Internet is expected to have a lasting impact on society, but we still do not know the full strength of it. However, one thing for sure is that any way to limit its effect, will means costs higher than the benefit. Let analyze this assessment in more details. So far, both global society (global village) and global economies seems to move, pretty much up to the pace internet has settled, in terms of information flows, communication channel, and transaction facilities. With TV soon placed massively on internet, conventional TV will become not just global, but instantaneous and so it will its influence. Therefore ,any attempt to restraint this dynamic looks like trying to stop the unstoppable, in what it is an useless effort .The rate of increase of internet users is more than 100%.
Ronald Coase said some years ago (1971), that the market for ideas, is not that much different than the markets for goods, such that both are accountable for regulation. The implication was that as long as there was regulation for imperfect competition ,so it was necessary to apply regulation in the markets for ideas. But how can be possible to apply such regulation ,to what has become a global multimedia source of new ideas?. Society needs all the information available to make the best decisions about different issues concerning their welfare level increase. For example, if had not been by internet , the environment damage caused by human intervention, would not have gone so far other than the daily news ,which means that the global warming issue would not have been more than a debatable topic for scientist and expert on climate change. Internet has made it not only a debatable topic , but also a priority because every one connected to this network has the chance to make comments, suggestion , critic and evaluations ;pressing the world organizations dealing with it, to pursue a more active role. As a matter of fact ,this year there are planned more than 26 conferences related to the global warming issue, all of them possible to track by internet. Physically it is impossible for anyone to attend them all , however internet allow to all who want to participates to register on line. On the other side, there are a global community worried about the environment, based upon internet facilities, which made possible for the year 2007 ,to become the year of the environment. Thus, because society has better information, key element to develop a deeper consciousness about the complexity of such challenge, these days the environment issue is on top of the agenda , and the expectations are to make further progress into the near future. In short ,in just a few years it has been possible to move forward on the environment dilemma, at a faster pace than in the previous decade .On the other side, information flows allow the global economy a quicker response and adjustment to random shocks at lower cost than otherwise. Any restriction on these flows, would mean welfare cost for global community.-
Blogging is the new wave of internet communication. More than 30 million of them live in the cyberspace, and it will become more relevant in the near future ,as each one person´ s point of view will matter in a more fractionated global society. The willingness to reach out other people, exceeds any attempt to impose limits and control . Chile has been working very actively on the internet platform for public services(education, health), privates firms, services,(financial, job seeking opportunities), and news media (comments segment),in what it looks increasingly like a virtual society although. with real effects. It is one of the leading countries in Latin America on this issue. However, while most of Latin America newspapers, have been moving forward to allow their readers a broader space to shape public opinion, some Chilean news papers seems to restrain their connectivity with its readers.
Friday, March 28, 2008
Friday, March 14, 2008
The economics of internet (I)
Since it was widely available for world audience a few years ago, internet has had a deep impact on the way of life around the world ,such that it is not possible to assume a situation without it. How can that impact be explained?. Internet is a communication revolution which allow people to be themselves, to speak out their fears and hopes to a world audience with no real involvement, because it is all virtual, therefore it is all imagination in real time, but it looks like real, and its implications are real. On the other side, it is its impact on transaction cost which has a deep effect on a variety of daily events, more so with the new tecnological development(video, voice, images applications) which make its effect more relevant .
Transaction cost represent a constraint not just for commercial transaction purposes , but also for research requirements in terms of both data gathering and analysis. Throughout internet, any researcher might go virtually any place in the world to get the material or data he or she needs, in a way which is impossible to do otherwise. Imagine a flight to the New York Public library, or for that matter to the NYU or Columbia Universities libraries,just to to check some articles, concerning for instance the impact of environment damages, on global economy. Internet induces an exponential increase in knowledge.
For commercial purposes, it facilitates the commercial transaction and decision making process, reducing the time requirement to get it done. Global Corporations ,are connected into global commercial networks which allows them to get quick access ( saving up to two a more weeks )to the best available alternative to buy any of their inputs , supporting more efficiently the production chain with the “just in time scheme”, and allowing important gains in competitiveness. Because it allows companies a better insight about the markets forces trends and expectations they deal with , it improves efficiency in the management decision process as well.
Far beyond global TV impact ,Internet has made the world a smaller place, because it is faster , in fact it is instantaneous. Besides it is available on the computer screen of everyone , reducing any world event to something “usual” and “closer” which "share space" with your own daily stuff. Moreover, it has concentrated both the past and the future into one single observation through simulation. In short, only the present matter, because has become the connecting point between the past and the future. The uncertainty is about the unexpected event, out of the boundaries, not necessarily about the future itself because somehow we have it already with us in our computer screen!.
There is no other revolution of such magnitude in human history , and beware that we are still away from its limits. Having said that, the next question is this ¿why could anyone cut this flow of communication, information and data exchanges? .Internet means improving welfare level at a global scale ,so it improves welfare levels to a smaller scale as well. It means a global democracy, where an opportunity create more opportunities for others. It allow citizen to evaluate government performance on public issues , improving the effectiveness of public polices.-
It follows that any restriction about this flow of information, would be equivalent to freezing time, while it keep rolling on outside the freezing area anyway . In other word , is like keeping fixed our own clock, while others ´s one , continues moving. -
Transaction cost represent a constraint not just for commercial transaction purposes , but also for research requirements in terms of both data gathering and analysis. Throughout internet, any researcher might go virtually any place in the world to get the material or data he or she needs, in a way which is impossible to do otherwise. Imagine a flight to the New York Public library, or for that matter to the NYU or Columbia Universities libraries,just to to check some articles, concerning for instance the impact of environment damages, on global economy. Internet induces an exponential increase in knowledge.
For commercial purposes, it facilitates the commercial transaction and decision making process, reducing the time requirement to get it done. Global Corporations ,are connected into global commercial networks which allows them to get quick access ( saving up to two a more weeks )to the best available alternative to buy any of their inputs , supporting more efficiently the production chain with the “just in time scheme”, and allowing important gains in competitiveness. Because it allows companies a better insight about the markets forces trends and expectations they deal with , it improves efficiency in the management decision process as well.
Far beyond global TV impact ,Internet has made the world a smaller place, because it is faster , in fact it is instantaneous. Besides it is available on the computer screen of everyone , reducing any world event to something “usual” and “closer” which "share space" with your own daily stuff. Moreover, it has concentrated both the past and the future into one single observation through simulation. In short, only the present matter, because has become the connecting point between the past and the future. The uncertainty is about the unexpected event, out of the boundaries, not necessarily about the future itself because somehow we have it already with us in our computer screen!.
There is no other revolution of such magnitude in human history , and beware that we are still away from its limits. Having said that, the next question is this ¿why could anyone cut this flow of communication, information and data exchanges? .Internet means improving welfare level at a global scale ,so it improves welfare levels to a smaller scale as well. It means a global democracy, where an opportunity create more opportunities for others. It allow citizen to evaluate government performance on public issues , improving the effectiveness of public polices.-
It follows that any restriction about this flow of information, would be equivalent to freezing time, while it keep rolling on outside the freezing area anyway . In other word , is like keeping fixed our own clock, while others ´s one , continues moving. -
Tuesday, March 11, 2008
Friday, March 07, 2008
The next decade Dilemma for Latin America economies:Distribution or growth
After the nineties most of the Latin America countries, followed a turn to the left, probably searching a new path more socially inclusive to guarantee Governance and democratic stability,not necessarily because of markets failure but more so because of lack of adjustment in the instituional framework to allow markets to work properly.
Governance and social inclusion are legitimate objective which come out not only from the left, but also from the right( Compassionate Conservative approach). The difference lies upon the means to achieve it. While the Latin America left, quite differently to their moderate European counterparts, believe in distributive policies based on more taxes, subsidies, and regulations, in short a bigger State to get better living conditions, the moderate right believes in the ability of individual choices throughout markets both based and within the proper institutional framework, to get such objectives. Given the fact that leftist Government in the majority of the cases, have followed the traditional old fashioned paradigm of trying to replace markets instead of cooperate actively with it, few countries like Brazil, Peru, Uruguay ,and Chile arise like the pragmatic exceptions, to counterweigh the more ideological approach of other Latin America economies. But Chile´s experience of focusing too much on distribution, is currently showing its limitations as well, because of the negative impact on the rate of economic growth.(This year, with copper price above U$$4,02 lb, the Chilean economy is expected to growth at annual rate of 4 -4.5%,half the average rate of the nineties).-
Thus, the dilemma for the next decade is already settled down: Latin America must decide the proper economic path to improve its living standard. Distribution based on the State means more poverty, because the State is political by nature, which means that Social problems like poverty and inequality, are constrained to political realities,(poor people can wait the next election), and it is not in the State ´s interest to solve it other than to save face. The link between the State privileges, political interest and power concentration on those who run the State, mean that they need “customers” to survive. Therefore,without any reforms on the colonial State, the real path is to focus on growth , free trade agreements with the new arising markets and more flexible approach to private initiative.
