Economics policy coordination: Looking for higher policy effectiveness

The financial crisis which started five years ago (2008), has challenged the main stream of macroeconomic policy and new paradigm are on the rise. In such a cases, it was used to think that each policy,(monetary or fiscal policies) properly focused on its target , would get the economy back on track. However recent experience has shown that it is not enough to implement economic policies. When it comes to implement such a policies, It has become more relevant to take into account the timing, coordination with other policies, spillover effects, expectations changes, complementary reforms, all at once!.- In its august 1st report , the IMF urges concerted policy action to reduce risk to global growth (www.imf.org). In fact ,concerted policy action to avert the risk facing global economy are estimated to have saved 2-5 % of global output, and if world ´s largest economies(“systemic 5”),could improve policy coordination, they would lift global GDP over the long run by as much as 3%., The larger volume of trade and financial linkages in the global economy, makes spillover effects more evident for implementing policies. Besides ,the current situation which has been characterized as “unstable disequilibrium” (www.economonitor.com) , requires more than just policies: It requires to go beyond the mechanics text book cases, it requires more inclusive approaches . Let takes the case of the quantitative easing (QE) applied so far. The evidence (IMF report mentioned above), finds clear evidence of positive growth spillover, but it also make clear the risk attached to the exit of such a policy : Too soon would impact growth negatively , but too late would induce asset bubbles and imbalances .In Europe, concerning the design of structural policies ,the chances are for more integration or fragmentation. Thus, there are also dilemmas attached to policy options, which demands for complementary reforms whether these policies are really to become effective .- What are the implication for global economy?. a.- In the short run, policies coordination matter. b.- In the long run, structural reforms improve the effectiveness of policy coordination(Besides, It boost stronger positive spillover effects).- c.- Macroeconomic policies isolated are not enough for effectiveness purposes. d.- The spillover effects, are important constraint for the design of economic policies. e.- Game theory has something to say about policy design(www.lawandeconhoss.blogspot.com)

The Pope Francis and the Economy

In his first visit to Latin America, The Pope Francis, who lead the 26th World Youth festival held in Brazil, gave an homework to economists : To pursue a Human economy. It was coincidentally in Brazil a decade ago, at the First World Social Forum , the effort to build up a Human Economy began. What about it? : It deals with questioning the supremacy of free markets and command models which do not consider citizens concerns ,but only statistical parameters to draw its conclusions and policy prescriptions . The risks of this “statistical approach” ,is to give a superior stand to the outcome of these models, even above citizens needs and values, to solve critical dilemmas concerning for example socials demands or cultural preferences .Reaching such a stage means somehow that the economy lose its sight .It make people´s needs to fit economic models and policies , instead the other way around : economy policies and models to fit people demands and expectations. Markets as an impersonal tools to solve the allocation of resources problem, substitute the value of human judgment to set economy priorities. Markets solve the allocation problem based only on economic considerations. Thus, key variables of human well being ,such culture , arts, literature, sports becomes commodities with prices which make them available only to those who can afford to pay for it, therefore excluding the meaning of for example a cultural policy . It becomes self evident that what The Pope Francis request set a pressing demand for such transformation to be applied for current social and economic problems, whose scope I may suspect ,goes beyond Latin America economic policies . On the other side of the issue ,Economics is a Social science which does not have the chance to work alternatives economic policies out ,based on laboratories conditions to prove what it does works or does not . Both Mathematics and statistic ,becomes useful tools to help economics modeling to represent reality in more simplified way , but in the process it get closer to miss about the essential ,if not in some cases to forget at all: Economics is a Science like other ones, to serve the well being of mankind. It follows that the outcome of such a models ,cannot substitute human judgment.- Therefore, to rely heavily on models which do not represent but a fraction of relevant variables, with the remaining ones left outside as error terms, is a risky situation as the 2008 global financial crisis has made clear. Those who were able to predict properly such a crisis, did not based their analysis but in their own judgment.- Is Human economy necessarily self excluding with both the main stream of microeconomic framework or normative macroeconomics?. Are free markets policies, contradictory with Human Economy?.I guess that it all comes down to better institutions and policies .This means to go beyond the simplistic representation of models , to stand up above it with ethic leadership . When Adam Smith (Moral Philosopher)supposed the presence of an “Invisible hand”, to solve allocation of resources , probably did not exclude faith, trust , the value of promises and hard work, honesty and honor to do business .Human values which in modern societies , laws transformed some of them in institutions. Thus ,Pope Francis is not asking for something unusual for economics , but just to go back to its roots and not missing its focus .-

Latin America and the new stage of global economy recovery

It seems that a new round of adjustment is under way in the global economy. Concerning the emerging economies it considers Lower commodity prices , capital outflow , and lower economy growth rates in the BRIC country group (4,3% on average, down from 5% for 2013)as the more relevant variables of what such a new stage look like. Besides, advanced economies have different growth paths. While the USA economy keep moving forward, with 1,8% expected GDP growth for 2013, and 2,4% GDP growth for 2014(roubinimonitor.com) ,the EU economy is still deep into the recessionary territory, (-0,6% for 2013,IMF )while Japan is pushing hard with its three arrow strategy for improving its growth prospect (2% in 2013,IMF). An Interesting feature in this stage, is that among the top ten higher economy growth for 2013, seven economies are from Latin America. It follows ,that this continent is doing what just a few expected it would be possible: Making the role of the main engine for global growth. Having said that some questions arises also: ¿Did Latin America took advantage of the first stage ?,¿ Is it over the chance of getting healthy economy growth rates with lower commodity prices?. a.- Fist the first. Latin America and the missed opportunity hypothesis. There is evidence which suggest that such hypothesis do not fully apply to the case. In its May 20th report, the IMF ´s global economy forum have an article (Adler y Maqud “ Saving Latin America´s unprecedented income windfall), which shows that the recent term of trade shocks (2000), while important has not been more so than the one of the seventies (1970).What it is different this time , deals with the use of those resources: More investment in capital equipment , less investment in foreign financial asset as saving for changing conditions in the economic cycle, and more consumption (Chile, Brazil). In the Chilean economy case, to keep the pace of the current public expenditures level with lower copper prices than current ones, would have mean an VAT of 23% instead of the actual 19%. On this regard, Brazilian economy has been on the critical watch because of its higher consumption bias following this windfall income effects, but it is important to keep in mind that Brazil has additional sources of incomes other than just commodity prices. For example new sources of oil supply in the Atlantic ocean and its expected higher revenues. Thus, it looks that overall there has been stronger preference for improving potential output and future higher rates of economic growth, instead of a passive approach of wait and see.- b.- Is it over the chance of moving through with lower commodity prices?.Latin America´s growth over the past decade has been driven by Physical capital and labor. Productivity has increased although below other fast growth regions. In the years 2010-2013 labor and capital accumulation contribute 3¾ percentage points to Latin America annual GDP growth, while total productivity Factor contribute by ¾ percentage points, therefore the chances of sustainable GDP growth goes along with higher productivity, (Werner, A , after a golden decade, Can Latin America keep its luster?)May 6th 2013 IMF direct),fiscal saving and structural reforms to improve competitiveness. All of which is not out of the policy makers priorities , at least in those economies which so far have the lead.

