Thursday, December 19, 2013

Not enough high potential enterprises are created in Latin America

Summary of an article published in Spanish in Revista Gestión of Ecuador, Dec. 2013

By Luis Fierro Carrión

Latin America suffers from a problem of low productivity: the human and physical capital of the economies of the Region are not used adequately in the production of goods and services.  This phenomenon explains in part why the Region has not achieved more dynamic growth rates since the past century, which in turn has prevented its average income per capita to converge towards the levels observed in more advanced countries.

Among other factors, this low productivity is due to a relatively low level of creation and growth of enterprises of high productive potential.  Even the government of Ecuador has expressed its interest in promoting a “change of the productive matrix” to achieve higher levels of productivity, and, tied to this, higher income per capita.

The relative absence of high-growth companies in the Region is the main topic of the “Economic and Development Report” (RED 2013) of the Andean Development Bank (CAF) this year, with the title "Entrepreneurship in Latin America: From Subsistence to Productive Change" (

According to the report, what are the main causes of the low level of creation of enterprises with high productive potential in the Region?  

The study asserts that the small size of the companies and their poor growth dynamic is not due to the lack of individuals with entrepreneurial skills: that is, persons with a creative and innovative thought, with managerial skills, focused on results, and able to tolerate risks.

The document postulates the hypothesis that there is an “informality trap”:  “given the lack of employment opportunities in the formal productive sector, an important proportion of the individuals with relatively low entrepreneurial skills decide to open micro and small businesses, that not only generate low and unstable income, but that also prevents them from accumulating labor skills and capacities, which in turn reduces over time their potential to transition towards a formal sector employment”.

In this context, the proliferation of microenterprises becomes an obstacle for the “emergence of transformative new companies, and the expansion of the already existing ones, given that there is not the sufficient skilled labor force that would be needed in case these would grow at an elevated rate.  This situation places the region in a sort of informality and low productivity trap, in which there is no entrepreneurial growth because, among other things, there are no workers with the required skills and this, in turn, occurs because there are few companies that generate labor opportunities that would create disincentives for informal micro-entrepreneurship” (p. 5).

Another factor would be the lack of access to credit, and the absence of companies that can “spill” technological know-how in the different productive sectors.

According to the Report, some tax, credit, labor and social policies would have the effect of “limiting the growth of formal and high productivity enterprises, while incentives are generated for the creation and survival of microenterprises that only provide employment to their founder and perhaps some family members, and that usually have scarce added value”. For example, their high costs of firing workers would inhibit these small enterprises form hiring personnel from outside the family.

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Wednesday, December 4, 2013

Presence on social networks

Regarding my presence on "social networks", the number of contacts is somewhat inversely proportional to how "public" each site is:  470 connections on LinkedIn (; 400 "friends" in Facebook; 147 "circle members" in Google+; 92 followers in Tweeter (@LatinoEconomist); 1 follower on this blog (

Monday, November 18, 2013

The slowdown of the Chinese economy

A version of this article was published in Spanish in "Revista Gestión" (

The slowdown of the Chinese economy

By Luis Fierro Carrión

In recent months, alarm bells have been going off about the likely slowdown of the Chinese economy, which could have negative effects for the world economy, and in particular for commodity exporters such as Ecuador and other Latin American countries.

During 33 years (1979-2012), the average annual growth rate of China was close to 10 %, and it became the second largest economy in the world.  The GDP per capita increased from $250 in 1980 (measured in purchasing power parity) to $9,185 in 2012 - that is, it had a 36-fold increase!

This extraordinary growth reflected diverse trends:  the reincorporation of China into the world market; the capitalist development (within a Communist political regime); urbanization; industrialization; opening towards foreign direct investment and joint ventures, etc.  There were some particular characteristics of the hybrid Chinese model, such as the expansion of state-owned enterprises (SOE), financed by the equally state-owned development banks.

But in part this accelerated growth simply reflected starting off at such a low base, after many decades of economic stagnation, "cultural revolution", state ownership of the means of production, and military conflicts.

The official growth rate target for 2013 is 7.5 %, but it is likely that this figure will not be met.  The longer term prospects for the future are even less auspicious, as economists believe that China is entering into what is know as the "middle income growth trap".

The rapid urbanization process seems to have reached excessive levels, with high urban rates of pollution:  16 of the 20 most contaminated cities of the world are located in China, and the life expectancy in Northeastern China has started to decrease as a consequence of respiratory and other illnesses associated with pollution.

Workers are starting to demand higher salaries and better working conditions, which will make a model based on cheap labor untenable.  Investment - that is as high as 50 % of GDP - is facing decreasing returns, as the labor surplus is falling.  The Chinese stock market index (SSEA) has fallen by 8 % since December 2012.  The state-owned financial system is facing increasing disequilibrium   And the population is ageing, and growing at a slower rate (with the added problem of having more males than females).