Governance and social inclusion are legitimate objective which come out not only from the left, but also from the right( Compassionate Conservative approach). The difference lies upon the means to achieve it. While the Latin America left, quite differently to their moderate European counterparts, believe in distributive policies based on more taxes, subsidies, and regulations, in short a bigger State to get better living conditions, the moderate right believes in the ability of individual choices throughout markets both based and within the proper institutional framework, to get such objectives. Given the fact that leftist Government in the majority of the cases, have followed the traditional old fashioned paradigm of trying to replace markets instead of cooperate actively with it, few countries like Brazil, Peru, Uruguay ,and Chile arise like the pragmatic exceptions, to counterweigh the more ideological approach of other Latin America economies. But Chile´s experience of focusing too much on distribution, is currently showing its limitations as well, because of the negative impact on the rate of economic growth.(This year, with copper price above U$$4,02 lb, the Chilean economy is expected to growth at annual rate of 4 -4.5%,half the average rate of the nineties).-
Thus, the dilemma for the next decade is already settled down: Latin America must decide the proper economic path to improve its living standard. Distribution based on the State means more poverty, because the State is political by nature, which means that Social problems like poverty and inequality, are constrained to political realities,(poor people can wait the next election), and it is not in the State ´s interest to solve it other than to save face. The link between the State privileges, political interest and power concentration on those who run the State, mean that they need “customers” to survive. Therefore,without any reforms on the colonial State, the real path is to focus on growth , free trade agreements with the new arising markets and more flexible approach to private initiative.
Friday, February 29, 2008
Politics and Economics In Latin America:The 2000 years experience (II)
It seemed like everything changed, to keep everything as usual. The State is still considered to be the champion of social welfare and protection. It has kept for itself the monopoly of such values, applying high entry barriers to private sector in case they want to go into those areas. Let take some examples, Public health infrastructure, public transportation (subways),and Education are considered as the “natural“ business of the State .The nature of public goods of such services however, reinforce such notion, given the wrong impression that there is a first best alternative(the state), for good institutional framework, to let markets and the private firms works properly. Chilean experience shows that it is not necessarily the case. Huge amount of money poured since early nineties, into education and public health, have not improved the system, or even worse have not improved its quality at all.
It fallows that to correct market failures, does not imply that public sector by itself will do the job better. At least, not within its current institutional format.
Thus, the reforms done in the nineties, did not ventured deep enough into the roots of most of economic and social problem in Latin America: State intervention in the economy, and those who carried them out, which were also in charge of running the State: politicians, bureaucracy managers, and special interest groups(Labor unions). They protected their own business with a self constrained reform!.Business man, intermediate business associations, regional leaders, intellectuals ,were left out of the process.
Why they did so?. One Hypothesis could be that because they believe their own values, are better that those arising from individual preferences and freedom of choice. A second hypothesis, could be that they depend upon the State protection and privileges, specially the political parties , such that they no longer could afford any substantial self reinforce reform of the State based on decentralization, as part of such process.
It fallows that to correct market failures, does not imply that public sector by itself will do the job better. At least, not within its current institutional format.
Thus, the reforms done in the nineties, did not ventured deep enough into the roots of most of economic and social problem in Latin America: State intervention in the economy, and those who carried them out, which were also in charge of running the State: politicians, bureaucracy managers, and special interest groups(Labor unions). They protected their own business with a self constrained reform!.Business man, intermediate business associations, regional leaders, intellectuals ,were left out of the process.
Why they did so?. One Hypothesis could be that because they believe their own values, are better that those arising from individual preferences and freedom of choice. A second hypothesis, could be that they depend upon the State protection and privileges, specially the political parties , such that they no longer could afford any substantial self reinforce reform of the State based on decentralization, as part of such process.
Friday, February 22, 2008
Politics and Economics in Latin America:The 2000 years experience (I)
Where Latin America economies are headed to these days ?.This question seems quite relevant after the adjustment process following the eighties lost decade, and the subsequent “Washington Consensus Policies” in the nineties. It looked like the “new economy” finally arrived to Latin America, so it was the expectations with Argentina, Brazil even Venezuela after its own experience with the effect of expansive fiscal policies following oil export income increases, in the seventies. Thus, with the first decade of the XXI century closer to the end , and beyond the favorable current situation with higher commodities prices, economic analyst, business man and politic leaders, start to wonder what is it next for these economies?.Chile was for quite a while, the reference to work out the new path. Market orientated economic policies, complementary role of the State , flexible regulatory framework, and stable macroeconomic policies and reliable institutions, seemed to be the first best approach. Unfortunately, there has not been that much sense of a leadership purpose ,in this successful experience. In fact, actually ,Chile looks somehow isolated within Latin America, trying its own economic path, which by the way, is the one (supported with further microeconomic reforms),upon which sustainable welfare levels increases are feasible .
However ,the fact of the matter is that most of the key Latin American economies, still rely on the State to pursue economic development. Argentina and its new Government first 100 days, seems to validate the traditional State intervention paradigm. Private sector depends on the state policies for transport infrastructure, urban development, macroeconomic policies design(inflation is controlled throughout special agreement with private sector).Refreshing views about either a modern more efficient State, or stronger private sector role in the economy, are out of the daily debate. So it is in Brazil, and Venezuela, although with different degrees. Brazilians authorities, have been far more pragmatic, than their ideological counterparts. They have followed a moderate approach, and as a result President Lula ´s support, is among the highest in the region,because of the results in terms of growth and poverty reduction.
However ,the fact of the matter is that most of the key Latin American economies, still rely on the State to pursue economic development. Argentina and its new Government first 100 days, seems to validate the traditional State intervention paradigm. Private sector depends on the state policies for transport infrastructure, urban development, macroeconomic policies design(inflation is controlled throughout special agreement with private sector).Refreshing views about either a modern more efficient State, or stronger private sector role in the economy, are out of the daily debate. So it is in Brazil, and Venezuela, although with different degrees. Brazilians authorities, have been far more pragmatic, than their ideological counterparts. They have followed a moderate approach, and as a result President Lula ´s support, is among the highest in the region,because of the results in terms of growth and poverty reduction.
Friday, February 08, 2008
New management rules for the CEOS (II)
Wealth creation means the ability to take risk sucessfully , but what are the price of those risks?.Benefits (returns),are the first measure of risks´price . The higher the price(risk) the higher the return .That is Tobin analysis of the relationship between risk and return for an individual investment. A different thing is to manage risks on behalf of others people´s interest, like firms do.
Milton Friedman said in the seventies that the only justification for business is private profit ,which means that firms should ruled out any sense of social compromise , other than with shareholders. From this point of view ,risks are justified upon the ground of seeking short run profit, thus it does not matter the risk price ,whether there is a reasonable chance to get the highest return ,measured at the end of the year accounting balance and dividends . Following this behavior, it is usual to find opposite interest between management and owner. This is so ,because in the process managers get a pay for the results they get, the better the result the better the pay. Therefore ,short run seeking profits decisions, are vulnerable to conflicting interest, more than long run strategies, because in the short run ,CEOS do not have limits other than the expected positive result .If they fail, their retirement bonus will fix it all.
What about a long run strategy?.Any strategy has different and particular support upon which stand,(market share, increase in sales, segmentation, innovations and the like),but no matter its justification, it allow to define a set of values complementary and sometime necessary, to the proper implementation of those strategies .In the long run, social values such as compromise with community , employees and markets stability, match quite well with the profit seeking strategy. This is what empirical evidence shows since the nineties .In other words, Corporate social responsibility fit better than exclusively short run result ,the right combination of management values other than simply to earn money. It follow that the best way to match different interest within firms ,is based on a long run shared view of what each business is about. Profits seeking by itself ,do not guarantee neither stable and sustainable firms growth.-
Milton Friedman said in the seventies that the only justification for business is private profit ,which means that firms should ruled out any sense of social compromise , other than with shareholders. From this point of view ,risks are justified upon the ground of seeking short run profit, thus it does not matter the risk price ,whether there is a reasonable chance to get the highest return ,measured at the end of the year accounting balance and dividends . Following this behavior, it is usual to find opposite interest between management and owner. This is so ,because in the process managers get a pay for the results they get, the better the result the better the pay. Therefore ,short run seeking profits decisions, are vulnerable to conflicting interest, more than long run strategies, because in the short run ,CEOS do not have limits other than the expected positive result .If they fail, their retirement bonus will fix it all.