Foreign direct investment: Its impact in the Chilean economy

Foreign Direct Investment has been an important source for economic growth in Latin America and other countries in the world. Whether it is in services, banking, mining, information technologies, manufacturing, retail or transportation, FDI have important advantages such as the access to new technologies, new management models, “know how” for productive process , and a better approach to R&D in private firms. Some Latin America countries, have made huge progress in the competitiveness index, because of foreign investment in new technologies (Costa Rica),or financial services (Chile).- The implications of FDI are wide and relevant. A recent research done by the Chilean Ministry of Economy concerning the impact of FDI in the economy ,got interesting results: a.- Firms with foreign investor participation ,pay wages 130% higher than their national counterparts.- b.- 15% of higher employment rate between 2009-2011 , was because of FDI incoming flows c.- 18% of GDP increases and 30% of investment (2009-2011),was because of FDI flows into the Chilean economy ( due to the global financial recession, the Chilean economy GDP growth was -1% in 2009, and 3,6% on average in that period).- So , It is in the best interest of domestic economies to support policies and the institutional framework aimed at keeping the incentive to invest in Emerging economies . FDI is link to more and better business opportunities, higher employment and welfare increases.- The expectations in Chile is for further FDI flows in the near future. The average GDP growth expectation of 4,5-5% for the next years ,imply a strong incentives for investment opportunities in energy (the environment protection requirements should definitively be clarified soon) , infrastructure, private health, and banking sector. In Latin America, there also good opportunities in those economies whose GDP expectation is on the rise, such as those ones working out the transpacific partnership agreement .

Water week in Latin America: An opportunity for better water management

There are many agricultural zones in Latin America, which currently faces water scarcity . At the same time, water demand is increasing because of mining and energy sectors investments, and human consumption. The implications goes beyond supply and demand. Actually Mining investment in particular, have to be based on desalination process of sea water to cope with its water demand which compete with other needs. This change of water sources from natural to sea water, has increased mining production costs. Those agricultural product highly water intensive, cannot be produced in areas with water scarcity. Thus, Tomatoes (3237m3/acre),and Onions (2670m3 /acre) production ,requires a lot of more water, than lettuce (1668m3/acre), and carrot (1214 m3/acre). The expected prices of tomatoes and onions may be higher than anyone can anticipate. On the supply side, there is also a lack of management model of water. In Chile for example, 80% of water available fade away into the sea. Therefore, a better water management model is required. There are already some alternatives available, such as WEAP (Water evaluation and planning),SAWP (State wide agricultural production), and a combination of both the so called EconWEAP implemented in California, USA. These models are related with the improvement of decision making process, concerning the use of water in agricultural activities . The EconWEAP approach for example , provide water supply simulation to cope with water demand preferences in each area, taking into account any specific year and its characteristics, to build up a model for optimization and maximization of profits, taking into account social cost.- Last March, the First Water Week in Latin America ,was organized in Santiago ,Chile. 40 countries, 500 attendants and 40 speakers, represent a strong commitment to discuss the issue of water scarcity , trends and opportunities. The preparations already started for the next event to take place in México in 2014.- But is it this problem just a matter of Firms and Governments? .What about the consumers behavior ?.It is obvious that consumers must change the current consumption pattern. In Chile, there is no water scarcity, but a mismanagement of it. The south is plenty of water, while the north is fighting the draught and its consequences. Some have suggested the fantastic idea of a water highway,(water pipe line) which means to transport water from south to north. But other countries and areas do not have such a chance, but to face a critical problem and to solve it. So, Governments need to set new policies about water. But , Consumers are a very important part of the equation. Each one of us, consume daily at least 100 hundred liters of waters (showers, Washing hands, drinking. laundry and so forth). But also we waste a lot of water (Car washing,garden maintenance and the like).- Wiser use of water is not a matter of just better Institutions or Government policies, or business practices and Social responsibility criteria .It is also a matter of improving awareness about the importance of protecting water.Otherwise, the price we will have to pay for water consumption , will rise far above what we usually pay.

Chilean economy Model : Between skepticism and doubts(II)

In the last thirty years the State in Chile ,has changed its profile to become a complement with the private sector. It has done a magnificent job working to widening domestic market , throughout Free trade agreements (more than 60, with equivalent number of countries). It has improved the availability of public infrastructure, throughout private sector participation to build up high ways, hospitals. and other public infrastructure facilities. But it does not have yet a new identity, such as to make it the reference of last resort so to speak, for private sector and the economy as a whole. This lack of identity have some implications. Let take some few examples: a.- In the public health sector, the State do not pay its suppliers promptly. It delays payment by 120-140 days. So, the private sector do not have a clear policy of paying its suppliers promptly either .In fact it also takes more than 4 months b.- Concerning the labor relations issues. Public employees, do not have the right to negotiate or access to ruled negotiations(arbitration included), and wages are not linked to performance. Civil servants are not considered to be relevant in the achievement of competitiveness. So, the private sector, do not use negotiations the way it should ,and do not consider labor unions as strategic partners. The Chilean economy as a whole in this case lose competitive edge. c.- The quality standard for all of the State´s services do not match expectations. The consumer protection laws, are far from being effective when it comes to deal with the services the State provides. For instance, in public health hospital, people in needs, must wait for 12 hours in the emergency room before getting a bed for treatment. On the other side ,the reform for the judiciary system in the year 2003,asked for more than 1200 public attorney, but no more than (roughly)700 were finally approved.. d.- Thus, the state do not have a Social Responsibility Code to sustain its actions. So, it is not a reference for wider Social responsibility codes on the private sector.- How did this adjustment lag happened?: It seems that there is a lack of understanding about the complexities of economic development within the framework of globalization and glocalization, the wider scope and impact of the social networks , and how it influences the State role ,the community involvement, the relevance of strong local government and better focused social policies. Within the globalization framework, the State is a service provider and as such, it is a competitiveness factor. What about the “new identity” of the State?.In the XX century the State was considered as the brain for social development, citizenships and nationality. It was the driven forces for better democracies, education and self esteem. However, these days those paradigms, are no longer self reinforced. Thus ,the issue is not for more State, but for better State. Besides, this does not mean a weaker State.- Actually the world is connected throughout trade networks of goods and financial capital flows. Cultural diversity creates new links for citizenships, other than conventional and national values. Social networks also support new ways of engagement between people, and their authorities. Democracy works more in real time, (not every four or five years), and demands need to be solved quicker than before. So, trade networks, cultural diversity, and social networks create global citizenships. Therefore, the new identity of the Sate arise from the fact that it is not longer the brain of society, and it depends upon a better connection with the people needs than before. The Community needs a friendlier State, capable of being both the articulator and the coordinator between markets and firms, between growth and development. People want the State to be a good service provider, a guarantee for the rule of law and local institutions, a competitiveness factor, and a facilitator not an obstacle for people achievements. The Chilean model might not be at its final hour yet, as long as it still has space for improvements. That it is the pending task for the coming years.

Chilean economy Model : Between skepticism and doubts (I)

