Germany at its best hour: Leadership for european economic recovery

Some economic agents might be surprised about the recent downgraded by ratings agencies, of European countries, Banks and even stability funds, but perhaps much more from it, because it did not hurt (at least in the short term) too much the market expectations about European economy prospect , to cope with its debt constraint . .-
Well , maybe an analogy might help.It is like you drive in a Dakar-America rally, or for this matter any rally . It is not just about the driver , but also about the engine. There has been criticism about the driver in the Euro zone economy , whether it is the European Central Bank, or Politicians, but the engine (German economy) has been strong enough to keep going. The markets expectation concerning Europe, might well be also shaped around the German economy prospect to keep the pace on growth .-
Thus, no matter what the ratings agencies said, markets look at the performance of the main engine of Europe economy ,as the key force capable of getting things back to normal , including the credit worthiness. However, it is not only about the German economy(the engine), but also about the required reforms to keep the pace. Let go first to the engine , then to the reforms.
As a consequence of the financial crisis , Germany economy (GDP) shrunk by -5.1 % (2009).It was the deepest fall in more than sixty years. but the two following years (2010, and 2011), the German economy made strong gains in economic growth (3%), which allow it to have an healthy fiscal position due to tax increase by 6% because of growth (meaning 1% deficit, well below Euro zone average), and public debt under control.
Although German economy is considered to be an export driven economy, (40% of its GDP comes from exports),consumption and investment ,made its way through in 2011 to increase up to 1,5% , the highest in five years (www.Spiegel.de, 1/12/2012).
Besides, German economy was leading contributor (2010) for intra EU share of trade in goods, services and foreign investment which is more than 50% of total .Moreover ,Germany rates of Exports growth kept a steady pace (16% in 2010).Thus ,Europe expectation to deal successfully with the debt crisis implications are linked (at least 50%)to Germany economy performance. Will it be enough to avoid the risk of recession in the euro zone?.It will depend upon the complementary strategy, Germany and its allies apply to support neighbors´ economic growth.-
Although the consensus forecast 2012 for Europe, goes into the direction of slower economic growth with 50% probability of a recession, the strength of the German economy engine, might play a key role to get a better performance for the euro zone economy, such that the recovery comes along sooner . However, it all comes down to the implementation of proper reforms and policies specially those aimed at supporting growth (medium size enterprises) and competitiveness( higher efficiency on States programs). Therefore ,It is not just a matter of austerity ,but also of economic growth. The German made engine,is still running.-

Macroeconomic Policy and Central Banks: The Financial variables are key
Most of the economies which have autonomous Central Banks , might count on it as a key tool for price stability .Latin America in the nineties started off with its own experience on the matter ,and the outcomes so far are pretty satisfactory. On average, Inflation rate has been steadily going down , up to a one digit level , something quite unusual a few years ago. Between 1972 and 1987 the average rate of inflation in six countries (Brazil 166% , Peru 2789%, Chile 802%, Bolivia 602% , Mexico 3710% and Argentina 257% ), was 150% on a year by year basis !.
On the other side, while in the year 2010 the average inflation rate in Latin America was 6,6% , during the year 2011 it is expected to be 7,7%. The inflation rate for this year, is going to be a main concern for Latin America Central Banks. The path of strong economic growth ,and the risk of inflationary pressures which comes along with it, becomes the issue to deal with it.
In this case the usual (textbook) approach, is for Central Bank to increase interest rate. Another matter is the speed and the magnitude of such increases, which depends on each economy particular situation. The fact is that before the global Financial crisis (2008), this kind of decisions was based on inflation gap ( The difference between the spot and the long run target inflation rate), without any consideration (aside from the output gap),other than to get inflation back on track.
The financial events of 2008, made clear that Central Banks must also include within its policy options the financial sector exposure to systemic risk. As interest rate goes up, Banks begins to feel the impact on its loans performance. The probability of default rate might increase. At the extreme (2008), it might get the whole financial system with it.
The contractive nature of increases in interest rates, impose an additional restriction. After all, as the economy cool itself down , the inflationary pressures also goes down calling for slowing the pace of interest rate increases .Besides , all of these chain of events works with lags, therefore in the mean time the issue of credit access to overcome the slower demand, with higher expected default rate, become critical. Thus, the financial sector enter into the optimization rule twice :
a.- Its risk exposure, which might be a threat to the whole financial system as the interest rate goes up.-
b.- Its flexibility to work counter cyclically, to financing the cash flow when firms needed it most, mainly those labor intensive medium size firms.
It might be the case that when condition (a) and (b) are so to speak, less than 0(high risk exposure and low flexibility to finance cash flow), Central Banks might turn out to impose unexpected efficiency loses on its effort to get inflation under control. The Chilean experience in 1998 and 2009,suggest that the Central Bank approach ,misses out the integration of key financial variables into the macro policy decision model. In both cases, the Chilean economy got a mild recession (-1,5%) following a previous steady pace of economic growth.