What about a long run strategy?.Any strategy has different and particular support upon which stand,(market share, increase in sales, segmentation, innovations and the like),but no matter its justification, it allow to define a set of values complementary and sometime necessary, to the proper implementation of those strategies .In the long run, social values such as compromise with community , employees and markets stability, match quite well with the profit seeking strategy. This is what empirical evidence shows since the nineties .In other words, Corporate social responsibility fit better than exclusively short run result ,the right combination of management values other than simply to earn money. It follow that the best way to match different interest within firms ,is based on a long run shared view of what each business is about. Profits seeking by itself ,do not guarantee neither stable and sustainable firms growth.-
Friday, February 01, 2008
New management rules for the CEOS (I)
From the economic point of view, there is a theory(agency theory) within the field of organizational economics ,which explains the opposition between the CEO´s management interest, and those of the shareholders ,employees and community. This is more obvious when it comes to risk management, because in case of failure the burden cost lies upon shareholders and the community (employment losses),but not necessarily in CEO´s pockets, because they might claim their retirement bonus ,unless they face justice to clear up their responsibility, when such a risk turn out to be a business failure.-
On the other side, Management models have tried to deal with this issue, throughout the so called Contract Theory, which says that because firms is so widely considered like a network of different and some times conflicting interests, there is no better way to internally regulate those one, than with the help of contracts. These contracts, might be the kind of either short run or long run periods contracts , depending on its scope and level of application. Thus, on daily operations these contract are the kind of well done job contracts, with penalties for failures (for instance low quality,) and bonus for results achievement (productivity or profit). On the strategic level, (CEO´s field) these contract, are the kind of a long run focused time span, although with strong emphasis on short run financial results, which becomes like the monitoring board, to evaluate the application of strategies .-
Whatever the focus of these contract, the fact is that risk management is hard to assess, mainly because of the nature of new strategies which the CEO´s are responsible for. New strategies implementation, means to undertake risks anyway, thus the question becomes what kind of risks failures are they accountable for?. Risks are within the core of business and wealth creation, therefore too much control about risks, might imply to introduce additional constraints to the whole decision making process, and profit seeking strategies. Double check procedures, and rotating risk involvement decisions among team members instead, within the frameworks of performance contract, seems to be a valuable instrument ,to get the proper equilibrium between those interest linked to short run profit seeking behavior CEO´s job) ,with those linked to its long run sustainability (shareholders ,employees and community ).
On the other side, Management models have tried to deal with this issue, throughout the so called Contract Theory, which says that because firms is so widely considered like a network of different and some times conflicting interests, there is no better way to internally regulate those one, than with the help of contracts. These contracts, might be the kind of either short run or long run periods contracts , depending on its scope and level of application. Thus, on daily operations these contract are the kind of well done job contracts, with penalties for failures (for instance low quality,) and bonus for results achievement (productivity or profit). On the strategic level, (CEO´s field) these contract, are the kind of a long run focused time span, although with strong emphasis on short run financial results, which becomes like the monitoring board, to evaluate the application of strategies .-
Whatever the focus of these contract, the fact is that risk management is hard to assess, mainly because of the nature of new strategies which the CEO´s are responsible for. New strategies implementation, means to undertake risks anyway, thus the question becomes what kind of risks failures are they accountable for?. Risks are within the core of business and wealth creation, therefore too much control about risks, might imply to introduce additional constraints to the whole decision making process, and profit seeking strategies. Double check procedures, and rotating risk involvement decisions among team members instead, within the frameworks of performance contract, seems to be a valuable instrument ,to get the proper equilibrium between those interest linked to short run profit seeking behavior CEO´s job) ,with those linked to its long run sustainability (shareholders ,employees and community ).
Friday, January 25, 2008
Weak dollar hurt Latin America export:Its implications
Most of the Latin America economies exports are highly concentrated on primary products, such as agricultural products (wheat sugar, coffee),mining products (copper, silver) and, few countries export gas and oil within the energy sector. Manufacturers products also are in export supply but they have a smaller share of total export. On the other side,15% of Latin American economies GDP are concentrated on USA markets. It is widely known that the USA economy is under a slowing down process, which means that as long as American income GDP ) decrease, the total demand for Latin Economies export also decrease. Additionally the weak dollar also affect the exporting sector ,because it make more expensive good coming from those economies.
The local currencies of most Latin America economies ,have appreciated not just because of more foreign investment, or incoming capital flows ,but also as a consequence of dollar depreciation.. Thus, the Brazilian real has appreciated by 25% against the dollar, up to October of the year 2007.Brazilian economy though ,is more diversified with its exporting markets.-
According to Latin America Economic Commission, current account balance worsened in 14 out of 19 Latin America economies. Colombia (-3,9% of GDP), Uruguay (-2,6% of its GDP)Mexico (-0,8% of its GDP) .Argentina and Brazil have more diversified its export markets toward Europe ,China and India. In the Argentina case , exports to the USA economy , represent only 0,3% of its GDP , ranked in the third place after South common markets association, and Asian economies.-
The solution is far from an easy implementation, because primary agricultural export got subsidies from European economies which make their prices cheaper than otherwise. It follows that the dilemma for these agricultural exporting economies lies between either high prices because of local currency appreciation ,or low prices , because of subsidies in European markets for some of its primary exports. Therefore these economies are more vulnerable to any change in world economy conditions.
Some sectors of Chilean exports have also been affected by dollar weakness ,although the annual volume for the year 2007 was positive, because of copper export volume ( 60% of total exports),which had a very good price throughout all year. Private Exporters though, have complained about this situation because peso appreciation has led the sectors to important losses of competitiveness. High labour cost, have affected additionally exports performance ,in such a way that world producers like Dole closed its production operation, concentrating itself only in products marketing.-
All of these issue means, that it is important for Latin America economies, to pursue a different and more diversified export strategy, to improve their management model focused on efficiency , productivity and value. All of those exporters (Germany ,Japan , South Korea are good examples) which has made of quality its trade mark, have been able to overcome the cost of its currency appreciation against the dollar.-
The local currencies of most Latin America economies ,have appreciated not just because of more foreign investment, or incoming capital flows ,but also as a consequence of dollar depreciation.. Thus, the Brazilian real has appreciated by 25% against the dollar, up to October of the year 2007.Brazilian economy though ,is more diversified with its exporting markets.-
According to Latin America Economic Commission, current account balance worsened in 14 out of 19 Latin America economies. Colombia (-3,9% of GDP), Uruguay (-2,6% of its GDP)Mexico (-0,8% of its GDP) .Argentina and Brazil have more diversified its export markets toward Europe ,China and India. In the Argentina case , exports to the USA economy , represent only 0,3% of its GDP , ranked in the third place after South common markets association, and Asian economies.-
The solution is far from an easy implementation, because primary agricultural export got subsidies from European economies which make their prices cheaper than otherwise. It follows that the dilemma for these agricultural exporting economies lies between either high prices because of local currency appreciation ,or low prices , because of subsidies in European markets for some of its primary exports. Therefore these economies are more vulnerable to any change in world economy conditions.
Some sectors of Chilean exports have also been affected by dollar weakness ,although the annual volume for the year 2007 was positive, because of copper export volume ( 60% of total exports),which had a very good price throughout all year. Private Exporters though, have complained about this situation because peso appreciation has led the sectors to important losses of competitiveness. High labour cost, have affected additionally exports performance ,in such a way that world producers like Dole closed its production operation, concentrating itself only in products marketing.-
All of these issue means, that it is important for Latin America economies, to pursue a different and more diversified export strategy, to improve their management model focused on efficiency , productivity and value. All of those exporters (Germany ,Japan , South Korea are good examples) which has made of quality its trade mark, have been able to overcome the cost of its currency appreciation against the dollar.-
Friday, January 18, 2008
Economic Freedom index: The relevance of the Heritage Foundation focus
The Heritage Foundation has announced its Economic freedom index 2007. Chile is at the global level in the eight place, above United Kingdom ,while at the regional level is in third place ,behind Canada and the USA.
The Economic freedom index is built upon ten categories: trade, fiscal policy, monetary policy, investment conditions, financial policy ,labour policy ,state intervention, property rights, and corruption levels.-
What is it the importance of Economic freedom? .It is important because there is no way society can live without it : Let briefly review why :
a.- Given the proper institutional framework, it allow markets to make their way through for better allocation of resources, which means they get the higher return considering all other economic feasible alternatives, maximizing society welfare.-
b.- Freedom is a condition for welfare increase within a community, as long as every one of its member , have the chance to try freely their best opportunities available. The twenty century ,has shown that all those societies based on freedom, are better off than they were at the early years of that century.-
c.- Freedom allow energy to go across where it is needed, like electricity allow the light where is needed , to clear the way through. Freedom have been the seed for major achievements in mankind history, although it might had carried out some cost to preserve it. But no matter the cost, there are people ready to live up to get the freedom level they believe it is necessary.-
The opposite to freedom is labelled with state intervention,(at the extreme, totalitarian regimes) whether it is into the economy or society as a whole. In other words, more freedom is associated with a smaller State .But this smaller State, does not mean to get rid of the State whatsoever ,but in G Sorman ´s word it means “a better State”. Freedom match quite well with a better State, as well as a better institutional framework. Both, a better state and better institutional framework, complement freedom in such a way that, it creates the most favourable conditions for growth, which means more freedom .
