Buenos Aires, Argentina May 28, 2008

Frequently I ask my macroeconomics students: “Why is it so bad to have an inflationary economy”? I can assure you that the answers I get are quite varied, at times even funny. In my opinion, if I had to choose two reasons why inflation is bad for an economy I would have to say, unquestionably, that first – it generates negative effects for an economy’s growth because it increases uncertainty for investment. Second, and possibly more important, inflation has an aggressive nature in that it adversely affects the poor – for in times of high inflation they often cannot afford the things they need.

Inflation tends to hit the poor people the hardest because they have fewer mechanisms in place protecting them against its effects. Also, due to inflationary pressures occurring in the region the effect on the poor is even greater because the increase in the cost of living typically affects essential items such as food and energy.

In the past, Latin American countries typically resorted to increasing interest rates in inflationary times. Also a very basic and widely known policy used to cool down the economy is to remove inflationary pressures on prices through lowering the aggregate demand.

But are these kinds of policies really useful when it comes to controlling inflation? I have already commented in past articles in my opinion that if inflation is caused by internal factors, then the policies that are most effective at controlling this inflation must be internal as well. But if the reason for price increases is external to the economy, then implementing more restrictive monetary policies tends to do very little to assist. Recently in Latin America, we have found instances of the effects of both internal and external pressures (i.e. domestic demand is strong while at the same time “imported inflation” is creating the most damage).

So the operative question is what can governments do when facing the impossibility of applying a restrictive monetary policy to effectively control inflation rates? One alternative could be the implementation of policies following the lead of other countries in the region, such as Mexico.

Currently, the Mexican government is implementing policies to fight the increases in basic food items. Instead of setting up price controls, a policy that ends up creating the opposite effect, Mexico is eliminating the importation duty on these items and creating a situation where the levels of supply are increased.

In keeping with this method, Mexico has decided to eliminate import tariffs on several food items such as corn, wheat, rice, and soy paste. This way, it fights inflation directly at its origin and at the same time it protects the population of the poor. This policy is complemented by a farmer support policy to increase production (a $1.9 billion package has been adopted to finance farm machinery), the elimination of tax on fertilizer and manure, and stronger aid to disadvantaged families.

Speaking about this policy, Calderón, Mexico’s president, noted: “In order to alleviate the effect of this international phenomenon in our country and to insure that it does not spread and effect those that are less fortunate, my government will implement several policies, starting today, to supplement the income of families in the face of the current international food price increases.”

These measures must be stressed because they are the ones that are most likely to have the greatest effect on containing external inflation without creating distortions in the economy. The significance of this policy is that it promotes the additional production of domestic food supplies, which in turn will decrease the dependency on external food supplies, which currently are experiencing great volatility in prices.

But maybe these are not the only benefits created by these types of measures to fight the causes of inflation…. Are there, in fact, any additional benefits to this type of economic policy?

In relation to this question, I believe that in this way, easing the monetary policy through much lower interest rate increases will benefit economic activity. And the final cost of the support for agricultural production and the elimination of import tariffs will be offset by the creation of a stronger level of economic activity.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: Imported inflation is generating the greatest damage in Latin America, even when domestic demand remains strong. When it comes to economic policy, México is doing the opposite of some populist Latin American governments. Send your comments to me at: paola@latinforme.com

Buenos Aires, Argentina May 26, 2008

Upon my arrival at home last Friday, my wife approached me with the following question: “What is the UNASUR?” Initially, I really did not know how to respond… I already have answers to some of her questions related to domestic issues such as why she cannot spend more money, why I have my clothing all messed up, who ate something, and others … but explaining the UNASUR really left me with no immediate answers at all.

To give you a little background, last Friday twelve South American countries formally ratified the Union of South American Nations Treaty (UNASUR), a regional integrative initiative going back informally to 2004. UNASUR hopes to strengthen Latin American and Caribbean unity by working together to create solutions to persistent regional problems while at the same time respecting the sovereign rights and territorial integrity of the individual member states. UNASUR hopes to achieve these goals through the development and implementation of policies addressing a diversity of issues such as those related to politics, economics, social and cultural issues, the environment, energy, infrastructure development and more. It is hoped that through addressing these concerns, solutions will also be found for the ongoing problems related to persistent poverty, social exclusion and inequality.

The members of UNASUR are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Perú, Surinam, Uruguay and Venezuela. To give you an idea of the importance of the region constituting this union: it includes 388 million citizens with a combined GDP of $ 1.9 billion, (3.5% of the world’s GDP).

UNASUR will be headquartered in Quito, Ecuador and consist of four main bodies: the Council of Heads of State and Government, the Council of Ministers of Foreign Affairs, the Council of Delegates, and the General Secretariat. It will also create a South American Parliament, seated in the city of Cochabamba, Bolivia.

One of those most delighted by the creation of this new union was Brazilian President Lula who pointed out that: “we shall move forward with innovative projects and will fully attain the goal of financial and energetic integration, as well as that of realizing the improvement of regional infrastructure, and the creation of a social cooperation agenda.” Lula, as always, has in mind ambitious ideas where of course, Brazil takes the lead in initiatives.

