to get access to down town from any point following straight lines. New York is a huge square, fitted into the Manhattan island, which allow commuters to move either way south or north, west or east in a shorter period of time. In both cases, no matter where you are going, you know where you are. Santiago has grown without a detailed urban path ,some places are like a square(downtown) ,but another are like a circle. Therefore the routes are not straight lines, in fact a recent poll indicates that the current plan, has increased by 11 minutes the time it requires to commuters to move form one point to another. Besides they have to wait on bus stop by 15 minutes, before it pass by. However, all those previous negative externalities it had , qualifies positively.

Social integration in Latin America: An outstanding goal for a Summit

It is about to begin the XVII Latin America Head of States Summit. The main topic will be Social integration and Inclusion, which can also be displayed with the following question: How to keep the balance between economic growth and social progress?. Quite relevant as it is, the issue of social integration has been in the last 15 years ,at the core of economic policy debate in Latin American economies, following the “Washington consensus” approach at the beginning of the nineties.
That goal should not exclude a modern focus on public policy. Actually, the challenge is to find new instruments to make economic growth more effective to reach all of those who most of the time are left behind. Near 40 % of Latin America population live on poverty condition, which looks like there is an urgent need to do something about it.-
Most of modern economic experiences indicates that inequality and poverty, can be solved by a sustainable process of wealth creation ,rather than redistribution of existing wealth at any point in time ,which might turns out to be transitory. All of welfare gains based on the State intervention into the economy ,that Latin America economies achieved in the sixties and seventies ,was lost in the eighties Therefore the focus should be on a more comprehensive view about Economic Growth and its key variables.
How to get higher economic growth performance?: Recent history, tell us that a primary source for economic growth is based upon private firms ability to do its job, and do not interfere them with unnecessary regulations. Private firms, creates jobs at a faster pace than the State. This does not mean that both can no longer work together .Quite on the contrary, they need to one another. To Complement the Free Trade agreement currently in place ,with the right policy mix , means to improve incentives ( more flexible financial rules, more flexible tax policies for new firms, more flexible training program for labour force, more flexible procedures to begin new business ) for more small size firms, to jump into the entrepreneurial track, and at the same time, to make effort to design the right incentives to come in ,for big business with innovation potential ,instead they go elsewhere.
The next step is to design the proper framework for social policies, such as better targeted focus in public health and education expenditures. What about the State ´s role?. There is no way to change inequality and poverty level, without a reform to the State to make it more suitable for current needs of global and deeply interconnected economy, which requires higher competitiveness level. To think otherwise is like to play against physics laws. What ever goes up, it must goes down. That is the main lesson arising from the economic failure, in the eighties. Therefore, it means that the Colonial State , in charge of reducing poverty and inequality, with its current characteristics , will increase poverty and inequality in the years to come. In other words, any gain on poverty based on the State intervention , it might turns out to be transitory!. However , it is important to keep in mind that the Sate needs people asking for more state intervention . But all of those people, with the proper incentives could also start their own business , whether they had the chance to do so, which means that the State should reforms its procedures to allow more flexible requirements to start new business .
If this Summit includes in its reflection this prosperity path, there would be a lot of reasons to considered it a successful one.-

Information as a source for optimal allocation of resources (II)