The model of market based policy applied in Chile (1980-2013),has been an engine for economic growth and prosperity. A key feature, was the state as complementary not a substitute of the private sector. Because of higher economic growth(an average of 5,0% between 1990-2009,and percapita gdp growth from USD6455(1981) to USD14331(2009) , tax revenues increased so, It financed higher social expenditures (Wagner law). Poverty decreased from 37% in 1990 to 14% in 2010, Half of this reduction (45%), came about because of economic growth. Health conditions improved (life expectancy, nutrition levels, child diseases coverage), and education became massive.(more than 1,1 million student are within the college educational system). There is ongoing discussion about inequality .But there are also different approaches concerning what it is within lower income bracket (whether it includes or not government bonus, subsidies , other social programs).Based on this different methodologies, Gini Coefficient in Chile, is actually between 47 -52, even though Fiscal Policy has been focused more on growth, than distribution. No matter the positive outcomes of this model , does not means that it is perfect. It must be up dated. It needs some fine tuning to be capable of matching expectations, which by its own dynamics has ignited, otherwise it will fail to cope with them. These days, there is a sense of a widening gap between what it is needed, and what people get from this model. Because of that gap anxiety and social stress are on the rise. Therefore, the questions is what to do: is it enough with some adjustment, and what are these ones?, or is it enough with the model, and it is the time to get rid of it? . The answer do not necessarily goes on the “all or nothing” solution .There is room for middle ground approaches. What are this middle ground solution ?.Let review some issues a.- The institutional setting for markets allocation of resources, must fit with the consumer rights as the driven force of market outcomes (innovation ,quality, value, post sale services). Given that the Chilean economy is an oligopoly, it is important to prevent its rents are not to be paid by consumers. Recently, has been implemented a wider scope for the law aimed to protect consumers, taking into account financial transactions. (Credit cards, Commercial cards charges consumer loans, mortgages charges).- b.- Consumer protection goes beyond goods. It also includes education, health, and services(safety, transportation, Communication, energy) .Some few examples :Education as a whole ,do not match quality expectations yet. So, the students think that in such a case, it is better to have education for free. Health programs, must still deal with inefficiency and low productivity.(In the last two years, public hospitals productivity have been 45% lower ).Besides, the State seem to underestimate the social demand for safety in the streets and at homes. (There are more private pay guards, than police man).Public transportation, do not match quality standard either. c.- It is needed to reduce centralization. The Chilean capital (Santiago) has a 44% share in the GDP, while the next two most important regions combined , do not have more than 8% share. Thus , the demand and uses of resources both private and public, concentrate , despite regional demands specially in infrastructure and services d.- Political reforms are also relevant to improve the outcome of the model. The broader the political representation, the better the political model will fit with community needs and expectations. Otherwise, the current duopoly working like an iron circle to collect the rents any duopoly provides to its beneficiaries , make them more disconnected with those they suppose are called to serve.- So, the oligopolistic nature of the model, requires to move forward to a more complex stage of development. What about the Sate and its role in this more complex model ? In the last thirty years, the State has been a complement with the private sector. It has done a good job working for Free trade agreements. It has improved the availability of public infrastructure throughout private sector participation . But it does not have yet a new image on its own to be like the reference of last resort so to speak, for private sector.The state role changed to a different status,the one which is the guarantee of the model.But is it?

Institutional setting for growth. What matters more than policies

It is usual to think on economic policies as the isolated instrument for economic growth, such that the impact of policies becomes a matter of evaluating its proper design and timing . Thus, there are good or bad policies according they get the outcomes they were designed for. However, these outcomes might be far away from what it was intended. A good example is the questioning of monetary policy applied by the Federal Reserve between 2001-2004 in the USA, and its implication for the beginning of the housing bubble and the crash of 2008. It is clear that although there was a mix of factors for that bubble to take place, the conclusion has been that it started out because monetary policy was too soft for too long. The surrounding conditions which influence policies effectiveness are left out. Let mentions some of those relevant surrounding conditions for other policies, for example : redistribution policies without quality standard for services, environment policies without institutions and leadership, financial policies without proper regulation and transparency, and state involvement in the economy without efficiency criteria, make a short list of cases which deals with those variables outside of policy makers chance to reach, but decisive for its final outcome. What do all of these means?. Policy effectiveness goes beyond its design .It is also connected with the conditions and characteristics of the setting upon which they are implemented. Out of date laws. weak institutions, short run minded politicians, special interest influence, inefficient state intervention, regulations flaws add all that up to a different real setting hard to assimilate into economic models . As a matter of fact, the financial crisis of 2008, was not anticipated by any of these models because its lack of consistency with the real setting. Thus, a lesson from the financial crisis of 2008, is that the meaning of timing should be far more inclusive than what usually is.- An alternative line of reasoning goes on a different approach. Let say, to focus on the necessary conditions for better effectiveness of policies, leaving aside the design issue, but focusing on the strengthening of timing conditions. Since the beginning of the nineties, Latin America has done huge progress on this regard: Better institutions, (autonomous Central banks) broader consensus,(integration to the world with social inclusiveness) pragmatism based reforms,(financial sector improvement qualifications), have increased the investment profile of some countries, as long as it all fit with the necessary conditions for more effective policies. Sure, we do not need to wait and see for the same wall to fall twice. As a result, it has created a positive expectations to reinforce the virtuous circle of investment and growth. It would be desirable a more homogeneous standing of all Latin America countries on the timing issue, to take advantage of current opportunities, because the actual lag will might become persistent and sooner or later, it will make clear the difference between those countries which were wise enough to move toward the path of prosperity, while others chose to be left behind with not many chances of catching up those on the lead.

Copper price trend: Some clouds in the landscape

Copper prices have moved steadily in upward direction in the last 11 years, from U$$/lb 0,60 in the year 2002 to U$$/lb3,15 on April 24th this year. Thus , it has increased by five times since then, and the question now is whether this trend has come to an end. The answer to this question requires to know the variables which push its prices up. A short list about it includes: a.-. Strong demand from China which count for 40% of global refined cooper demand. For instance, in 2012, world usage of refined copper grew by around 3,1% as compared with 2011,mainly due to China demand.- b.- Lack of supply capacity at the beginning of this cycle (2002),compared with copper demand increases, and its slow pace of adjustment upward due to higher production cost. c.- New and different uses of copper. The average car contains 1.5 kilometers (0.9 mile) of copper wire, and the total amount of copper ranges from 20 kilograms (44 pounds) in small cars to 45 kilograms (99 pounds) in luxury and hybrid vehicles.(www.geology.com). d.- Dollar depreciation since its peak in 2002.Between 2002-2008 the (inflation adjusted)trade -weighted dollar exchange rate depreciated by 25%(18% against the yuan), at a pace of 3-4% annually. Following a short appreciation period (2008) ,the dollar began to depreciate again between 2009-2012 and fell by 16% through mid 2011(CRS Reports for Congress, www.crs.gov ).Despite some forces on the contrary, the dollar value trend,is closer to further depreciation. Of all of these variables, (a) and (d) influence short run and mid term(2014) movements in copper prices. Looking ahead into 2014, because of local government debt adjustment, China is more likely to decrease the pace of its expected economic growth. Some analysts believe China economic growth might decrease to 6,5% next year (www.roubini.com, April 22nd) . Without, compensating demand increases from other markets , copper price might move downward the current level. On the other side , Copper Supply grew in 2012 in most of the global producers,(global supply capacity grew from 80% in 2011, to 82% in 2012). Thus, there is already in place a higher copper supply capacity which will push inventories upward ,as demand turn out to be weaker than expected. Therefore, there are strong reasons to believe that Copper Prices might fall down next year further its current level. Is this situation the end of high copper price cycle ?. The cycle has transitory(adjustment in demand) and permanent(innovation flows, substitution alternatives) sources of volatility. In the copper case it has relatively lower transitory persistence partly due to the impact of the short lived shocks on it. Therefore what matter for the cycle fluctuations are the permanent sources.( www.sciencedirect.com Energy economics 30 pg606-620).Thus, current copper price changes, seems to be part of normal volatility, with prices adjusting toward new lower levels,but still within the cycle at least for now(www.investorplace.com).A more cautious approach is needed to be applied beyond 2014.

