Rio +20 Summit: the expected outcome

Brazil is a nice place to visit, Brazilians are nice people to meet. Rio de Janeiro has nice beaches and touristic attractions. It is all add up to the expected outcome of the Conference on sustainable development , held this week in Rio: No real progress to deal with the implications for global warming, of economic growth without environment restrictions. Because of their upbeat mood ,Brazilians are the only ones capable of getting involved in events like this one, with no expectations of meaningful outcome .It was the same in 1992 (just coincidence?), when the world was anxious about the new expectations arising from the new scenario ,after the collapse of east Europe regimes. Twenty years later Dioxide of carbon emissions have gone up by 40%, and there still no deep rooted consciousness about the risk of doing nothing about climate change. However, each event means a step forward, although the issue of climate change, will not be strongly addressed ,because there is no incentive to be the first, whether the next one do not care about it .Global climate is a global public good , which like many public good in economics end up in market failure. It means its overexploitation and destruction. The only way this failure might be fixed, is with a global institutional framework with the proper tools to deal with the implications of breaking the universal environment laws. The ones which says, that as the inputs apply over a fixed resource, the outcome will diminish. It follow that there is also a technological variable to take into account to deal with the problem. Faster Technological progress, matter. It will allow not only cleaner production process, but also to capture dioxide emissions. Thus, the problem of global warming have more chance of decisive action, when it come to individual action dealing the application of the new technologies, mainly those ones environment friendly. It also helps to get further progress, to have new international laws for market exchange mechanism of green bonds, or to consider environment protection into the productive process . All of these is hard to get by, with massive deployment of opinion. It might work better based on case by case approach.-

The euro perspectives: A Matter of cost

The alternatives for the Euro zone debt countries, has been progressively narrowing to the evaluation of two cost: a.- The cost of keeping the membership in the Euro club (I) b.- The cost of walking away from the Euro Club (II) The lower any of these costs ,decide whether it is better to stay in or to stay out. So far, it seems obvious that the second kind of cost, has been higher than the first one. Thus, there has not been a clear and explicit intention of leaving the euro zone .This the case of the smaller countries, which do not have the capabilities to deal on its own with the consequences of breaking apart from a framework which even with its weakness has been useful to improve the chance of collapsing and panic.- But what about those countries which do have the capabilities to deal on its own, with the consequences of leaving the Euro. Besides , these countries might have the resources to master the immediate effect on the financial sector and expectation, of a decision of such magnitude. With no clear policies to maintain the membership ,other than to adhere to strict rules few countries can afford, the euro at this point is no longer what it was expected to mean: A mean to get together the diversity. Instead it has become a burden for the recovery following the impact of the financial crisis of 2008, specially in the case of smaller countries of the euro zone. What comes next?: a.- It is unfeasibly the massive implementation of the Eurobonds. At most it might follow a selective approach. b.- Those bigger size countries of the Euro zone, still in trouble because of the heavy adjustment under way to keep the membership ,might decide to leave the Euro as soon as the cost (I) is higher than cost (II).- c.- Given the current probably scenario of breaking the euro apart, it is more feasible the implementation of the two speed euro zone. Thus , even within the euro framework and its rules, there would be the chance to allow those countries capable ot moving at a lower speeed, to works in some areas (specially the trade sector one) , with its own currency at an euro exchange rate , given by the European Central Bank.- d.- The austerity approach , is not longer a substitute for growth. The German engine running, is a guarantee to go further beyond austerity.-

Global economy uncertainty.The Unsolved European debt problem consequence

The still unsolved European debt problem, is charging its fee on the global economy current prospect.It seems that a global economy slow down, has become unavoidable. Policy makers are preparing theirs best tools to deal with it.Latin America average economic growth expectations, close to 4% a few weeks ago, might also be hit.However, quite to the opposite to previous experience, this time Latin America has better and more effective options to overcome the impact of such slow down.It has an healthy external financial credit,a banking system isolated from the the risk exposures of other global banks, and policy makers capable to coordinate policy response, in case it is needed. No matter the good economic stand Latin America has to face the current uncertainty , the key issue is still related to the real impact the European events, will have on the global economy as a whole.European zone is still in a recessionary mood ,and it perform like a brake to the global recovery dynamics. Whether the Euro zone is capable of dealing orderly with Greece economy weakness, it can make a difference.After all , it is not just up to the Greek Government to decide on its own, what it has no way to get control of.Either, to leave or to stay with the euro zone ,would probably be a joint euro zone and Greek Government decision. This means that in case it is decided Greece is better off out of the euro zone , it will be based on a plan to mitigate the cost. The critical issue would be if it happens the other way around.With no guide line plan,no clear path where the Greece economy is headed to, after such a move. In time of uncertainty, there still some room for trust in the quality of judgement of global leaders , politicians and Global financial institutions.

