The State and Social responsibility: Moving away from traditional models

It is well known that the welfare State notion was imported from Europe, to allow massively to others, what it was granted for just a few. Did this notion fit properly with some sense of social responsibility ?.As long as Social Responsibility, deals with taking into account the interest of stakeholders (not just shareholders), probably it did so.
In this case ,shareholders were those who finance the State with their taxes, but stakeholders were those who share with the State the importance of social stability, and self esteem of being considered part of a community and their needs. Wherever these needs were not matched, it was not up to the dignity of the State, and the community which it belongs .-
Thus, the notion of welfare State is the first attempt to include social responsibility on State actions. However, further developments distorted the compromise to make the State Socially responsible, as long as the whole efficiency of the state intervention was below desirable standards.
But how do we understand a socially responsible State these days?. Latin America in the fifties, made the State the engine for economic development. Later in the eighties, it realizes how difficult is to fix what the state could not .There are limits to the actions based on the State resources.
Economic development, is a matter of private sector decisions about investment opportunities .Therefore, the State becomes rather socially irresponsible when it interferes in such a process through regulation above optimal level, inappropriate economic policies, or corruption practices which distort the price signal to allocate resources, making inequality an even more complex problem to solve. In such a situation, the State actions are far away from what is desirable in terms of its social responsible expected behaviour .-
These days of global trade and markets integration, most of the economies needs higher level of competitiveness which depends upon better public policies ,as much as efficient management private firms models.
Actually, a Social responsible State and its public policies, include a different approach which is based on helping citizens to take advantage of new opportunities no matter whether it deals with entrepreneurs, productive infrastructure needs, or regional economies and its potentialities . Besides, global citizens demand more space for freedom , self realization and wider options to fulfil each one expectations concerning their own future. The State deals in a more active way with its stakeholders and their demands, which imply that the State can not become an entry barrier for business opportunities, education facilities and better quality of services, and quality of life improvement .The Sate should move to a new condition to become a source of social responsibility, which requires deep and against the clock reforms .
In Latin America it take more time to begin a new business, than elsewhere (Asia and the USA). The justice system, work with fewer resources than what it needs, which make the law enforcement less effective than otherwise The quality of public health is far from appropriate .In Chile, even though it opened up the access to public health, there are 500.000 people on the waiting line for medical surgery in the public system . than otherwise. Public education in Latin America do not qualify among the best in the world, which affects future competitiveness gains due to lack of human capital. Besides, there are still more Psychology than enginery students. Poverty rate although decreasing in the latest years, is still a source of non traditional exports to the rest of the world. These facts do not fix with the purpose of a Social responsible State.

The political side of Latin America economics prospect

There has been wide spread positive evaluation of Latin America economies, specially considering its relatively faster recovery than the rest of the economies ,after the big financial crash of 2008.
Some analysts have divided the continent in two blocs: the one leading by Mexico which include Central America, and the other one leading by Brazil which include some of the southern countries of the continent but exclude others .Besides, the later group have on average higher rate of economic growth , than the former. Besides there is also a third group which supposedly follow Venezuela .
Whether this classification is useful or not is a different matter. But it allows to make comparison among them, taking into account its economic performance. Let take a quick look at it with some data which might be revisited either upward or downward.
Projected Inflation rate 2011 : Venezuela 50%,Brazil 4.5%.Mexico 3.8%
Projected Economic growth 2011:Venezuela -5%, Brazil 4,5% Mexico 3.2%
It is clear that the first two groups are in a better shape in its long run perspective. Which are the causes ?.-
The preliminary approach suggest that there is a wider gap between politics and economics in the third group, than in the other two groups.
Politics and economics, get along with one another in a smooth way when they are complementary. Politics support economics, when it creates friendly environment for investment, but it might be a constraint for economics, when it distort the key price signals which investment is based on .As a result, in this later case economic growth is lower than in the former caser. In such a situation, politics get into a conflict with economics because it make more complex the dilemma between the social requirements and needs, which requires more fiscal expenditures ultimately leading to more inflation, and the implications for private sector which have access to fewer resources to foster growth .Social needs end up being solved ,at expenses of economic growth.
What about the implications?
The experience in Latin America since the nineties, indicates that social needs ,are better solved with stable economic growth. In fact ,poverty reduction is possible to be sustainable when it is supported by increasing new opportunities arising from growth. Current available data shows that poverty in Latin America has decreased ( roughly 42%) after several years of efficient matching between politics and economics .
The State on its own is more limited to offer new opportunities to make sustainable poverty reduction programs , because it has no way to finance them at a cheaper cost than the private sector.
Greeks philosopher ,used to say that politics instead of economics, should be the one to lead society .However, as long as politics might be contaminated with ideology, it goes in collision course with economics. Were wrong the Greeks philosopher ?. Not necessarily so. These days the real meaning of politics, deals with the ethics of freedom and welfare as much as the ethic of justice. It is because of freedom ,that people might have the chance to improve its quality of life and standard of living, just because each one decides on their own to pursue what it is suitable and better for it, and not because some else try to do so, like a paternalist guide. Thus , although it seems that there is more than one way to get Latin America on its feet as a global partner, a more realistic orientation suggest that choices are more restricted, unless we want to move backward history clock.-