The Iron Lady: A woman of her time

Former prime Minister Margaret Thatcher legacy (1979-1990),will be hard to forget as times goes by. Although she did not focus too much her attention about Latin America, but after she decided an unnecessary war with Argentina(1982), with it, she sealed her vision about the British role for years to come. Quite remarkable is that she probably did not expected to get that outcome in that way. How come? a.- The seventies were rough time for Great Britain. The old fashion socialism of Former Prime Minister Harold Wilson(1964-1970,1974-1976) ,led the country to a self diminish path which required strong leadership to turn things around. Those were years of ideology, and as Guy Sorman has said “ideology get to more ideology ”, which what Ms Thatcher message was about. To confront the threat on freedom arising from an increasingly invasive State , the answer was stronger markets. The weaker the ability the markets to solve the allocation of resources and the improvement of the welfare community, the stronger becomes the state which take its place. For this purpose she had Strong allies, like Ronald Reagan President of the USA(1981-1989)and clear mind inspirer like M Novak. Deregulation, more flexible labor markets , privatization and competition were the key to what became a counter Keynesian revolution. b.- Free markets policies in Europe in the mid seventies , looked like very unorthodox approach for improving welfare levels. Europe created the welfare state, based on high taxes , fiscal expenditures ,subsidies, regulations and generous programs for public health. Those were the years of Olaf Palme, Willy Brandt , Aldo Moro ,Francois Mitterand. In such scenario, to try the alternative path it was like moving backward the history clock . However the unexpected happened, and It was even claimed early in the nineties that the end of history had been reached .Free markets policies seemed to settle down as “the “ alternative .- Did it all worked out the way it supposed to ?. The outcome is not that much negative. Since 1990 UK economic growth was higher that its European partner, and unemployment is currently lower than the average rate for the EU(12%) .Besides, in the years 2000, Germany made reforms to reduce the distortion of the welfare state, to improve the incentives to look for jobs . The winds of prosperity has arrived to new places throughout globalization , which is the direct result of private sector expansionary strategies. Latino America did not stay either away from the wave of reforms. Following its external debt lost decade (1980-1990), deep reforms were made according to the new policy framework: The private sector instead of the State as the engine for growth. The outcome so far, does seem to fit the minimum higher growth, less unemployment and poverty, unthinkable achievements in the beginning of the nineties. Latin America economies look forward to what come next, instead of feeling sorry for what it did in the past. Does all this means that free market policy and Reagan- Thatcher legacy, has definitely become the new paradigm, like they dreamed ?.Not necessarily so. The Financial crisis of 2008 indicates that deregulation is that much dangerous as it is regulation, specially in the extreme sides. There is a middle ground between them, which is the challenge of policy makers to find out. Furthermore, markets energy need an institutional framework to get its way through for welfare improvement , otherwise it can be very close to become self destructive.

Latin America Transpacific partnership: The road to prosperity

It has been long settled that free trade is necessary for growth, as a condition for improving the welfare of any society . These days , it seems to arise new calls for protectionism. The so called “currency war” looks like the first step, before going further on with restriction on trade to compensate any loses of competitiveness arising from exchange rate variations. Latin America learnt also long ago that inward looking kind of growth, leads the economy to dependency and inequality . Since the latest reforms applied in the nineties, and those one later on, trade has been quite relevant for Latin American economies. Between 2009-2011, total trade (exports + imports) grew by 54% . However, intraregional trade is somewhat behind the trend. Between 2011-2010 the intraregional trade share was barely 19,8%, with Mexico and Chile as the countries with the higher share among all Latin American economies, with 30,1% and 26,6% respectively. It follows that there is space for additional intraregional trade and investment growth. The Trans- pacific partnership comes out to reinforced the trend focused in what it is considered the trade theater of this century : the pacific ocean. Since 2010, there has been negotiations to shape a high standard agreement to deal with the complex issues of trade (such as property rights ), within the new global scenario which has lifted up the status of Latin America ,to become a global partner for trade and investment. Originally stated in 2005 by a few countries, aimed at liberalizing trade within the Asia- Pacific region, is currently moving to deeper commitments. Just a few days ago Mexico, Chile Colombia (in process to become a TPP member)and Peru, set a framework to liberalize 90% of their trade flows. The significance of improving intraregional trade flows ,goes even beyond its shot run impact on export and import volumes . Because the higher mobility, it also support better allocation of resources within intraregional areas, such that it increases specialization, innovation , infrastructure investment all of which create competitive edge and endogenous sources of growth .

Lessons from Venezuela experience: between the ideology and pragmatism

History deals with facts , but not that much about the variables which surround those facts . Almost at the closing time of the XX century , in 1999 a strong mix of religiosity , patriotism, wrapped by both ideology and populism, took the Government of Venezuela. All at once in one man at his charge .The explanations of such outcome are lengthy .It involves the main stream of a nation. No matter this considerations, there is a single question of practical implications worth to be asked: Is there any lesson to be learn from such a combination to become the driving force for 14 years in that country?. Let get into that complex issue, focusing only in the political economic side of the story. a.- The Greek roots of democracy, are in the weakest within society, who validated it as a political model to solve problems arising from scarcity. Therefore, democracy becomes weaker and vulnerable, when it does not match the expectation of its people, but it does only that one of politicians, and those who are in the position of getting the rents arising from their privileges. Poverty and inequality living side by side with corruption, create a moral dilemma, hard to solve by market forces alone, whether politicians do not care about it. b.- The State replace the private sector, but at a cost : Any welfare gains have the risk of being transitory and unsustainable. The State does fit better with the combination distribution-taxes, instead of growth-incentives. Therefore, the sources of sustainable growth disappear. Thus, Ideology becomes the driving force to solve what otherwise it might be so by rules, good policies ,smart politicians and consensus. c.- The fundamentals of any economy are not beyond its own boundaries, unless it expands with more investment, innovation, technologies, and better human capital . Even in the case of natural resource rich countries , any attempt to surpasses those fixed boundaries , sooner or later will exacerbate inflation, fiscal deficit, speculation on secondary markets .Without corrections, it might all end at the same stage it began (corruption , poverty and inequality). d.- Ideology do not serve the cause of prosperity and growth as much well as Pragmatism does. Ideology by its own excluding nature ,make democracy even weaker, breaking down the self sustained balance of power. Any economic-political implication from the above? :There are some which it is interesting to be aware of: a.- The pending challenges for Latin America in a globalized world, is a matter of a new generation of pragmatic politicians, focused on people expectations and needs, but also friendly enough with the requirement for growth . b.- The State do not need to excludes the private sector to get its social goals. Distribution and growth are not necessarily self excluding, as long as there is a proper balance to keep incentives working.

The sources of growth: Latin America and its growth expectations (II)

For the purpose of economic growth explanation, the state of mind issue is considered a cultural variable. It is based on Motivations dealing with needs, values and expectations. Within economics development literature, there is a school of thoughts, which concern with this factors as the source of growth. According to the so called Cultural thesis, there are industrial values which are key to unlocking the economic potential of poor countries. These values includes hard work, responsibility, punctuality, and achievement .Most adherents to this view, believe that these values can be inculcated through a deliberated effort, let say education and improvement of human capital endowments. (Excerpted from Development and Underdevelopment: The political economy of global inequality, 4th edition. Seligson, M and Passé –Smith ,J.2008). Thus, the success of Asian countries in the last decades of the XX century, has led some to believe that there are cultural values found there; which boosted Asian economies growth and which jas been labeled as the “Confucian ethic”, a variant of the notion of “Protestant Ethic”, and its relevance for the success of immigrants in the USA, and the post WW II experience in Europe . Following this approach, in the Latin America case, it should be important to clearly identify the “Catholic ethic” and its impact on the incentives for economic growth, quite below expectations for a long time. The same would apply in other regions struggling for economic progress.However,this would wrongly suggest that these later regions, have in its cultural values a constraint. The first implication of overemphasizing this variables, might be to hide the negative incidence of other ones, like the impact of the State and weak Institutions,short run minded politicians,corruptions and the like . But,in Latin America,(XV century) quite the opposite to the USA , two hundred years later (the XVII century), the State was not defined to support individual achievement and entrepreneurship. Instead, it was conceived as an instrument to collect taxes and manage rents, not much different as others cultures did before. Therefore, the complementary nature of those cultural variables with institutions,and good public virtues, did not worked properly in Latin America, at the time of the Birth of Plenty (1820). It was only in the last decades of the XX century, coupled with efforts to modernize the State, when this cultural values have become more relevant in its complementary nature from the economic pint of view. Now, is the time when the state of mind matter most, as long as there is a wider space for individuals to seek for achievements, whatever its inspirations,as long as Latin America has engaged itself in pursuing a better and moder State. However, a second implication,(perhaps a key one) deal with the “Catholic ethic”, and the timing for the “Birth of plenty” in Latin America. My hipothesis is that Latin America is whithin the timing for plenty( by the way this timing might be fifteen years or so), but Does the Catholic ethic add up to this current timing?.I guess the answer goes beyond economists.