2012: Some guidelines

This year has been plenty of uncertainties concerning the global economy possibilities to overcome the spillover effect of the financial crisis of 2008.Policy makers, confronting tough choices about fiscal and monetary policies, and politicians thinking about the next election (whenever it is),rather than the next generation, made the whole year a mixing experience of mild recovering on the one hand ,but soft recession on the other hand .-
On the other side, emerging global partners are shifting the attention of global economy toward the pacific .Latin America is on the trend to increase its focus on the pacific, which undoubtedly will have an impact on both its economic growth prospect , and its strategic importance as the key supplier of necessary raw materials . Therefore, this focus toward the pacific will also have geostrategic effects, unclear to foresee completely up to know, but for sure, Latin America is increasingly positioning itself as a reliable alternative for global investment flows as this trend goes along .
Thus, there is currently a change in global power parameters as long as geography ,market size, knowledge , and GDP share at global level matters. This is not something new, but this year has made it all a fact .-
What can we expect for the year 2012?.
a.- Latin America ,might become a key player on the solution side of the global economy constraint. (4,1%, 4,4% of economic growth in 2011,and 4,3% , 4,8% expected for 2012, ). This expected outcome, is an incentive for more investment which means more production, less unemployment, more consumption, more imports (machinery ,equipment and goods ),from economies which needed it most . -
b.- Latin America moving forward with its integration process, but mainly based on the private sector lead .Business culture work faster than politics, as a tool for integration. This has been the case since the nineties, and it will continue in the 2012. This process will imply to have more pragmatic Governments, complementary with private sector to support the still low percentage of intraregional trade (20%). It is also expected , to go further on transforming the Latin America State .
c.- Global economy growth will stay at a soft pace, as long as Europe do not solve its debt constraint and inflationary pressures arises in some emerging economies. Latin America might also have the impact of such restriction , but not strong enough to reduces its prospect for growth , although depending on China economy keeping strong demand for raw materials.
d.- Europe is increasingly moving into the territory of economic recession, which might be longer than expected unless there are some additional definitions on the nature of its institutional framework, currently based only on prices stability, leaving aside financial stability and its impact on growth. There has been some progress , but market anxiety will push hard for more.
e.- The USA economy keeping its (slow)pace toward a full recovery , but depending for it ,upon a more dynamics global economy .-

Will the Euro Survive ?: The Eu at its critical hour

Will the Euro survive?: EU at its critical hour

Most of analysts agree that the chances for the Euro to survive the current debt problem in the EU , goes along with Central banks focusing on financial stability as much as they do on price stability.-
The problem is that in most of the world economies ,Central Banks have made of price stability a trade mark based upon its importance for sustainable economic growth. But as the financial crisis of 2008 (and many other crisis as well) showed , it is hard to get economic growth ,when banks cannot keep the cash flow working.
There are a lot of reasons for Banks to be in a weak position, but probably the most complicated deals with confronting speculative forces. This is one of the reasons that the “lender of last resort” comes along as key partner to control what it might be a liquidity problem to become a solvency problem, because the fall of the financial system ,imply a longer and more difficult period of recovery.-
When such a lender of last resort it is not available, Banks must go on its own. In this scenario nobody trust nobody, and hoarding money becomes an alternative ,although it means a higher chance of credit crunch for productive purposes. Thus , at this stage it is the moment when the price stability focus , become a source of recession instead of growth.
This paradox is to say the least puzzling because it contradicts the main stream of macroeconomic policies, whether it is monetary or fiscal policy , which is to play rules concerning economic growth stability. Therefore, there are three simultaneous variables for central banks to take care of : Price stability, financial stability and economic growth stability. This is not an impossible triangle, but it assumes the availability of proper tools both legal and economics ones.-
The EU economic institutional framework, was not designed for situations like the current one .If that would have been the case, probably the Euro never would have come to live, because economic discipline was a necessary condition for the whole experience to be successful .However , some country members saw the monetary arrangement , as a ticket to wasteful spending anyway .Most of them thought that they were too big to let them fall, but a few if any, thought that at the same time , they could become too big to save without risking the fundamental of the Euro currency principles.
The EU is trapped within its own design. Any modification needs more time than it is available. Besides, without the lender of last resorts, the options are between two social cost : economic recession, or the euro going to the economic history book.-