The meaning of equal partner: A preliminary approach

In his address to the Americas in Santiago (Chile), President Obama´s speech (march 21,)set the working boundaries for a new deal with Latin American countries. This one, based on mutual respect as it happens among equals, leaving behind the traditional backyard perspective. Although it did not specify any core initiative (such as a strategic alliance on the implementation of renewable energy resources, or climate change) to start up this new approach, it clearly means that from now on, Latin America stand on its feet as a global partner capable of working on different issues with their own partners .It also imply that in a variety of topics, it might or it might not be similar approaches .Let mention the issue of nuclear energy, environment, and agricultural export goods . Therefore, Latin America has become more independent as just a few leaders had such a vision decades ago. However, for its global stance, Latin America can not go alone, it needs a strong allies. Needless to say where it is or where to find it.
On the other side, there are key issues in which both Americas, have common ground upon which this new deal is really based on: Human rights, Democracy, Economic growth and development to overcome poverty and inequality. Latin America has become an opportunity for foreign investment, and it does not depend from foreign capital flows to get the resources to finance growth. Democracy is stronger than dictatorships to consider citizen interests .Thus, Latin America is in charge of its own destiny.
Some analyst expected more from President Obama , but a key question deals with the fact that there is more than one way to cut the cake. In other words, is really Latin America ready to become an independent global partner?. It seems of basic prudence to have some reservation about it. It seems that it is process still underway to be a more mature one . After all there are limitations for that purpose ,which have been set on their own by the Latin American Government .Let mention two issues: Trade and democratic rules. While it was expected that “The South America markets agreement”, (MERCOSUR), represented a chance for supporting trade, it has become more a problem than a solution. Concerning democratic rules, some Government still believe that they can do behind the back door, what they can not do in front of everyone. Latin America News media capabilities, means that transparency is an obligation for politicians , the same way it is in developed countries.-
No matter some doubts ,hope and expectations is what really means by now this new approach. However, this time there is a really good chance to become a reality: Both Americas working like equals: We are all Americans.

President Obama visits to Latin America countries: March 2011

When the evaluations were made, there were probably few doubts about the countries President Obama could consider in his short list to his first trip to Latin America: El Salvador, Brazil and Chile .These countries represent what has been historically a priority:
a.- Its strategic influence in Central America
b.- The importance of having reliable Latin America partners, and
c.- To support economic models , which represent an alternative approach to the traditional state based economic model in Latin America.-
Adding up all of these variables, it make up a single one but quite relevant : The rise of Latin America as a new land for investment opportunities at a global scale.
Going back in time, this long run purpose have roots in the late eighties following the Latin America external debt crisis,(1980) and the failure of inward looking trade approach (1950-1980). The Presidency of Mr G. Bush (father),(1989) applied a different focus which based on key consensus concerning trade, investment and debt renegotiation for this continent, shifted from ideology to business pragmatism. (politics inspired by business, rather than business inspired by politics).It was called “An Initiative for the Americas” which also proposed a NAFTA (North America free Trade agreement) as a goal to be reached, in the next decade. A few years later (1995), after the implementation of a free trade agreement with Mexico and Canada , President Clinton could start over the preliminary talks for a free trade agreement for the Americas .(First summit for the Americas held in Miami).
In the year 2004, President G W Bush finally signed the first free trade agreement between USA and a southern Latin America country (Chile) .Then, it followed other countries (Peru ,Uruguay, and Colombia which is still on the list for Congress approval), such that actually there are a whole range of new opportunities for trade, and investment in a variety of fields. It follows that USA-Latin America interaction , it is not that much a matter of countries to include in a Presidential visit, but rather a matter of a long run purpose shared by Latin American economies , which requires additional resources better to be disposable than to be scarce. Sure, there are economies which excluded themselves out, but sooner or later they will join the ones who has taken the lead.
Besides, the trade flows between USA and Latin America, have grown consistently in the last decade. Between 1998 and 2009 total US merchandise trade (export plus import) with Latin America grew 82%, compare to 72% with Asia and 64% for the world. Mexico account with a 11,7% of total USA merchandise trade flows , and 56% of the region trade flows with USA, the rest of Latin America account with a 8,5%(Brazil, Colombia and Venezuela). Thus, the USA-Latin America trade partnership goes forward to become deeper.
On the other side , there is still an important trade potential arising from the new rising Asian markets, and its demand for raw materials and commodities which requires huge investment in infrastructure facilities , new technologies for energy supply and innovation. Brazil and Argentina make an interesting and huge market for commodities, to be exported to Asian economies. Chile (along with Peru), play the role of the exit port toward the pacific of such a potential. At the same, time it also represents a reference of stability for additional investments , and integration to global economy, which also requires new policies approaches in terms of a deeper decentralization focused in regional competitiveness requirements , and additional investment in energy non traditional sources to stay on with the expectations.-.

Beyond rational behavior : In search of better assumption for economic analysis

Rational behavior has been the key variable for microeconomics analysis in the so called neo classical economics school. These school of thought , applied that approach to consumer behavior , then extended it to business(producer) decisions ,labor-leisure hour allocation, such that it establish the foundation for a macroeconomics analysis more rigorous and consistent with the whole purpose of market allocation of resources to become more efficient : To increase the welfare level of community.
It is interesting to mention that psychological factors have also been considered in the neoclassical analysis of consumers (Marshall),and investors decisions (Keynes). So the behavior school of thought is not a new branch of economics,but the intent to rescue the true fundamental of human behavior.
The average behavior of economics agents was better understood upon the basis of rationality than psychology. Therefore it became the paradigm for policy design as well. The most of it, arose with the rational expectations school,and its implications for macroeconomics policies, which left aside any policy decision, other than the one wchich were unexpected by the market. In other words no policy at all!.
The 2008 global financial crisis, and its still lasting effects ,has probably changed very much of this paradigm.
When it comes to market behavior, irrationality is more often than previously thought, such that it make weaker the assumption of pure rationality, for economics agents decisions. The notion of limited rationality (the one which apply with less than efficient level of information),do not seems to solve fully , the fragile status of current theoretical framework for economic analysis, which seems to need a deeper search beyond rationality to understand the foundation of both consumer and producer behavior, and ultimately the process of policy design and resource allocation.
Let looks some of the underlying issues concerning irrationality.
a.- Consumers debt. Rational analysis assume that consumer maximize welfare given their income levels, but experience indicates that consumer spend beyond current income, increasing their level of debt .Besides, consumers make decision based not only on prices, but also on personal values, tastes,perception (status),and emotions .
b.- Business financial risk. The rational approach ,(the one of Tobin diversification proposal,and CAPM model) , indicates that diversification is the key to maximize returns from a portfolio. It follows that, risk must be balanced within it .However, new financial instruments which cover up its real risk, generate a huge distortion in the risk-price balance of the whole portfolio. As a result, higher risk do not mean higher return ,but higher probability(not known) of getting broke .and economics agent bet on that!. Thus, while rationality assume that economic agent might pull back from a riskier than average portfolio, because there is no guarantee of higher return, in the real situation,(on average risk averse behavior) they go even further because partial information , conceal the real risk, and there is no way to evaluate properly the chances of getting a benefit. It is pure irrationality!.(it is equivalent to jump out from the sky without checking out the quality of the parachute).
How to cope with the implications of irrationality?. The real assumption for Economics analysis have nothing to do with rationality , but with both strong and good quality institutional economics framework, such that behavior is constrained to its boundary.What about freedom?.It means to chose among rational options.