The sources of growth: Latin America and its economic growth expectations (I)

Within my summer reading list I included this time a book: “The birth of Plenty : How the prosperity of the western modern world was created “ by William Bernstein(2004). Although, I am far from finish the reading, it is quite clear the central argument about the forces which ignites economic growth in western world specially since 1820 up to the XX century. These are :: a.- Property rights b.- Scientific rationalism c.- Capital markets d.- Transportation and communication facilities Some either might agree or disagree with them, but they get right into the core of the capital accumulation process, key ingredient of economic growth: It all comes down to the institutional setting. Other authors, have also stressed key variables to understand economic growth. But “The Birth of plenty”, place them all that out as boosting forces at a specific period of time (1820), which became like an inflection point in terms of a new trend for improving standard of living of mankind. The book focus the attention on “when”, rather than “how”. ¿Why did world economic growth and the technologies progress underlying it, suddenly exploded when it did?. (Preface ,page VIII). Challenging and interesting question. Following that approach ,economic growth is also a matter of timing, and we might be wondering whether Latin America is currently in the “right timing” for higher expectations concerning steady trend of economic growth, sustainable development and its implications. Sure, we move into trouble waters. The phrase “birth of plenty”, suggest something beyond usual economic, sociological or whatever variables a researcher can identify dealing with the explanation of economic growth forces. It is. The “ State of mind” concept (Harrison,Robinson), which deals with emotions, desires, beliefs, thoughts, perceptions, and intentions leading people to cope with higher goals.Thus, What does influence that State of Mind? .

Latin America-European Union Summit: 2013

From January 26th -27th, 60 Chiefs of States and Prime Ministers met in Santiago, Chile, to discuss the future of cooperation and integration between Latin America and European Union. The main purposes is to make it deeper and specially aimed to seek an strategic alliance for sustainable development. Previously it was held in Madrid (2010), Lima (2008),Wien (2006), Guadalajara (2004),Madrid (2002) and Rio de Janeiro (1999). With 1070 million of inhabitants, the two sides of the Atlantic have strong cultural, historical and economical ties which goes as far back as the XV century, when it happened the “Encounter of two cultures”. Actually, the EU is the second commercial partner of Latin America and the Caribbean, the first foreign investor, and an active partner to support integration further . Latin America and the Caribbean are also working toward more integration, to solve challenges dealing with economic growth, economic development, reducing inequality and poverty. Latin America Integration, has been a long distance goal which have endured tough times because of ideology, geostrategic and political reasons ,each one at its own time. The XX century, did not allow strong results on integration, despite the effort in the sixties (for instance the Andean Pact and Latin America Free trade Association ), basically because it was a political driven process, therefore constrained to Government changes policies. Later in the nineties, it began a sort of second round following the external debt crisis ,with a draft of a Free Trade agreement from Alaska up to the extreme south America proposal , which was based on trade and investment as the basis for integration, very similar to the approach applied in Europe by then:”Politics inspired by business” .This approach meant to have the private sector as a key player , with a whole set of economic policies pro markets rightly designed for such purposes, which it was needed as well. This approach did not last too long. In the final years of that decade (1998-1999),It arose ideology as an alternative for integration goals: “Business inspired by politics”. The outcomes looks heterogeneous because while those countries which followed the “Politics inspired by business” approach, have made substantial progress ,the others with the alternative “Business inspired by politics” focus , face more difficulties with the economic fundamentals such as inflation ,public spending, exchange rates, wages, productivity and investment .Thus this Summit was a very useful space for reflection. analysis and evaluations . Based on the current European Union situation, It seems that the dilemma of politics or business as integration drivers ,might complement to each other.

Currency appreciation : Is the fear of floating real?

Most of the currency in emerging economies appreciated in 2012 , specially after the Quantitative easing policy approach spread out to majors Central Banks. Huge amount of additional currency depreciate them and the counterpart, is the appreciation of the rest of trade currencies . Additional reasons for this situation are the capital flow to emerging countries, the less risk averse behavior ,interest rate differential, and better performance of these economies which has improved expectations for foreign investment . Implications : a.- Currency appreciation is good for consumers, inflationary expectation , foreign investment returns, and growth when it is based on domestic consumption. Not that much so, when it is based on exports with high price elasticity .Keep in mind that low price elasticity exports , such as high valued added goods, appreciation means huge profits for theirs exporters . b.- Currency appreciation means an incentive for foreign investment to stay in and reinvest profits, which keep economic growth pace on track. Besides, lower interest rate associated with it, decrease financial cost which boost up economic expectations even further . It follow that Currency appreciation, has a positive distributive effect which is not neutral for growth and welfare level . Then, why is there such a worry with the issue? a.- Exports have indirect and direct effect on employment .It is not just growth what it is hurt by appreciation , but also net jobs.(job creation because of appreciation ,might be lower than jobs destruction because of it). b.- As much as capital flow goes in , it might also either stop suddenly or start to flow out back to where it came from. Either case , mean costly downward adjustment in the spending path. c.- Import growth , increase the deficit in the trade account , which can be a threat for a country solvency status whether it goes beyond some reasonable rate(3-4% of GDP), no matter whether it is because of new investment or higher consumption (Investment might fail, and the multiplier effect of it , take consumption down ), the fact in this case is that Spends Grow rate, is higher than income grows. d.- Domestic currency can get out of its long run fundamental. Thus, over appreciation (Dornbusch effect), might induce a corrective market reaction, which as the Asian crisis taught us can be hard to control and of severe consequences .- Some analyst think that as long as Central Banks partially created all of this, they are called to solved it with some policy decisions which are not neutral, but on the risk balance scenario, in some cases (only in scenario (d)) can be an useful tool when it is properly designed and rightly applied. In such case (d), the fear of floating explain itself.

The public debt restriction

While there is a law for expenditures growth (Wagner´s law), there is no law (aside from Murphy laws),for public debt growth. This difference count quite a lot, because in the first case there is a way to deal with the issue of more expenditures: Increase incomes. Whether it is throughout lower taxes , less inefficient regulations, more flexible markets and the like. The menu is wide and the option is clear: unless incomes growth keep its pace, there is no way to increase expenditures indefinitely . The implications of this result is obvious: to keep the growth machine in good shape.- But in the second case, because of its riskier nature ,there is no other way but to get the public debt under control, which it is not cost free because it takes a bite to economic growth. Thus, public debt becomes a restriction for growth, which in such a case can no longer sustain further expenditures growth. Therefore , the second implication of public debt is that it becomes highly regressive. Europe efforts to solve this problem, has increased poverty at unimaginable standards for European countries. (Spain and Greece have 20% of poverty, the average for Europe is 16,4%.As a reference , Chile has a 11% of poverty level, still better than France, Austria and Hungary).Public debt in Chile is no higher than 10% of GDP, and in the second half of the past decade was an average of 7% . The current status of public debt as a share of GDP in developed countries is worrisome : Europe has 90% ,USA 100% , Japan 200%.On the other side, the BRIC countries have less debt as a share of GDP.Latam has on average of 20% as a share of GDP . It follows (third geoeconomics implication of public debt ),that the better prospect for global economic growth in 2013 , comes from these countries which might become the new engine the global economies needs.