Is it feasible the two speed euro zone?
The notion of the “two speed euro zone” , foster speculation whether it is a kind of yellow light for countries which refuse to go on with necessary reforms to stay in the euro zone, or it is a real possibility to get Europe and the global economy out of the economic recession territory .
European Union, is currently the largest economic zone of the world with 16% of world GDP (IMF 2010). 11,3% of its imports comes from USA, (13,5% comes from NAFTA),and 18,8 % comes from China ,(33,7% comes from BRIC Countries).This means that the global economic recovery, is undoubtedly connected with EU engine running. The latest IMF economic projections , suggest for the Euro zone, weak economic growth with GDP within the 0,5 - 1% range for 2012.
On the other side, the austerity programs in highly debtors EU countries ,has a strong bias to the so called “self adjustment path”. This depend heavily on:
a.- Markets flexibility to get the necessary cost gains to improve competitiveness, (there is a reallocation between losing money sectors, toward those winning profit sectors).
b.- Fiscal policy rejecting its countercyclical nature.
The expected outcome, is a deeper and longer recession than otherwise.
This self adjustment path, has failed before in countries with debt problems ,(although not equivalent to the ones of European countries,Argentina 2001, Chile 1982), because it denies the fundamentals for debtor countries to be succesful in their effort to overcome the situation :
a.- Economic growth (to decrease the Debt /GDP ratio, and as a consequence to improve access for additional financial resources(lower rate of interest).-
b.- Structural investment loans (roads, ports, airports), coupled with structural adjustment loans (higher efficiency in public sectors, incentives to winning sectors and the like)
c.- The Lender of last resort , (Central Bank or the IMF, or both),and the interest rate levels .
Thus, the “two speed Euro zone” arises as an transitory alternative,(just the way when you have to drive your car at lower speed because of bumping in the road), to break up the Euro stability restrictions (self adjustment bias), allowing debtor countries to work within a more flexible framework, (like a physician trying to save a life ). It would also protect those still solvent countries, but with potential liquidity problems, if they cannot get back to the growth path soon. Finally, as it has been suggested by key analysts, there is the risk of disorderly Euro zone break up, which might become increasingly possible, as the recession get deeper (www.economonitor.com ), unless something beyond current approach is done sooner than later, to avoid that the whole effort become politically unsustainable.

Tax reforms and government efficiency (II)
Do Governments have incentives to be efficient?.What is the real meaning of tax efficiency?.What is the real burden taxes imposes on welfare level?.These questions ,should come along for tax reforms.
Governments do not have incentive to be efficient, because its key role is to be effective, which means it has to do what it is demanded by citizens needs. So, the standard of evaluation about government performance, should be the fulfillment of those needs. The efficiency issue, arises when it comes to the tools used for that purposes. But, Governments follows political criteria rather than economic one, to choose those tools. The cost of efficiency for Government actions, seems to be higher than its benefits, because it limits the impact .Besides, the principle of politics decisions rely on seeking the best possible outcome , but not necessarily at the lowest cost.
On the other side, Wagner Law (1883),suggest that the main support for economic growth should be government actions, because economic growth increase revenues. But this is a long term scenario while government faces short run demands.
The real meaning of tax efficiency(simple, fair and efficient), do not consider the other side of the coin. It deals only with its effect on resource allocation based on prices, assuming there is no gap between social and private values . However, this gap exist and it turns out to be that taxes cover up this gap and government inefficiencies. Therefore, there is no efficient taxes, but fair and simple taxes.
What about the burden tax imposes on welfare levels?.Some years ago, there was a discussion concerning Arnold Harberger´s calculations to measure such a burden(roughly less than 2%-3% of USA ,gdp), because his outcome was not precise enough .Others economist, claimed to be more reliable on this calculations. But no matter how precise the methodology was, as long as it did not include government inefficiency ( which also impose a burden on welfare level), any result was not an exact valuation of the real burden. Taxes impose an higher real burden on welfare levels, because it helps to finance government inefficiency .
Laffer ´s proposal of lower taxes make sense regarding the issue of government inefficiency, (leaving aside the impact on investment and employment which by the way is complementary with government efficiency ).In fact , when taxes go up revenues might decrease not only because its impact on incentives, but also because government inefficiency to collect them. A recent report, (Citizens for fair taxes), shows that 280 of the more important firms in the USA, did not pay the tax they should have (2010-2011).
What are the implications of all of these hypothesis for tax reforms?.

a.- Fair taxes imply much more than the progressive or regressive nature of tax rates. It also deal with its share to finance government inefficiencies.
b.- Higher tax revenues , might be additional resources for financing government inefficiency and inequality. Even worse, higher taxes do not guarantee to solve inequality or better services. (The health public sector in Chile,1990-2000).
c.- The only tax reforms that matters, is the one which deal with lower taxes. It push spending to focus where it is needed the most.