Central Bank Intervention:Another symptom of the Chilean economy disease?(II)

It has been well known the case of an economy which has a positive price shock on its main export good, and later it has not tool to deal with its implications: It is known as ” The Dutch disease”. Chile, might have a similar problem with its leading exports good : Copper .So far, and as expected , the impact on the local currency has been an appreciation to drive it somewhat below its long run trend, within the overvalued range,creating room for Central Bank intervention on the basis of protecting welfare levels.(the gains from consumers, do not compensate the loses of exporters).-
Having said that, the issue becomes more complicated because at the beginning of the year 2000,it was set the goal for the Chilean economy, to become a developed country ending that decade, taking as a reference to set the target the Portugal economy. The target was to move from a middle income range (roughly USS 14000 p/capita), up to U$$ 24000 in the year 2010.
That goal was not possible to get. Productivity level did not increase, and it decreased specially in the last five years,(2005-2009), unemployment could not go down below 8,5% on average, inflation went out of course in 2007-2008(6%) which forced a more restrictive monetary policy , and GDP start to decrease from 6% (annual rate ) in 2004 down to -1,5% in 2008. This latest decrease, mainly due to the Global Financial crisis. Poverty increased from 13% up to 15%(roughly), in the years 2009-2010.
Thus, Chilean economy seems to have a second disease as well. This one related to the Malaysia economy , which deal with the constraints arising along the way , to move up from middle income to higher income levels status, keeping the economy in a sort of middle income trap (www.Roubini.com, January 12,2011 newsletter).In the Chilean economy case, it applies as far it was unable to become less dependent from copper exports, building up a more diversified export basket with industrial goods on the rise, to get away from the risk of too much export concentrated on raw materials, which have high price volatility. .
This second disease, was already present when copper prices start to rise at a stronger pace in recent years, and it has made more difficult to overcome the impact of such a shock. Thus, “The Chilean economy disease” means two symptoms (a).the middle income trap,(b) the loses of competitiveness on its exports due to currency appreciation.
What about the cure of this disease?. Paradoxically ,the solution goes beyond the traditional and already implemented microeconomics reforms. It includes decentralization , a long run strategic focus for public resources allocations, taking into account local government needs ,regional economies potential and better quality in services. It is needed a forward looking political reforms, an outward expansion of opportunities for citizens to take action about what they consider to be the key issue for their community . The reforms made in 2005 were inward looking, past based reforms unable to inspire collective mood . Recent polls ,show that Chilean people do not believe neither politics nor politicians who are protected in their close and narrow view of what the country need. The Chilean economy disease is mainly a political one.It is necessary to fit politics with economics.

Chilean Central Bank Intervention : Another symptom of the Chilean economy disease? (I)

These days ,there is an ongoing discussion in Chile about two issues with important implication for the midterm prospect for Chilean economy economic growth.
a.- The justification for Central Bank intervention on the foreign exchange market
b.- The question concerning the “Chilean disease” , which deals with the impact on domestic economy, of the high price for copper in world markets.
Let focus where the issue stand in both cases
a,. As it is well known, a floating exchange rate policy, has distributive implications which are not neutral, arising what it is called “the fear of floating”. A overvalue exchange rate, hurts exporters because it decrease their competitiveness as foreign price of export increases. At the same time, such overvalued exchange rate, support imports increases, lower domestic prices due lo lower price of imported input, therefore consumer get the benefit from it . It follows, that as the exchange rate fluctuates, there are winners and losers. This is when arises Central Bank role, because in such a situation, there is an higher probability of intervention throughout purchasing of foreign currency . How that this intervention happen ,if there was a compromise with free floating?. There are a couple of reasons beyond the distributive issue, which might justify by itself such intervention:
a.1. The current exchange rate ,is out of its long run flotation base line. This was the case in the recent decision of programmed intervention made by Chilean Central Bank to be applied throughout 2011, for buying U$$12000 million.
a.2. The main target to keep in mind by Central Banks authorities with their policies, is to minimize the community welfare loses due to both output and inflation fluctuations. In this case, the critical point to justify intervention , arises when the magnitude of gains made by consumers, do not compensate the magnitude of loses made by exporters , such that there is a net loses of welfare. A different issue is whether this welfare loses spread throughout a long period of time, or it concentrates in a short period, or whether is transitory or permanent. Another issue ,deals with the link between welfares loses and the degree of deviation of current exchange from its long run trend. Which is more important?. In the Chilean case apparently, both happened at the same time.
Taking into account this welfare changes, it allows Central Bank to claim that it decides beyond any fear of floating .More so, because floating exchange rate might have negative welfare implication, it applies in such a case to have an alert Central Bank to make the decision at the proper time, which it does not imply another symptom of the Chilean disease. So, let focus about this “Chilean disease”.
b.- It is widely known in the economic literature the so called “Dutch disease” ,which make the case of a country which has to deal with an huge increase in the foreign currency flows due to a sudden increase in key export prices . The mid term trend is to over appreciate the local currency, hurting exporters and decreasing economic growth expectations. Thus, what it should be positive (a better price for a key export good), become a problem due to its economic implication.-
Chilean cooper exports have increased its share from(roughly) a 36% in 1996 ,to 53% in 2010, mainly because its price rose from U$$1 in 2003 to U$$ 4 in the year 2010!.Thus, after 30 years of export lead economic growth, cooper share stay not that far the share it had in the seventies (70%).Secondly, the increase of foreign exchange flows set permanent pressure on local currency which moves it into the appreciation territory. How to cope with it to avoid the Chilean Disease?.-

