Economics

Economics

Whyhave economic reforms in Mexico not generated growth?

Therevarious questions which can be developed from this article as onetries to analyze the article. These questions include the reasons asto why china developed while Mexico stagnated and why the reformsfailed to work in Mexico’s favor.

Whyhas China developed significantly while Mexico stagnated irrespectiveof the employed reforms?

Thearticle records very well that both Mexico and china are majorimporters as well as exporters in the world economy. The fact thatthe Chinese economy is growing significantly while the Mexican onehas stagnated raises a great concern. In the year 1995, China toppedin the recipient of FDI to the developing economies list while Mexicocame the second. After Mexico opened itself to trade it stagnatedwhile China rapidly grew (Timothy &amp Kim, 2010). The articleindicates that factors which impede Mexican growth are insufficientrule of law, insufficient financial institutions and labor marketrigidities. The article hypothesizes that china might be a victim ofthese factors in future because they have not attained a sufficienteconomic development level. These factors or reforms will one daybecome essential Chinese growth and their implementation mightconsequently slow down its development as it did in Mexico.

Itis hence right to argue that the reason as to why China has beendoing well is due to lack of these crucial reforms. However, it isevident that these reforms will be required someday. This mightretard its growth as well. It can also be a fine argument that Mexicowill have learned taking advantage of the reforms and hence as theChinese economy will retard it might overtake it. The article alsoclassifies countries as either open or closed depending on theireconomic characteristics (Timothy &amp Kim, 2010). China is referredto as closed while Mexico as open. A country is determined closed ifthe country has any of the following characteristics. One of them ishigh tariff rate, socialist economic system, nontariff barriers tomost of imports, monopoly over significant exports and a significantblack-market premium. These factors have also contributed thevariation in development of these two nations.

Whyhas the reforms failed to work in Mexico’s favor?

Thearticle records that openness possesses an economic regressionaspect. The article indicates that an average tariff on capitalimports as well as intermediate goods possess a negative effect on acountry’s development. Mexico is believed to have lower thanaverage on intermediate goods and tariffs on capital. This iscontrary to China which has higher than average tariffs. Thisindicates that amount or value of tariffs on capital and intermediategoods determines a country’s development. This is one of the mainreasons as to why the reforms that Mexico implemented failed toproduce economic development. Lack of contract enforcement andinefficient financial system are other major contributors of theMexico’s stagnation (Timothy &amp Kim, 2010). Mexico has very poorfunctioning financial system and they also lack contract enforcement.This has contributed to its economy’s stagnation.

Otherresearchers as the article indicates have found that impediments toMexico’s growth include a rigid labor market. This rigid labormarket hinders Mexico from benefiting from opening to trade. Thissimply means that opening to trade alone is not enough. Irrespectiveof its benefits encompassed in these reforms (Timothy &amp Kim,2010). It is hence very correct to argue that there is hope of theMexican economy benefiting from these reforms. However, this willonly occur after they will include flexibility in their labor marketand also make their financial sector efficient. In my opinion thereforms are valid and have great potential to create a significantturnaround in the Mexican economy. After Mexico will manage to workon their internal systems such as financial systems comprehensively,economy growth will be recorded automatically. Credit allocation bythe Mexican government is the main cause of financial inefficiency.This indicates that these factors are resolvable.

Inflationtargeting works well in Latin America

Hasthe inflation targeting worked for the respective nations?

Thereare five Latin America nations which have adopted the inflationtargeting as a strategy to curb inflation. The article has analyzedBrazil, Columbia, Chile, Peru and Mexico. All these nations haverecorded a positive result in its attempts to curb inflation throughinflation targeting initiative. Brazil for instance, adopted thestrategy in the year 1999. Inflation rate went on decreasing from 8%± 2% in the year 1999 to 6% ± 2% in year 2000 and eventually to 4%± 2% in the year to 2006-2007 (José &amp Fernando, 2012). Chilealso recorded a success in curbing inflation with the help of thisstrategy. From the year 1991 inflation target has been graduallydecreasing. In was 15%-20% in the year 1991, 3.5% in the year 2000and eventually became 2%-4% as from 2001-2007.

Thesetwo countries reveal that the inflation targeting worked to theadvantage of these nations. The fact the inflation is decreasinggradually reveals how efficient and consistent the strategy is incurbing inflation. Brazil was found to have reaped best resultsirrespective of huge inflation of its years of hyperinflation. Thearticle also recorded that various aspects of these five countriesimproved significantly with implementation of the inflationtargeting. Their interest rates dropped significantly from 86.81 to10.36 on average while their average GDP grew from 3.75 to 3.85 (José&amp Fernando, 2012). This reveals very well that inflationtargeting is a successful and effective tool in curbing inflation. Ithas worked for these nations perfectly well thus contributing toother economic advantages. In my opinion inflation targeting was thevery correct strategy these countries required so as to curbinflation as well for other economic benefits like dealing withinterest rates and GDP.

