So much for the reduction of inequality

According to the FT, bankers' salaries in Latin America (particularly Brazil) are growing rapidly and are higher than in many other countries. This surely will have impacts on inequality; in fact, exploring what is happening with income at the top is key if we want to understand how the Latin American model is evolving.

The evolution of macroeconomics

Mankew offers an interesting account of the evolution of Macroeconomics. He argues that the discipline is divided between engineers and scientists; the former want to develop tools to intervene in policies while the latter want to understand how the economy really operate. In many ways, the engineers continue to operate with a IS-LM model that is useful for policy but was developed a long time a go. New Classical and New Keynesian theory has influenced little the policy debates (and the teaching at the undergraduate level).

This is an interesting point, but one that fails to tackle a key point: why should we consider new classical and new Keynesian models "good" science? At the end, it seems to be because they have higher levels of mathematical sophistication and clearer roots in individual maximization. But at this point in history, we need to go back to the question of why we need to build Economics (and social science more generally) around methodological individualism and rational choice. In fact, the crisis (and even globalization more generally) is a clear demonstration of the importance of structural processes and factors, no?

At the end, then, New Classical Macro was both bad policy but also bad science...

Inflation fundamentalism

Good news! More criticisms of inflation fundamentalism and more calls for a more expansionary monetary policy... and for the obvious political reasons!

Robin Hood Tax

Here you can find a great video in defence of the so called "Robin Hood Tax". Doesn´t it really make sense? What would be the arguments against it?

A sign of restraint

A $9m bonus is now seen as a sign of restraint...

Wolf from Davos with right comments on the crisis

Here are some reflections from Martin Wolf on the current state of the world economy. A couple of particularly interesting points:

a. For those of us that prefer the European social-democratic model to any other, it is painful to see how badly the EU manages its macroeconomy. An excessive concentration on stability and a lack of any kind of coordination between poor and rich countries could lead into a permanent recessionary environment in several countries (including Spain).

b. After a year of significant expansionary programs, why are we rolling them back so quickly?

c. Will most Latin American countries really follow a V-shape trajectory? What will happen with Mexico and Central America, which face significant external weaknesses?

Samir Nair on the unjustice of history

Samir Nair argues in El Pais that the last year has shown a political paradox (he talks about "the ingratitude of history"). The financial crisis has demonstrated the weakness of globalization, but the anti-globalization movement has been unable to capitalize and to build a real political response. I think the paradox is even larger than he argues: why hasn´t the world seen more social mobilization and more protests in the last year? Why are we all accepting the expansion of profits in the financial system AND growing austerity measures, when both have been the result of the programs to support the banking sector (programs that were, in my view, needed). One wonders if this is just a result of a growing structural weakness of trade unions and social movements all over the world...

Spain´s erratic economic policy

The Spanish government has just announced an austerity plan, which aims to reduce the public deficit from 11.4% in 2009 to just 3% in 2013 (see here for the article in El Pais in Spanish and here for the FT in English). A few reflections:

a. The Spanish government policy has been rather erratic in the last two years and there is not much sense of direction. The situation is obviously quite difficult, but it would have made more sense to evaluate the situation rightly and maintain consistent policies.

b. I thought the crisis had shifted the macroeconomic policy debate... but I am no longer sure. Yes, it is true that many countries have run high deficits, but the concentration on returning to stability as soon as possible is still dominant. More importantly, the favourite sentence of most politicians is still "we need to preserve market confidence". What is exactly what markets want at the moment? And should that be the only concern?

c. We probably should make more comparisons about the effects of the crisis in Southern Europe and the big Latin American countries. For once, the situation in the former seems to be much worse in the latter... Is it all about the housing market?

The danger of technocracy in Haiti

Duncan Green (from Oxfam) is convincing on his criticism of some of Paul Collier´s ideas for the reconstruction of Haiti. It is still amazing how little many economists understand about politics and the role that DOMESTIC institutions and DOMESTIC social movements must play in the process of development. External actors can help in the short run but will be totally ineffective in the long run unless a real, effective state is created and social movements are strengthened. When are we going to realize that technocratic solutions are both ineffective and also political in themselves?