Ronald Coase wrote an essay on The American Economic Review. (Vol.64,Nº2 1974),about the real differences between the market for ideas and the markets for goods, to justify the regulation framework applied to both of them :None for the markets for ideas, and a lot for goods markets. He suggested that from the regulation point of view, the markets for ideas (information), should be treated the same way it is treated the good market. In other words, regulations should be applied to both markets. Therefore any activity related to the production of information(the press, new sources of information (internet),religion and innovation )should be regulated the same way it is the good markets, to the extent that for Mr Coase , both markets are similar.-
Are both markets alike ?.The big difference is that information is needed for the decisions process of efficient allocation of resources, as much as the human body need water to keep itself alive . Any restriction on information ,is an artificial constraint on data flow which leads to inefficiency and welfare loss.The cost for society of applying regulation to such a data flow ,is higher then the benefit from it. Welfare level depends upon the level of information available, to make possible the decisions making process which leads to production and consumption equilibrium levels , and above all, because it is not possible to substitute lacking of information, it follows that the welfare frontier lies below its optimal level. Information value is at its most, when it is available just on time . Besides by definition, from the economic point of view, nobody get the benefit of the missing information. Hoard information is useless.
Quite different to the goods markets case. Any good can be substituted, because of quality failure or prices ,which allow consumers to protect their welfare level . However, those case of goods which can not be substituted (lack of substitutes) ,gives to its producer an above normal level of benefit . This above normal level benefit, which is absent in the information case (normal market situation), justify to regulate markets such monopoly and , oligopoly to neutralize social cost
What about privilege information ?.Well this information does not have substitutes, and indeed it might provide to its owner, high level of above normal benefit. This the only kind of information ,which should be addressed with some normative approach which is quite different to a regulation framework .In other words ,it is a matter a ethic to allow the benefit of better and more information to everyone , because information production is the result of a lot people working toward the fulfilment of a goal, none of them measure the value of their contribution, therefore the benefit arising from it belong to all of them.
Finally ,Mr Coase ´s essay suggestion that this issue is a matter of convenience for intellectual community ,more powerful than consumers organization , might lead to believe that the problem of regulation in both markers is related to special interest group abilities to pursue their own interest, despite the impact on welfare. In particular, the strong argument for press freedom , made by the new media , it would clear reflect the relevance of this kind of focus .However, the missing point in such argument, is that new media, no matter the means they use (newspaper, Tv ,radio, internet),or the power of its owner, reduce the transaction cost for community itself, (economics agents producers and consumers) to provide all the information it need. It follows that if new media would not care about press freedom, community should! .So it would with people caring about faith and so on.-

Information as a source for optimal allocation of resources (I)

Information availability allows economic agent the most efficient allocation for resources. Usually market competition works, on the assumption that all information is available with zero transaction cost .Otherwise , it is hard for economic agent to realize the best chances of making profit. Although information has transaction cost , rational behaviour assume that every agent ,will gather information up to the point marginal benefit = marginal cost. When it comes to goods transaction, information is self contained on each product characteristics, such as quality, value and price. If there are not perfect competition, advertising expenditures complement each product helping out to positioning itself on consumers mind with more information about its characteristics .It follows that markets is all about information as much as its institutional framework.. Given an institutional setting ,any restriction of any kind(biased reports) on information flows, will affect the efficiency of allocation of resources.
What about financial transactions ?. It apply the same. Economic agent, needs information about the quality of financial instrument available for investment decisions. However, quite on the contrary to the good case, this information is not self evident on every financial instrument as it is in the good transaction case. There is information asymmetry ,the seller of the financial instrument knows better the quality of it, because it has all the information to evaluate the present value of such asset. This situation leads to the adverse selection problem. Bad quality financial assets, are the predominant ones in markets transaction, because every investor do not have the chance of getting correct information ,any time it is needed.
Financial Markets evaluate the information available , asigning a price to each asset which match the risk associated to it. The riskier the asset the higher the return , but the lower the chance of finding a customer ready to take the risk of buying such asset, when markets behaviour turns out to be risk averse.-
Given the importance of a proper risk valuation , markets need the advise of the asset rating agencies, which classify asset according its different level of risk within a scale ranging from the top to the bottom. Those better qualified get the most ( AAA+) grade, which means low risk high profitable assets, which every one want to include on their portfolio. On the other hand ,those assets which do not get the best grade investment, are the ones which every investor would prefer to get away from. This was the case in the eighties and nineties with defaulted foreign government bond , which at that time allowed the development of the so called swap operation market.
All this discussion lead us to the current situation of mortgage sub prime market crisis, and the implications for market performance,as a case study in terms of the role of information. No matter the ignition factor, the fact of the matter it represent a market failure on two key variables: institutional framework and quality of information .From the quality of information stand point , any one in charge of asset information analisys, is the one to be questioned , about its procedures to properly grade the risk involve on this kind of sub prime transaction. Economic agent, followed and trusted the grade investment those rating agencies gave to every one of this new financial instrument and subsequent transaction.It seems that even with a weak institutional framework, proper and accurate information can make the difference between right or wrong allocation of resources .