Whichare the tests used in assessing the impacts of inflation targeting(IT)?

Thearticle incorporated various tests in order to assess the inflationtargeting impacts. Time series regressions can be termed as one ofthe tests. It was used in assessing whether the variability andlevels of three variables the short-run interest rate, rate ofinflation and GDP growth have changed between pre-IT and post-IT(José &amp Fernando, 2012). The test used the below equation inassessing IT impacts.

=+ ++ +

Whereis the variable being analyzed of the country i where while t is thecorresponding period and isthe dummy which takes the value where the country i applies theinflation targeting. The parameter measures the IT effects on the variable.There are two control variables so as to isolate pure IT effect. Thefirst one is andthe second one is(José&amp Fernando, 2012).

Thesecond one is panel regressions. It includes one dummy that is deemedso as to capture differences in macroeconomic results between theNITers and ITers. It incorporates the following equation

=+ +

Wherestandsfor interest variable and istermed as a dummy variable. This dummy variable takes value 1 forobserved data from IT countries and value 0 for the data from the NITeconomies. The parameter measures the difference between valuesof the two different groups of countries. The regressions for threevariables namely bank deposit interest rate, inflation rate and GDPgrowth (José&amp Fernando, 2012).

Thethird and the last one is treatment effect. The manner in which theeconometric tests get applied in assessing the qualitative variablesinfluence like its adoption may tend to suffer from the endogeneityproblems. This can be overcome by a model of treatment effectsdesigned in investigating the non-observable variables impact on thequantitative ones as well as to solve self-selection bias (José&amp Fernando, 2012).It incorporates various formulas in its assessment. These testsproved to work perfectly.

RealOptions in Foreign Investment: A South American Case Study

Whatdoes the foreign direct investment appraisals?

Thearticle indicates very well that international investment appraisaldiffers with the decisions of domestic capital budgeting decisions.The foreign investments tend to expose companies to the collection ofnew as well as complex risks which are not encompassed in thedomestic context. The appraisal of the foreign direct investment(FDI) is required to evaluate risks from both the investment as wellas the underlying financing process behind it. The accurateappraisals are believed to combine the aspects of management, financeand strategy. The article indicates that FDI and especially theinitial FDIs contributed to large increases in profits variance forthe investing organizations (Naylor &amp Boardman, 2011). It is alsoargued that the FDIs should be valued accurately as a result of largepotential sunk variations and costs. Improving technology in the FDIappraisal is essential where by improving technology entails adjustedpresent value (APV) and net present value (NPV) appraisals.

Thesetwo aspects are very essential when considering investment made by agiven business so as to rate that investment. NPV analysis forinstance plays a significant role in adjusting the equity and debtcash-flows. On the other hand, APV plays an integral role incalculating the value of both equity and debt cash flow streams. Thisreveals that they are crucial facilitators of determining the valueof the investment made. In other words, the appraisal of the foreigndirect investment is dependent of these two aspects. They can be usedby an investor to find out the direction his or her investment isheaded. It is my belief that this is the main cause of carrying outthe appraisal. These aspects are hence the integral part of the FDIappraisal while the appraisal is simply a process of determining andunderstanding the investments (Naylor &amp Boardman, 2011).

Whatare the foreign investment options?

Soas to understand the options which were available in foreigninvestment a case study of an investment was in Village South America(VSA) was analyzed in phases. The VSA’s business strategy was tobecome the Argentinian market leader. Their program was divided inthree different investment phases. All the suitable development siteswere in a very good supply. The first step of appraising this venturewas through calculating the risk adjusted NPV for the VSA. Thisinvolved various considerations. They had to consider some advantagesof the investment like the population per screen in Argentina (Naylor&amp Boardman, 2011). They also considered the constraints thatwould come along with the investment like the volatility of theeconomic environment. There are various steps which can help inquantifying value that has been created by the investmentreversibility and force’s potential opportunity growth.

Thefirst step is recognizing and describing the options. Once aninvestment has been made two or several options tend to be created.Options are believed to have substantial value as opposed tounderlying cash-flows in NPVs. The options were found to be force’sput option whereby it is assumed that force signed an agreement so asto increase the investment’s liquidity. The other option is theforce’s call option whereby it is considered as force that createda call option for a phase 2 investment. There are other steps whichfollow so as the entire investment appraisal can be fully manifested.They include separating cash flows, calculating NPVs and optionpricing among others. Consideration of these options as well as thesesteps associated with it so that the investment can be well appraised(Naylor &amp Boardman, 2011). The appraisal is essential indetermining the value of the investment.

References

José,G. &amp Fernando, T. (2012). Inflationtargeting works well in Latin America, Cepal review 106, April 2012.

Naylor,M. J., &amp Boardman, J. (2011). RealOptions in Foreign Investment: A South American Case Study.Massey University, New Zealand.

Timothy,J., &amp Kim, J., (2010). Why have economic reforms in Mexico notgenerated growth? Journalof economic literature, 484, pp. 1005-1027.