Looking back to 2012: A transition year

The 2012 was the year of adjustments: Economic, social and political ones. The global economy did worse than previously thought. Advances economies are projected to grow by 1,3 % this year, compared with to 1,6% last year. Emerging markets and less developing economies are in the range of 5,3% down from 6,2% last year. World trade growth is projected to be at 3,2 % down from 5,8% last year. The Euro area is expected to decline by 0,4% this year. Latin America and the Caribbean will be in the range of 3,2% -3,9% for 2012 -2013 respectively, down from 4,5 in 2011.(IMF ,October 2012) All of these downward movement in growth rates, comes along as uncertainty was the key input to consider for both policy makers and economic agents in decision making process . Thus, after too much of adjustment policies , 2013 is expected to be the year of upwards (BRIC´s countries ,Latin America ,and Japan) ,and downward corrections (EU(fiscal austerity) and USA(fiscal cliff) ). Of course the final effect between those two opposite directions, will be known as 2013 rolls on. Besides, it is also possible that depending upon the focus, all of the factors can become upwards movements. Social and political adjustment because there were democratic elections (Mexico, USA; Venezuela, Japan), and in some cases change in political leaderships (China) ,which will probably influence perceptions concerning global governance. Whether will it be for better or worse, 2013 will say its last word.- So 2013, is just around the corner and it looks like a unique occasion of reshaping history , at least for the rest of the decade. Am I going too far? .The 2013 will have the last word. So let see, what surprises brings up to us the next year.

The meaning of development

Michael Todaro, a leading economist on economic development issues , asked in his lectures: What is the meaning of development? .Most of us wondered about the meaning of the question, because the mainstream approach to it, was to focus on GDP per capita gains as the key variable for development .- These days Latin American economies, are on top of the expectations because of its outstanding achievements in unemployment (6,5 % , below 11% a decade ago), poverty reduction(28%), economic Growth(average 2009-2012 , 4-4,5%) and inflation rates (average 2009-2011, 6,3%). Government spending (share of GDP) for the whole region, has been in the moderate territory(average 31%).Public debt is not at a risky level (the highest is at 70% of GDP). The implication of this trend, whether it goes on, are quite interesting: Increase middle class segment , higher purchasing power because lower inflation , higher sales on consumer goods markets, and better opportunities for investment. In other word , the virtuous circle of prosperity seem to be working in Latin America, although there is a long way to go before matching for instance east Asian economies performance. Thus, it look feasible to ask for more anyway : the development status. Chances diverge among Latin America countries to get that outcome, but Chile is a leading position to get it through. However, we go back to the initial question . Clearly, GDP gains are not enough. In many Latin American economies, high prices of raw material and commodities, have increased its share on GDP ,which has boosted economic growth rates. For instance ,In Chile mining had 5% share of GDP in 2001, while it has become 15% in 2012.Therefore, there are important GDP gains, but not substantial improvement on what really matter for development such as education (85% of Chilean has level 1 in comprehensive abilities),innovation and knowledge creation . Besides, GDP per capita has important flaws. It does not measure inequality reduction. Professor Todaro, proposed instead a weighted poverty index ,as a better and reliable indicator of welfare improvements. The real meaning of development goes beyond per capita GDP. It should be perceived , as a multidimensional process involving the reorganization and reorientation of entire economic and social system .In addition to improvements in incomes and output, it typically involves radical changes in institutional, social administrative structures ,as well as in popular attitudes and in many cases even custom and belief. (Todaro page 57.Third world development.1983).Chile is undoubtedly in the right track, but it still has key issues pending.-

World Bank Report : Upward Social mobility in Latin America

The latest WBR (November 9th , 20129) brings out interesting outcomes concerning social mobility in Latin America. Over the last 15 years , 43% of Latin americans changed social class and Middle class increased its size by 30 million people , making up in 2009 a total of 152 million, well above the 103 million people within this segment in 2003. Between 2003 -2009, almost 2 million people in Chile , became part of middle class segment leaving behind their poverty condition. Chilean society has 42,3% of its population within this segment, just below Argentina (46,5%) and Uruguay (56,3%).Other countries like Brazil which has 32% of its population within this segment, has also made significant gains in the last ten years. WB report set middle class income ranging from U$$ 10 up to U$$ 50 daily .Besides it identifies a fourth segment with incomes ranging from U$$4 up to U$$ daily, which represent 40% of the population. This segment ,is still considered to be fragile with important chances of becoming poor again. So public policies must keep close attention to it.- What are the implications of these changes: a.- Middle Class was the driven force of history in the XX century, and it will be so again this century. In Latin America ,very much of social and economic changes since the seventies (with cost and benefits), had the middle class as its main engine. b.- Increasing Middle class share means key features for economic progress such as : more stability and social cohesion ,higher demand for services and complementary products, large size of markets for goods with high value added, higher average of education level which improve innovation flows and induces higher productivity . c.- Middle class shift the focus of politics from needs and demand (captured voters), to expectations and supply (autonomous voters), changing the nature of government involvement in economics .- d.- Important Middle class segment mean a government focused on efficiency and quality of services ,capable of fulfill higher expectations than just provide basic and limited assistance . Thus, the surge of Middle Class is not only the outcome of good economic policies , economic growth, and better institutions, which policy makers can count on as a measure of success and effectiveness. It is also the opportunity to move along with stronger policies to eliminate poverty,(30% of Latin America population),as long as it also ignites the virtuous circle of prosperity .

Different ground for conservatism.Election also matters

Mexico and the USA: Two presidential elections. Two similar outcomes. The center left take it both over. That is what democracy is about. But in the USA case , there was more than just a democratic exercise. Facing the avenues of time for this century, this election was stated as a matter of choice between two models self excluded from one another. The basic of it ,goes like this : More or less government, More or less regulation, More or less taxes and so on. It seem increasingly plausible that these were the slogans for the XX century,already gone. Chile usually considered as leading example of free markets policies, have a center right government .But it has applied a tax reforms , with lower taxes for middle income people although higher taxes for business (from 17 to 20%), which it has been estimated will create losses to firms of more than U$$ 100 million. It added up more government influence in economic activities, with new public organisms for education, environment, and inland security, and manage public expenditure running at a pace of 7% for the first months of this year .Is there something wrong with it?.Does it means that the center right has quitted their ideal and principles?.Not necessarily so . From the Government point of view, is a matter of governance, social inclusiveness ,stability and the chance to be competitive for the next election. It follows that these last three values have become the constraints , that none platform to run a government and win elections , can get rid of. It seems that the same apply to our neighbors in the north. Citizens of the world are more involved throughout social networks, which can get together huge crowds no matter their individual preferences, for the sake of what to expect from Government .But What do people expect from Governments ?.Let try some answers: a.- Pragmatism to cope with people expectations and needs. Ideology is for books, novels and intellectuals , but not for politicians .- b.- The issue is not whether to have more or less Government, but to have a both better and more efficient government.- c.- The dilemma rich against poor, is a false one. These days, what count is middles class needs ,which goes on the line of quality of services (health, education, safety, life style) resetting public policies priorities. d.- Demographic factors: People get older than before and live longer, therefore demand protection. Immigrants flows have something to say. Beside they also have values to believe in, and hopes to carry on to get some outcome. Young people and women looks for different dreams. They look for better place to live, with less congestion and environment contamination such that they feel they are in charge of their life and destiny. e.- Finally, there are different values away from traditional ones , but not necessarily worse than those ones but different , and leaders must be able to navigate through with them. Otherwise is to stay out of the winds of history.