The year 2007: Some comments

Most of forecasters are already working on their projection for the year 2008.Michael Mussa ,has said that the best friends for them is luck. At the beginning of this year, there was little concerns about issues such the sub prime mortgage markets crisis, and its expected impact on global economy. At the same time, it seemed that the US economy was getting on its way through, toward a soft landing following the upward adjustment on the interest rate. Markets were wondering what would it be like without A Greenspan as Chairman of the federal Reserve ,and the character of the incoming new boss B Bernanke, along with China stock exchange markets turbulences , after applying new regulation to reduce speculation and gambling .Most of the attention, was on oil prices behaviour . Europe heavily concentrated on environment ,set the pace on the issue for the month to come .Finally Latin America, even with deviation in some countries from macroeconomics fundamental, had the expectation of another year of economic growth.
A famous question which was done by former President Reagan, is fully applied at the end of this year: Are we better off now than what we were at the beginning?. This question matter because when it come to make forecasts , it is very important the conditions surrounding those forecast ,otherwise there is chance to be wrong on markets predictions. Therefore, any forecast for the year 2008 ,should take into account the answer to this question, otherwise who knows what the forecasters are really predicting?. If we are better off, any forecast would mean to improve even further our current conditions .If not, any forecast would mean any thing ranging to be worse off than we are right now ,or to keep the same situation at the same level it is right now. Macroeconomic data only measures the addition to current GDP value, but not the framework which influence those results. It usually appears as the “error term” in the econometric model. Well some time the “error term” make the difference, between right or wrong.
My guess is that we are not worse off now ,than what we were at the beginning . Every aspect of global economy ,is a bit better now than what it was at the beginning of the year , and above all better than what it could have been. Let checks some issues which were on the list of potentially harmful for the global economy: Volatility on global stock exchange markets ,oil prices increases (which contrary to the expected is still below U$$100 a barrel)),sub prime mortgages markets crisis, slowdown on the pace of economic growth in China, India and Europe, and protectionism threats .
How come that global economy has been so resilience, so far ?. My hypothesis is that the world economy , is moving toward a new stage with a more diversified distribution of world product. Actually, 40 % of Global GDP is produced on emerging markets, reducing the risk of global slowdown .The pace of economic growth ,of the leading economies in such a group ,is strong enough to keep the train moving forward. Global economic growth has met its fifth year of continuing growth at a 5% rate. On the other hand, it seems that a global framework is already working to protect specific issues such quality products, and that of domestic economy policy. Therefore there are better instruments and tools to solve current global economic challenges, which means that there is space for moderate optimism for the year 2008.-.

Global Warming :The new totalitarian ideology?

The 2007 Nobel Peace Prize has made a new call for environment protection, and above all new development for decisive action .A new global institution just for environment?.
Does this means global warming might become the justification for constraining economic growth, human freedom and trade?.This is something what some analyst are afraid of.
First of all, environment protection should not be a constraint for economic growth. It is a matter of making them both complementary, instead of substitutes.-
Secondly, those countries which pursue environment protection policies, have been capable of improving both :Economic growth potential, human freedom and trade , keeping at the same time the proper attention to environment. In Latin America ,Brazil, Uruguay and Chile are good examples about that.-
Third, It is hard that a new ideology comes up from environment ,because every one is watching what it is going on with it, and the expected effect of doing nothing .On the other hand , It is not a matter of belief, it is a matter of fact. Science and scientific community although without unanimity , recognizes that human intervention has some important probability of being responsible for global warming. Even though it could also be part of a cyclical pattern, it is obvious that such a pattern in the last years has been above the trend .The Inconvenient truth documental has made it clear for all.-
Fourth. At this point ,it is too late for such an issue to become an ideology .Thus it should be the basis for a new environmental pragmatism.-
Fifth .Environment is like most of the cases of common property goods. Because nobody might claim property right about it ,there is no incentive to take care of its exploitation level. The expected outcome, is the collapse of such a resource. This a fact which applies for all resources in such a situation, underground water, river side contamonation, fishery industry and the like.
Sixth .Markets mechanism can solve a lack of property right claim, assigning such a right to every firm which contribute to reduce environment damage. Those claims are traded in secondary green markets ,with very high potential for benefit for everyone involve in such a transaction However this markets mechanism can not make the difference as fast as it is needed.-

PD: I WANT TO MAKE THIS CONTRIBUTION JUST FOR THE VALUE OF ENVIRONMENT ITSELF,AS THE INHERITANCE FOR MANKIND ON OCTOBER 15TH IN THE BLOG ACTION DAY.-

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.-.