Monday, March 22, 2010


Via Greg Mankiw (who if you're not currently reading, add him immediately to your daily list!)

Wednesday, March 10, 2010

Well, an issue certainly

Sebastian Piñera becomes President of Chile this Thursday.

Chile is, by nature, a centre-of-right country. The energy sector and the waterworks are within the private sector and the law makes the existence of wide-scale deficit-financing basically verboten.

So, after the years of Bachelet, who was in all accounts a terrific president, pushing constantly for the social aspect of liberty, Piñera's reign was bound to be pleasant and straightforward.

He would overturn slowly but surely many of Bachelet's economic decisions and steer the country gently back towards the path that has shown to lead to immense progress.

But the earth was shaken from beneath him.


So now, Piñera's first years of economic progress will instead be dedicated to a large-scale project for the restoration of Chile.

When disaster strikes, the reply "Let the markets take care of it" sounds callous, evil yet. Even if it
works (PDF link).

Now, Piñera, who must fight to keep afloat above Bachelet's exiting 80+% exit approval rate, will no doubt invest heavily in government solutions to the earthquake crisis.

I'm not saying this is right or wrong. In the face of strong adversity, it is even inhumane to stand back and wait for the market to take care of things, even if it will necessarily do so.

Politically though, this means that Piñera's honey-moon year will be spent on rebuilding. With deficit-capping legislation, the Piñera administration might even have to raise taxation percentages to fund the restoration.

Within the realm of palatable politics, the Piñera administration should help eagerly in the rebuilding of Chile, even if it means reshifting its planned budget to fund mainly infrastructure projects.

Parallel to this, however, he should also press for market solutions, viz. (i) enforcing property rights to prevent looting; (ii) avoiding price controls which would force already destroyed businesses out of, well, business; and (iii) cutting government expenses across the board (except in infrastructure brackets) so that the private sector can rapidly fund itself back to its feet.

If this path is taken, and the expenditures and results are carefully monitored, Piñera will come out with a strong case for market forces and will have earned sufficient approval to carry out system-wide free market reforms.

Reforms which, after all, got Chile to its current superior economic position.

Monday, March 8, 2010

O kírios tha plirósi giá óla

This bit of news comes as an interesting study between short-term gain and long-term catastrophe.

I am thoroughly uneducated with regards to this matter, but from what I can deduce from the article and additional research, a law is in the making in Nicaragua that would allow thousands of local low-income producers to renegotiate their debt with microfinancing institutions.

Usually, poor families do not have either the money to pay and sustain a bank account or gain proper credit rating or do not have sufficient collateral to pledge as security for bank loans.

Therefore, they are usually left outside of traditional banking schemes. Not because banks are evil profiteering entities, mind you, but because if they granted these loans with very little security they would be losing your money in the process.

Enter the microfinanciers. Microfinance seeks to take care of that demand of loans by providing low-income families with low quantity, short term loans at reasonable interest rates, allowing millions of families around the world to have funds to finance their own projects, say, a new chicken coop or a new cow. Nothing big, but it definitely is substantial for them.

However, this article points out an interesting trade-off. One the one hand you have the short-term gratification of producer interests. They can't pay back right now, so a renegotiation opportunity would allow them to get lower interests within the same or longer time frames. This goes against the natural grain of lending practices, which states that the longer a loan lasts, the higher the interest rate.

On the other hand, if you were a microfinancier, you wouldn't be interested in setting up shop in a country where government could unilaterally modify private loan documents.

In fact, you would be driving microfinanciers away, because regardless of their kind hearted goals, they still must break even or profit if they are to continue in business.

So, what is the solution? Renegotiate debt and save thousands of indebted producers? Or protect the microfinancing industry from the ravages of government sanctioned intervention?

Maybe the correct response lies in neither option.

Many economists agree that local low-income families in many Latin American nations have thousands of dollars of collateral, but cannot touch that bounty because of socialist land redistribution schemes.

With proper property rights and a decent credibility in the rule of law, low-income families could use the land they own (but is currently not recognized as property by the government) to access thousands of dollars in loans. Rather than building a new chicken coop, they could invest in high-end technical solutions, like the Chickentron Egg Replicator 3000.

Ok, well, maybe two new chicken coops.