The emerging Markets Bond index

A few days ago(October 18th) , the Emerging Markets Bond Index (EMBI+) for Latin American economies was released. The EMBI+ tracks total return for traded external instrument in the emerging markets. There are two categories of such index. The JP Morgan EMBI global , and the EMBI+ index . The former covers the Brady Bonds, loans and Eurobond .The later has a more strict setting related to secondary market trading liquidity .Instrument in the EMBI + must have a minimum face value outstanding of U$$ 500 million. The J.P. Morgan indexes are a popular benchmark for money managers that deal in emerging market debt, so investors make a comparison with their mutual funds or exchange-traded funds. Because of their higher interest rates, emerging market bonds can significantly outperform U.S. Treasury bonds. For example, in the 10-year period ending in May of 2004, the J.P. Morgan Global Emerging Markets Bond Index had a total return of 248%, greater than both U.S. corporate bonds and the S&P 500.(read more at http://www.investopedia.com).- Concerning the Latin America economies, the EMBI+ index is a good indicator about the current position of these economies, to take advantage of the situation of traditional safety investment places. It becomes increasingly evident that the Euro Zone, is not longer capable to get out of its austerity trap soon.The USA is facing quite a challenge , with the so called Fiscal cliff, to be solve before the beginning of 2013. The BRIC group is in the adjustment path to new scenarios and Japan is still on its way to get a sustainable recovery. Thus ,all of the sudden, higher economic risk seems to have shifted to developed economies. Therefore, Latin America has the opportunity to take an higher share of investor preferences, as long as its economies risk level, does reinforce the perception of these economies, as reliable places to invest. In fact, the EMBI + average index for Latin America economies was 346, which means that taking as reference the Brady Bonds, any Latin America country might get financial resources paying a 3,46% return above those Bonds return. Sure, this average is misleading as long as there are economies which outperform the average (Venezuela , Argentina and Equator). But there are others, whose EMBI+ index fit quite well with market expectations and investment grade status. A somehow surprising case, is the EMBI+ index of Colombia (96), and Perú(91).These economies need to pay less than 1% above the base return of the Brady Bonds, to get external financial resources.Quite remarkable for both countries which have experienced the tragedy of terrorism ,at its most devastated level. It is important to keep in mind (as others have already said), that this results do not mean an insurance as a protection for wrong economic policies. It rather imply, that there is a path which can be pursue steadily ahead ,such that to consolidate this higher reliability status. Finally, the Chilean economy risk level (117),(like Brazil(133) and Mexico(139)), is below average but above the expected, which is a signal to take into account . Chile , like Uruguay, have the strongest institutional framework to deal with economics matters. Perhaps its weakness (shifting up its Risk level), is right on both the environment and energy institutional frameworks which still have some flaws to solve.

WE the citizen of the world: A reflection

The current global events, whether these are economics, political or geopolitical, makes us all to believe that although We endure the burden of its cost , WE are not taking into account for its solutions. Lack of effective political leadership, weak institutions, the trap of wrong designed economic policy, the aggressiveness of those who believe they own the last truth, the pace of environment destruction, religious intolerance, women and the poor as the XXI century slaves, the nuclear threats , make us all to think that WE are going nowhere. This civilization has made outstanding progress on different topics such as, technology, science, artificial intelligence ,which have been the result of ordinary people, like We citizen of the world are, who realize that their abilities and skills, belong not to them but to the rest of us. So, We are the masters of knowledge and human skills As a result, We have become more engaged with daily life affairs, and because of that, We have become the conscience of the world, and the last moral column of it, who think that We need (http://bit.ly/BAD12) a. Religious Tolerance which we cannot live without. It make us all stronger as humans being, as long as we all share the value and virtue of life, We are all called upon to preserve it . b. Wider opportunities for freedom, both economic and political freedom , for those who live in poverty, oppression and despair ,who have become dependent from inefficient Governments and politicians, instead of themselves. c. Better environment policies. The world is not just a matter of rich and poor. It is also a matter of keeping sustainable God properties. d. Leadership capable of shaping the events ,and not the other way around As We move along into this century solving those issues, We will keep hope alive .

The right policy mix: New evidence

The recent IMF report (September 27th ) ,says that many emerging and developing economies did well over the past decade and the latest financial crisis. This mean that these economies, spent more time in the expansion pattern, than advanced economies. 60% of this outcome, comes from better policy design. The current trend is to continue this upward pattern for emerging and developing economies , while the advanced economies trends go in the opposite direction. The world economy seems to be upside down!. What is the meaning of better policy design?.At first glance, it deals with the purposes of macroeconomics policies to secure sustainable economic growth, which requires the ability to keep fiscal expenditures and inflationary pressures under tight surveillance. However, the financial crisis of 2008 , is a strong evidence that it also includes the ability to react properly with effective policy tools, to deal with any kind of shocks, both external and internal . So, it is a set of characteristics which go beyond the conventional wisdom of self adjustment, based on a strong “knowledge endowment” of economic agents, or market flexibility. This last two might be considered as a desired conditions, but it is hard to find them fully disposable, so policy makers have to figure out the right policy mix based on lack of effective learning, some time weak political leadership, unpredictable economic agent behavior , policy decision lags and the like. By the same token, Government intervention might be useful when it is based on credible rules ( fiscal deficit/surplus limits, and debt limits,) .These days, economies have high rate of resources mobility, and anything which affect transaction cost for it (like discretionary Government intervention),turn out to be negative or less effective. Markets scrutiny and global economy more risk aversion, make what it is left to erase any option of effective impact for such policy. Therefore, better economic policy design take into account, the implementation of rules for both , monetary and fiscal policy as well. This is what emerging economies have done : Inflation targeting, flexible exchange rates and fiscal responsibility ,which allows a stronger policy mix with more space to maneuver to stimulate aggregate demand or supply , when the economy is weak, and to reverse when the economy is overheating . Latin American economies (some of them are within the leading groups of emerging economies), learnt those lessons in the eighties, and worked with them out since the nineties. There was a consensus about it, which was the starting point for a new path to get economic development .The “Washington Consensus” made it right to be the first step. However, it could not be perfect and some of its weakness (lack of social needs explicit priorities),were adjusted along the way. Thus “Socially Inclusive economic growth”, became the new paradigm which has allowed Chilean economy to get poverty down from 40% in the nineties ,to 14% in 2012 , or Brazil which got 16-20 million people out of poverty, increasing the middle class segment, widening market size for small and medium size business, and placing itself on the top five world economies. The same is happening in Mexico, Peru, Colombia ; Uruguay. On the other side, it is also important to keep in mind that better economic policy are not based on ideology but on pragmatism. The institutional framework and its improvement, matter. Getting rid of these criteria lead to the well known social bad : Inflation, poverty, informal employment , underemployment and no effective signal for private investment . PD : Greetings to our boss (Google) in its birthday day (september 27th )

The nature of entrepreneurship (II)

Entrepreneurship is a matching process between the abilities of entrepreneur, and the abilities of the economy to sustain economic policies aimed at supporting business creators . At the same time, it allows opportunity takers entrepreneurs , to go on with ideas which fit nicely with the economy when it is growing. Thus ,entrepreneurship is an adding up win –win game, which take into account not just the economic environment ,but also the best of endowment talents, to move on to try a better future . It is also a self reinforcing circle. On the other side, Entrepreneurship generates positive externalities, as much as it implies less government dependent citizens, capable of making it on its own, when it comes to decide what to do with a set of natural talents we all have available. The latest GEM (2011) reports, measure the score of Entrepreneurship factor conditions(EFC),for different countries grouped within three categories( Efficiency driven countries, natural resource driven countries, and innovation driven countries), to differentiate the impact of each variable on the conditions for entrepreneurship. The EFC index (1-5scale ) compares the importance of such factors for entrepreneurship. It measure nine variables, (Financial support, Public policies -Regulations ,Government programs, Primary and secondary education, R&D transferences, Commercial and Physical infrastructure, Internal market (dynamism , openness),Cultural values ). All of these categories primary education, ranked as the lowest average(2/5).Then comes financial support, regulation and R&D transferences with 2,5/5. Almost 60% of all categories, are within the range of 2,5-2,8, which means that 55% (roughly) of them, do not get a score better than 3 out of 5. The more complicated outcome, comes from the low score for primary education. This seems to suggest that education, is not designed to enhance natural entrepreneur abilities, but it might goes in the opposite direction instead. Chile and Mexico, included as efficiency driven countries, have on average of 1,8 and 1,9 respectively .However, theses scores are not different from the ones some European countries (Germany 1,9.France and Spain 1,6) get. The difference becomes important, with countries which have made of entrepreneurship a key variable for economic growth , such as Finland (2,3/5),South Korea 2,1/5).- What are the implications?.Whether “opportunity taker” or “opportunity creator”, entrepreneur talents might be strengthened from the beginning of the education process. Those educational systems which start up at earlier stage to work with entrepreneurial abilities and its potential, have a higher chance of being a positive variable to influence decisively entrepreneurship .Besides, it allows to get better and more efficient result (lower cost) from public policies designed for entrepreneurship. So, when it comes to entrepreneurship ,a good education system designed for it , is the first step .-