Latin America : Looking forward for its best alternatives Although it might seem unusual, Europe with its debt problem is in an alike situation to the one America Latina had in the eighties.Is Europe next to also have a lost decadae.Maybe so. The point to address is what America Latina has learned from the past. 1.- Ideology is not the best path to solve the social problems 2.- The State is not an efficient partner to complement the private sector 3.- Private investment need clear and stable rules 4.- Inflation does not pay off 5.- Property rights matter for goods exchange and investment decision 6.- Financial markets ,needs regulation up to the point necessary to be in charge of systemic risk, but no more than what it requires to do its resource allocation task.- 7.- Markets flexibility helps to get more competitiveness advantage All of the previous conditons one or another, have been presents in the current pace of economic growth of Latin America economies.Those closer to them , have better performance regarding those more distant from them. The question is what comes next?. It seems that the option goes in one direction, to pursue the path already done. Thius does not means to deny some corrrections, specially when it comes to unequalities and key services (education and heakth). But the core of aditional progress, it is hardly different to the one proved.-

Economics and the rule of Law

Most of the economics analysis of markets behavior , assumes a frictionless world without transaction cost . In the real world, there are transaction costs, the most important of them arising from legal requirements, because at the current technology level, perfect information is probably fully available, although it does not necessarily imply zero transaction cost because of different learning abilities. Thus, what about the legal costs?. When it comes to either good or services exchange, or for this matter any kind of exchange, economics is all about transfers of property right . Markets are an instrument to do so, in more efficient way than public authorities. Exchange and capital accumulation, work while there is a well designed framework, which protect those property right .Those countries which walk away from this “rule of law condition”, hurts the core of capital and wealth accumulation. Nobody will dare to invest, where there is no protection for the benefit of that investment .The premise that those wealth loses ,can be recover by the action of the state has proved to be false. Corruption and mismanagement, replace the efficiency, and there is no way this substitution might be considered neutral.- The Peruvian economist Hernando de Soto, has analyzed the correlation between the legal setting , business transaction and capital accumulation , concluding that those economies which work without such a proper legal setting , have significant wealth losses. Therefore, the rule of law, is a necessary condition to support wealth creation. Those countries which have made its way through up to the developed status, have been guided by key principles and a legal framework to facilitate the capital accumulation. Latin America ,do not have a strong tradition of being driven by the rule of law. Most of its tradition, deals with the role of the State in the economy, and the influence of those who control it who have made of the law a caricature : the law is accepted , but is does not imply a compromise with it. These days, we live in an interconnected global economy , with instantaneous mobility of financial resources, which walk away from those places with no legal framework. They compare transaction costs, and sure they will chose those places where those costs are the lowest. As long as Latin America need more private investment, it is not the time to move back to a situation which indicate to foreign investors they do not have a guarantee for the risks they assume by investing here to create more wealth.

The new global macroeconomics and sovereignty : A Narrower boundary

The current interconnection between different economies, the market scrutiny and the analysts surveillance of economic data, have transformed quite a lot the scope of the sovereignty issue. Just a couple of years ago, when the discussion about the new rules for global financial transactions took place , it was clear that there would be important losses of sovereignty , if there was any chance of making significant progress on the matter.-
The Free trade agreements with all of its benefits, in some cases also imply losses of sovereignty . Let take the case of Chile, which for the sake of getting the Free trade agreement with the USA, had to quit its option of unilaterally impose control (taxes) on its capital account. Greece has been able of restructuring its private debt, within the umbrella of the euro zone and its terms. The same apply for other European countries which within the Euro zone framework, had to quit to both its own monetary and fiscal policy .-
Thus, it seems that global economics is moving toward the so to speak, Global Governance based on global rules, coordination ,information and power sharing , which beyond the specific domestic rules of each country , becomes a necessary condition to facilitates trade and financial flows . If not, market will say something about it.
Is the global economics also evolving toward a Global Supra State?. Maybe so. But what kind of state?.Certainly, not the Keynesian one. On the other side, some leaders have questioned this “market interference”, on each country right to do whatever seems appropriate. Well, that might be the cost of technology spreading everywhere. Besides as long as we live in a flat economy, it is easier to check each other out.
Actually, It is hard to think of a country alone to be able of solving its own economic problems. Let take the debt situation in Europe, which has undoubtedly an impact on the recovery of those economies ,which are complementary because of financial and technological links, and at the same time ,on all of those economics which are depending on Europe economic growth, because of the kind of good European consumers demand. Latin America economic performance, is importing more goods from the USA and Europe, which turns out to have a positive impact on the prospect of economic growth as well. So, in such a case each economy is losing its ability to apply autonomous policies without affecting the natural flows of goods and capital. Argentina tried to do so with the implementation of restriction on foreign trade, and nobody felt indifferent about it.
What are the implications which arises from this link between more chances of benefit from global growth, but at the cost of the less sovereignty?. Some preliminary ones: The State, have to be more responsible and less discretional. Policy makers, need to act with more and better coordination among themselves.The power share buttom, is not off anymore.