Unfortunately ,in Latin America people still live up to their fears instead of their freedom. There is a strong dependence from the State. Historically, the state has been involved in most of the activities these societies lives for. Education ,health care, economic policy have strongly been based on State egalitarian principles , which is the opposite to personal talent principles ,which freedom is based upon. Thus, it is not a surprising that relative younger countries like the USA ,has surpassed most of the older Latin America countries. More devastating the comparison, if we take into account than in the middle of the fifteen century, ancient civilizations were already using technologies for water irrigation, road constructions, infrastructure developments, education and public management model( based on tax collection). The conquerors, did not change that model, and in the process they could not support new entrepreneurial initiatives, losing the opportunity of taking advantage of all what it was available: land, water , technology and expertise .
So, lack of freedom is not trivial for society, even more if you get to the core ethics of it: Freedom allow people to reach happiness ,just because it is every one own choice, to decide what they want to stand for ,just because it allows to get the higher expectations mankind might have as a whole, but above all, because it allows us all to survive. Therefore the higher the economic freedom index the better, keeping in mind what relevant is the proper institutional framework. Latin America countries not only fall behind other countries freedom standard, but also they do not have a modern institutional framework to expand opportunities ,which is the other side of freedom .-
The Economic freedom index is built upon ten categories: trade, fiscal policy, monetary policy, investment conditions, financial policy ,labour policy ,state intervention, property rights, and corruption levels.-
What is it the importance of Economic freedom? .It is important because there is no way society can live without it : Let briefly review why :
a.- Given the proper institutional framework, it allow markets to make their way through for better allocation of resources, which means they get the higher return considering all other economic feasible alternatives, maximizing society welfare.-
b.- Freedom is a condition for welfare increase within a community, as long as every one of its member , have the chance to try freely their best opportunities available. The twenty century ,has shown that all those societies based on freedom, are better off than they were at the early years of that century.-
c.- Freedom allow energy to go across where it is needed, like electricity allow the light where is needed , to clear the way through. Freedom have been the seed for major achievements in mankind history, although it might had carried out some cost to preserve it. But no matter the cost, there are people ready to live up to get the freedom level they believe it is necessary.-
The opposite to freedom is labelled with state intervention,(at the extreme, totalitarian regimes) whether it is into the economy or society as a whole. In other words, more freedom is associated with a smaller State .But this smaller State, does not mean to get rid of the State whatsoever ,but in G Sorman ´s word it means “a better State”. Freedom match quite well with a better State, as well as a better institutional framework. Both, a better state and better institutional framework, complement freedom in such a way that, it creates the most favourable conditions for growth, which means more freedom .
Unfortunately ,in Latin America people still live up to their fears instead of their freedom. There is a strong dependence from the State. Historically, the state has been involved in most of the activities these societies lives for. Education ,health care, economic policy have strongly been based on State egalitarian principles , which is the opposite to personal talent principles ,which freedom is based upon. Thus, it is not a surprising that relative younger countries like the USA ,has surpassed most of the older Latin America countries. More devastating the comparison, if we take into account than in the middle of the fifteen century, ancient civilizations were already using technologies for water irrigation, road constructions, infrastructure developments, education and public management model( based on tax collection). The conquerors, did not change that model, and in the process they could not support new entrepreneurial initiatives, losing the opportunity of taking advantage of all what it was available: land, water , technology and expertise .
So, lack of freedom is not trivial for society, even more if you get to the core ethics of it: Freedom allow people to reach happiness ,just because it is every one own choice, to decide what they want to stand for ,just because it allows to get the higher expectations mankind might have as a whole, but above all, because it allows us all to survive. Therefore the higher the economic freedom index the better, keeping in mind what relevant is the proper institutional framework. Latin America countries not only fall behind other countries freedom standard, but also they do not have a modern institutional framework to expand opportunities ,which is the other side of freedom .-
Friday, January 11, 2008
Driven poll events: What if the poll is not accurate?
Opinion Polls represent a kind of summarized information about society ´s mood, concerning some specific issues. From the economic point of view, it represents the reduction in transaction cost, which authorities can count on in their decision making process .Thus, if anyone want to discuss abortion, divorce, environment, political preferences, regulation and the like ,opinion polls show a convergence path about them, to reduce the chance of mistake for any policy design.
However, what is the real relevance of this opinion poll?. Well it depends upon both the quality of the sample, and expert´ s judgement to explain its results. Let take an example: you want to know how people would react , in extremes case such as an alert of tsunami. You guess that between stay in a shelter or running away, at leas 90% would run away , whereas other expert might think that 50% would spilt between running and seeking for shelter. You decide to do some research about it, so you ask randomly to 25 people about what the would do in case of a tsunami: Assume that 10 people of this sample cares about tsunamis ,and 70 % say that they would run away from it, while 30 % say they would seek some shelter around. Both answers imply a public policy requirement either to build up proper shelters ,or to set a proper signalling mechanism for those who would run away. But is that it?. From the public policy point of view, it is important to use efficiently scarce resources, therefore it is a better approach to improve the information about what it is at stake: If you spend money on the basis of poll results, it might end up to be a waste money, because we do not know the probability of occurrence of each one of such event. The next question is , Taking a sample of those ten people ,what is the probability that seven of them, would run away in case of a tsunami threats?. Applying statistical tools, the probability would be 0,0574. What about staying at a shelter? .The probability would be 0,117. Therefore, it is more feasible for people to look for a shelter, than to run away ( 5,7% probability in the former, against 11,7% in the later) . Thus, the correct policy option should more be in favour of building up shelters , instead of concentrating on signalling equipment . Quite the opposite, if the decision would have been based on the first poll result.!. Beware that this conclusion is sensitive to the sample size. It means that whether 8 instead of 7 people run away ,the probability changes.-
Something similar it might happen in a political election: Two candidates go on a very tight race, although one of them have a slight lead. Is that enough to conclude that the one with the slight lead ,would win? .Recent experience shows it might be not. The result depends upon the probability for voters, to keep up to their preferences. Thus , it can happen that the probability of keeping their vote in favour of the one who is leading the polls, is lower than the probability to change their votes, of the other candidate´ s supporters. It means that the one who is leading the poll , has more volatility in his voters preferences, than the one who is behind .In such a case , if you rightly consider the probability scenario as a complement , you would have more information to take a better decision.-
Most of the time, opinion polls show the event in absolute yes/no terms. However, modern times offers citizens a lot of more options to look upon for additional information , which at the same time allow them to shape in a better way their preferences, affecting deeper than expected the probability of changing them. In the information society , instantaneous event make preferences more unstable.-
However, what is the real relevance of this opinion poll?. Well it depends upon both the quality of the sample, and expert´ s judgement to explain its results. Let take an example: you want to know how people would react , in extremes case such as an alert of tsunami. You guess that between stay in a shelter or running away, at leas 90% would run away , whereas other expert might think that 50% would spilt between running and seeking for shelter. You decide to do some research about it, so you ask randomly to 25 people about what the would do in case of a tsunami: Assume that 10 people of this sample cares about tsunamis ,and 70 % say that they would run away from it, while 30 % say they would seek some shelter around. Both answers imply a public policy requirement either to build up proper shelters ,or to set a proper signalling mechanism for those who would run away. But is that it?. From the public policy point of view, it is important to use efficiently scarce resources, therefore it is a better approach to improve the information about what it is at stake: If you spend money on the basis of poll results, it might end up to be a waste money, because we do not know the probability of occurrence of each one of such event. The next question is , Taking a sample of those ten people ,what is the probability that seven of them, would run away in case of a tsunami threats?. Applying statistical tools, the probability would be 0,0574. What about staying at a shelter? .The probability would be 0,117. Therefore, it is more feasible for people to look for a shelter, than to run away ( 5,7% probability in the former, against 11,7% in the later) . Thus, the correct policy option should more be in favour of building up shelters , instead of concentrating on signalling equipment . Quite the opposite, if the decision would have been based on the first poll result.!. Beware that this conclusion is sensitive to the sample size. It means that whether 8 instead of 7 people run away ,the probability changes.-
Something similar it might happen in a political election: Two candidates go on a very tight race, although one of them have a slight lead. Is that enough to conclude that the one with the slight lead ,would win? .Recent experience shows it might be not. The result depends upon the probability for voters, to keep up to their preferences. Thus , it can happen that the probability of keeping their vote in favour of the one who is leading the polls, is lower than the probability to change their votes, of the other candidate´ s supporters. It means that the one who is leading the poll , has more volatility in his voters preferences, than the one who is behind .In such a case , if you rightly consider the probability scenario as a complement , you would have more information to take a better decision.-
Most of the time, opinion polls show the event in absolute yes/no terms. However, modern times offers citizens a lot of more options to look upon for additional information , which at the same time allow them to shape in a better way their preferences, affecting deeper than expected the probability of changing them. In the information society , instantaneous event make preferences more unstable.-
Friday, January 04, 2008
Some guidelines for the year 2008
It is a tradition among market watchers , to make announcements about the new year economic prospect and expectations. This is a very hard exercise ,which can also be highly risky if you get wrong with your assessment, specially feasible when events which nobody can count on , appears along the way. Even so, it is an interesting experience try to assess what it might become the key event of the new year. My own record ,by the way, it is not that bad .However, I will try to give some guidelines ,instead of specific projections, based on my own judgment of current global economic events.-
1.- Environment will continue to be the key issue for all this year, hitting its peak at the next Global Warming conference to take place in Istanbul ,Turkey on next July. Previously to that event, more than 20 conferences world wide, will keep that issue on the spot light.