Brazil and President Lula: Well Done

Brazilians have a lot to celebrate these days. They are in their way to become again the global power they already were before. It is not the first time Brazil is in such situation. In the sixties,(1968) it was among the eight world economies, and its potential on different areas placed it ,in a leading position for the XXI century along with other few Latin America countries.
As we approach the end of the first decade of this century, and we are about to begin the second one ,the usual end of the road kind of evaluation show Brazil as the shining star .In the year 2000 , Brazil was hope, ten years later Brazil is reality. It is within the selected group of economies (8th),which carry out the torch of global growth.
Very much of these achievement comes along with the implementation (1990) of moderate free market economics policies, integration to world economy and fiscal responsibility .As a result, Brazil has been gaining positions both politically ,as a global partner and economically ,in the competitiveness index as well. According to the World Economic Forum in the year 2009, Brazil catch up eight places in the competitiveness index, surpassing economies like Russia.
Brazil economic policies, represent the consolidation of a new approach to free markets economy policies, and an “investment friendly” State, which place Latin America, closer than ever to successful experiences of development known in the past, such that of the east Asian tigers. Of course there are differences, but Latin America pursuing the current path, is in the position to surprise global markets a few years to come .
On the other side, the Brazil trade composition is quite diversified, which is like a markets fluctuations insurance. It includes Latin America (25,9%), European Union(23,4%), Asia (18,9%) ,USA( 14 %) and others (18%).Besides, Brazil exports(60%) are mainly manufactured and semi manufactured goods.
President´s Lula Government made work, what Chilean Governments had made its brand since the nineties. In fact, both cases fit quite well with two new paradigms: Stability and Governance, as necessary (not sufficient, because good economic policies have no substitutes), condition for growth .Let take a look at both.
It is important to remember that before his first election in 2002, there were doubts about candidate Lula commitment with free markets policies, fiscal discipline and integration to the global economy. In those years, Chile was the only economy fully committed to growth based on free markets policies, and private sector investment. Other Latin America countries, were struggling with deep economic crisis on their own, somehow as part of the transition to a new stage, post Washington Consensus.
Thus, after being elected President Lula took the unexpected course, and decide to follow what former President Cardoso set in, although making the social progress an important target( zero hungry policies) . From then on, there were more than one reference in Latin America, in terms of economic policy, which allowed to create with other key countries, an huge geographic zone for trade and investment , creating the condition for Transoceanic routes, which will push further up these potential.
Governance is the second paradigm, which means that there is no way to make Government works with the country paralyzed by violence on the streets or business uncertainty. It is key to implement economic policies aimed at getting social balances, as much as economic growth .After all, wealth creation has its real meaning when more people have access to it . Governance support stability such that both add up not 4 but to 5(synergy).
President Lula is about to finish his successful Presidency, so Latin America will be grateful with his legacy.-

Some economics guidelines for 2011

As the end of 2010 approach, it is useful to take a look back at the most important economics event such that it might be possible to look forward. So ,let start .

a.-There is probably no too much disagreement to consider among the key events in this year, the crisis in the Euro zone and its implication. Alternatively, the Euro requires rule to be considered otherwise it does not work up to what it was created.
b.- The USA recovery seems to be slower than required ,but at least from my point of view it is what could have been expected. The financial sector crisis take a while to be back to normal.-
c.- Global economy does not work as close world economy. It rather works as different segment which does not add up to a fixed previously settle outcome. Thus while coordination was necessary in 2008 to get the whole system back on track, as time went by , it arose different requirement for different economic settings. While Europe needed a more conservative stand, others industrialized economies do not necessarily needed so .Besides emerging economies were on the opposite side of the economic cycle, taking good care of keeping the fundamental ,to avoid the ghost of inflation.
d.- “Currency war” and the war which did not happen .It was a possibility and it still a real one. However, because global economy is not equivalent to a close world economy, it is unlikely it will happen .Diversification works in this case to avoid such outcome. There are more than one market at half of its potential, capable to absorb product from everywhere. Emerging economies ,China, and Latin America, growth a steady pace.-

What to expect for 2011?.
a.- Te whole recovery should take place. However, inflationary pressures might arising from food prices increases, oil prices back to its trend , affecting the pace of global economic growth. Even so the IMF project an economic growth of 4,2% for the next year, with an average of 6,6% for the BRIC group.
b.-The trend will continue for raw material increasing prices. This will represent a new challenge for market inflationary expectation, as long as those prices are influenced by dollar variations, speculative forces ,and real conditions arising from strong demand .-
c.- Technology will continue to be the driving force for economic of scale, cost reduction and efficiency in productive process. However, Human capital is getting more important to keep the pace of such innovations. How about the trend?. Asian countries have a strong potential to take a stronger role. Keep on eye on South Korea, Homg Kong ,Taiwan just to mention a few.On the other side, Africa seems to be left behind.-

Cancun Climate Change Conference: Failure is not an option

A recent report issued by the WMO (World meteorology organization) , set a pessimistic tone to the ongoing discussion about climate change ,at the Cancun XVI Conference on Climate Change in Mexico. The report emphasize the fact that in this year, the emissions of dioxide of carbon has been the highest ever, even though the global economy was not working at its maximum . This fact confirm the trend , which indicates that while in 10000 years the level of emission was level off, in the last 250 year, it has increased by 38%. Therefore , human behaviour has a lot to say about it.-
Thus ,it looks like we are all headed toward an environment catastrophe , and only few seems to be aware of the risk involved in keeping the current pace no matter what might happens next. It is feasible to assume that climate change, will not be solved without some important cost some of them currently under way.
World community wonder whether such a cost is affordable .Perhaps it is , but if it is not , it is better to change the course toward more direct compromises to protect environment . Market solutions, will be slow to provide a long term solution because the main benefit of the trade mechanism no longer goes to those who reduce emissions, but to those who trade the green bonds . Sure, while the one who reduce emission get the actual market value of it, the one who engage in market transaction to make profit from it , get the present value, which is above the current one because it includes the expected gains form future reductions in emissions. Prices signals work in different direction , because there is no a single price to pay for those who contaminate. Environment like any common good has not a price, because nobody can claim property right on it.-
Protocols agreements work as long as governments wants them to do so. If not, Kyoto protocol is a good example of what some Government would like to do, but what they finally do when incentives are not clear enough.-
Therefore, It is not helpful to follow just the path of willingness to take action ,when the cost has already been somehow included in the current pace of growth. Massive flooding , pattern changes in weather temperatures ,rising sea levels, are the first hand cost of the climate change due to human intervention. These social cost must be reduced applying proper policies, which should include subsidies for new sources of energy, tax exemption for reduction on emissions, tax incentives to support clean technologies.-
The real problem is to get a reliable comparison between marginal benefits (Economic growth) with marginal cost (further contamination)of carbon dioxide emissions to make sure there is a net gain .This gain depends upon benefit going higher, faster than costs do. Sooner or later , we will need that technology develops new means to make possible to catch back emissions from atmosphere ,building plant specially designed to do so, such that to bringing down such cost further .
So, it is the time to move forward with a new approach on climate change, based on policy instruments capable of getting result to make the difference on environment protection .-

