Small firms and information Technologies (II)

The theory of representation might be considered as a restriction for the implementation of new technologies, as long as it cares mainly with the enforcement of every employee contract. Besides, it might also rules out the implementation of the planning process, a basic requirement for information technology to be useful, as long as the contract does not allow any new task other than the one already set in.
However, the real issue with this approach, deals with the handling of risk. In fact, contracts reduce the propensity to risky behaviour of managers, the same way it reduces the necessity of planning. Given that new information technologies by definition, are friendly with risk behaviour,(more information imply better risk control), those contracts will allow only the risk which the firm can pay for ,restricting the potential of information technology to be fully implemented .A different matter is the profit maximization process , in this case subject to a different constraint, which is a set of contracts to enforce, aside from the financial resources available, make in this view ,the maximization process a more limited target.-
Back to the study of these Greeks economist , they classified the IT within the following categories: Enterprise system(ERP,CRM,SCM),Information system (TPS,MIS,DSS,ESS), Digital technologies(E–Business, E-Commerce), telecommunications net works (Wired, wireless).-
Some finding concerning information systems indicates that small firms prefer MIS(Management Information System) ,rather than DSS (Decision Support System), which is used by 34,8% of all small firms ,whereas 50% of small and 77,8 % of medium firms prefers MIS. The enterprise resource planning(ERP) system, is used by 59,1% of small firms ,and 88,9% of medium size firms. This applications, is consistent with the representation theory, as long as it deals with a better picture of human resources performance, inventory levels and information needs ,both at the horizontal and vertical levels.-
The customer relationship management (CRM), is applied at a rate of 45,5% by the small firms, and 55,6% by the medium size firms. These percentages are low for the standard of any firms customer - led management approach , but they reflect the focus of many small firms , mainly the short run and daily needs of cash flow.
On the other side, the Supply chain management(SCM), is used by a very low percentage of firms.28,6% of small firms, and 28,6% of medium size firms.
The overall picture indicates that SCM is used by 32,3% , while CRM is used by 42,6%, and ERP is used by 44,4% of small firms. No matter this percentages, the implementation of ICT, is not too much linked to firm size, but more to the functions and goals each firms might set for these instrument . However, the bigger the size of firms, the better the chance of implementing these technologies, taking full advantage of their potential. In such a case ,the determinant factor for success , will be to have a proper ICT strategy, coupled with the right market focus.
In Greece, small firms, do not have a clear policy concerning implementation of new information technology. Whether this is a global characteristic of small firms, it is a worrisome situation , given the fact that most of the globalization dynamics lay down on the ability of small firms to adapt to new market conditions at a global scale. If they do not have a more aggressive stand on this new technologies, it might be more difficult for them to consolidate new markets opportunities.

Small firms and information Technologies (I)

It has been quite usual to assume that because there are new information technologies available, it should have a positive impact on management had they are applied. However, the empirical results does not follow the path of a straight line.
A recent research done by Greek economists o(Global Journal of Business Research, Volume Nº 4 ,Number 1, “An empirical study of Small and medium sized enterprise information communication technologies”,2010), concludes that smaller firms do not consider technologies other than those related to specific functional matters, while larger ones (from 10 up to 250 workers), based on these technologies, try to integrate their processes. Thus the main concern is to support the internal horizontal development( It means to get the organization flatter ) , taking into account internal vertical development (Management requirements to make sure positive financial results. In other words , using information technologies is related with the unification of internal with external environment (markets ).-
What are the implications of these findings?. A better understandings about them, require to take a look at the justification for using information technologies within firms. From the microeconomic theory point of view ,there are two approaches about firms structure :The theory of transaction cost, and The theory of representation.
According to the theory of transaction cost, firms expand up to the point that their organizational internal cost ,are just equal to the external cost of getting the same product from other firms. If these costs are higher, firms will try to reduce it both throughout externalization or better management skills. This management skills, includes new technologies ( not to mention cultural values), whose purpose is to increase productivity such that the expected lower operational cost, keep the organization more efficient that their competitors. In this process, firms substitute labour specially unskilled one. The more skilled labour, is complementary with higher capital value, arising from new information technologies equipment available .Physical Capital stock might also decrease, because what it counts in terms of efficiency is capital flow(information, data, prospective analysis).The design process within the automobile industry is a good example, of this substitution.
These days ,such a process is done mainly using computers simulation which imply less period of time to get the final design( a car) ready to be produced. Quite different to the experience of designing the Ford Mustang in the seventies, even with a highly qualified team, with Lee Iacocca as their leader took more than one year.
The theory of representation ,assumes the firm as a set of contract between different people, with different interests and not necessarily connected with the firm maximization profit purposes. The only way to take control of such disparity and its implications in terms of cost ( these people need to be managed, supervised and controlled) , is using contracts , but these contracts supervision also means higher cost. Thus information technology, allow firms to reduce such a cost, because it allows the implementation of shared values center ,and better contracts management, keeping cost pressures under control.-

The €uro : A recession proof currency?