Tax Reforms and Government efficiency (I)
Taxes are the main source but not he only one of revenues for Government to provide services. Thus, any time those services are increasingly necessary,(economic recession, inequality gap, new demands and the like), the first option which comes along is to increase taxes. It is assumed that the efficiency level of Government programs, is such that it compensate the cost of taxes .It means, the services delivered fulfill the expectations and needs of those who asked for it.
However, it is not obvious that government efficiency might be to such a standard, to be confident that the social benefit just match the social cost of taxes. It might be that the social cost turn out to be higher than the social benefit, because of different kind of inefficiency, such as corruption, bureaucratic and institutional delays, special interest groups influence, changes in politicians preferences. In the 2010-2011,WEF report on competitiveness ,wastefulness of government spending evaluation has an average of 3,4(the closer to 1, means extremely wasteful government spending),with more than 80 government spending performance, placed below average.
Given a set of standard services based upon public policies implementation, Taxes and Government are complementary. Inefficient governments require higher or more taxes, while efficient governments require lower or less taxes. The data on government performance, shows the connection between taxes and Government, based on efficiency. In the same WEF report, the variable the extent and effect (efficiency) of taxation, has an average of 3,6 (The closer to 1, the more tax level limits incentives to work and investment),with 76 countries below average which seems to be quite consistent with previous index of government efficiency evaluation.
Therefore, the real issue It might not be necessarily narrow to whether the tax burden goes to the rich or not, but following the complementary nature of both, the efficiency use of the collected revenues by Government come along to the debate . In the extreme side of the argument, the rich might pay higher taxes but whether it is not efficiently allocated , it is not useful to anyone. In such a case, the welfare of the society will be better off with lower taxes on the rich. Why?. Because this resources will alternatively go to productive investment, employment and wealth, and Government will have to work to become more efficient. This is what the WEF report evaluation 2010-2011 might suggest.
On the other side of the implication, lower taxes are strongly linked to government efficiency to get the most of its impact on both economic growth, and a better outcome in terms of equality.

Global economy risks : The time for coordinated leadershipRecent weeks have shown how vulnerable is global economy to risk perceptions. The complicated situation of debtor countries and the risk of defaulting their debts, has made market volatility something rather usual. Any positive signals(even weak), might be enough to recover the mood, but apparently for not too long.
World public opinion wonder how come that the recovery has not gained momentum to be sustainable, after fiscal and monetary expansionary policies at global scale. I do not think that the stimulus program applied at the beginning of the crisis were too weak, but the real problem to be solved, was more complex than expected. More so, when there was not a recession proof institutional framework(EU debt and the euro ), to cope with global implications. Each decision was made as specific requirement(whether it was Ireland, Greece or Portugal) came along, which exacerbate risk aversion of global economy.
Thus ,there are two problems strongly connected which might explain current risk.
a.-The sustainability of rescue packages for debtors countries to avoid default
b.- The strategy to get back on the track of economic growth, for those countries which needed it most .
The overall scenario of a global recession is still hanging on, as long as one of those, or both previous conditions, are not fully satisfied. After all, both are strongly related. Without economic growth, the higher the chance of debt default, and the more urgent the necessity, to make sure there is enough financial support to deal with it. If this financial support availability, is made up day by day, markets bets go on to the negative territory .
Banks recapitalization goes in the right direction, Euro bonds purchases helps to clarify doubts. The Tobin tax on financial flows ,do not seem to be the proper tool, as long as it confuses the factors which explain the situation . Besides, speculative forces arises not because of lacking taxes ,by because of wrong economic policies, specially the ones which creates disequilibrium(debt, deficit, inflation ), which is when speculative forces benefit the most.
What About Latin America?.Latin America is for the first time , in a crisis not of its own. Sure ,It might be affected, but it has a basic framework to deal with it. Latin American countries are working together to confront the crisis. Perhaps ,it might go further on with the future implementation of rescue fund in case it is necessary, or better policies coordination, specially to deal with local currency appreciation implications. These efforts would get better control of risk perception.

IMF World economic outlook: Any Improvement for 2012?
The IMF world economic outlook reflect the current risk of global economies.The GDP estimation decrease for developed and emerging economies fro 2011 ,from 4,3% to 4% and 6,6% to 6,4% respectively.-
Latin America is expected to have a slower growth pace this year down from 6,6% (2010) to 4,9% (2011).Although it still represents a good source of investment opportunities.Even political events, do not change too much this assesment.Argentina is next to have a Presidential election on October 23rd ,and the environment for investment and Economic growth is quite good.
Global uncertainties, might have some effects next year on Latin America , but the whole region is working on a basis of cooperation to face the situation.On this regards , almost all countries in Latin America will have a slower GDP growth in the year 2012.
The question is what the traditional economic tools might do to overcome the current global uncertainty?.In terms of effectiveness (short run impact), it seems too late to expect a turn around .Global GDP goes down for this year. However , lacking a global institutional framework,it might be the case that this is the time for politics:Global action ,global cordination seems to on top of the list to improve expectations for the year 2012.The worst scenario would be each one on its own.