The slowdown in China has already had a negative effect on the prices of commodities.  The price of metal products, for example, has fallen by 6.5 % thus far in 2013, and the price of gold by 26.2 %.  This has affected commodity producing countries, such as Australia, Brazil, Peru and Chile; and it could also affect oil exporters, if the same trend starts to be felt in the oil market (the price of the West Texas Intermediate benchmark has fallen by 7.9 % in the month to November 12, although it is still up for the year).

What can countries such as Ecuador do to confront the Chinese slowdown?  Diversify its productive matrix and its commercial partners; depend less on commodities, and more on the increase of productivity of manufacture and services; depend less, as well, on Chinese financing, which will probably become less available and more expensive as China experiences growing economic and financial difficulties.

Monday, October 21, 2013

Oil demand could reach peak, oil prices could fall

By Luis Fierro Carrión

(A Spanish version of this article was written for Revista Gestión of Ecuador)

For several decades, some environmentalists and critics of the oil industry have warned that oil production could reach a "peak", due to - supposedly - its over-exploitation and decrease in reserves.  This "peak oil" phenomenon, however, has never materialized, and production has been increasing steadily, from 15 million barrels per day (mbd) in 1950, to about 60 mbd in 1980, and 89 mbd today.  The increase in the supply has taken place at the same time that the international price of crude oil has risen, reaching historical records in recent years.

In recent months, however, some analysts and institutions have begun to warn that, to the contrary, what we seem to be approaching is a "peak demand" for oil, as the global use of hydrocarbons seems to have reached a maximum.  Citi, for example, estimates that the demand could reach a maximum of 92 mbd within a few years, an analysis that coincides with the auto parts manufacturer Ricardo, and with the British magazine The Economist.  Even BP, one of the main oil multinationals, estimates that demand growth will decelerate, and reach a maximum of 104 mbd towards 2030.  The OECD and the World Bank also foresee an eventual reduction in the demand, and, consequently, a fall in the price of oil.

The fall in oil demand responds to several trends.  One of them is the development of new sources of energy, including shale oil and gas in North America and other regions; the expansion in renewable energy, especially in Europe, Japan, and North America; and even investment in nuclear energy in China and the Middle East. The production of shale gas in the United States and Canada, in particular, could enable North America to become self-sufficient within a few years.

Another important factor is the increase in energy efficiency, in areas such as transportation (hybrid vehicles, electric cars, and other technologies); in industry, at home, etc.  

Growth is also slowing down in the emerging markets, particularly among some of the BRICS (in China, India, and Brasil), and these countries are also investing in energy efficiency, renewable energy, and in reducing greenhouse gas emissions.

The fall in demand and the increase in supply (both from crude oil and other energy sources) will probably lead to a substantial reduction in the international price of oil.

What can oil-exporting countries do to adapt to this scenario?  In general, they should have been investing the windfall revenues from the current high prices, through a sovereign investment fund (such as those in Norway or Kuwait), or directly in the generation of hydroelectric energy and other forms of renewable energy; as well as in the development of other sources of income. Another option is to expand the exploitation of natural gas, liquified petroleum gas, shale oil and gas, sand oil, and other sources of energy.  

Some oil exporters have very high subsidies on internal gasoline and gas consumption, which should be eliminated, or even reverted into a "carbon tax" (so as to discourage the over use of hydrocarbons, reduce greenhouse gas emissions, and promote energy efficiency);  these energy subsidies also tend to be very regressive.

Monday, September 30, 2013

Ecuador was the country with lowest foreign direct investment in Latin America (as a % of the GDP)

Ecuador was the country with the lowest Foreign Direct Investment (FDI) in Latin America
Summary of the article by Luis Fierro Carrión published in Revista Gestión, No. 229 (July / Aug 2013).
Ecuador was the country in Latin America and the Caribbean that received the least amount of Foreign Direct Investment (FDI) as a proportion of GDP in 2012, according to a recent study by ECLAC.  According to this study (, Ecuador received only 0.6 % of GDP as FDI, below countries such as Venezuela and Haiti.
In absolute terms, according to ECLAC, Ecuador received a total of $364 million in the period Jan.-Sept. 2012; according to more recent statistics by the Central Bank of Ecuador, the amount for all of 2012 was $586 million (  However, not all this amount represents new capital inflows.
According to the Central Bank, the new investments were only $227 milllion, whereas $ 300,6 million corresponded to reinvested profits, and $ 58.9 million to other capital (inter-company loans).  The preliminary data for 2012 reflect a reduction of 8.2 % with respect to 2011, and a reduction of 44 % in comparison to the amount reached in 2008 ($ 1,057 million).
ECLAC indicates in its report that the main countries of origin of FDI towards Ecuador were Mexico, CHina and Canada, and the main receiving sector was the exploitation of natural resources (oil and mines).
El Ecuador recibe menos inversión extranjera que Haití.
Por Luis Fierro Carrión
Edición No. 229 (Julio / Agosto 2013).
El Ecuador fue el país de América Latina y el Caribe que menos inversión extranjera directa (IED) recibió en 2012, como porcentaje del PIB, de acuerdo a un rTabla-TC_229eciente estudio de la Cepal. En efecto, de acuerdo a la publicación (, el Ecuador recibió apenas 0,6% de su PIB como IED, por debajo de países como Venezuela y Haití. En términos absolutos, de acuerdo a la Cepal, el Ecuador recibió un total de $ 364 millones en el período enero – septiembre 2012; conforme a estadísticas más recientes del Banco Central del Ecuador (BCE), el monto para todo 2012 se estima en $ 586 millones ( Este total no sólo representa flujos de nuevo capital invertido.
De acuerdo a las estadísticas del BCE, las nuevas inversiones representarían $ 227 millones, en tanto que $ 300,6 millones serían utilidades reinvertidas y $ 58,9 millones, otro capital (préstamos entre compañías). Los datos preliminares de 2012 reflejarían una caída de 8,2% con respecto a 2011, y una caída de 44% con respecto al monto alcanzado en 2008 ($ 1.057 millones).
Según el informe de la Cepal, los principales países de origen de la iED en el Ecuador fueron México, China y Canadá, y la explotación de recursos naturales fue el principal sector al que se dirigió.