Europeans are wondering about the prospect for the €uro (www.spiegel.de ,march 9, 2010), following the seriousness of the Greek economy difficulties these days. Three unbalanced account (Public debt, fiscal deficit (12% of GDP) and current account deficit), is the usual menu for economic crisis, which might turn out to be political ones. The financial situation of other European countries , has made a usual post recession scenario, a highly complicated situation to care about.
A mix of doubt and fear goes across borders within European Union concerning the implications of such a risk. Will the €uro be capable of coping with these difficult times? .
Just a few months ago international analysts were predicting the fall of the Dollar as a global currency, because of the US economy long run prospect for solving its fiscal deficit and debt. The €uro, seemed quite in good shape to take a better stand as a global currency. All of a sudden, it seems all is gone. Speculators as usual, take advantage of this uncertainty , betting against the €uro ,just as they did some time in the past against the dollar, or other weak currencies.-
Since the beginning of the €uro experience, (1999),it should have been clear that although from the economic point of view was an interesting approach to Europe economic progress and political stability , from the political point of view was not that much friendly. A currency which works like a fixed exchange rate among its different partners which are include in the monetary Union , means very unpopular and some time politically unsustainable requirements to keep it working.
Thus, there are key elements which are hard to get implemented for a single country, more so for a community of countries. These are : Flexible markets (specially labour and goods market,), steady productivity increases, and fiscal deficit under control. The founders of the monetary union ,cared publicly only about the third requirement ,setting tough restriction for making fiscal policy €uro friendly ,fixing the limit of overspending at 3%.Of course such a target become just good intentions when the recessions wind comes along the way. In fact, most of the current problems in the €uro zone ,deal with the fact that the European monetary framework is not recession proof, which means that it exacerbates the implication of fiscal activism for the €uro stability, in those countries forced to go ahead with more spending. Any adjustment follow a different path, because there is no way to depreciate local currencies, to support tradable goods to reallocate resources from domestic spending to exporting sectors , and with low level of productivity , alternatives fall within a very narrow space: To reduce both labour cost and incomes ,which is politically unthinkable .Thus ,external financial support is the only way to get through at the cost of losing sovereignty.
What is it next?. It is unlikely that the €uro will be short lived. It is more likely that the whole institutional framework which support it, will have to be more flexible, including better design for the lender of last resort issues, and the prevention of moral hazard behaviour.

Chile :After the earthquake , the painful recovery

Just a couple of weeks ago, Chileans were next to finish their vacation season. A lot of them, were getting ready to go back home with personal bags full of nice memories, after enjoying their free time .From the political point of view, the expectation were running high with the new incoming Center right Government, which was also getting in shape to cope with key challenges mainly about the economy performance . All of that, suddenly changed the Sunday February 28th at 3.34 am in the morning , because a strong earthquake(8.8 in the Richter scale)left the country upside down.
From then on, a lot of questions and considerations about the emergency management model capabilities, have been in the public discussion and analysis. Besides, the economy recovery (GDP grow 4,3% in January),from the last year global financial recession currently under way , will be delayed for some time .
Let looks each of these issues:
a.- The emergency management model. The Katrina disaster, showed clearly that it is hard to fully anticipate the magnitude of these nature disarray. So ,it was in Chile. Years of preparations, plans and trails were useless when it finally happened the furious awake of the nature. A different matter deals with the quality of the plans, its effectiveness, the level of decentralization, and the quality of contingency decision. Thus, override it by the unexpected, the emergency model did not have sufficient instruments to keep itself on. The result were, delays to make critical decisions and, lives which might have been saved, losses which might have been avoided, and desperation of those in need , which might have been mitigated . Anyone might agree with the difficulty to predict the unpredictable. However, the problem lies on the ability to design effective plans , in a country widely known because of these natural disasters, and severe past experience (1939.,1960,1985,2007), more so in a country which is pride of itself because of its economic achievement based on good public policies at all levels . Therefore ,it is the time to make a deep reform to the State, the responsible of last resort in the whole emergency machinery. Those of us who have been calling about it, were right to stress the necessity to undertake such a reform in the new Government.
b.-The recovery process. Early estimation indicates the magnitude of losses at a range of 10% up to 20% of GDP (roughly Chilean GDP is at USS150 bn).How long it will take to get all the economic infrastructure back to normal, will be key to improve the recovery speed. Some preliminary data suggest that such process, will last at least one (1) year, and up to a maximum of four (4) years. Thus ,in the optimistic scenario, GDP recovery pace will, be negatively affected throughout this year up to the month of June. It is expected that during the second half of this year, the impact of higher public spending will be in place allowing to finish GDP grow for 2010, at around 5 to 6%.The more probable scenario though ,deals with a slower process of normalization, (The same centralized model applied to a different situation),a deeper negative impact on GDP grow and higher inflation. In short, probably a couple of years with GDP growing below its long run trend. Just for the record, half of the national fishery industry is in the area devastated,100% of the forestry industry is in the same area, the highway networks will be operating at 100% capacity not before 8 months. The new rules for construction industry (heavily questioned for the poor quality of buildings), will delays the process of building construction, and employment data improvement. The damage to the stock of physical capital can not be underestimated concerning its impact on the economy. What it will become important ,is the stock of human capital. Chileans at this hour, must take the best of them no matter whether they are. That is the beginning of the real recovery.

The moderate right in charge of Government in Chile:Its real meaning

The presidential election results in January 17th 2010 , will be considered another historic day, just like that one ,when for the first time a woman was elected to be President(2006). It looks like Chile has learnt to work upon a long run span, quite unusual for countries like the Latin Americas ones which for most of the twenty century , hardly were able to cope with day by day challenges. Chilean voters have elected Mr Sebastian Piñera a business man, to be the next President of Chile.
Now is all about expectations with the new Government which it will take oath next march 11th After 52 years, and leaving aside the exceptional period 1973-1990, the so called conservatives forces will be in charge of Government again. The exceptional circumstances of having gone through a recession, has made more significant this result: In times on recession people has voted for the moderate right.
A couple of considerations about this event and its long term implications:
a.- It was not a surprised at all, the electoral defeat of the current Government coalition, after 20 years in power, due mainly to lacking of new ideas and innovative proposals to cope with today Chilean economy ´ challenges. After a very successful integration into the international markets, based on the Free trade agreements (more then 60 in 20 years), recently upgraded by Chile {s admission as a new member of the economic European association, the next step is the more difficult one because it requires deeper reforms on the State management model, specially the way it deals with incentives to small business and investment, productivity increases and competitiveness improvement . A recent report done by a the World Bank ,indicates that Chile has a disadvantage in logistic cost compared to some of its competitors,(Australia, New Zealand).Besides as a percentage of the GDP the logistic cost in Chile represent 18%, twice that one from the European Countries (9%).The whole process of preparing the trade (export-import) documentations ,take in Chile 21 days while in New Zealand it take half that period. Another study done by the European organization for development and economic cooperation, has signaled the importance of more flexible labor markets and better educational setting. All of these challenges are by its nature, long run kind of task. This lead us to the second consideration.
b.- Chile has been steadily making economic progress since the mid eighties, increasing its GDP per/capita form USS 5000 in 1980,up to more than USS 12000 in the year 2005,but with a 70% negative gap compared to that one of developed countries(50% because of lower labor productivity).Thus, any additional achievement on development status requires better policies on labor regulations, taxes, and efficiency of public policies. At the same time, this economic progress has allowed to decrease poverty (12%), and improve expectations about future standard of living .People feel they have the chance of living better, with better access to buy assets like either a car or an house .As a consequence ,there are a new emerging middles class which also demand better education, health services and safety on streets. The new Government, will have the challenge of meeting those expectations. So far, it looks like it is up to it.