2.- Global growth might be a slower pace than the previous two years , because of inflationary pressures due to both oil and food prices increases, and its subsequent probabilities of interest rates increases ,besides the high probability of slowing down in the USA economy growth , and the impact of more than usual, natural disaster such as hurricanes and flooding. Inflation will be the problem to take care of.-
3.- Women will be on the spot light throughout the whole year, because of politics, economy, environment, diplomacy, and sports with the Beijing Olympic games. They might consolidate their influence, as a new source of change.-
4.- Oil prices will be higher following its long term trend, as long as inventories fall after the winter season, dollar depreciation goes deeper , and supply constraint due to geopolitical tension coupled with speculative forces, make their way through to push prices upward .
5.- From the financial point of view, it is expected that important adjustment will take place, specially from those firms anxious to get rid of sub prime market losses. There will be a reshape of financial services industry.
6.- Other industries to keep an eye on, are the automobile and aviation ones ,both connected to the top issues of environment and oil prices . In the automobile industry, Toyota should continue to move ahead with its goal to become the number one in the USA markets and in the world, within the segment of fuel efficient cars. –
1.- Environment will continue to be the key issue for all this year, hitting its peak at the next Global Warming conference to take place in Istanbul ,Turkey on next July. Previously to that event, more than 20 conferences world wide, will keep that issue on the spot light.
2.- Global growth might be a slower pace than the previous two years , because of inflationary pressures due to both oil and food prices increases, and its subsequent probabilities of interest rates increases ,besides the high probability of slowing down in the USA economy growth , and the impact of more than usual, natural disaster such as hurricanes and flooding. Inflation will be the problem to take care of.-
3.- Women will be on the spot light throughout the whole year, because of politics, economy, environment, diplomacy, and sports with the Beijing Olympic games. They might consolidate their influence, as a new source of change.-
4.- Oil prices will be higher following its long term trend, as long as inventories fall after the winter season, dollar depreciation goes deeper , and supply constraint due to geopolitical tension coupled with speculative forces, make their way through to push prices upward .
5.- From the financial point of view, it is expected that important adjustment will take place, specially from those firms anxious to get rid of sub prime market losses. There will be a reshape of financial services industry.
6.- Other industries to keep an eye on, are the automobile and aviation ones ,both connected to the top issues of environment and oil prices . In the automobile industry, Toyota should continue to move ahead with its goal to become the number one in the USA markets and in the world, within the segment of fuel efficient cars. –
Friday, December 28, 2007
The year of the environment is almost gone
Next to finish this year,there are three elements which has made the difference between what it was expected and what it was real.:
1.-At the beginning of the year 2007,there was some doubts about the importance environment issues would have.March 2007,marked a turning point when the "Unconvenient thruth" documental was awarded at the Oscar ceremony.It ignited a new focus on a subject most of the time, left for bureaucratic atention,instead of ordinary people and global media concern. It began the new focus, based on world public opinion now pushing hard for new policies and agreements.The Nobel prize award made the whole issue a matter of piece.Therefore, in the next months ,both Europe and the USA,made important contribution to move forward faster than expected. New emerging economies also stepped in, to a global consensus for a different approach on environment,following the expiration of Kyoto Protocol.
2.- The global economy has been stronger than expected to cope with unstability conditions.While the oil price is close to U$$ 100 a barrel,the 2007 year global growth is expected to be within the range of 4%- 5% .This does not mean to rule out complications ahead ,due to the implication of sub prime markets crisis.But the global economy has been resilient so far, which indicate a positive sign of strenghts.-
3.- The economic growth prospect for Latin America economies has improved, after the new Free Trade agreement between the USA and some countries such as Peru and Uruguay, (not considering Central America).However,Free Trade agreement effects turn out to be positive, as long as there is a proper institutional framework ,specially designed to take advantage from it,specially in the case of Medium and small size firms. Although inflation is back because food prices and energy cost increase,the reforms made in the nineties heavely focused on the macroeconomic and financial side of the economy, suggest it will be a transitory situation.
1.-At the beginning of the year 2007,there was some doubts about the importance environment issues would have.March 2007,marked a turning point when the "Unconvenient thruth" documental was awarded at the Oscar ceremony.It ignited a new focus on a subject most of the time, left for bureaucratic atention,instead of ordinary people and global media concern. It began the new focus, based on world public opinion now pushing hard for new policies and agreements.The Nobel prize award made the whole issue a matter of piece.Therefore, in the next months ,both Europe and the USA,made important contribution to move forward faster than expected. New emerging economies also stepped in, to a global consensus for a different approach on environment,following the expiration of Kyoto Protocol.
2.- The global economy has been stronger than expected to cope with unstability conditions.While the oil price is close to U$$ 100 a barrel,the 2007 year global growth is expected to be within the range of 4%- 5% .This does not mean to rule out complications ahead ,due to the implication of sub prime markets crisis.But the global economy has been resilient so far, which indicate a positive sign of strenghts.-
3.- The economic growth prospect for Latin America economies has improved, after the new Free Trade agreement between the USA and some countries such as Peru and Uruguay, (not considering Central America).However,Free Trade agreement effects turn out to be positive, as long as there is a proper institutional framework ,specially designed to take advantage from it,specially in the case of Medium and small size firms. Although inflation is back because food prices and energy cost increase,the reforms made in the nineties heavely focused on the macroeconomic and financial side of the economy, suggest it will be a transitory situation.
Friday, December 21, 2007
The Asian economic crisis: Ten years later (II)
It might be helpful for current uncertainty about the lasting effect of subprime market crisis, to keep in mind how important expectations are, and how relevant speculative forces are, to set the pace of adjustment path. Once there was well supported doubt, about the real value of each Asian economy exchange rate ,speculative forces were in charge of market behaviour. Any analysis on exchange rate fluctuations at that time, illustrate the magnitude of this speculative effect. R Dornbusch called overshooting , J Keynes called the speculative nature of business behaviour. Indonesia currency felt dramatically from 2,909 (1997)up to 10,014 ruppies per dollar(1998) , Korea currency moved from 950 won/dollar, (January 1997) up to 1600 won /dollar,(January 1998) , and Thailand baths from 31 (January 1997 ) up to 50 (January 1998). With all information available, speculators made quick decisions to move away from an increasing risky scenario. Somehow, speculators care very much about the real conditions of the economy, round the clock gathering information such that they are able to move quickly in case their expectations are not consistent with the fundamental .
It follows that speculative forces (suden changes on capital flows)are like a warning light ,about what is going wrong in the economy .Of course speculative forces by itself ,are not enough if they are not complemented by institutional weakness and misplaced focus of monetary policy.
a.- Institutional weakness. Reckless loan policies by private banks in Asian Economies, led to a sudden increase of loans which were not capable of matching its payment schedule .Bad loans, exacerbated negative expectations which reinforced the depreciation round, because everyone wanted to get out of that market to avoid further losses.The process of large gross intermediation of capital inflows and outflows through the banking system, implied that the domestic Asian bank increased their foreign short term liabilities faster than their foreign assets.. In the South Korean economy case, liabilities increased by U$$ 56 b between 1993 and 1997,while the gross assets increased only by U$$ 19.8 b. As a result, the net liability position of Korean banking system went up from U$$20,8 b in 1993,to U$$ 57 b by 1997,(U$$90b liability against U$$ 33b assets)(Roubini 1998).It is obviously a moral hazard case, which arise because of expectations of Government promises of bailout. Very much of domestic loan , were driven to finance speculative demand of existing fixed supply asset.
Another lesson from the Asian crisis, was that monetary policy must be rightly targeted to keep expectations under control. In most of Asian economies at that time ,it was focused on the wrong target .Instead of reacting to the speculative forces ,it underestimated the magnitude of such forces .It was more concerned with keeping stable the exchange rate throughout foreign currency markets operation, than constrained the aggregate expenditures level throughout higher interest rate which would have also allowed to slow down capital outflow and further currency depreciation . When it realized that such a correction was on top of the list, it was too late to stop the speculative waves.