The nature of entrepreneurship (I)

One characteristic of Global economy is (believe it or not), the wide variety of new opportunities available for entrepreneurs. Let check some examples out: Do you want a birthday card to someone in Europe , USA or Buenos Aires?.What about a book?.Flowers? These days, it is possible to be in touch more often with those we care about , because new means are available . Small businesses have gone further their local markets, taking advantage of connectivity options arising from internet , social networks, smart phones and the likes to establish market positions as it was not possible to think of , a few years ago. (4,6 billion people have access to mobile phone). There is a story of a Mercedes car driver, who has a problem with the engine somewhere in Europe , and it get the problem solved in less than 24 hours ,even though it is more than 800 kilometers away from the main Mercedes supplier How come? Well, a combination of logistics, technology (GPS, and supplier networks),and small business , ready to do the complementary job dealing with the solution. Small business(labor intensive), are the perfect complement for big business , usually capital intensive. The UK government has recently released figures ,showing that the number of graduates leaving university on a self-employment route has soared by 46 per cent over the last six years.(www.yourhiddenpotential.co.uk) .- Thus, technology and global markets, have allowed to generate new opportunities for entrepreneurs which to take advantage on. Because of the scale volume, and low operational cost (some cases it is needed few laptops, and above all an agile mind), entry cost in global markets, are lower for small business and entrepreneurs.60% of new business in the global markets, are related to entrepreneurs and small business, because of their abilities to move resources from one low productivity use, to another higher productivity alternative, faster than big companies do. But, not all entrepreneurs know these opportunities, neither not all opportunities are captured by entrepreneurs . Entrepreneurship and business opportunities are a matching process, which depend on transaction cost , economic policies ,and entrepreneurs abilities and competences .However, because of its nature (related to individual ), when it comes to support entrepreneurship activity, it begins with economic growth based policies, flexible regulations ,clear and stable rules ,flexible markets ,which add up to set a framework of strong incentives, for new business. Therefore ,too much government intervention , mean fewer opportunities for entrepreneurs. On the other side ,how come that the business opportunity and the entrepreneur match one another?. Is it a matter of entrepreneur “opportunity taker” abilities ?, or is it a more complex process which includes self stem , network quality, and market knowledge, which allow entrepreneur to be an “opportunity creator” as well?. It follows that it might come down to the entrepreneur ability to create their own opportunity given a framework of incentives. The later , is The Babson College approach, which support the idea of entrepreneur as the “opportunity creator” instead of being just an “opportunity taker”. In fact, the latest GEM report (2011), shows that the perception of new business opportunities, decrease the fear of failure, which induce entrepreneur to go on to create its own opportunity .-

Friedman¨s legacy and the Chilean economy

Almost six years after his death ; for most of the Chilean economists listed on the center right political spectrum ,Milton Friedman is still a prominent icon of free markets policies and freedom. His legacy on monetary policy, is also revisited in the USA ,to evaluate the current approach and implications, for the purpose of a better monetary policy design and results.( Friedman´s monetary policy in practice. Edward Nelson, Federal Reserve Board, Washington D.C. April 2011) Two years ago, an article (How Milton Friedman saved Chile.WSJ march 2010),stressed the contribution Friedman did to laid out the new foundations of the Chilean economy ,following the failure of the state based experiment (1970-1973). According to that article, these foundations were specially tested with the consequences and implications of the earthquake of February 2010 which took place in Chile.(An earthquake of 8,8 grade (RS), with capital losses estimated in U$$ 30 billion. Was this earthquake a good measure to such evaluation?.Maybe, but I do believe it was not. Since the sixties, Chile has strict rules for building constructions .Therefore, it was not because of Friedman concern that Chile had implemented such a framework. Perhaps the article would have gone on a different direction, analyzing the cost of not following Freidman prescription of small Government because of its risk of inefficiency, or the contribution to freedom arising from a more political competitive system. No matter this considerations, after two years, the percentage of the reconstruction effort, has a wide range of achievement percentages starting at 11% ( NGO watchers), up to 47%Government officials). Whatever the real value, there are still 50% of the reconstruction job still pending .- How come for this economy, which claim to be on track to become a developed nation?. Friedman supported decentralization as far as market transactions, works better and more efficiently that way. Price signals allocate resources, in a way that any government action cannot replace. Government can not substitute the nature of wealth creation. Having said that, although with a share of 22% of GDP, and better evaluated that some European countries (France) ,Chilean Government still has a centralized model of public services(Housing, health, education ), which make harder to implement fast solution to demanding problems arising from regional economies, or from reconstruction needs. Besides, it has not solved yet the local Government requirements for different management model and financing, which make centralization cost even higher, because of bureaucracy and corruption. Thus, solutions are far away from the problems. Friedman contributions to Chilean economy , were partially applied as far as decentralized government and more competitive political model is concern. Chilean economy has become an oligopoly, and its political system a duopoly. Therefore, the main characteristic of this economy is not that much the efficiency ,as it is the rents it creates for those who are able to be part of the game. Entrepreneurs are making its way, but with important restrictions. More than 60% of them ,are in the secondary markets (not formally included in the system).

The Austrian Business Cycle theory:The alternative path

After two years since the Financial crisis of 2008 began, it has become clear that traditional macroeconomics policies has failed to match both, markets and entrepreneur needs. This failure goes into two lines : a.- It did not anticipated the outcome of the housing bubble : The financial crisis of 2008, the subsequent stagnation , and the Euro tragedy . b.-It did not have the proper analytical framework to face the crisis ,(lack of microeconomics foundations), which is an essential reference for policy design .- Although it is possible to discuss further on about the two previous points(specially the second one, for example taking into account the importance of politics ; very much closer to economics and policy decisions), current expectations are no substantially better than a year ago, even though the QE (quantitative easing) has been applied, austerity measures have been implemented (Europe),and Banks have endured three years of adjustments to take control of l solvency and liquidity problem . It seems that something it is missing in the whole framework of analysis. A recent article written by Joseph Salerno (Quarterly Journal of Austrian economics, Vol 15 Nº1l 3-44,Spring 2012) is quite clear about this missing variable: It says (page 37): “Entrepreneurs have discovered that their spectacular success during the boom were merely a prelude to a sudden and profound failure of their forecast and calculations to be realized. Until they have regained confidence in their forecasting abilities and in the reliability of economics calculations ,they will be understandably averse to initiating risky ventures even if they appear profitable”. Negative real interest rate, send the wrong signal for new ventures as long as it distort the adjustment process to realign the productive structure . The reallocation between those with high time preferences (consumers), to those with low time preference (capitalist-entrepreneurs), is badly influence by such a low interest rates.- Besides, let recall that learning abilities area heterogeneous , and it comes along at a asymmetrical pace. Thus some of them will learn faster than others, but any action which interferes with this learning will make it even slower, and the entrepreneurial spirit necessary for any full and robust economic recovery will shy away longer than expected.- What are the implications?: a.- To accelerate entrepreneur learning and adaptation to new scenarios, leaving aside wrong and disturbing signals and shifting up business expectations.- c.- Monetary interventions ,seem to have a decreasing marginal impact to improve conditions for new business .It was helpful at the beginning, but its usefulness seems to be decreasing over time.