Paul Samuelson:The economist and his time (II)

Originally a scientific not an economist, Samuelson set the tone from the beginning. While he was defending his PhD thesis, Schumpeter who was among those present at that moment said:” I do not know whether this jury is able to write something as brilliant as this thesis” .
The contribution to macroeconomics has made Samuelson the real father of Macroeconomics, quite on the contrary to the conventional wisdom which give that credit to Keynes. As usual, public validation goes through a different way to what it should be.
Samuelson `contribution might be summarized as follows: The economic analysis as a conditional optimum (1947)(these days this is known as limited rationality).It made the so called neoclassical synthesis (1948),which means the classical approach plus Keynesian approach, to be applied to the way the economy works: mixing market with the State. Other areas includes Consumption theory,(revealed preferences 1947), International trade theory (The Stolper-Samuelson Theorem) , and the conditions to make equal world prices of capital and labor,(1948).Public economy and markets failure which affect optimality on market result(1954).Economy Growth theory ( 1939) and the accelerator principle ,the first overlapping generation model (1958).On the financial side , Samuelson worked on the efficiency of diversification(1967),and the rules to build a life time efficient portfolio (1969).He gave microeconomics a better mathematical support , such that it allowed to improve the quality of its implications .All of this transformed the economy from the traditional -static social science, to a modern –dynamic science with strong mathematics background.
On the political economics side, he said that both Marx and Friedman were wrong ,which it is true about the Marx interpretation concerning the real forces of History . but unlikely about Friedman statement that inflation is a monetary phenomena, or the nature of market forces and its close ties to human motivations, which add severe limitations to the role of Government in the economy . Friedman was probably wrong concerning his approach about the role of institutions , which apparently he ignored, and his misinterpretation of the strong ability of capitalism to adapt itself to different political regimes. However, it is hard to say that Samuelson had the last word about the way markets and Government works .The recent financial crisis ( 2008-2009 ) proved that both government and market might fail, and what it count more at the end of the day, is to have strong and reliable institutions. Thus, it seems that Douglas North Is the one who has settle down this discussion, although it is not the case to be a shadow on the outstanding Mr Samuelson` contribution .

Paul Samuelson: The economist and his time (I)

It is not easy to say something relevant when it comes to comments the legacy of a prominent economist .Thus, maybe it is better to side step. But ,I am an economist just like Paul Samuelson. Sure, I am not a genius like him ,but I am fully capable of understanding the magnitude of his legacy . I studied with his books, my basic notions of economics.
Like many other great economist once they pass away, the real issue becomes not just theirs contribution , but how it fit properly with the times. Let checks some examples: Michael Kalecki was a polish economist(socialist) ,who stated the foundation of Government intervention into the economy(1933) , just like Keynes (Liberal)did a few years later(1936). However, they had a different impact with this approach of Government activism. While Keynes has been widely considered the founder of macroeconomics, Kalecki is barely known outside the academic circle .Rudiger Dornbusch, a German born economist, who helped to reshape the financial implication of both capital mobility and monetary policy impact on exchange rate(overshooting effects), and along with it , the foundations of the normative macroeconomics , did not get the same recognition and impact as Robert Mundell got, who even rised himself up, above his colleague and mentor, Fleming . Thus, great economists with outstanding contributions do not get always the recognition they deserve .That was not the caser of Paul Samuelson .
Is it a matter of luck?. I think it is more a matter of timing. To be on time with history and its requirements , neither sooner nor later, but just in time. Knowledge is the input of economic progress and society welfare, and like any input its usefulness is higher when it is available at the right time, where it is most needed and with the format more comprehensive to all. Friedman ,although not the first one to call the attention upon the inflationary impact of money growth ,was also on time to cope with the implications of both Fiscal and monetary expansion.His contribution, cames along when Governemnet intervention and fiscal expansion were considered as the conventional wisdom. Therefore, it is the proper combination of the man ,the time and the knowledge which provides, which make the most of brilliant ideas.-
Paul Samuelson contribution was wide and diverse. It was famous his explanation of stock fluctuations and its ability to anticipate recession. “They had anticipated nine of the last five recessions” ,he said in a TV interview in the eighties. Beyond what it is at the surface, he was sceptics about markets and its ability to solve the cyclical fluctuations ,which make him an icon of Government interventionism. However ,Did he had the last words about it?.-

Reviewing the end of the decade

As long as we get close to the next decade it is time to evaluate this one. This decade has been a mixed one. Extraordinary events on the economics ,social, politics, technological and environment side , has made it a unique period of innovation, progress but also the natural stress arising because of passing from one stage to another . Let take a closer look to some of these variables:

a.-Economics: Although it seems that the financial crisis of September 2008 screwed up everything, the average global GDP growth for this decade , will be above expectations (4,5%).On the other side, the emerging economies with average GDP growth of 6,6 %, are leading the path of global expansion. At a pace of 143 people per minute adding up to the world population, keeping Global GDP growth is an imperative. Thus, the main challenge for the next decade will be to focus globally on growth .-

b.- Environment: The Copenhagen conference will barely meet the expectations .In fact, it might be possible to have a failure on reaching an accord deeply rooted on protecting the environment. The implication of this failure will not be trivial ,because it will mean that there is no a serious global framework to cope with the effect of dioxide emission and climate change.