Quality of information for a proper allocation of resources and economic decisions, was not good enough to guarantee stable economy growth and to avoid the recession in Asian economy by the end of 1997. The investment boom took place in the wrong sectors ,and speculative forces reacted faster than authorities attempt to control the damage. As a result, the whole event were driven by speculative behaviour adjustment , with no chance for macroeconomic policy , forces , to mitigate its negative impact.
It follows that speculative forces (suden changes on capital flows)are like a warning light ,about what is going wrong in the economy .Of course speculative forces by itself ,are not enough if they are not complemented by institutional weakness and misplaced focus of monetary policy.
a.- Institutional weakness. Reckless loan policies by private banks in Asian Economies, led to a sudden increase of loans which were not capable of matching its payment schedule .Bad loans, exacerbated negative expectations which reinforced the depreciation round, because everyone wanted to get out of that market to avoid further losses.The process of large gross intermediation of capital inflows and outflows through the banking system, implied that the domestic Asian bank increased their foreign short term liabilities faster than their foreign assets.. In the South Korean economy case, liabilities increased by U$$ 56 b between 1993 and 1997,while the gross assets increased only by U$$ 19.8 b. As a result, the net liability position of Korean banking system went up from U$$20,8 b in 1993,to U$$ 57 b by 1997,(U$$90b liability against U$$ 33b assets)(Roubini 1998).It is obviously a moral hazard case, which arise because of expectations of Government promises of bailout. Very much of domestic loan , were driven to finance speculative demand of existing fixed supply asset.
Another lesson from the Asian crisis, was that monetary policy must be rightly targeted to keep expectations under control. In most of Asian economies at that time ,it was focused on the wrong target .Instead of reacting to the speculative forces ,it underestimated the magnitude of such forces .It was more concerned with keeping stable the exchange rate throughout foreign currency markets operation, than constrained the aggregate expenditures level throughout higher interest rate which would have also allowed to slow down capital outflow and further currency depreciation . When it realized that such a correction was on top of the list, it was too late to stop the speculative waves.
Quality of information for a proper allocation of resources and economic decisions, was not good enough to guarantee stable economy growth and to avoid the recession in Asian economy by the end of 1997. The investment boom took place in the wrong sectors ,and speculative forces reacted faster than authorities attempt to control the damage. As a result, the whole event were driven by speculative behaviour adjustment , with no chance for macroeconomic policy , forces , to mitigate its negative impact.
Wednesday, December 19, 2007
ATRAPANIEBLA EN PATACHE - Iquique TV Noticias
This video, shows how important it is to get advantage of nature resources ,without hurt them.The fog trapper curtain, allow to get water (7 lt per square meter/day) which by gravity support local communities productive activities.This is part of a 25 years Catholic University research project.
Friday, December 14, 2007
The Asian economic crisis: Ten years later (I)
The Samsung Economic Unit Research Institute( http://www.seriworld.com) has published a review of the situation focused on the South Korean economy ,after ten years of the Asian economies crisis(1997).
First of all, some background .The Asian economic crisis started off in 1997 in Thailand, when those economies could not get over with the effect of economic growth, based on serious unbalances and disequilibrium. The exchange rate policy applied was Asian currencies pegged to the US dollar, such that while the dollar started to appreciate in 1995,the Asian currencies also had a real appreciation ,which led to current account deficits . On the other hand ,interest rate differential and low exchange rate risk, led to huge amount of capital inflow which prevented currency depreciation. By the beginning of 1997, it was clear that several Asian currencies were overvalued, and that such overvaluation was a factor in the worsening of the current account deficits in many countries of that area (www.rge.monitor.com ). This current account unbalances ignited a series of depreciation in local currencies, which pressed the financial sector ,governments and firms which had huge amount of debt in such foreign currency. At the same time, this depreciations were self reinforced because all of those economies shared the same markets, so they had to protect their exports competitiveness .
At that time ,on November 21st ,the South Korean economy requested assistance from the IMF because of the effect of such a crisis on its own economy, which was not possible for them to carried over. South Korea economy was heavily hit by their neighbourhoods countries, because of the different adjustment of its exchange rate policy. While at the end of September 1997 the average rate of depreciation of Thailand, Malaysia, Indonesian and Philippines currencies, were roughly 33%,the Korean won was depreciated only by 8%,which means that the won was appreciate in real terms. This meant an important loss of competitiveness for Korean economy.
Ten years after the crisis , South Korea economy has fully recovered with some impressive figures. It holds U$$ 260 billion in foreign currencies reserves, and it has a per capita national income of almost U$$ 20.000.Exports has surpassed U$$ 300 billion, specially important the fact IT industry has become much more important on total exports.
The score card for the Korean economy ,according to the SERI report, indicates that in the last ten years firms were reluctant to invest more, reducing capital accumulation. Qualitative growth improved somewhat, because firms enhanced their management models focusing on higher profit.
Some of the challenges which lies ahead includes more labour market flexibility, innovation in small and medium sized business to make them more resilient to markets fluctuations, softer regulations and additional investment in the services industry.
This case illustrate how important is to take the right lesson from crisis time. In fact the South Korean economy, made out an opportunity of that painful crisis, to make deep corrections specially on the financial sector, which otherwise were next to become severe restrictions on growth .-
First of all, some background .The Asian economic crisis started off in 1997 in Thailand, when those economies could not get over with the effect of economic growth, based on serious unbalances and disequilibrium. The exchange rate policy applied was Asian currencies pegged to the US dollar, such that while the dollar started to appreciate in 1995,the Asian currencies also had a real appreciation ,which led to current account deficits . On the other hand ,interest rate differential and low exchange rate risk, led to huge amount of capital inflow which prevented currency depreciation. By the beginning of 1997, it was clear that several Asian currencies were overvalued, and that such overvaluation was a factor in the worsening of the current account deficits in many countries of that area (www.rge.monitor.com ). This current account unbalances ignited a series of depreciation in local currencies, which pressed the financial sector ,governments and firms which had huge amount of debt in such foreign currency. At the same time, this depreciations were self reinforced because all of those economies shared the same markets, so they had to protect their exports competitiveness .
At that time ,on November 21st ,the South Korean economy requested assistance from the IMF because of the effect of such a crisis on its own economy, which was not possible for them to carried over. South Korea economy was heavily hit by their neighbourhoods countries, because of the different adjustment of its exchange rate policy. While at the end of September 1997 the average rate of depreciation of Thailand, Malaysia, Indonesian and Philippines currencies, were roughly 33%,the Korean won was depreciated only by 8%,which means that the won was appreciate in real terms. This meant an important loss of competitiveness for Korean economy.
Ten years after the crisis , South Korea economy has fully recovered with some impressive figures. It holds U$$ 260 billion in foreign currencies reserves, and it has a per capita national income of almost U$$ 20.000.Exports has surpassed U$$ 300 billion, specially important the fact IT industry has become much more important on total exports.
The score card for the Korean economy ,according to the SERI report, indicates that in the last ten years firms were reluctant to invest more, reducing capital accumulation. Qualitative growth improved somewhat, because firms enhanced their management models focusing on higher profit.
Some of the challenges which lies ahead includes more labour market flexibility, innovation in small and medium sized business to make them more resilient to markets fluctuations, softer regulations and additional investment in the services industry.
This case illustrate how important is to take the right lesson from crisis time. In fact the South Korean economy, made out an opportunity of that painful crisis, to make deep corrections specially on the financial sector, which otherwise were next to become severe restrictions on growth .-
Friday, November 23, 2007
Public Transportation in Chile : Working with the wrong assumptions (II)
A couple of considerations about the mass transportation system in Chile , known as "Transantiago".( a better name would be "Transexpress"). First ,Working with the wrong assumptions in the first stage, requires a careful approach on the next stage , which is the crucial one to make it a feasible project , on the mid term time span. Otherwise ,the situation can get out of control. Secondly, precisely because of such considerations, following the House of representatives in the Chilean congress , the Senate did not approve the financial resources neededfor the year 2008, which were asked by the Government .The Senate, in a joint partnership of both sides of the political spectrum; the opposition and the current coalition government supporters, are demanding a new and different law with specific and detailed explanation of every aspect of the working plan of the system, instead of being part of the public budget for the next year, just as one more within of a lot ofdifferent sources of expenditures . Therefore the mass transportation system in Santiago (Chile) which generates losses of U$$35 million monthly , do not have the financial resources at the require level, to keep fee at its current level and to increase the fleet. The authorities have ruled out the chance of increasing the cost for commuter, as an alternative source of financial resources. Thus ,the question now is: What is next? .
