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  • The Challenge Ahead for Commodity-Price Dependent Latin American Economies

    Andrés Velasco , former finance minister of Chile, is not exactly bullish on growth in his country and across the region. At Project Syndicate , he lays out the challenge ahead. If Latin American economies do not diversify sufficiently, then maintaining anything close to the recent rate of growth will be difficult. Velasco: It is pretty clear by now that an extraordinarily benevolent external environment, not a revolutionary policy shift, underpinned Latin America’s rapid growth in the years following the 2008-2009 global economic crisis. As long as the price of soy, wheat, copper, oil, and other raw materials remained stratospheric, commodity-rich countries like Brazil, Chile, and Peru got a tremendous boost; even Argentina grew rapidly, despite terrible economic policies. But now “secular stagnation” – the concept du jour in US policy debates since former Treasury Secretary Larry Summers argued last November that the US (and perhaps other advanced economies) has entered a long period of anemic GDP growth – may also be coming to Latin America. The argument goes like this: high consumer debt, slowing population growth, and rising income inequality have weakened consumer demand and stimulated savings, while slowing growth in productivity and output itself has discouraged investment. So the “natural” rate of interest – the rate at which the demand for investment equals the supply of savings – has fallen, and arguably has become negative. But, because real interest rates cannot be strongly negative unless inflation is high (which it is not), there is a savings glut. With consumption and investment lagging, the US economy is bound to stagnate. But how could such a situation apply to Latin America, where GDP growth is faster, interest rates are higher, and domestic demand is stronger than in the US? Consider the region’s history. Until the recent commodity-driven boomlet, growth in Latin America was mediocre. The 1980’s are known as the “lost decade,” owing to a debt crisis and massive recessions, while the market-based reforms of the 1990’s did little to reignite short-run growth. From 1960 to 2007, only four countries in Latin America and the Caribbean – Brazil, Chile, the Dominican Republic, and Panama – grew faster than the US. So meager growth in the coming years would be a return to Latin America’s historical pattern, not a deviation from it. Read Secular Stagnation Heads South here .
  • Swiss Pay Remains the Best Pay

    If salary matters most to you, you will want to try to get a job in Switzerland. In Mercer 's latest International Geographic Salary Differentials , Switzerland dominates the rankings (of course, this report doesn't cover how expensive it is to live in Switzerland ). Some other interesting findings from the report include Venezuela as the place with the highest gains in salary over the last year. The full report is available for purchase, here . But here are some of the key findings (full size graphic available here ):
  • The Challenges of a Rising Global Middle Class

    One of the great positive global economic stories of the young 21st century--perhaps the top story--is the rapidly rising middle class in developing nations across the globe, especially in South America and Asia. But Johannes Jütting ,Head of Poverty Reduction at the OECD Development Center in Paris, warns us not to overlook the challenges that a burgeoning new middle class bring to nations and the global economy. Writing at Project Syndicate , Jütting argues that the middle class's "dreams" can become "nightmares" if policymakers get complacent and overlook the structural challenges that they must face: In today’s shifting world, with GDP in roughly 80 developing economies rising at twice the rate of per capita growth in the OECD, the club of the world’s richest countries, middle-class citizens paradoxically complain and protest regardless of whether fortunes improve or decline. Moises Naim, a former Venezuelan minister of trade and industry, even warns of a possible “emerging global war of the middle-classes.” While anger over pay cuts and unemployment make sense, it is harder to understand the current protests in fast-growing countries like Thailand and Chile, where standards of living are improving. What is going on? High growth in Asian and southern countries has meant greater export earnings and rents from natural resources. Unfortunately, this blessing can turn into a curse. In China, former Communist leader Deng Xiaoping’s vision – “let some people get rich first” – has led to impressive economic growth and poverty reduction; but it has also undermined the self-proclaimed “harmonious society,” as recent protests and labor conflicts indicate. Indeed, it is telling that, in the spring of 2011, Beijing’s municipal authorities banned all outdoor luxury-goods advertisements on the grounds that they might contribute to a “politically unhealthy environment.” Rising inequality, lack of civic participation, political apathy, and a dearth of good jobs, particularly for the young, comprise the Achilles heel of emerging-market countries’ current development model. A Gallup poll on subjective well-being in Tunisia and Thailand shows that, while income levels and social conditions in both countries improved between 2006 and 2010, life satisfaction dropped. Read The Middle Class Goes Global here .
  • Harvard Business Review: 'How to Start and Entrepreneurial Revolution'