c.- Technology . Who thought at the beginning of this decade that we will witness the marvellous of either I Pod or , Blackberry , as a new line of development on global communication?. Who thought about the chance of a competitor for Yahoo?. Goggle arose as a light star, to become a global giant adding its new resources up to revolutionary transformation on global communication to make the world just one global village , just as the global TV started to do in the eighties .What about Facebook or twitter ?. The human creativity does not stop, and the years 2000 will be remembered because of a genuine expression of that.-

d.- Stress. Although the signals of progress are clear enough to count on them as a fact. For different reasons ,fear has become a daily feeling for many people around the world .It looks like the further we move ahead on the technological front ,the more we move backward when it comes to enjoy what we have accomplished .Thus, it seems obvious that the next stage on global development, will be more complex than expected.

However, the world is already flat, which means that everything goes on faster than before, it spreads quicker than before, but it should last less than before, as long as a new event arise because of human creativity. The learning abilities should apply as a guarantee for such a characteristics, innovation and knowledge should make the difference in the next decade ,the one which is close to begin.-

Economists and ideology: Lesson 2008

On september the 6th, the 2009 Nobel laureate in economics Paul Krugman, wrote on his column (http://www.nytimes.com/) about two different economist groups. Those from the west (freshwaters),and those from the east (Saltywaters) .Both groups , have in common only the basic framework which the economics science is build upon: This is the economy is more often than expected out of its long run trend , and the problem is how to get it back again.-
One group (freshwater)felt self confident about the strength of their argument. Gerad Depreu (1983) ,had demostrated the mathematical foundations of free market economy,in such way that gave liberalism, not only a scientific foundation but also a superiority status .Besides , F von Hayek stated that social desorder is appropiate for a liberal project and its spontaneus order , and M Friedman,had stresed the consequences of inflation ,mainly its negative impact on the economic activity,all of these three big gave strong theoretical support to this approach :The government is part of the problem, instead of the solution” . Market are capable of self regulation, and they do not need any thing more than the proper incentives to get the maximum efficiency.-
The other group (saltywater), think that economics concern more with politics than efficiency.It deals more , with the process than the outcome (short run bias) ,such that it is not possible to avoid governmenet intervention to cope with natural disestabilization forces, arising from the nature of private markets .Keynes is the main inspiration for this approach,deeply rooted on the financial crisis of 1929-1933,and how Governmenet at that time might have solved the crisis, which by the way, it did not..-
So, as long as economists fixed their position, (market agaisnt the Government action), they lose the perspective to focus on the problem which economics deals with, and as a result they were unable to think about how to prevent the consequences of the financial bubble .(version 08).-
Prominent economists believed that prestige and reputacion by itself, would be enough to constraint bank manager risk taking behaviour .However bank managers, did not care too much about those issues, and the whole argument proved to be a failure.
Did the economy really fail to anticipate the global financial crash of 2008? .The fact of the matter, is that economics had instruments to anticipated the financial crash, but they were not considered to be good enough, as long as they were against the conventional wisdom , concerning efficient outcomes based on rational behaviour.Thus, the real failure was on the economist beliefs concerning markets performance, rather than a lacks of instruments. It was like a phisician who confusing symptons with the disease, trust more in a painkiller than in his own ability to judge by himself, the nature of the problem to be solved .Therefore , economics as a science , is in better shape after the crisis.-
N Roubini, and others economist, all said at some time where the global economy was headed to.Ideology ignored them. Therefore , the big failure has been on idelogies . Economics which did not learn from politics failed . We hope it will the last.-

Brazil : What is new about its prospect as a global partner?

In the sixties (1968) ,Brazil was among the top ten world economies. It was an industrial power based on public policies designed to support industrialization . Unfortunately, that experience ended up with inflation, fiscal deficit and higher poverty. Brazil missed that opportunity but the seeds were already on the field for the following years. Infrastructure, technology (Brazil has developed its own technology capabilities), Human capital based on immigrants (Japanese, Korean and other groups) supply the energy needed.
After the shocks of the seventies ;Brazil went into the economic contraction like most of the world economies did because of oil prices increases, However, Brazil started out the process of substituting oil to become less energy dependent .They developed ethanol and alcohol as an alternative source of energy, such these days they do not depend that much of foreign oil.
It seems that it is not by chance that Brazil is already on track to be what a lot of economic experts, expected them to be. The most important Latin America economy as a global partner . Thus, its economy progress and stability, has allow them to become member of the so called BRIC group, which includes aside form Brazil, Russia, India and China.-
After the oil shocks of the seventies, and both the political constraint and inflationary experiences of the eighties, in the early nineties Brazil, started off a second generation reforms which handed out public companies to private owners , throughout privatization programs . Improved its macroeconomic institutions with autonomous Central bank, and better fiscal policy design has allow its economy to be ready for the next step, such as to be a global partner.
So, it is not a recent event which has lead Brazil to its current status, but a long way with rights and wrongs . Actually is the main exponent of the so called soft power in Latin America .Everyone respect Brazil even they do little to get so, except for the fact that they work based on pragmatism. The best example about has been President Lula economic policies, which have worked out a framework friendly with markets, but keen with social needs.

Entrepreneurships: the new way to cope with global opportunities.