The Chilean model: The social costs of oligopoly (II)
How the Chilean model became an structural oligopoly?. Free market economy might work with both political monopoly and political oligopoly, because of its adaptability.(in both cases, the economic institutional framework might be market oriented).Therefore, while it looked that Chilean model worked its way through to become a modern democracy, markets did not react negatively to the political trend arising from the new rules applied to the political setting, as far as it did not hurt the expectations of economic returns , given the profile of stability at the core of it.-
It is hard to assume that the military regime (1973-1990),proposed an economic model to become a failure. They set the foundations of it, and if they could not go on further, it was because politics had also something to say about it. Thus, as long as the new political setting was in place (from 1990 on),the incoming Governments, had the responsibility of making corrections along the way to make sure it was real its ability to make sure the best outcome(higher welfare ).This corrections, were done but they were more effective on the economics side, because the benefits were at sight in the short run.( More than 20 Free trade agreement with 60 countries, were signed up between 1990 and the year 2009). The social issues corrections (quality of education, public health, infrastructure availability), were effective as long as the private sector jumped further into it(infrastructure investment, education) as a supplier, although with short comings unsolved on the public side (specially education)which made the gap of opportunities allocation wider. Thus, actual center right wing Government, inherited a model in its way through to become exhausted by demands for corrections.
What are the implications of the structural oligopoly?.Let try some preliminary answers .Free markets economies are an unique way to offer opportunities for all those ready and prepared to catch them in. However, these opportunities are not evenly allocated when markets are non competitive. The structural oligopoly in the Chilean model, imply that those opportunities will be concentrated in just a few, which validates the exclusion and lack of self esteem ,leading to a failure of expectations. The third implication, deals with the demand of more protection throughout a stronger role of the state in the society and the fulfillment of its needs, with social instability arising from a variety of demands to close the gap. Free Market economy might work with political imperfection, but not with social oligopoly. All of those successful experiences are based at least on high levels of social mobility and institutional framework (monopoly or oligopoly) making the remaining requirement to improve welfare levels .The Chilean model in its current status, might end up with more and not less State .Its life span has been overstretched ,and it is the time to make deeper reforms to it. These reforms ,are widely related to improve competitiveness throughout a better quality of public services, and a more competitive political setting.

Chilean Economic model: The social cost of oligopoly (I)
In recent months, Chilean society has been stressed with street demonstration . Why?. Lets try some explanation.When the “Chilean Model” started out 36 year ago, it was based upon a free market economy, with the private sector on the lead to support economic growth and wealth creation, and the state playing a complementary role with the private sector and focusing on public policies related to poverty reduction . The results are impressive. In 2010, Chile became an OECD member. It has reduced poverty from 40% in 1990 to 14 % (roughly)in the year 2009, income per capita has grown in the same period from USS 4000 up to USS16000(ppp),and the current expectation is to reach a developed country status in the year 2018.On the other side ,it is the inequality issue with the Gini coefficient(GC) in 55, which of course is far from the OECD level, which has an average of 32 (GC). Besides, beyond statistics outcomes, there are clear signals of oligopoly in Economic, Political and social areas. The first implications is that those results(poverty , income per capita and inequality index) could have been much better, whether a real free market economics would have prevailed all along.
Economics analyzes oligopoly as a market failure, because it means competition among the few, which imply welfare losses due to higher prices ,lower employment and productivity than other market arrangement. Oligopoly might lead to collusive action to maximize the outcome of those within the oligopoly area, given that it is easier to coordinate a few. Thus, the “Chilean model” has become a structural oligopoly far from the desired competitive market model set in the seventies. Let get to the specific:
The areas of insurance, banking, retirement fund, retail , private health, beverages, air and load transportation are all oligopoly, although there has been a steady improvement in the institutional framework to deal with its consequences. The social oligopoly arises due to the high level of social segmentation (according to PISA index of Social segmentation(2006), Chile has an index of 52 , while Argentina has 39).This social oligopoly implies that the best of any opportunities, goes to just a few .Thus, the gap between the lowest income and the highest 10% income level in Chile is 46 to1!.(more so if we compare the 5% range ). In the banking industry for instance, the wage gap between the top and the bottom managers has reached 43 to 1 . A recent OECD research, has found that Chilean education is among the more expensive of the world, while its quality levels goes below international standard.( PISA achievement has not been on the top 30%).
The political oligopoly arises, from the fact that democratic elections with the exception of presidential one, do not represent the voters preferences, but the ones of those who designed the process specially aimed to protect the election of those supposedly to be icons of stability and governance. As a result, on any side of political spectrum, just a select group can have the access of being part of democratic game, because as long as they become a “brand”, the electoral system assure them what it is left to be elected.

Financial markets tiranny or the cost of efficiency losses?