In reality, the creation of UNASUR has taken many by surprise as it has happened at a moment in history when the union of so many countries seems unimaginable.

Relating to this idea, we should be mindful that this union was created at a time when many Latin American countries have reached a powerful level of macroeconomic and institutional consolidation; achieving international recognition as having gained the much desired investment grade for many of its countries.

The establishment of regional blocks is more viable now with the consolidation of the economy and institutions within these countries, coupled with a long-term vision. The regional blocks of the past have not reached significant achievements in the long run due to difficulties within their individual countries, recurrent crisis and political instability. Mercosur serves as a prime example of these kinds of problems.

In the instance of UNASUR, there is a political and ideological fragmentation among many of the signatory countries. There are countries with serious internal problems such as Bolivia. Venezuela and Argentina are plagued with internal issues as well, but to a lesser extent. There are also member state conflicts such as those between Colombia, Ecuador and Venezuela. Additionally, there are ideological divisions between several countries that make it very difficult to imagine how those countries could go forward with the successful coordination of policies.

UNASUR’s successful unification of regional forces having benefits realized by all member states will depend in part on the influential leadership of Brazil coupled with the lessening of individual differences between countries.

This brings us to the question: what benefits could UNASUR bring investors in the region? I think that there are no short-term benefits. However, if UNASUR is able to successfully establish itself, it can then contribute to the development of the regional financial market (one of its main stated goals) creating one with stronger depth and liquidity than other financial markets of the region. More importantly, UNASUR can contribute to the strengthening of the regional economies, underpinning their growth and development which will benefit the investor who will then find less risk and more profitability in their investments in the region.

The UNASUR has just been born. It will be necessary to give it time to grow and develop. We hope that the countries comprising this new group allow this to happen.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: A new community in South America is born with a variety of diverse and complex objectives spanning cultural, social and economic realms… another aim is the social inclusion, the civic participation, the strengthening of democracy for all… Horacio’s wife is asking questions and Horacio finds he does not know how to respond. If you want to know, keep on reading… Enjoy, and send your comments to the editor here: paola@latinforme.com

This is just the latest attempt by the software giant to try to stem the rising tide of counterfeit products that costs the company millions of dollars annually in some of its most promising markets.

“The crackdowns are part of Microsoft’s global Genuine Software Initiative, which aims to help protect legitimate distributors and customers from the effects of software piracy,” said Microsoft SA partner executive Mark Reynolds.

Microsoft is also trying to protect its bottom line, which has been sharply undermined by the rise in piracy.

For its fiscal third quarter ended March 31, Microsoft net income fell 11% to $4.39 billion, or 47 cents a share, mostly the result of a 24% drop in sales for the company’s flagship Windows software.

Microsoft’s general manager of investor relations, Colleen Healy, attributed much of the sales decline to the cottage industry that has sprouted around an upswing in the number of unlicensed PCs on the market.

“Q3 was a tough quarter on the unlicensed front,” Healy told CNET. “We had been making gains there for the past several quarters.”

The company made special notice of it in its fiscal third-quarter earnings, released Friday:

“While piracy adversely affects U.S. revenue, the impact on revenue from outside the U.S. is more significant, particularly in countries where laws are less protective of intellectual property rights. Similarly, the absence of harmonized patent laws makes it more difficult to ensure consistent respect for patent rights,” the company said.

Skeptics of the growing piracy epidemic may find it difficult to empathize with Microsoft, a $276 billion company with its own legacy of piracy dating back to the company’s founding. But the black-market distribution of counterfeit software is also a hurdle for emerging economies by siphoning off tax revenue and strangling legitimate software retailers.

Arrgh-dent Piracy Concern

Software piracy is so widespread in South Africa, it’s almost thought of as commonplace rather than illegal.

A 2006 piracy study by IDC – a technology and telecommunications advisory firm – found 35% of the software in South Africa is illegal, costing software publishers more than $150 million a year in that country alone.

“Piracy remains one of the major hurdles to realizing the potential of the information economy in South Africa and on the continent,” Business Software Alliance SA Chairman Alastair de Wet told IT Web. “There is great concern for our local economy that over a third of software in use is illegal.”

Indeed, South Africa’s IT industry employs more than 355,000 people and for every rand that Microsoft earned last year, partners working with Microsoft would have earned 9.69 rand, de Wet said.

But Microsoft is not one to stand on the sidelines. To continue its pursuit of protection, Microsoft has launched the Genuine Software Initiative.

“We want to protect legitimate computer businesses and resellers who do the right thing in selling genuine software,” Microsoft’s Reynolds told IT Web. “Microsoft won’t stand by and allow unscrupulous vendors to destroy the businesses of our channel partners or the jobs of their employees.”

Earlier this month, Microsoft settled out of court with 21 South African computer dealers that were selling computers loaded with unlicensed Microsoft software.

And last week in China, police broke up a piracy ring in Shenzhen, seizing programs worth upward of $750 million on a tip from the Federal Bureau of Investigation.