The month of November will be full of activities around the world concerning entrepreneurship .Between November 16th and 22nd, there will be events world wide to discuss the nature ,implications ,and prospect of entrepreneurship.
What is the meaning of entrepreneurships?. In a nutshell, means an attitude toward opportunities arising both from internal and external markets forces. The internal market forces, deal with the environment within firms which might be plenty of opportunities to take action on, but no all of its human capital is ready to do so because they lack the will to go for it. Some examples: Computer network, allows everyone to get access to data and information ,in such amount sufficient enough to build up an internal service platform(birthday greetings ,firm commemorations, data analysis for innovation applied on management and productive process, share value added services center ,customer services ) which might influence decisively the job performance, both in terms of social interactions and results. The only requirement to go along with it, is to have a the willingness to go for the difference .
In other words, it is required intrapreneurship , which is different from entrepreneurship, because the latter deals with the external markets opportunities, while the former deal with the internal markets. Business needs intrapreneurship , more than just employees doing he same all the time , trapped in the routine of changing nothing, to get over with the standard of value added which actually apply to the allocation of resources .
Entrepreneurships , is also important because it deals with the way people within a community, face the chance of doing something better and different, with the same resources available for everyone, but which otherwise would be wasted or unproductive. Even more, it would allow to create wealth.
At the core of entrepreneurship is to solve business problems with an approach based more on individual strength, than other based on external support or luck. Entrepreneurs stories are all based on the ability to pursue what others are not willing to go for, not necessarily because they do not want to, but mostly because they do not believe in. Strength ,faith, willingness , attitude are all mixed on both entrepreneurs and intrapreneurs. These input are the source of innovation, change and wealth creation.-
Behind great ideas there have been the seed of entrepreneurship. Burger King, Mc Donald, Amazon, CNN, Apple, Facebook, Twiter even our boss Google, are all the outcome of geniality mixed with passion, focus and tenacity to get what these entrepreneurs really believed in .-
Chile is also working on this subject .Just in November there will be 7 events related to entrepreneurship ,from north to south. In the end of the nineties, there were in Chile more than 1 million of entrepreneurs ,which outpaced the rate of entrepreneurship as a proportion of total population, of countries like Japan. Thus, entrepreneurship has become the input to mobilize energy toward a global scale of wealth creation.

BLOG ACTION DAY

Climate change threat : A requirement for a more efficient use of resources.

The whole world is looking for better answers to climate change. Copenhagen will be at the core of the matter next December , when the industrial and emerging economies will start to work at it. Let make a short introduction to the state of the art.
Although it seems an urgent issue ,which suggest that nobody care about it, the climate change discussion has made a decisive progress in the last couple of years, such that is not a back stage (secondary importance) problem anymore, but it is a front page problem which need to be addressed firmly. Thus, beyond the Kyoto protocol and its results, it has gotten the attention of key leaders. The Catholic Church and the Pope Benedict XVI, has made a call just a couple of year ago, for better protection of environment .This was a breakthrough step, given the fact that the religious beliefs do not have a clear focus on environment ,and the way the human specie deal with what it might be considered the God Property. The Nobel committee ,also said a word in 2008 , with Mr Al Gore as the laureate with the Nobel Piece Prize recognition.
Besides, world political leaders, The United Nations, the global news media, Non government organization, even celebrities from different fields, are all engaged in this challenge of controlling the pace which human specie make its way toward economic progress, keeping the delicate balance with nature and the environment.-
It follows that this BLOG ACTION DAY, should not be a day of sorrow, but a day of hope and expectations. Something is changing, and we should realized the scope of that change . Therefore , the next step is to identify the primary issues which come along to define priorities in this age of environment constraint.
On top of the list, it is the new concept of efficiency. From the economic point of view ,efficiency deals with minimize the monetary cost involved in the process of transforming input into output. With the environment considered to be a “free good”,(it means no price was needed to get that resource ) ,it was not include in such calculations. In fact, most of the countries measure of GDP increases, without considering the impact of such increase in the environment ,which at this moment might be negative. Thus ,this new concept of efficiency must be applied to every transforming action, into the whole productive chain. Actually, the main activities adding up pollution and dioxide emissions are :Electricity companies (23%),Industry ( 16,8%),Transport (14,0%),Agriculture (12,5%), Resources Exploitation(11,3%), Residential consumption (10,3%),Garbage (3,4%),others ( 10%). Almost 78% of dioxide emissions come from productive activities, not efficient enough in its productive process. It follows that Electricity which is in the first place, has become the priority for new sources of efficiency. So, let concentrates on that. There are already some interesting approach, like the “Smart grid electricity” source of energy power , which has been developed by Siemens (http://www.siemens.com/) , promoted at the “Meeting trade show” in Europe from October 6 ,up to October the 8 , in Barcelona .
We all face the challenge of getting the attention on environment issues, but also it is the time for focusing on productive sectors called to improve their efficiency standards. This is the challenge in the coming years.

Politics and global economy

Following Paul Johnson, Politics and politicians became important after WW II, because there were important issues to solve peacefully among different partners. The negotiation table was the new scenario, to solve what the battle field left unsolved. These days, the global financial crisis and its impact , is the equivalent to the economic battle field , and also there are important issues unsolved which requires a rather politic approach. Some of these issues are global financial regulation ,CEO compensation payments, Management models concerning risk taking , rating agencies performance and the like. None of these topics, concern to just one economy, it concern to the global economy .
The global economy is more risk averse, than each of the economy it includes. In other words , the real problem concerning global economy performance are not the one related to the real economy (trade), because the current link between consumption and production make unthinkable the option of protectionism , but the current instantaneous financial capital links is what has becomes a more pressing issue. A recent IMF report indicates that the transmission speed of the September 2008 financial crisis, was higher than past experiences because of these links. Therefore the new issue to solve, deals with the kind of financial regulation feasible to apply to a global scale, than what to do about cheaper imports .Why is it so?. Physical Capital mobility make protectionism a short lived option. Governments might set either quotas or taxes, but it can not set physical barriers to new investments coming in . Whereas unregulated financial flows might deteriorate the foundations of consumption and production links when exchange rates react to such a flows. Both Depreciations and appreciations are not risk free for each individual economy. In fact, These flows might be the main source of output variability in the global economy , as long as it might affects strongly the real side of each of the economy it includes .
Thus, while some analysts might have thought that the importance of politicians was decreasing , politicians and politics are back again on the world economic stage. The G-20 is a very good example of this came back .It replaced the traditional G-8, because there is a new world allocation of economic influence. The emerging economies have gotten its place in the global economy , because after all are among the main loser when it comes to capital flows and its effect on the domestic economy.
An interesting point deals with the fact that it is not just any kind of politics. Voters, which after all are the employers of politicians, have already said in some countries which way they prefer to go through in terms of policies focus . It might be strange but in some of these cases (Germany),they have preferred a conservative pragmatic market based approach ,instead of a more liberal stated based approach .How is this possible? . First of all, right and left politics do not mean the same as they did just a few years ago(1990). Services have replaced manufacturing, and the new manufacturing is based on automatic process and robotics, which require more skilled labour force. Low skills workers, do not have chances to support redistribution policies, because they have been replaced by machines and robots. Thus ,the traditional left, has lost its core message. The new workers are more aware about their tax payment, and therefore more conservative with taxes allocations, because they earn higher incomes or expect to get so in the short run. Is this a trend? It might be so, although each economy has its own social and productive structure. However, Brazil and Chile are in Latin America at least, good examples of this change about the new focus concerning political orientation .Pragmatism is the path for this new era of politicians.-