Millionaires of the world, unite! Millonarios del mundo, uníos

Millionaires of the world, unite!
Summary of an article by Luis Fierro Carrión published in Revista Gestión of Ecuador, August 2013
An interesting article on the distribution of wealth in the world, and the scandalous concentration of wealth in the hands of millionaires and billionaires:  there are 12 million millionaires in the world, who jointly hold a fortune valued at $46.2 trillion.
North America influenced in the increase of the world population of High Net Worth Individuals (HNWI) in 2012, with the highest growth rate (11.5 %), and reaching 3.73 million HNWI.  This displaced Asia Pacific to second place, with a growth rate of 9.4 %, and 3.68 millionaires.
The article includes details on the countries with the highest number of millionaires, the global distribution of wealth; the investment strategies followed by HNWI; the fiscal policies adopted in some of the OECD countries; and an overview of fiscal evasion at an international level.
Interesting facts:
• High net worth individuals or HNWI are those who have net assets or equity that they can invest, of at least US$ 1 million.
• Latin America's growth rate in millionaires slowed down, and it only grew by 4.4 % in  2012.
• Over 50% of the world's millionaires are in three countries:  USA, Japan and Germany.
• The global population of millionaires (12 million) is equivalent to 0.17 % of the population.
• Their participation in total world wealth (net assets) is 32,1%.
• During the first quarter of 2013, only 45,4% of these individuals trusted in financial markets.
• An excessive level of inequality, aside from being a problem from an ethical point of view, may also lead to growing social and political instability.
• Fiscal evasion is estimated at more than $100 billion in the USA.
Millonarios del mundo, uníos.
Por Luis Fierro Carrión
Revista Gestión, Edición 230 (Agosto / Septiembre 2013).
Un interesante artículo sobre la distribución de la riqueza en el mundo y escandalosa concentración en manos de millonarios y multimillonarios: hay 12 millones de millonarios en el mundo, quienes en conjunto tienen una fortuna valorada en $ 46,2 millones de millones (trillones en inglés, billones en castellano —se usa billones en el artículo—).
Norteamérica influyó en el aumento de la población mundial de los individuos de alto patrimonio (High NetWorth Individuals o HNWI), al registrar la tasa de crecimiento más alta (11,5%) y alcanzar los 3,73 millones de HNWI. De esta forma, la región volvió a tener la mayor cantidad de millonarios, superando a Asia Pacífico, que aumentó 9,4% y alcanzó los 3,68 millones de personas.
Incluye detalles sobre los países con mayor número de millonarios, la distribución global de la riqueza, estrategias de inversión de individuos de alto patrimonio y políticas fiscales adoptadas en algunos países, así como un panorama de la evasión fiscal a nivel internacional.
Datos de interés:
• High net worth individuals o HNWI (individuos de alto patrimonio) son aquellos que disponen de un patrimonio o activo neto susceptible de inversión de al menos $ 1 millón.
• Hay 12 millones de millonarios en el mundo.
• Tienen una fortuna valorada en $ 46,2 millones de millones.
• Norteamérica tiene 3,73 millones de individuos con alto patrimonio. Es la región con mayor número de millonarios.
• América Latina se ralentizó y creció solo 4,4% en 2012.
• Más de 50% de los millonarios del mundo está en tres países: EEUU, Japón y Alemania.
• La población global de millonarios (12 millones) es 0,17% de la población mundial.
• Su participación en la riqueza mundial (activos netos) es de 32,1%.
• Durante el primer trimestre de 2013, solo 45,4% de estos individuos confiaba en los mercados financieros.
• “Una excesiva desigualdad, aparte de ser problemática desde un punto de vista ético o moral, también puede conllevar mayor inestabilidad social y política”.
• La evasión tributaria se estima en al menos $ 100 mil millones en EEUU.