Although with the participation of the private sector on technical matters(software design) , and some operational areas of mass transportation, the whole project is a State designed one .This is the critical point, because it seems clear that it is beyond its current available options, for the state to go alone with the remaining phases of the project . Therefore the whole project, not just part of it, should become a joint venture between the state and the private sector. The previous experience with firms which have been managed by the State ,is not encouraging enough to support enthusiastically the request for additional money, at least no without some control mechanism or specific justification for it. This project, the way it is right now, could become in the near future, a permanent high demand of public resources project .
The payment system applied so far, could also require some adjustment sometime into the future , taking into account different options of commuters transportation, such as the express line(faster than average with fewer stop), the frequency of traffic (The more often commuters use the system ,the lower the fee) , and the volume of combinations , ( The more combinations the lower the fee),along with the size oif the market (population areas), (The larger the market ,the lower the transportation fee).The current fee system, is hardly affordable in the long run, mainly because the rate of commuter future demand for mass transportation might increase,( it is supposed that commuter will left their car at home),which will imply faster depreciation of current fleet, and higher operational cost because of oil prices increases,plus higher cost for unfrastructure facilites. Sooner or later, there will be additional requirement for more money, which tax payers not longer can support,speacilly whether the quality of service does not improve substantially. Subsidy to the poor would be an option, to take into account,such that the burden of keeping the system working ,is well distributed among commuters different incomes level.-
The fact of the matter , is that the new mass transportation system proposed, is an expensive one, which sooner or later commuters will have to pay the real cost. Anything different to this reality, would the worst of the assumptions.-
Although with the participation of the private sector on technical matters(software design) , and some operational areas of mass transportation, the whole project is a State designed one .This is the critical point, because it seems clear that it is beyond its current available options, for the state to go alone with the remaining phases of the project . Therefore the whole project, not just part of it, should become a joint venture between the state and the private sector. The previous experience with firms which have been managed by the State ,is not encouraging enough to support enthusiastically the request for additional money, at least no without some control mechanism or specific justification for it. This project, the way it is right now, could become in the near future, a permanent high demand of public resources project .
The payment system applied so far, could also require some adjustment sometime into the future , taking into account different options of commuters transportation, such as the express line(faster than average with fewer stop), the frequency of traffic (The more often commuters use the system ,the lower the fee) , and the volume of combinations , ( The more combinations the lower the fee),along with the size oif the market (population areas), (The larger the market ,the lower the transportation fee).The current fee system, is hardly affordable in the long run, mainly because the rate of commuter future demand for mass transportation might increase,( it is supposed that commuter will left their car at home),which will imply faster depreciation of current fleet, and higher operational cost because of oil prices increases,plus higher cost for unfrastructure facilites. Sooner or later, there will be additional requirement for more money, which tax payers not longer can support,speacilly whether the quality of service does not improve substantially. Subsidy to the poor would be an option, to take into account,such that the burden of keeping the system working ,is well distributed among commuters different incomes level.-
The fact of the matter , is that the new mass transportation system proposed, is an expensive one, which sooner or later commuters will have to pay the real cost. Anything different to this reality, would the worst of the assumptions.-
Friday, November 16, 2007
Public Transportation reform in Chile : Working with the wrong assumptions (I)
Can anyone imagine a transportation system reforms, based on the assumption that it will work with fewer but bigger busses ?.Can anyone imagine a transportation system heavily dependent on the subway transportation, without increasing the frequency of the trains?. The questions are long enough to get mad to daily commuters .But, those are some of the assumptions which the new public transportation system in Santiago (Chile)was based upon. What went wrong ?,asked the Washington Post (http://www.washingtonpost.com/) on Tuesday, November 13th .
It is not the first time in Latin America , that a reform on public transportation system is attempted .to carry out. Brazil and Colombia have also tried this reforms in the past, with apparently good results. In the Chilean case, it was a huge effort without precedent, to implement a public transportation system based on a modern concept of environment friendly ,and likeable to commuters .
For many years the old transportation system was on the spot because of a lot of reasons :Pollution, dangerous operational conditions, uncomfortable for commuters needs, which all add up to negative externalities But even with its externalities it worked ,although not that much up to commuters expectations .The new system ,have solved the externalities ,but it does not work as expected !.How come ?. It does not work , because the assumption upon which the whole system was built up, were wrong.
Let take a brief review of some of the key assumption:
a.- Local Subway system, worked for years with less than two and half passengers by square meter .It was one of the cleanest ,nicest and secure transportation system in Latin America. It was assumed that taking as a benchmark the way Japanese did with their own subway; Chilean subway was able to increase the density ratio up to seven passenger by square meter. Therefore ,there was room for increasing the density ratio such as it reduced the sunk cost of idle capacity. The result : The system collapsed and there is no way to use the subway on rush hours (early morning and early evening), because it crowed out.-
b.- How much cash was it needed for the proper implementation, of the new public transportation plan ?.There is an unwritten rule which says that any public plan , whatever it might be, always requires more financial resources than expected . Therefore ,the current cost (roughly U$$800 million),is well above the original budget. Actually there is a discussion going on in the legislature, asking for more than U$$150 million for the year 2008 as an additional supplement .However, the House of representatives, approved symbolically only U$$ 2 !,while it is not clear the way those resources are going to be spent.-
c.- Santiago city is not Madrid ,or New York. It lack the necessary infrastructure to implement a transportation network, the way it works in those cities. Madrid has a kind of ring which surround the city, allowing to get access to down town from any point following straight lines. New York is a huge square, fitted into the Manhattan island, which allow commuters to move either way south or north, west or east in a shorter period of time. In both cases, no matter where you are going, you know where you are. Santiago has grown without a detailed urban path ,some places are like a square(downtown) ,but another are like a circle. Therefore the routes are not straight lines, in fact a recent poll indicates that the current plan, has increased by 11 minutes the time it requires to commuters to move form one point to another. Besides they have to wait on bus stop by 15 minutes, before it pass by. However, all those previous negative externalities it had , qualifies positively.
It is not the first time in Latin America , that a reform on public transportation system is attempted .to carry out. Brazil and Colombia have also tried this reforms in the past, with apparently good results. In the Chilean case, it was a huge effort without precedent, to implement a public transportation system based on a modern concept of environment friendly ,and likeable to commuters .
For many years the old transportation system was on the spot because of a lot of reasons :Pollution, dangerous operational conditions, uncomfortable for commuters needs, which all add up to negative externalities But even with its externalities it worked ,although not that much up to commuters expectations .The new system ,have solved the externalities ,but it does not work as expected !.How come ?. It does not work , because the assumption upon which the whole system was built up, were wrong.
Let take a brief review of some of the key assumption:
a.- Local Subway system, worked for years with less than two and half passengers by square meter .It was one of the cleanest ,nicest and secure transportation system in Latin America. It was assumed that taking as a benchmark the way Japanese did with their own subway; Chilean subway was able to increase the density ratio up to seven passenger by square meter. Therefore ,there was room for increasing the density ratio such as it reduced the sunk cost of idle capacity. The result : The system collapsed and there is no way to use the subway on rush hours (early morning and early evening), because it crowed out.-
b.- How much cash was it needed for the proper implementation, of the new public transportation plan ?.There is an unwritten rule which says that any public plan , whatever it might be, always requires more financial resources than expected . Therefore ,the current cost (roughly U$$800 million),is well above the original budget. Actually there is a discussion going on in the legislature, asking for more than U$$150 million for the year 2008 as an additional supplement .However, the House of representatives, approved symbolically only U$$ 2 !,while it is not clear the way those resources are going to be spent.-
c.- Santiago city is not Madrid ,or New York. It lack the necessary infrastructure to implement a transportation network, the way it works in those cities. Madrid has a kind of ring which surround the city, allowing to get access to down town from any point following straight lines. New York is a huge square, fitted into the Manhattan island, which allow commuters to move either way south or north, west or east in a shorter period of time. In both cases, no matter where you are going, you know where you are. Santiago has grown without a detailed urban path ,some places are like a square(downtown) ,but another are like a circle. Therefore the routes are not straight lines, in fact a recent poll indicates that the current plan, has increased by 11 minutes the time it requires to commuters to move form one point to another. Besides they have to wait on bus stop by 15 minutes, before it pass by. However, all those previous negative externalities it had , qualifies positively.
Friday, November 09, 2007
Social integration in Latin America: An outstanding goal for a Summit
It is about to begin the XVII Latin America Head of States Summit. The main topic will be Social integration and Inclusion, which can also be displayed with the following question: How to keep the balance between economic growth and social progress?. Quite relevant as it is, the issue of social integration has been in the last 15 years ,at the core of economic policy debate in Latin American economies, following the “Washington consensus” approach at the beginning of the nineties.