From recessions to recovery:Some notes (II)

The role of macroeconomic policy , is key to have a strong impact on the economic recovery . According to the IMF paper ,(WP/09/183, august 2009), a 1% of GDP increase in fiscal deficit imply a 0,12% increase in the post recession GDP rebound. On the other side, expansionary Monetary policy is also a powerful tool in industrial countries ,for economic recovery. In fact ,a 10% increase in the growth rate of real money stock , is associated with 0,35% increase in GDP growth. Adding up both effects, GDP growth in industrial economies , should start to reflect the impact of these recent expansionary fiscal and monetary policy.
Exchange rate policy is also relevant to define the recovery profile. Those countries with flexible exchange rate , experience a recovery growth more than a percentage point higher than those with fixed exchange rate .This was also the case after the Asian economic crisis in 1997.The flexible exchange rate ,allows for relative prices to adjust itself while the recession take place, such that while the non tradable sector fall the tradable sector expands , compensating for the decrease in domestic activity ,without making it further significant
Concerning structural policies, effective labor market rigidities( abiding by the enforcement of the labor law), have a negative effect on economy recovery, as long as it acts like a constraint to the adjustment between non tradable to tradable sectors goods , delaying the transfer from the unemployed to employed status, while the tradable sector creates new jobs opportunities.-
All of the previous notes, lead us to the following conclusion:
a.- Macroeconomic policies differences , influences the path of economic recovery among different countries. In the 2008 financial crisis, a decisive level of coordination which guided the implementation of both expansionary fiscal and monetary policy ,will make possible to have a low level of growth divergence between industrialized countries ,concerning the pace of recovery, although it is still plausible to have a “F” shaped recovery anyway. Some countries in Europe (Spain and Italy)are behind schedule for economic recovery.
b.- The mix between monetary and fiscal expansion, creates the challenges of the so called “exit strategy” ,which depend heavily upon monetary policy skills to avoid inflationary pressures, given the political nature of fiscal policy. However, as long as the fiscal expansion impact on growth is stronger and persistent, than the impact of expansionary monetary policy , it might be possible to neutralize the risk of the so called “W” shaped recovery(math in the first paragraph , seems to support this hypothesis).Therefore, while the monetary policy becomes more restrictive, the lasting impact of fiscal policy, might be a compensatory force keeping the momentum for economic growth .-
c.- Thus, the economic recovery which is already under way, it might turn out to be persistent although not homogeneously a strong one across the board, at least in the beginning of such a process, to get momentum later on (2010).

From recessions to recovery: Some notes (I)

A recent IMF paper (WP/09/183) , “International evidence on recovery from recessions”, (august 09)written by V. Cerra, U. Panizza and S. Saxena, analyzes the evidence concerning the main characteristics arising from past recoveries ,with data spanning 1960 to 2005 .
The first notion to take into account ,is that not all recoveries have the same profile although at fist glance, it might look so. It is important to make the distinction between recoveries arising from real shocks from that ones arising from financial shocks. In the former case the recovery looks stronger, while in the later case the recovery looks sluggish and weak which make more vulnerable . .
These differences , arises from the fact that the financial sector is at the core of the transmission mechanism of financial resources from savers to investors, such that when the banking system works well , they (investors) can undertake their investment project as planned ,otherwise when the banking system is in trouble ,they face unexpected delay to do so , therefore reducing output expansion because of lower investment level .
A real shock instead(For example, a decrease in exports due to a falling external demand ), deals with an adjustment process concerning expenditures ,which must go down according to the new lower income level, while the financial sector is healthy and ready to support the new expansion cycle, which will start up as soon as there are new sources of external demand .This was the case , after the Asian economies crisis (1997), for those economies which had the capabilities to shift exports from one falling market, to other with some potential making the case for stronger recoveries because of both: this managerial skills ,but also because its fundamental (financial sector) were also strong.
The other side of the analysis, deal with the effectiveness of the instrument applied since the economic activity start to go into negative territory, along with the level of openness to world market . Thus, Fiscal policy is less effective in open economies than it is for closed economies, therefore economic recovery is weaker in open economies than what it is closed economies. On this regard, and to be fair with fiscal policy countercyclical capabilities, it is important to take into account the Income elasticity of demand for export as well. If the income elasticity is high, a substantial drop in external demand will impact strongly on export ,affecting the path of tradable goods contribution to the recovery, making more difficult to compensate for the decrease in domestic demand .The opposite applies for closed economies .In this case by definition, the impact of countercyclical fiscal policy goes fully to the sector (domestic demand) which matter for economic activity.-
The available data suggest that the current recovery will have different characteristics, and it will hardly be a fast recovery. The economic recovery profile, looks to be at a slow pace in industrialized countries , while in emerging economies the recovery might be at a faster pace than their global counterparts.-