APEC 2010: Interesting projection

Since the beginning in 1989 ,APEC has been an important source for new opportunities for global trade and economic development. The 21 economies which are part of this association, represent 56% of Global GDP and 46% of global trade. Such a share in global economic in motion ,certainly expand the boundaries for growth. Research by the APEC policy support unit (2009), shows that its members are three times more likely to export ,and two times more likely to import from fellow members than non member. Thus, lower transaction cost among APEC members, generate endogenous positive conditions to foster additionally trade and growth, making the APEC area, more active in terms of intra regional trade, than EU,NAFTA and the Asian -7 association .-
While there still a learning process about the complexities of global economy, trade association based not only on economic- financial flows, but also on geography has, proved to be very useful to open up new alternatives for growth. Global economy is not only about mobility of financial resources, risk exposures and its regulation, it is also about additional path for export and import of goods, raw materials and equipment.-
Besides, Global economy preferences for risk, is lower than the economies which are part of it, are willing to be worry . The level of debt of some European countries ,far from what it supposed to be a rule (3% of GDP ), increase the risk perception above what it is desirable for global economic financial and good flows, and it is better to make adjustments than to go away from them.-
An issue which is on its way to get through, is the project for a Free Trade Area of the Asia pacific, pushed on mainly by business leaders (APEC Business Advisory Council), who understand the fundamental of Global economy, better than Governments usually do.
There is currently a whole process of setting common standards for environment protection , intellectual property rights, rules of origin, and services ,which will set the ground for concrete steps toward the goal of such a Free Trade.-
The implications of the further strength of this initially called “Forum”, to become a Free Trade area, are both strategic and economics. Strategic , because assuming business lead the course for future international relations, and politics become constrained by economics, the stronger these associations are, the lower the risk of any single power prominence ,and the higher the chance of multilateral paths of cooperation. Economics, because it creates the conditions for endogenous source for economic growth , providing a sort of safety net for sharp fluctuations on global economic activity.-

Latin America : New trends on social mobility and implications

Recent data and research show that the middle class segment in Latin American economies is growing. While in 1990 53% of the population was in the middle class category, in the year 2010, 63% of the population has reached out such a condition, and the trend is to be even higher twenty year from now , (100 million additional people) as long as economic growth keep the pace.
The implications of this results are wide and complex: Wide because it means that the middle class get stronger. For a society as a whole, is better to have strong middle class, than the opposite. Middle class do support and prefer stability and consensus, it also asks for more information and involvement before making decisions, which is good for an higher quality of the debate and evaluation of alternative options, all of which end up with better public policies design. Free press have key target in middle class readers.
Complex because strong middle class, is helpful to shape a different approach on different subject concerning politics and leaderships, but not always this demand are listened. Middle class demand both different leadership, and better answers arising from Government and private firms as well . Thus, it is not a surprise that women are becoming more involve in Latin America politics. It is matter of style and tuning. The same apply for private firms and their focus on Social responsibility.-
Does it means that strong male leaderships are outdated? Not necessarily so. It is the requirement coming from Latin America middle class voters, to shape new directions for leaderships , no matter whether it is male or female. While in Latin America there was an important proportion of people in poverty conditions , strong and some time populist leadership fitted quite well , to fill the gap between the rich and the poor, had not with concrete result, at least with keeping the hope alive. Politics and economics were far away from each other, but now with economic growth at its current pace , and the expectations of further increase in good consumption, higher banking services demand and investment , the requirement goes on the line of broader and pragmatic consensus.
This time ,Politics needs to be closer to economics. Even Latin America integration , is actually better founded in the principle of politics inspired by business, than the other way around, business inspired by politics. Latin America economic Integration , will not be just because of Government support, but despite Government , private firms will take its place.
Following the implementations of reforms, since 1990 most of Latin America countries have increased its middle class segment. In Brazil(2010), 50% of the population is considered to be in the middle class. Chile (77%), Uruguay(72%), Argentina(71%); Colombia (61%) and Peru(57%).On the other side, economic crisis had an high a price for countries like Mejico (2008) and Argentina. In the later case, at the peak of the crisis (2001),30% of the middle class fall down to a poverty condition. Strong leadership and no conventional economic policies, made its way through to get the country to stand up again.
However, new directions and opportunities arise when middle class voters become more important. Thus ,it is up to the current leaderships in Latin America countries to move forward to take advantage of this trend.-