Fifteen years of NAFTA

A new working paper by Ciro Murayama reviews Mexico´s economic performance since the approval of NAFTA (fifteen years ago already!). The document does not reveal anything that we didn´t know, but it highlights once again the importance of active policies to overcome the weakness of the Mexican model.

The paper is in Spanish, but here it is part of the summary in English:

"The explanation of those poor results rests on the fact that Mexican economic
policy just went looking for to the goal of trade’s liberalization without take care
of the industrial or agricultural public policies to impulse the domestic
production. In addition, public investment in Mexico suffered a hard reduction
that means that Mexican governments misplaced the mission of the state to
impulse the development. Mexican policymakers fail out when they trusted that
free trade is enough and sufficient condition to be successful in develop an
economy."

Short book on the new left

The Wilson Centre published a short edited book on the new left and political governance in 2007 that I had not discovered. It sounds promising. A Spanish version of Kauffman´s article can be found here.

Not good!!!!

Demos offers some evidence on the changing structure of the financial sector in the US. There are now fewer banks in the United States but they are larger, more complex and have continued investing in risky assets during 2009. Somehow it just seems that we are about to lose a big opportunity to modify our global development model and that we could have a new crisis in the near future. Definitely not what some of us expected and very bad news!!!!

Piñera wins in Chile

After twenty relatively successful years, the Concertacion has lost the Presidential elections in Chile and the right will be in power for the first time. There are many reasons why this may be bad news, including the fact that Piñera is a billionaire with a TV program (does Berlusconi ring any bells?) and that a slow down in progressive socio-economic reforms should be expected (in a country where reducing inequality has been difficult). Yet if one wants to be optimistic in these difficult times, there are two facts to remember:

a. This was the final step needed for the consolidation of democracy.

b. This gives the Concertacion a unique opportunity to redefine their agenda and, hopefully, move to a more progressive path.

Will they use the opportunity? And will we see more continuity or change?

Moody´s decision on El Salvador

According to the daily brief of Oxford Analytica, "Moody's recently downgraded El Salvador's foreign currency government bonds from Baa3, the lowest investment grade level, to Ba1, with a negative outlook. The ceiling for foreign-currency bank deposits also was cut from Baa3 to Ba1, with a negative outlook."

Could this be in part politically motivated? Other countries (the Dominican Republic comes to mind) are also experiencing problems but have not witnessed a change in their grade of their debt....

Simon Lund: uest contributor on inequaltiy

Here you have an entry from a guest contributor (and great former student!). I hope he continues to contributing in the future.

The debate is terribly important for Latin America as well:

In a recent article for The American Prospect, Professor Dalton Conley opines that it is wrong to target inequality and to seek links that don’t exist between inequality and negative social outcomes. It is better, he says, to focus on increasing opportunities, especially for the very poorest.

There are two issues here: the first is whether wealth and income inequalities negatively affect social outcomes such as prison populations, health, trust, etc. The second is whether policy-makers should aim to improve outcomes or opportunities. Prof. Conley opts for the latter. To deal with the second point first: like all proponents of this argument (that equalising opportunities is always preferable to equalising outcomes) he ignores the fact that the two are inextricably linked. Individuals born into rich households (an outcome) will always have more opportunities, which in turn produce more favourable outcomes. So, the decision to send one’s child to private school (an outcome) may well produce higher exam grades (an outcome) and the possibility of a place at one of the country’s better universities (an opportunity). Once this has been achieved (and has become an outcome) the individual will have the chance to choose a rewarding career (an opportunity) earning a high salary (an outcome). As this example demonstrates, although outcomes most certainly flow from opportunities, opportunities also flow from outcomes and the difference between the two is simply a temporal one. Therefore, for politicians to simply declare they are “on the side of aspiration” will not increase opportunities, let alone produce better outcomes. However, investing in free, high quality pre-school childcare for all children (an outcome) regardless of social class, as occurs in Scandinavia, will improve cognitive performance and life chances (opportunities) across the board.

Regarding the first point about inequality and social outcomes, the evidence gathered by Richard Wilkinson and Kate Pickett in their 2009 work The Spirit Level points very clearly to the fact that more equal societies such as Sweden, Germany and Japan experience more favourable social outcomes than more unequal societies such as the UK, US and Portugal. And if it is income alone that concerns us, then we should recall that per capita incomes in Scandinavia, Denmark and the Netherlands exceed those of the US.