The shipping industry:The other side of the global financial crisis

While the global economy was booming ,the world trade flows by sea ,were unstoppable ,so it was with the shipping industry including both containers cargo ( 500 million containers were transported in 20008 throughout the world), and ship building ( the cargo capacity increased from 4 millions TEU in the year 2000, to 12,5 today. Source http://www.spiegel.de/, august 11,2009) ).
All of the sudden ,the world demand for transporting goods by sea has fallen sharply ,and a new story has begun. What are going to be the consequences for global shipping industry?.
Actually, container shipping has declined world wide by 15,7% , the tariff has gone down from U$$27 ,64 to U$$5,32 for container ship per dollar /day , and for every container, shipping firms are losing roughly U$$ 300.At the same time, new ships has been designed to cope with a higher expected demand for container transport. Current ships with 363 feet long, are capable to transport 11400 containers, almost double the current rate of capacity use . Singapore and Hong Kong, have become the place for empty ships which are waiting for the good times to come back soon.
What Onassis would have done with a crisis like this one?.The first approach is to take it like an opportunity, to consolidate market positions specially for big shipping industry player to take control of all of those smaller companies , which are not in the position to make it over .The Chilean shipping company CSAV, was helped by such an arrangement .On this regard, the expected outcome will be a contraction on the level of supply , which means that fewer firms, will take control of all of those smaller ones unable to survive the crisis. Thus ,the future shipping industry structure will be characterized, by a higher level of concentration. Whether it will be within the range of the H-H (Herfindal - Hirschman index) index, considered as moderated concentration or not, is another matter.
As long as this concentration goes on, the implications for long term shipping tariff(beyond the year 2012) might be an increase above previous level ,once the recovery is fully underway ,as the oligopoly forces drive prices up .
Should government step in into this industry, as it did with the banking industry ?.There are substantial differences between this two casualties form the global financial crisis.While the global banking industry was on the edge of collapse , the shipping industry as a whole ,seems to be far form such an outcome. Some firms, specially those with unrealistic expectations about the global economy growth capabilities, which borrowed beyond the reasonable business standard, will be hit hard. However, the business manual suggest that the solution in such a cases goes with cost reductions, productivity increase and , more efficiency which are pretty accessible throughout rationalization process. This is what bigger firm will do in the process of taking over smaller shipping firms. In this scenario , and aside from strategic consideration, (after all Chinese shipping industry will be among the winners) , Government intervention would be negative, as long as it might look like as an arbitrary intervention into the market adjustment to a new equilibrium. In terms of the banking industry, this new equilibrium meant the new great depression 2.0.-

The path of global economy recovery: Some preliminary thoughts

While the economy is moving throughout the second half of 2009, it looks highly probably that sooner than later this year , the NBER will call for the end of the USA economy recession(chart Nº 2. Source http://forecast.org/) ) . Based on recent data (exports recovery, slight decrease in unemployment compensations claims , profit level in some key sectors, revival of the financial sector, prices expected performance ) the USA economy should already be close to the bottom up point .
Given the fact that the recovery is at sight ,there are some question which markets are worry about: The path of the recovery.-
Let try to go deeper into what it might be that path, to foresee its strength and weakness.
a.- It seems that at least in the beginning of the recovery, employment/output elasticity will be low .Thus, although output will start to move to positive territory, in the second half of this year, employment will follow but with some lag . Later on, probably within the first half of the year 2010, employment gains will start to be stronger and sustainable.-
b.- It will not be a consumer driven recovery, therefore it will be a recovery , with a weak start although with a stronger pace in the months after . Investment and firms will take the lead, as long as global economy will demand capital equipment , necessary to sustain the next cycle of global economy expansion. Besides, Banks with higher risk aversion than before , will be more selective to build up theirs portfolio, which will works against consumers considered riskier at this moment .
c.- Foreign demand (chart Nº 3) rather than domestic demand will the engine main of this recovery .This does not mean that domestic demand will stay away for quite a while but , the pace of its own recovery will be slower, manly due to the weak labor market conditions which affect the expectation of the stability of income levels, and the level of private debt which consumer must take care of, before starting again to go shopping .-
d.- The inflationary expectations (chart Nº1)and the Central Bank exit strategy, will have a key role to shape the strength of the recovery. It might be the case that, the next recession although milder than the current one , might be waiting just around the corner. However, the pace of inflation (http://forecasts.org/ ) do not seems to be a threat , therefore there is room for a smooth exit strategy .-
e.- The Developing Asia area (China and India) growing at 5,5% this year and 7% next year (http://www.imf.org/ , July 2009 forecast) , will keep the pace of global economy recovery such as not to lose momentum.-

The new stars on the global economy :The BRIC group

With 40% of world population, and 25% of world GDP, the BRIC group is increasingly considered as the key new economic global partner. The BRIC group , which includes Brazil, Russia, India and China, has arrived to the world stage apparently to works with a different approach , specially concerning the currency for international operations. They do not fully trust the dollar, as the only reference for international finance, so they believe a new world order must arise with more currencies available.-
A key issue about the BRIC group, is related to the fact that they to do not seem to be homogeneous enough as it would necessary to count them as a strong partner .Let check this out a bit further:
a.- Geographically distant from one another, it might affects its sense of identity and common purpose for their leadership. Asian countries share history and cultural values, which makes them prone to work together more actively than with “foreign” .-
b.- Politically ranging from democracy to Political State kind of regime, their leaders are accountable by different audiences and institutions .For instance Brazil has a free press ,with no restriction whatsoever to the news media ability to check what government is doing, which imply higher transaction cost than its partner, when it comes to make political decisions.
c.- Institutionally , the BRIC group also have a mixture ranging from a strong State like China and Russia, to a less centralized State in India, whereas in Brazil the State is returning to a more complementary fashion with the private sector. The rule of law also differ, setting undesirable conditions for trusting them a reliable partners.
Thus, although it looks like the global economy will be organized on the basis of important blocs,(USA ,European Union and Asia), the adding up factors (population and GDP)might not be sufficient condition to consolidate such BRIC structure, like it is the APEC which is also an adding up organization (all of them are on the pacific grim). As long as there is connecting points, the BRIC group will represent the new world economy reality, specially decisive for global economy recovery. However, there is still a long way before such an interesting group become a global partner on its own .
The real importance of BRIC, will probably deal with its role of fulfilling expectations of those countries which are left behind on global affairs , because of the relevance of its new political voice status, to speak out at global stage and international organizations. In fact, the G8 might not longer be what it was, excluding for future meeting the BRIC .
Further advances will depend upon this BRIC group to creates its own structure either to solve differences ,whether they appears on key issues, or to make decisions.-