Water it is not longer a free good

When it comes to keep our health in good conditions, most of us count on food quality, but very few of us realize, how hard this is going to be in the future. Very much of what we need for our health, comes from clean water. Our body is 70% water, which means that the first condition for good health is good quality water. This a well known fact by physicians , but what about its implications when water is scarce?
The problem arise because clean water for human consumption unfortunately has already become a scarce resource. It will require tough competition among its different users, to get what they need. Let check the list(www.treehugger.com)
a.- Every average person need around 200 hundred liter of water for daily consumption.
b.-To produce an hamburger requires 24 liters of water
c.- To produce lettuce 60 liters of water
d.- To produce tomatoes 88 liters of water
e.- To produce apples 332 liter of water
f.- To produce wheat bread 616 liters of water
g.- To produce chocolate 11388 liters of water !
g.- To produce rice 1612 liters of water
The list goes on and the issue is clear enough to look for ACTION. Check this web page out :(www.blogactionday.change.org), for more .
Less than 1% of all water available on earth is suitable for human consumption. 42000 people die each week, because lack of clean water. Underground source of water are not huge such as to count on them. Productive activities such as agricultural and mining ( whose productive process is highly water intensive )will have to compete between each other for water. Thus, it is a real possibility that severe conflicts might arise because of lack of water.-
The Blog action day deal with a responsible call to make water preservation a duty.-
From the economics point of view , water scarcity means it has an higher price , which we are not paying . In fact in real terms we are consuming free water ,(those people who die because of lack of water are part of the price!), and it seems feasible that sometime in the future, we will have to assume an higher share of water cost in our budgets.
While in the last 40 years we have been worried about oil prices, in the next 50 years or so, we will have to be worried about water prices.-
Besides , water is considered a common good (The tragedy of commons), which mean that there is no restriction about its use, and the risk of over exploitation is real. The solution, include to assign property right ,and this rights might be sell to other customer. As long as to protect water has a price , users get more cautious about the way they use this resource.
But water preservation is not judt a market issue. Government regulations also are important. At the same time,it is also a Government responsibility. Some regular activities concern with such responsibility : Car wash, garden maintenance, laundry requirements are increasingly luxuries goods, but at a very cheap price!. Something is wrong when a distortion like this one is not solved. It is the well know market failure issue, for common property good, which requires efficient government intervention.-

Chile :Two hundred years later (1810-2010)(II)

As long as the State was key to design the new framework, ideology was the driven force in the following years. On this regard and as a condition to make the State stronger, the institutional profile , was bias toward the law and order, rather than freedom and rights.
The foundation of the new republic was based on the strength of its State and those who supported and controlled it. However, this emphasize on the State responsibilities ,left apart and on a secondary level , the citizens and their role as the most important source of contribution to a nation greatness .The Chilean State was in charge of education ,public health, infrastructure ,even the economy in the second half of the latest century (1940-1975) , was designed upon the State preferences .-
As a result , ideology replaced pragmatism because all what mattered was what to do with such a power . From time to time, politicians forced the institutional framework stretching ideology beyond the level which the system could absorb and sustain. Social unrest and repression was the outcome. From 1958 up to 1970, there was three different but not complementary government programs. Three different way to go nowhere because there was not a long run perspective to go through, other than to get control of the State. The main consequences of these stress, was a permanent social struggle between opposite forces ,with severe consequences as much as the system was not designed to protect rights, but mainly duties from certain segments of society. The human rights concern, is a recent phenomena in Chilean politics and society. Past history on this issue ,is quite fragile to say the least.-
At the beginning of the third century, Chile is in the path to become a development country, just the same way it was before, one hundred year ago. Thus, the question which arise is this : will it be able to make this time such transformation to lead the rest of the Latin America continent ,to higher levels of economic progress and performance?. Historically Chile has been leader on social issues: It was the among the first to recognize women rights, and to implement social security as well. At the end of the twenty century (25 years),it was the first to open up its economy to private sector and world markets getting rid of the State preponderance .Wealth creation became as much important as it was poverty reduction.
Others countries at a different speed, are also following their own path to improve conditions for economic progress and development, based on a more active role for the private sector .
Actually, there is an interesting process to get the development status, which includes almost all countries in Latin America. Politics and economics must be quite well fitted. Ideology is a risk because it might left some countries behind. The majority of countries are moving forward into this century , with a different approach concerning the real force of prosperity and wealth creation.
For Chile own expectation ,the challenge ahead goes on two complementary path to get such goal:
a.- Higher productivity and competitiveness
b.- Better education and innovation
A preliminary evaluation indicates that the chances to get substantial advances on the productivity level are higher, because a deep decentralization of the State, and its full scale modernization as necessary conditions depends upon political will, which has been one of the main assets in the latest 20 years for important reforms. Education improvements needs a very long period of time to show substantial achievements.

Chile : Two hundred years later (1810-2010) (I)

These days Chilean people celebrates the most of their pride : to be independent .On September 18 th, in the year 1810 started out a long journey for a new tough land full of scary natural phenomena (earth quakes, volcano eruption, flooding in winter seasons ), but also with the majesty of both geographic and weather diversity. Dry and hot in the north, rainy and cold in the south.
Geography has played an important role to shape Chilean people character, as much it made the quality of leadership and resources endowment, in other independences experiences . Chilean people can endure strong challenges whether they propose themselves because Nature call upon them from time to time, to do so. Just a few months ago a devastated earthquake made it again. Destruction everywhere in the Center south of the country did not change the mood and the will to keep on moving forward.-
But Chilean character it is also about social and cultural heritage .From the beginning Chilean society was stratified by social levels depending on whether there was or not an European background .These differences also shaped the struggle for independence . Although the first signal of independence, was a reaction against Bonaparte ´s Army invasion of Spain(1810), supporting the King of Spaniard Emprire,the real independence came out with Argentine support years later (1818),after decisive battles (1817,1818).As a result of the outcome of those battles, Chilean people at that time, wanted an Argentine General to be the first Head of State of the new country.Thus ,it was at the battle field where the independence was really wrapped up instead of the desk of some prominent citizens.-
The State was also designed upon these social classification .The Army,(later the Navy), the Church ,the public administration were the places for those who were linked to the European status. This is the reason because Chile as a country ,has a strongly institutional profile like no other country in Latin America .Somehow Chile is a mix of credible institutions to make the balance for and important concentration of political power .On this issue, the Centralized State has taken away very much of the entrepreneurs willingness to do business on their own.
To start e new business, still take twenty days and requires almost U$$500. Taxes are among the lowest in Latin America, but they are highly regressive because they are based on consumption. The lower income have an higher share of consumption, so they endure the burden of financing the public expenditures .
All over two centuries, there has been progress. No doubt about it, although there are still some areas which requires more attention. However, the national identity has not changed too much. Chile is still in a transition from an agricultural politically based society , to a entrepreneurship politically based society.-