That goal should not exclude a modern focus on public policy. Actually, the challenge is to find new instruments to make economic growth more effective to reach all of those who most of the time are left behind. Near 40 % of Latin America population live on poverty condition, which looks like there is an urgent need to do something about it.-
Most of modern economic experiences indicates that inequality and poverty, can be solved by a sustainable process of wealth creation ,rather than redistribution of existing wealth at any point in time ,which might turns out to be transitory. All of welfare gains based on the State intervention into the economy ,that Latin America economies achieved in the sixties and seventies ,was lost in the eighties Therefore the focus should be on a more comprehensive view about Economic Growth and its key variables.
How to get higher economic growth performance?: Recent history, tell us that a primary source for economic growth is based upon private firms ability to do its job, and do not interfere them with unnecessary regulations. Private firms, creates jobs at a faster pace than the State. This does not mean that both can no longer work together .Quite on the contrary, they need to one another. To Complement the Free Trade agreement currently in place ,with the right policy mix , means to improve incentives ( more flexible financial rules, more flexible tax policies for new firms, more flexible training program for labour force, more flexible procedures to begin new business ) for more small size firms, to jump into the entrepreneurial track, and at the same time, to make effort to design the right incentives to come in ,for big business with innovation potential ,instead they go elsewhere.
The next step is to design the proper framework for social policies, such as better targeted focus in public health and education expenditures. What about the State ´s role?. There is no way to change inequality and poverty level, without a reform to the State to make it more suitable for current needs of global and deeply interconnected economy, which requires higher competitiveness level. To think otherwise is like to play against physics laws. What ever goes up, it must goes down. That is the main lesson arising from the economic failure, in the eighties. Therefore, it means that the Colonial State , in charge of reducing poverty and inequality, with its current characteristics , will increase poverty and inequality in the years to come. In other words, any gain on poverty based on the State intervention , it might turns out to be transitory!. However , it is important to keep in mind that the Sate needs people asking for more state intervention . But all of those people, with the proper incentives could also start their own business , whether they had the chance to do so, which means that the State should reforms its procedures to allow more flexible requirements to start new business .
If this Summit includes in its reflection this prosperity path, there would be a lot of reasons to considered it a successful one.-
That goal should not exclude a modern focus on public policy. Actually, the challenge is to find new instruments to make economic growth more effective to reach all of those who most of the time are left behind. Near 40 % of Latin America population live on poverty condition, which looks like there is an urgent need to do something about it.-
Most of modern economic experiences indicates that inequality and poverty, can be solved by a sustainable process of wealth creation ,rather than redistribution of existing wealth at any point in time ,which might turns out to be transitory. All of welfare gains based on the State intervention into the economy ,that Latin America economies achieved in the sixties and seventies ,was lost in the eighties Therefore the focus should be on a more comprehensive view about Economic Growth and its key variables.
How to get higher economic growth performance?: Recent history, tell us that a primary source for economic growth is based upon private firms ability to do its job, and do not interfere them with unnecessary regulations. Private firms, creates jobs at a faster pace than the State. This does not mean that both can no longer work together .Quite on the contrary, they need to one another. To Complement the Free Trade agreement currently in place ,with the right policy mix , means to improve incentives ( more flexible financial rules, more flexible tax policies for new firms, more flexible training program for labour force, more flexible procedures to begin new business ) for more small size firms, to jump into the entrepreneurial track, and at the same time, to make effort to design the right incentives to come in ,for big business with innovation potential ,instead they go elsewhere.
The next step is to design the proper framework for social policies, such as better targeted focus in public health and education expenditures. What about the State ´s role?. There is no way to change inequality and poverty level, without a reform to the State to make it more suitable for current needs of global and deeply interconnected economy, which requires higher competitiveness level. To think otherwise is like to play against physics laws. What ever goes up, it must goes down. That is the main lesson arising from the economic failure, in the eighties. Therefore, it means that the Colonial State , in charge of reducing poverty and inequality, with its current characteristics , will increase poverty and inequality in the years to come. In other words, any gain on poverty based on the State intervention , it might turns out to be transitory!. However , it is important to keep in mind that the Sate needs people asking for more state intervention . But all of those people, with the proper incentives could also start their own business , whether they had the chance to do so, which means that the State should reforms its procedures to allow more flexible requirements to start new business .
If this Summit includes in its reflection this prosperity path, there would be a lot of reasons to considered it a successful one.-
Friday, November 02, 2007
Information as a source for optimal allocation of resources (II)
Ronald Coase wrote an essay on The American Economic Review. (Vol.64,Nº2 1974),about the real differences between the market for ideas and the markets for goods, to justify the regulation framework applied to both of them :None for the markets for ideas, and a lot for goods markets. He suggested that from the regulation point of view, the markets for ideas (information), should be treated the same way it is treated the good market. In other words, regulations should be applied to both markets. Therefore any activity related to the production of information(the press, new sources of information (internet),religion and innovation )should be regulated the same way it is the good markets, to the extent that for Mr Coase , both markets are similar.-
Are both markets alike ?.The big difference is that information is needed for the decisions process of efficient allocation of resources, as much as the human body need water to keep itself alive . Any restriction on information ,is an artificial constraint on data flow which leads to inefficiency and welfare loss.The cost for society of applying regulation to such a data flow ,is higher then the benefit from it. Welfare level depends upon the level of information available, to make possible the decisions making process which leads to production and consumption equilibrium levels , and above all, because it is not possible to substitute lacking of information, it follows that the welfare frontier lies below its optimal level. Information value is at its most, when it is available just on time . Besides by definition, from the economic point of view, nobody get the benefit of the missing information. Hoard information is useless.
Quite different to the goods markets case. Any good can be substituted, because of quality failure or prices ,which allow consumers to protect their welfare level . However, those case of goods which can not be substituted (lack of substitutes) ,gives to its producer an above normal level of benefit . This above normal level benefit, which is absent in the information case (normal market situation), justify to regulate markets such monopoly and , oligopoly to neutralize social cost
What about privilege information ?.Well this information does not have substitutes, and indeed it might provide to its owner, high level of above normal benefit. This the only kind of information ,which should be addressed with some normative approach which is quite different to a regulation framework .In other words ,it is a matter a ethic to allow the benefit of better and more information to everyone , because information production is the result of a lot people working toward the fulfilment of a goal, none of them measure the value of their contribution, therefore the benefit arising from it belong to all of them.
Finally ,Mr Coase ´s essay suggestion that this issue is a matter of convenience for intellectual community ,more powerful than consumers organization , might lead to believe that the problem of regulation in both markers is related to special interest group abilities to pursue their own interest, despite the impact on welfare. In particular, the strong argument for press freedom , made by the new media , it would clear reflect the relevance of this kind of focus .However, the missing point in such argument, is that new media, no matter the means they use (newspaper, Tv ,radio, internet),or the power of its owner, reduce the transaction cost for community itself, (economics agents producers and consumers) to provide all the information it need. It follows that if new media would not care about press freedom, community should! .So it would with people caring about faith and so on.-
Are both markets alike ?.The big difference is that information is needed for the decisions process of efficient allocation of resources, as much as the human body need water to keep itself alive . Any restriction on information ,is an artificial constraint on data flow which leads to inefficiency and welfare loss.The cost for society of applying regulation to such a data flow ,is higher then the benefit from it. Welfare level depends upon the level of information available, to make possible the decisions making process which leads to production and consumption equilibrium levels , and above all, because it is not possible to substitute lacking of information, it follows that the welfare frontier lies below its optimal level. Information value is at its most, when it is available just on time . Besides by definition, from the economic point of view, nobody get the benefit of the missing information. Hoard information is useless.
Quite different to the goods markets case. Any good can be substituted, because of quality failure or prices ,which allow consumers to protect their welfare level . However, those case of goods which can not be substituted (lack of substitutes) ,gives to its producer an above normal level of benefit . This above normal level benefit, which is absent in the information case (normal market situation), justify to regulate markets such monopoly and , oligopoly to neutralize social cost
What about privilege information ?.Well this information does not have substitutes, and indeed it might provide to its owner, high level of above normal benefit. This the only kind of information ,which should be addressed with some normative approach which is quite different to a regulation framework .In other words ,it is a matter a ethic to allow the benefit of better and more information to everyone , because information production is the result of a lot people working toward the fulfilment of a goal, none of them measure the value of their contribution, therefore the benefit arising from it belong to all of them.
Finally ,Mr Coase ´s essay suggestion that this issue is a matter of convenience for intellectual community ,more powerful than consumers organization , might lead to believe that the problem of regulation in both markers is related to special interest group abilities to pursue their own interest, despite the impact on welfare. In particular, the strong argument for press freedom , made by the new media , it would clear reflect the relevance of this kind of focus .However, the missing point in such argument, is that new media, no matter the means they use (newspaper, Tv ,radio, internet),or the power of its owner, reduce the transaction cost for community itself, (economics agents producers and consumers) to provide all the information it need. It follows that if new media would not care about press freedom, community should! .So it would with people caring about faith and so on.-
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