    In the latest Harvard Business Review , Daniel Isenberg , professor of management practice at Babson College and executive director of the Babson Entrepreneurship Ecosystem Project, lays out a comprehensive list of action items for government that seek economic growth through creating a thriving "entrepreneurial ecosystem." Isenberg sets up the opportunity for governments to spark entrepreneurship by taking a trip through Costco, and pointing out the products that come from small countries that he says represent strong business climates: Rwanda, Chile, Israel, and Iceland all are fertile ground for entrepreneurship—thanks in no small part to the efforts of their governments. Though the companies behind the products on Costco’s shelves were launched by innovative entrepreneurs, those businesses were all aided, either directly or indirectly, by government leaders who helped build environments that nurture and sustain entrepreneurship. These entrepreneurship ecosystems have become a kind of holy grail for governments around the world—in both emerging and developed countries. Unfortunately, many governments take a misguided approach to building entrepreneurship ecosystems. They pursue some unattainable ideal of an ecosystem and look to economies that are completely unlike theirs for best practices. But increasingly, the most effective practices come from remote corners of the earth, where resources—as well as legal frameworks, transparent governance, and democratic values—may be scarce. In these places entrepreneurship has a completely new face. For leaders and policymakers that wish to follow these examples, Isenberg provides these rules: 1: Stop Emulating Silicon Valley. 2: Shape the Ecosystem Around Local Conditions. 3: Engage the Private Sector from the Start. 4: Favor the High Potentials. 5: Get a Big Win on the Board. 6: Tackle Cultural Change Head-On. 7: Stress the Roots. 8: Don’t Overengineer Clusters; Help Them Grow Organically. 9: Reform Legal, Bureaucratic, and Regulatory Frameworks. Read Isenberg's detailed descriptions for these action items in his HBR article, The Big Idea: How to Start an Entrepreneurial Revolution . Click here .
  • Jeff Frankel Praises Chile's Countercyclical Fiscal Policy

    Harvard Kennedy School professor Jeff Frankel , director of the Program in International Finance and Macroeconomics at the National Bureau of Economic Research , has an interesting look at the popularity of Chile's outgoing president, Michelle Bachelet . Bachelet and her administration were deeply unpopular in the summer of 2008--pulling the lowest approval ratings of and leaders of Chile since "the return of democracy," according to Frankel. But with the global economic crisis came newfound appreciation for Bachelet and her economic policies. Frankel calls those policies--in which the government resisted spending off its commodity (mainly copper) assets during boom times, then spent the savings during the global recession--"a truly countercyclical fiscal policy." And he says Chile, which just joined the OECD, essentially moving out of the "developing nation" category, provides a strong example for other developing nations: Under the Chilean rules, the government can run a deficit larger than the target to the extent that: (1) output falls short of potential, in a recession, or (2) the price of copper is below its medium-term (10-year) equilibrium, with the key institutional innovation that there are two panels of experts whose job it is each mid-year to make the judgments, respectively, what is the output gap and what is the medium term equilibrium price of copper. Thus in the copper boom of 2003-2008 when, as usual, the political pressure was to declare the increase in the price of copper permanent thereby justifying spending on a par with export earnings, the expert panel ruled that most of the price increase was temporary so that most of the earnings had to be saved. This turned out to be right, as the 2008 spike was indeed temporary. Any country, but especially commodity-producers, could usefully apply variants of the Chilean fiscal device. Given that many developing countries are more prone to weak institutions (Greece comes to mind), a useful reinforcement of the Chilean idea would be to give legal independence to the panels. There could a requirement regarding the professional qualifications of the members and laws protecting them from being fired, as there are for governors of independent central banks. The principle of a separation of decision-making powers should be retained: the rules as interpreted by the panels determine the total amount of spending or budget deficits, while the elected political leaders determine how that total is allocated. This may be just the sort of structural reform needed in so many countries where the politicians have repeatedly proven themselves unable to maintain long-term budgetary discipline. Read Achieving Long-Term Fiscal Discipline: A Lesson from Chile here . (Hat tip: Mark Thoma)