Monetary Policy and economic expectations: Lesson from 2008

It is going to take years before the main economic stream, will settle down the key variables which could be considered as the main source of the global financial crisis which took place in 2008 , and it is still making noise.-
So far, it is clear that a mix of wrong doings ranging from policy makers up to credit rating agencies , created the conditions for an over expansion of risk in the financial system . On this regard, it is important to make the point, that somehow that is what can be expected from banks and financial organizations. After all, their business is to manage risk up to make a profit out of it. By the same token, it is part of their business to explore new financial instrument for making that profit .A different matter arises when there is no supervision about the systemic implication of such a risk levels, and the quality conditions concerning to those new instruments ,which spread out higher risk along the all financial markets .-
Thus, we might leave aside the financial institutions responsibility as long as they do not manage everything on their own, but according the available regulatory framework. Therefore the focus move toward those variables which these institution work with: The interest rate and expectations about its fluctuation .
Following the year 2001, and for quite a while, the interest rate in the American economy was at very low levels . It was just in the mid of the year 2006, when it started out the process of normalization to a more credible long run level.
The question which arise with this issue, deals with the implications concerning the delays to implement that normalization process before 2006, and the incidence it might have had as a source to ignites an over risk financial expansion. In a nutshell, whether monetary policy failed to prevent such outcome and the subsequent near global financial collapse.
On this issue ,it is also important to make the distinction between the economic fact and the economic expectations. The fact means that with productivity level moving upward , any prices pressure might be contained. It follows that higher productivity levels, perform like a filter to control prices increases. Thus, on this regards, from the Monetary authorities point of view ,the economic fact(productivity increases at an annual rate of 2%) did not match with the imperative of increasing interest rate earlier than 2006.
But what about the expectations?. This is the real issue. Economic agents make decisions about the future based very much on both economic fact, but their expectations as well. As long as the monetary authorities did not make any comment about the transitory nature of low interest rate, it was assumed by market forces that interest rate would stay at low level for a long time.
The failure to manage expectations, was the last input for the financial disaster which were about to come. However, where this failure comes from?. After all economic agent were assumed to be rational ,so they did not need for someone to inform them what the course of interest rate would be. Economic Rationality(learning by the past experience ) suggested to be cautious about low interest rate for a long time. On the other side, economic rationality suggested that some asset like prestige and prudence, have economic value which is the business manager job, to take care of . Therefore at most, monetary authority trusted that the economic evaluation made by banker managers and economic agent, worked this way because that was the way it suggested by the paradigm of rational expectations. Well it did not. The real failure was to focus the behaviour of economic agent within a simplistic framework , leaving aside key parameters of human nature and economic behaviour .-

The State and the Social Responsibility

It has been usual to evaluate private firms market valuation, by their willingness to get on board of Social responsibility requirements : In this latest report previous to launch the new ISO 26000,( August 2010) the International standard organization says:
“The need for organizations in both public and private sectors to behave in a socially responsible way is becoming a generalized requirement of society. It is shared by the stakeholder groups that are participating in the WG SR(working group on social responsibility) to develop ISO 26000: industry, government, labour, consumers, nongovernmental organizations and others, in addition to geographical and gender-based balance.”
Thus, Social responsibility is getting wider field of application , while includes not just private firms, but public enterprises as well .The implications of this change are quite significant . Let get more details about it:
a.- Public enterprises and private firms might develop business partnerships on the basis of homogeneous management model.-
b.- Public enterprise develop new management model based on the accountability of its results, which creates incentive to transform public enterprises in a source of value creation, quite the opposite to the traditional public enterprises as the source of fiscal deficit, waste of resources and corruption.
c.- The Social responsibility in Public enterprises, set a new frameworks for all firms to do business based on new rules ,focused not just on short terms results but on the long run result as well.-
The implication of this new framework goes beyond business ,and get to politics. The State should also evaluate to be orientated by the boundaries of Social Responsibility.
Actually ,a lot of public services do not qualify to have high quality standard . Public Health, public education, macroeconomic policies , infrastructure capabilities , and even citizen safety .In this case accountability (democratic rules) works with imperfections which are not possible to fix them up ,because it is in the State interest to keep it that way: bad quality is a substitute to higher price, in case those services are provided by private firms.
It follows that this new framework for Social responsibility, will impose sooner or later new demand on the State actions, and how it fit with citizens expectations of better quality in everything , no matter whether it is either public or private.It would not be posssible to have again the experiences of some economies with their badly designed economices policies .

Latin America and inequality : Tough realities for public policies (II)

From the economic point of view, inequality has broad implications for whatever the notion of welfare. Starting from the macroeconomic side, it has been widely demonstrated that inequality is a threat for both social and political stability. Besides, it creates a distortion about the true nature of economic growth ,and the real meaning of freedom associate with it . As long as economic growth by itself do not solve inequality, its positive impact is strongly biased toward those who are able to catch the whole range of opportunities available as a result of growth. Thus, the paradox which comes along, is that economic growth might become “an alternative”, although it should be the best alternative. It follows that to solve inequality, policy makers try other alternatives(second worse), such as direct redistribution which is like inflicting a punishment . Those who are more fortunate, get on their shoulder the burden of the less fortunate. In this case, the state fail twice, the first because it aborts growth, and the second ,because neither it does not propose or implement the proper public policies . From the microeconomic point of view, inequality distort resource allocation as long as those with higher income levels , dictates the consumption and production pattern, because their weight on the total consumption expenditures, is higher than what it is for those with lower income. This implies either, an higher production level of capital intensive goods, or higher level of luxuries goods imports. Both cases do not help too much ,to new jobs opportunities, but do help to increase profits because these goods have higher prices, and inequality becomes wider. To overcome such a distortion, public polices should focus on the proper issue changing the measure of economic progress .It is necessary to go beyond the GDP growth, as the key indicator of economic progress. Using the GDP measure, in the sixties Brazil was among the top ten world economies , but its Gini coefficient (1970) was 0,61.In those years(1968) Chile with lower rates of GDP(2,3 annual average 1960-1975) than today, had a Gini coefficient of 0,49.(actually following the UN report is 0,55). Thus, economic growth needs good public policies and properly focused. These are complementary variables .The “real economic growth” is a broad – based one, with special emphasis for public policies on accelerating incomes growth of target poverty groups. This approach requires to redefine the “character” of Economic Growth. For inequality, it matters more the economic structure, than the rate of GDP growth. The practical implications go on to support actively small and medium size firms. Most of public management model actually applied in Latin America economies, deals with the implications of the rural urban migration flows , from the early stage of industrialization in the beginning of the twenty century ,and its demand for public services(housing, public health, education, infrastructure) .It was necessary for the Sate to organize those services with the implementation of the organizational structure functionally designed .These days, competitiveness challenges, suggest that it is needed a different public management model,a specific targeted focused one, which fit with entrepreneurs expectations (specially those from low incomes) to do business. Finally, it is also needed a different way to measure progress.It is needed an index which focus on the impact and direction of economic growth, rather than just its speed. An alternative would be, to construct a “poverty - weighted index” (Todaro 1981), to measure social welfare progress. This index ,weighs the growth of income , in each income groups, not by the proportion of total income in that groups, but by the proportion of the total population in each group.