Do policy makers or politicians have to feel constraint by market reactions to any decision they take?.In other words, do markets performance creates a sort of boundaries on what policy makers should or should not do?.After all, there is legitimate authorities and institutions whom any public decision must be accountable to.-.
We have witnessed these days, the wild fluctuations in stock market world wide due to the unsolved debt problem in key countries, and the current uncertainty concerning policies design and its implementation to cope with it.
Government debt is not a new economic phenomena, but simultaneous high level of government debt at global scale (over 75-80% of GDP), might be a risky scenario for a risk averse global economy following the financial crisis of 2008. Government ability to implement countercyclical economic policies become restricted ,because it can not neither increase spending further when it is needed or reduces taxes. The remaining source of support is the Central Bank .Markets take note of the risk of inflation, and the inability to take action .-
The fact of the matter is that financial market not always match precisely the pace and fundaments of the real economy, because does not consider deeply the underlying process of those data upon which financial market make its decisions, creating room for speculative forces. It all comes to prices and the quality of information prices might reflect. The expectations of falling prices because of lacking of credible information,(more uncertainty) induces massive sell off, and with the expectation of more precise information (less uncertainty) and therefore higher prices, it happens the other way around. In both cases, speculative actions work its way through, because there are different risk preferences.
However, the impact of financial markets goes beyond its fluctuations and volatility: it generates efficiency losses and drop in welfare levels causing damage to the cycle production-investment .Markets have a key role to allocate assets and signaling investment opportunities. Acting as an economic risk filter, It helps to shape expectations as well . Therefore, it is not cost free to dismiss markets reactions, although it is important to keep in mind the adjustment due to speculative bias in its behavior .
Latin America policy makers have made substantial progress in the last twenty year ,considering how to work with markets surveillance .It is not a problem of sovereignty , but a basic references of good economic policies .The result, has been the ability to have a full range of policy instrument at their disposal to cope with the risk of global economy .-

Crisis

Learning from economic crisis: Where the economics science stands?
Although economic crisis means losses of efficiency ,output, employment and welfare levels, the economic science has not been able to reach out the point such that the quality of its economic policies make possible steady economic growth, employment and welfare gains . Rather there has been economic cycles with up and downs ,due to different kind of sources for economic crisis, (Banking , Balance of payment deterioration, external or internal debt ,financial sector failure, information asymmetry and the like)
Keynes blamed the private sector for the economic instability, due to mismatch between production and consumption, focusing in the role of Government as the stabilizing factor. The Evidence indicates that Government can also be a factor of economic instability. Let keep in mind the experience of Latin America economies since the fifties up to eighties, which ended up with the lost decade. Besides ,Government actions might be a factor of economic crisis, because by its own nature it is based upon political volatile criteria, with short run considerations. Thus, overspending lead to over taxation and debt, which decrease consumption , investment and growth.
In such framework, economic policy was focused mainly on the stabilization purposes. Rational expectations assumed that people gather all information they need to make decisions ,which are usually right unless unexpected event happens. Therefore, to get any economic objective the prescription was to surprise economic agents, because they learned from the past and were able to anticipate the effect of any previously applied economic policy.
It follows that economic crisis are somehow the consequence of a mismatch between economic policy and expectations. Thus, the implication for policy design is not to dismiss what markets expect to happen .Taylor(1993) proposed a rule to deal with market expectations, focusing on reducing volatility of both output and inflation improving the quality of information to shape better expectations. Even so, economic crisis are still on the spot of global economic .Does really economic agent learn from the past as rational expectation proposes?.Probably so, but such learning is not homogeneous among economic agents. Given the quality of information, there is learning asymmetry .Just a few learn quickly, but the rest of us do not learn that fast, or we might not learn from the past at all. Unfortunately, the majority is in the later group, and economic crisis might happens because the cost of learning from the past is too high for such a group, and economic policy cannot count on either past experience or previous knowledge ,to make more effective its prescription. Thus, economic crisis do not occur only because of an economic policy failure, but also for a learning failure.