The Life Cycle of economic reforms and Economic policies

A key constraint to the effectiveness of economic policies, might be the fact that most of the times, it requires complementary economic reforms of different nature to be implemented , before any evaluation concerning its outcome can be done. In other words, in many cases without such reforms ,there is no way economic policies will work its way through to get some goals which it was designed for. Just to mention a few cases: Increase employment: labor reforms to make wages more flexible, More Small and medium enterprises :Financial reforms to make credit more effective, Higher competitiveness level :state reform to make it more efficient ,Better innovation flow: educational system reforms to improve human capital quality, and so on.-
The problem with those reforms , is that not always match the timing that economics policies need. Thus ,it arises a lag between the right economic time ,and the proper political time . Besides, the political nature of the approval and implementation process creates a gap between what it is needed and what it is available for economic policies to be really effective. Even more, reforms have a life cycle, which imply that its stronger impact melt away sooner or later. Therefore, economics policies must be reviewed permanently, such that the new round of both necessary and complementary reforms are clear enough about its scope, timing and implications. Recent events, seem to validates the connection between economic policies and reforms to get the most of policy design.
This is a learning process, in a world without perfect rationality and market conectivity keen enough, to keep the atention on the whole process.
Those countries which lack a path of reforms to adapt themselves to changes and market turbulences, reduces the effectiveness of any economy policy designed to deal with it. At the time, it reflects the limitations economic policies have on its own to cope with the expectations to solve complex problems, without the support of politics. Economics and politics are closer than much of the main stream economist think.
A case study about this is the Euro experience. After more than ten years as a common European currency ,the Euro zone is still working on the require “fine tuning” reforms to be truly a monetary union, such that to make the euro what its founders expected to be : A strong currency to get closer the diversity.
The same might happen in Latin America, whether their leaders believe that with the reforms made in the nineties, has been enough to make all of the current positive result happen and staying steady. There are high expectations for few policy options, unless more additional reforms are implemented. What is in the first place?: The State reform.

The greek reestructuring debt: The (suggested)next step

The recent restructuring debt held by the Greek Government has important implications:
a.- The Greek economy can orderly default its privately held debt, without leaving the Euro zone .-
b.- The “ End of the road Dilemma ” for the Greek economy ,either to stay or not in the Euro Zone , from the economics point of view , does not longer exist The Euro Zone offer an umbrella type of framework . Greece on its own, is not capable of getting what it has so far: the expectation that after all things can be better .Moreover, actual Euro zone macroeconomics setting ,has not being designed to overcome the consequences of Greece leaving the Euro Zone.
c.- The substitution between private debt and public debt, does not solve the core of the problem, which is to adjust the country to the reality of being in a zone with severe rules to get the benefits from being part of it.-
d.- The question these days , deals with the willingness of the ruling Government and their politicians , to implement the necessary and proper reforms which are complementary to the successful restructuring debt program of March 8th . Public spending represents 48% of GDP, quite high for a country desperately needed of more private investments which requires modern and efficient public management procedures, to go along before it gets done. Besides, tax evasion practices, make such a spending proportion, a heavy burden for current scarce resources, because it creates a competition with any new resources available, which otherwise have more productive alternatives.
e.- The necessary competitiveness gains to stay within the Euro Zone, might also come from , focusing on what the Greek economy might be better suitable for . Greece has a good quality Human Capital (comparative advantage). Therefore, the Greek economy, should focus its human capital stock, in those sectors with better potential to transform a comparative advantage in a competitive advantage.-
f.- Greece has tourism (18% of GDP), and other sectors which use intensively human capital. High quality Human capital, means higher productivity (the other side of cutting wages).Thus, the Greek economy should pursue a focused strategy on all of those areas with important competitive advantage potential specially those ones related to services.-
Finally, the Greek economy is currently following a path which like a marathon, needs a strategy to look over the burden of debt. The most of the benefits from the proper reforms will be collected, whether those reforms are implemented sooner than later.

Labor Markets reforms: What really matters with it?