I will finish by rebutting two statements made by Prof. Conley in his article. The first is that income inequality saw its most dramatic rise under President Carter. Not true. According to the US Census Bureau, the US Gini coefficient (for households) rose from 40 to 41.2 on Carter’s watch; and from 41.2 to 43.8 on Reagan’s. The second statement is that during a recession inequality matters less because “families are too worried about their own finances to be concerned how the Joneses are doing.” This is wrong-headed. Firstly, rising incomes at the top at a time of wage compression for middle- and low-earners only serves to highlight disparities that were previously hidden by growth (or borrowing), and can give rise to what A.O.Hirschman called the ‘Tunnel Effect’. Secondly, as Gillian Tett said this week, socially cohesive countries such as Japan will find it easier and more politically acceptable to pay down the government debt accrued during a recession because of their ability to spread the pain among the whole population. This is why Moody’s, the rating agency, is trying to create a rating for social cohesion and stability. In a much talked about op-ed piece, Jim Manzi has said something similar regarding social cohesion and growth. Whether times are good or bad, it would seem that there are definite advantages to being a more equal country.

Simon Lund

Nothing has changed!

According to the NYT, Wall Street will distribute bonuses of up-to eight figures next week. Goldman Sachs will give each of its employees an average of nearly $600,000. Is it possible that so little has changed after the Global Crisis? The bail-out has saved banks but not changed their behaviour... How long until people really revolt? And does this mean that income inequality will (sadly) remain high in the Americas?

Devaluation in Venezuela

The Chavez´s administration has decided to devalue its currency in respond to the current economic situation. This is, in many ways, good news for the country and reveals:

a. That the government is willing to implement unpopular measures--even if later than expected.
b. That the non-oil economy could begin growing for now on.

However, it may also demonstrate the difficulties that Venezuela may have to maintain its macro-policy in the future. Could that result in changes in the country and the region?

Indigenous protests in Ecuador

According to a recent daily brief from Oxford Analytica, indigenous protests are intensifying in Ecuador with discontent with the government´s mining policy:

"Government policies to attract mining companies to Ecuador have excited strong reactions from the country's highland indigenous communities. Indigenous groups argue that the detailed regulations that would implement the government's Mining Law have not been properly discussed in negotiating committees. Ecuador's mining potential has become increasingly evident in recent years, thanks to a number of exploratory surveys by foreign mining companies. Conflicts between rural communities and mining companies have erupted into major battles in neighbouring Peru. Indigenous groups in Ecuador are demanding that all mining concessions to private companies should revert to the state."

In my view this is one of the most relevant conflicts in Latin America at the moment because it reflects the difficulties that the left is facing to devise a coherent model of development. We have two positions that are at times difficult to reconcile:

a. The modernizing left, which wants to promote economic growth and equity through industrial policy, universal social policy and, more generally, active state intervention.

b. A "small is beautiful" left (for lack of a better name!), which questions the modernization project altogether and wants to concentrate on community autonomy and the protection of the environment.

Which of the two projects make more sense? Are they compatible? These are questions that we must confront both theoretically and in terms of policy if we are going to consolidate a more progressive development path.

Spain's grim future

Martin Wolf rightly forecast difficult times for Spain. Is the country prepare for it? Can developing countries, particularly from Latin America, learn from its experience? We can expect four or five years of very low growth, but institutions, political parties and citizens do not seem to accept it.

Walmart´s new sourcing strategy: what impact on developing countries?

According to the FT, Walmart just announced that it aims to manage its supply chain on a global basis:

"Walmart is launching a drive this year to cut billions of dollars of costs from its supply chain by combining its store purchasing across national frontiers in a new stage in the globalisation of its business.

The effort is part of plans by the world’s largest retailer to increase the proportion of goods that it buys directly from manufacturers, rather than through third-party procurement companies or suppliers."

This could contribute to further alter the opportunities for many developing countries as Walmart increases its bargaining power over domestic suppliers all around the world. At the end, then, the crisis may accelerate the concentration of lead firms in many sectors and further reduce value added in Central America and other regions of the developing world.