Latin America and inequality: Tough reality for public policies (I)

The recent financial crisis (2008),has made of Latin America economies the focus of attention because of its strength to cope with the effects of such situation, keeping the fundamental for steady economic growth . However, unemployment (10 million people in these economies), poverty(higher in countries which were on top of the list, because of its progress to reduce poverty), and inequality are at the core of the real impact of the global crisis.
It is clear that those well endowed with education and financial resources did not feel that much the burden of the crisis, as those less protected did. Thus, all social achievements since the nineties, have become obviously too fragile to overcome the wave of output losses starting in 2008, and no matter the success in terms of growth for more than twenty years inequality is still the big issue.
There are different approaches for inequality. The Gini coefficient, is a statistical measure widely accepted to get a more precise evaluation of the magnitude of the problem, and to make comparison. Thus , while Portugal has an index of 41,Chile,Colombia,Paraguay has an index of 55,just one point below Uganda.
A recent UN report, suggest that inequality depend of public policies design, such that good public policies can do better to reduce inequality, than bad public policies do. Besides, it states the argument that inequality goes from generation to generation, which might be relevant for those people historically displaced from social net work in theses economies .We might distinguish different groups and characteristics.
First, the native population and their civilization, who might be considered a “displaced civilization” by the new sixteen century culture ,which either they did not have a chance to assimilate or they could not properly integrate themselves to it. Anyway, since then on, one way or another, they have been outside of the new institutions including public policies design. Thus, It is not surprising that Latin America countries with higher share of native population, are among the ones with the higher level of poverty and inequality. The UN report, reinforce indirectly this argument with the fact that 10 out of 15 most unequal countries in the world are from Latin America
The second group comes from those who migrated from the country side to urban cities, pushing up the demand for services provision to such a level ,that the system can not afford to provide, creating the so called “ urban poverty bag” These groups are the direct demand for public policies outcomes, and the main variable to measure its effect and impact, but also the main focus of public policies . So, in this case Urban poverty is a consequence of State failure to improve the quality of its services, and lack of Social responsibility in public policies. So, it is the recent increase in these social cost of the global financial crisis.-

Is the global fiscal deficit the right path for the global economy recovery?

In recent weeks, very much of the discussion about global economic recovery has been focused on the role of fiscal deficit to push up global demand, such that to get back the economic activity to normal levels.-
Some key considerations about this issue, deals with the fact that even though the global economy might be considered a “closed economy”, it is a kind of decentralized economy , with both strong and heterogeneous commercial ties within their members. These commercial ties make the difference between regional rate of economic growth, which add up to global economic growth . Thus, those economies with better quality commercial ties , (outward looking economies) might expect to growth faster, than others with so to speak, more restricted commercial ties (Inward looking economies).Therefore, there are asymmetries between the quality of these commercial ties, as much as the level of openness to commercial ties differ. It follows that as long as these asymmetries includes key global economic players( let say Europe, USA , China, South east Asian countries and Japan, which become “regional economies” from the global economy perspective), it is hard to get a common ground at global scale to get through the global economy recovery with the same “real side “ approach. It means every one working on the side of additional fiscal stimulus.-
The real issue is not about what it is best for the global economy on their own, as much as its performance depends upon of the result of regional economies economic growth. In other words, the argument of the “Closed global economy”, which gives ground for additional fiscal stimulus, do not a fully apply, because the effects are different depending on the nature of commercial ties orientation, those economies “inward looking” get the benefit , but those economies “outward looking”, get the cost .
The alternative view, considers the global economy fractioned by regional economies, each one with different levels of commercial ties, which they must consider as the alternative option to domestic demand expansion, to get faster economic growth. This domestic expansion ,is more suitable for economies with lower level of commercial ties and a higher share of domestic expenditures ( higher level of domestic consumption).
Therefore, beyond the conventional wisdom of industrial homogeneous economies, there are two approaches: that one suitable for regional economies more “inward looking oriented” ,(Fiscal stimulus),and that one suitable for economies more “out ward looking oriented”( Fiscal austerity ). However, the nature of commercial links, make both approaches complementary. Higher domestic expenditures will boost aggregate demand and imports (export from other regional economies which must be competitive, otherwise they stay out of the market). On the other side ,coordinated Fiscal deficit every where at a global scale, will push up both inflationary pressures and higher interest rates sooner than otherwise, besides raising the expectations of higher taxes, making more difficult a sustainable recovery.-.
So, What is all of this about?. As long as the Global Economy become more relevant as the frameworks for policy makers decisions, the nature and scope of such decisions might differ, given the fact that economic heterogeneity become more relevant. Alternatively whether we considered all regional economies as an homogeneous case, we miss the relevance of cross over interdependence, which arise from commercial links diversification. A more complementary designed policy framework, fit better with this interdependence.