From the general equilibrium point of view, markets works propely when they are flexible enough to allow its equilibrium.Mosts of labor market reform, work toward that direction given the fact that unemployment is considered a disequilibrium.
The current global economic do not necesarily is founded on that premises.Unemployment might be part of a search process.Of course this search is the result of job expectations.If there is not such expectations, people just get out of that search process, and out of the labor force as well.
The point is that labor market reforms, usually take into account the first approach.It deals with lower entry cost to the firm, throughout lower exit cost.The lower this exit cost, the higher the chance of hiring someone.But it does not consider the training qualification variable.Firms need labor whichs is complementary with capital.It is not just any kind of labor. The better qualified the labor is, the more effective such a reforms might be.
But as usual, that qualification is not good enough, thus it might be insuficient to solve the problem a labor reform only focused in the entry cost.
Labor market reforms should incliude the training factor,just because people and firm search for training match and training qualification respectively, which can sustain labor services flow with high productivity. No matter the low cost of hiring , firm will not get into its productive or management process, people not qualified for it.Therefore, some complementary incentives to improve on the job training ,works in the right direction.

Small and medium size enterprises: The road to more jobs (II)

The global economy needs to create more han 600 million jobs in the next decade.Three quarter of them because of population growth..-
The pice of capital goods is decreasing because of the scale factor at the global economy level, technological progress, and free trade.This lower prices induces a substitution from labor to capital specially in the manufacturing sector ,which might imply slower rates of employment gains in the that sector.Besides ,current unempolyment levels in ost of the advanced economies , make aditional pressure on the employment gains side.
Therefore, the goal of creating more jobs have some constraints other than those related to labor policy desing.
Thus ,the question is where those jobs will come from ?
The answer to this question is the importance of SMZE to the issue. It means that policy makers have to focus on those incentives more suitable to let the SMZE enterprises to do what it can do best : Create jobs, and support innovation. On the other side ,much of those new jobs need to be more quailified , given the fact that these kind of jobs are complementary with capital goods.-
The whole design of SMZE policies is a new challenge for the traditional macroeconomics setting, quite fiited to aggregate variables, but not that much prepared to understand the new dinamics of the mix economics (micro and macro at the same time).
Some of those new policies might include.
a..- Tax incentives
b. On the job Training facilities
c.- Closer link with educational entities (Univerisites)
Better market flexibility might help, but not that much if it does not considers more qualification and trainig needs.-

Small and medium size enterprises(SMZE): The road to more jobs (I)

S

SMZEs have been considered in many countries ,to be the core for economic dynamism and growth. When these firms get its market target and become well positioned to compete, it creates not only additional jobs, but also are a source of innovation .
Global economy characteristics have important implications for SMZEs: It increase connectivity, it increase markets size ,it develops new market segments because of fragmentation, it foster innovation and value added.
On average , 98,5% of total enterprises in Latin America, are SMZEs. The remaining 1,5% are in the upper size category .It is well known the impact SMZE have on employment: 75%(roughly) of employment in Latin America economies arise from SMZEs. Leaving aside Costa Rica which has the highest level of employment arising from big enterprises (45%),,the percentage goes even higher (almost 80%).These data are not accurate enough to draw a definitive assessment , but it make clear the relevance for the social outcome , the SMZE have for the economy. Even though they do not have a strong performance in the exporting sector (15% in Argentina,2% in Brazil,4,8% in Chile, less than 20% in Mexico ,and 2,2% in Peru, Source: Center for the promotion of SMZES ,R Servat. Peru, 2005), the main positive externalities of these firms, are jobs. In 2011, unemployment in Latin America was 6,8%,probably because of SMZEs employment gains due to economic growth.
In fact, the road to employment is within the SMZEs area, no matter whether they are from the services or productive sectors. However, it is not a wise approach to take them for granted , because SMZEs also have weakness ,which can be decisive in times of economic crisis to fulfill its expected job creation capacity. Let review some of them :
a.-Limited access to financial sources, which is an important constraint when the economy is in recession. The Chilean experience on this issue (1997 ,2009),shows that SMZEs access to stable credit for cash flow ,does matter.
b.- The quality of management is behind the best practices .Most of Latin America SMZEs, do not have a standardized procedures and quality standards .They survive with informality , which it turns out to be a constraint for the capital accumulation process.
c.- Low level of networking support for its operations .In Chile , only 35% of SMZEs(roughly) ,have internet connection,(the area of services instead (commerce )with 44%).Thus, without the internet support, productivity is lower than otherwise, market information is available with delays and lags which means loses of business opportunities.
All of these weakness, do not mean that SMZEs lack of strengths. They do have the ability to get innovation flow, they do have flexibility to adapt itself to new market conditions as well. More than 60% of global business come from SMZEs. In fact, because of theses strengths, these kind of business is the one which have benefit most, from global economy growth.

Germany at its best hour: Leadership for european economic recovery

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

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

2012: Some guidelines

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

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

Will the Euro survive?: EU at its critical hour

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

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

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

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

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

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

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