Capital flows and emerging economies recovery

Private Capital flows is a key variable, to support the economic growth of countries which can not count on domestic financial resources, due to the weakness of domestic capital markets to increase saving. However, these flows are both risk averse and with high sensitivity to any wrong doing on domestic economic policy matters, such that emerging economies actually have to cope with two crisis at the same time: Then one already under way ,and the other caused by the sudden stop of capital flows.
World banks reports indicates that while in the year 2007 the capital flows to emerging economies was USS 1,2 trillion, the year 2008 declined to USS 700 billion and this year it is expected to be USS 300 billion. Thus in less than two year the capital flow have decreased by a margin of four. Accordingly the rates of economic growth went down from 8,1 in the year 2007, to 5,9 in the year 2008, to 1,2 in the year 2009. Whether China and India are excluded, these countries´ growth is expected to be in the negative territory falling (-1,6%).-
These slower pace of economic growth mean that job losses increases, trade flows decrease ,and investment prospect are no better to improve expectations. Thus, the question is when these flows are going to be restored to its previous level?. The answer depend upon the chance of having a more robust global financial system, in the coming months. As long as the financial system remains fragile, the private capital flows will stay at low levels.
But there is a second question which is :Can Foreign Government aid be an effective replacement for those capital flows ?.In other words, is it possible to apply a kind of Global expansionary fiscal policy, to cope with the losses of growth in emerging economies due to lack of private financing?. Let analyze some scenarios to get an approximation to the answer :
a.- Extraordinary times call for extraordinary actions. However, a crucial issue is the effectiveness of these actions ,which depend in most of the cases upon the well design and proper focus of the policy prescription. However, in emerging economies, the problem is not only the proper focus ,but the structural economic conditions, ( weak institutions), which can make the whole issue of effectiveness a lot more complicated.-
b.- Whether experience is a proper guide to decide, there is strong evidence concerning the negative impact of Government aid to Emerging economies. Government recipient, has become the main cause for poverty, the main poverty producer and so the main poverty exporter. How come such a dramatic outcome could happen?. Foreign Government aid, has become in many countries a source of corruption when bureaucracy is in charge of managing those financial resources .At each level of bureaucracy , every one take a fee ,such that at the end of the process there is no financial resources left out ,to cope with the objective which justified it.-
c.- Emerging economies should take this global financial crisis as an opportunity , to undertake those reform which has been postpone in the past, specially those aimed at improving the quality and strength of its domestic financial sector and capital market, modernize its state management model ,to make it suitable to cope with the risk standard of private capital flows, and improve the domestic conditions for international trade. It is this combination of better incentives for both capital flows and trade, which really will help more the emerging economies to get back on the growth path soon.-

Unemployment:The weakiest side of the expected economic recovery

While the financial markets wonder about the shape the economic recovery would look like, it seems to be a fact that employment will be behind the fundamentals. To get a better approach to the problem, let assume some scenarios for the expected economic recovery:
a.- From a “L” shaped recession ,to a kind of “F” shaped recovery. It is unlikely that the whole industrialized world and the emerging economies, will get their economies back on truck at the same speed .There will be differences because global economy have an heterogeneity economic framework, rather than an homogeneous one.
In fact, The European union policy framework was not designed to cope with recessions, but to keep low inflation level based on fiscal discipline. Thus ,its response to the current financial crisis was strongly influenced by it, as an institutional constraint. Quite on the contrary to the others economies, and the text book recipe, of no constraint to fight recessions, the Europe Union had to cope with a very strong one .The implications of this constraint ?: it will settle down the pace of the economic recovery in the industrialized world which will be slower ,and it will make its own recession longer. Thus, It seems probably that there will be two levels for the economic recovery. One on top (the USA , the emerging economies , and east Asia ) higher, than the other on the bottom (European Union, and Japan).(Data: IMF and World Bank)
b.- Unemployment will stay high for a longer period than otherwise , because manufacture production drops (15% in industrial countries and 10% in developing world ,excluding China , since august 2008) ,will be hard to get back quickly, while capital flows become more scarce,(pushing down investment) and hard to be available for cash flow firms requirements . All of these means higher uncertainty for better job creation rates. Besides , people already expect to be unemployed longer than previously thought , so they prefer to drop out from the labour force until labour conditions improves. Thus , current unemployment, do not reflect the real magnitude of the fall in the job creation rates , such that when it starts again to be positive , more than expected people will suddenly arise asking for those initially scarce jobs available ,adding up additional pressures to the level unemployment ,even with the recovery under way.-
On the other hand , in industrial economies most of employment is concentrated on services sector, which follow production. Following new orders for higher production , it arises the role of logistics and support services(transportation, banking , insurance, data network management, legal requirement ,and the like). Therefore, the expansionary fiscal policy , although capable to sustain job creation, it will be unable to cope completely with the kind of more specialized jobs which characterized services in the private sector, so it will be hard to get a total neutralization of job losses.-
c.- The output gap will not be enough to get the whole information about the real conditions for the economic recovery, as long as the financial conditions for borrowing and lending do not improve. Thus , the financial gap arising from the expected demand for cash flow, and the supply of it available , somehow it makes the potential output not far away from the current output , leaving without productive prospect ,a lot more than the available resources.-