Investment in education:The human capital battle in Chile

Chilean students of different levels, although mostly from public universities, have been claiming about the current conditions of public education, and the implications of private investment in this field.
Public universities(25),are financed by the State with percentages which has been decreasing in real terms over the years. In the last five years, Public Universities, have submitted its Corporative project to the evaluation of the National Committee of accreditation to get the quality certification ,which is a necessary condition to apply for public funds to develop academic and research programs. At the same time, due to the quality signal, it allows to get the preferences of students. In Chile, there is no free education at the university(college) level. Parents must finance their education when they get into the university. However, there is a virtuous circle of quality which should be considered.
On the other side of the story, since the eighties, Private sector has been allowed to invest in education at all levels. Since then, Private Universities have grown steadily. Actually there are(roughly) 40,which have more than 50% of total students registered in Chilean Universities. Private Universities has allowed an historic increase of students registered in universities, which it is fact to be considered.-
The students (and professors as well) claims have two lines of discussion:
a.- The State and its responsibility with Education requires some definitions.
b.- The negative reaction to the profit –seeking behavior of Private Universities, given that they have been authorized as such based only on academic purposes.
Given that the State responsibility begins where the private sector responsibility end, Private Universities play a key role . Therefore, in this case the State should do what the private Universities can not do, such as pure research and innovation research which are too costly . It follows that the expected course of action, should follow a mixed path :to reinforce private universities, but taking care of its profit level such that to pay taxes for it, and on the public side to focus resources on those subject which public universities based on quality standards criteria, do better than their private counterparts.
Concerning the seeking profit behavior of Private Universities, it is important to keep in mind that there is also seeking profit behavior in private health by physicians ,and related insurance companies, lawyers and some politicians. Thus, the problem with private universities, should be to make them accountable, but not rule it out for this investment.

The Greek economy tragedy: A Plan is necessary
Latin America learned thirty years ago, how hard is to cope with external debt when it goes beyond what it is available. It meant a “lost decade” and incredible enough ,made the whole continent a capital exporter .It had to pay back U$$ 100.000 millions(Dollars of 1980) .Those resources, could not be used to finance roads, schools, educations and so forth.
Does that experience has some value for the current Greek economy debt problem?.Not necessarily so. There are some elements of it, which might be helpful. Others, like the economic setting are not alike, therefore each experience has an uniqueness characteristic .The same applied for the post WW II situation, of USA and Great Britain debt, which kept low interest rate to reduce the interest payment burden on its debt .
What it is helpful is the way different actors(Government, Banks and multilateral Organisms) worked together to confront the problem. Some basic premises at that time (eighties decade) were:
a.- The main source to pay the debt back, was to support the economic growth.
b.- The economies needed to implement structural economic reforms.
c.- Multilateral organism (World Bank ,and the IMF), were the lenders of last resort for economic reforms implementation.-
d.- Private Banks were willing to negotiate loses and debt payment both on short and long run basis,
With these premises it was presented first the Plan Baker(1985) and four years later, the Plan Brady (1989)which was designed to complete the program. This one included three axis: Trade, investment, and reprogramming debt programs. The first two aimed at supporting economic growth, throughout the structural adjustment loans programs (SAL) implementation). The last one, aimed to support a restructure of foreign debt throughout debt swap operations, and the Brady´s Bonds.
Whether this plan was the best way or not to cope with the external debt burden , it is still a matter of analysis, but the fact is that it allowed an opportunity , creating some room for economic growth.
Thus, a plan including a comprehensive strategy to support economic growth for the Greek economy, will give some expectations beyond the current debt rollover programs, other than the need of more debt .-

Chile ´s own sub prime crisis: The retail industry under scrutiny
It has been widely said that the market oriented Chilean economy, strongly depend upon an economic institutional framework almost crisis proof. It means there is no chance the regulatory authority, do not have the proper tools to protect market confidence, consumer rights, small investor interest and systemic risk. In fact from time to time, there are new development to match such an institutional framework with the steady growth within the retail industry ,and the market as a whole as well(credit cards massive availability, better access to credit market to different segment ).All of that ,coupled with the increasing share of middle class consumers in total sales of almost every kind of goods.-
The retail industry in Chile, has grown steadily in the last ten years. Although with an oligopoly structure, it is very competitive .JC Penney ,Home Depot stores and Carrefour could not consolidate positions on this market. At the same time ,It has also managed to focus on consumers needs basically throughout credit , issuing its own credit cards which have allowed a 25% share of total domestic credit. Within the retail industry, 50% to 80% of daily sales are based on the use of its own credit cards which firms encourage with special discounts and offers on the spot.
Actually, this industry has five players whose key indicators for 2009 are (ROE,ROA ): Cencosud (4,43%,1,94%), Ripley,(1.04%,0,6%)Fallabella, (11.12%,4.81%),La Polar,(14.15%,6.13%),and Hites (4.68%,2.42%). (Source:CORPRESEARCH.2009).According to this data, the Chilean retail industry as a whole look healthy, and in good shape to get investors preference, but with some exceptions. “La Polar” store, is actually in deep trouble because of its practices of hiding real default debt ratios, replacing it by debt reprogramming based on its own terms ,making up financial returns to look better than otherwise .With a market value of U$$ 1335 million and more than 30 local stores, Its property share is divided among local institutional investors (27%),domestic investment funds (12%),Foreign investors (20%), and stock options traders (31%). Moreover It is placed at the fourth place among Chilean retail players .La Polar store was under scrutiny since 2009 by some risk agencies and consultants. At that time it was rated by Fitch-Ratings(April 2009), with negative perspectives. Since then, key managers started to sell their stock options, anticipating by two years in advance expected losses, all of that at sight of local authorities who obviously did not react as quickly as managers did.
Besides, nobody seemed to care about some facts concerning risk and management debt of La Polar : Focused on low income customers, their average debt was almost U$$1200, ,well above average income level of its target(roughly U$$600), and its competitors debt levels(U$$800) .It follows that risk defaults were high enough to impose a threat on reported earnings (EBITDA of 15.4% in September of 2010)and expansion plans.
What went wrong? Reality has proved once more that the institutional framework is a necessary but not sufficient condition, to protect markets from internal or external shocks .It is as much important to have the people ready and prepared to apply the tools they have at their disposal, if not they should resign. At the end of the day ,It is a matter of credibility.

RoughTimes

Rough times for global economy: The middle of the road situation
The economic recovery arising from the financial crisis of 2008, seems to follow the traditional path. Let make clear that it is not the same an economic recovery back from a real shock ,(sharp drop in exports), that a recovery back from a financial shock. While in the former, it is a matter decrease domestic spending to stabilize aggregate demand, in the later, it is a matter of the real conditions of the financial sector to support growth, which mean its ability to overcome credit crunch, when firms need additional resources for its cash flow.
A weak financial sector, make the whole process a lot more complex. Actually, financial sector in developed countries is still in the process of getting back to normal , which according to prestigious research center, it might need up to three years to reach the fully recovered status (www.seriworld.org).-
Besides, at this moment the main concern is how to cope with debt and the risk of inflation. The former imply the risk of higher taxes or spending cuts, none of which help to boost expectations for further gains in economic growth. The later, induces a tighter monetary policy which does not help the recovery either.
Thus, given a confuse framework arising from the combination of both, the effect of the solutions applied since 2008 , and the still ongoing structural weakness of the economy, private investment delay decisions concerning job creation, weakening household expectations about improving income level . Moreover, both overcapacity and weak demand will keep housing market fragile for a longer than desired period of time.-
Worst of all, the willingness for international cooperation, which was a key factor to overcome the initial stage of the crisis, has been replaced by domestic needs in each of the big global player. Whether it is the currency volatility ,the debt level, the rescue package for those in trouble , or the implications of fiscal deficit increase, it all add up to more global uncertainty.-
It follows that the financial crisis effects on the global economy are far from over. On the other side, Emerging economies on their own can not overcome current uncertainty, or compensate oil prices increases.
Therefore, because of uncertainty , it is time to focus on expectations making clear that key macroeconomic variables (inflation , debt and fiscal deficit) are under control. Besides, it does not seem to be the time for further government involvement, aside from what it has done. Perhaps to get a more robust global recovery, it is the time to make easier to the private sector, to be in charge of the remaining second half of the road.-

BetterReforms

Reforms that do matter

There are different kind of reforms depending upon their scope and deepness. Thus ,there are economic ,political , public services, institutional and financial reforms to mention the most usual. All of these reforms ,have a kind of life Cycle which means that they are useful to the extent that they fulfill its purposes. After that it begins a decreasing relevance and impact because as times goes by, it loose momentum .Then it is the time for new reforms, like the one which consolidate the achievements due to previous reforms.
Secondly it is the issue of timing. When it is the proper time to do reforms?.It is usual that Governments prefer at the beginning of its period when public support is strong. Later on, means negotiations which not always allow to get what it is desirable ,but what it is politically feasible.
There is also the issue of the nature of reforms. Some reforms make improvement to democracy while some do not .Some reforms deal with people needs , while others deal with politicians needs .Finally some are a success (pragmatic),while others are a failure (ideological).
Latin America have had different type of reforms ,such that can fit each one of the three categories mentioned above most of them during the XX century. That century has been characterized as a violent , conflictive and destructive one. Thus , it is feasible that most of the reforms done ,were not capable to change the main forces of conflicts and confrontation, which prevailed over the forces of convergence and negotiation.
At the beginning of the XXI century, a key question arise: What kind of reforms are needed?:One thing for sure ,none of the kind of reforms which were a failure because they had an important ideology bias Among these, the belief that the State was a good at allocates scarce resources, the belief that people do not like freedom to chose , the notion that there are citizens which deserves different privileges, the belief that private sector might be rule out from economic growth requirement , and the notion that press freedom do not match basic human right for societies .
Therefore , the kind of domestic reforms which fit this century expectations, deal more with current productive needs such as the use of alternative source of energy, the legal framework for better participation of private sector in traditional public areas (highways ,hospital and housing construction, and education investment), a better protection for consumer and free competition to avoid concentration and oligopolies , a deeper and stronger financial sector, and better innovation flows to make the economy more competitive, or the justice system to guarantee the proper protection of citizens rights.
In other words ,the reforms that are urgently needed have nothing to do with politicians needs, but with people expectations to take advantage of current good environment for higher prosperity in the coming years.

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.-