Financial repression and furniture

Many people take for granted that when they are going to the bank to open a savings account, of whatsoever type, the interest rate that its investment will yield won’t be inferior to the rate of inflation. This would at least assure the savings’ purchasing power over time. Another thing that many take for granted is the fact that from time to time some neighbor can leave furniture or a house appliance in the street -because she moved and couldn’t take it with her, couldn’t sell it or has bought something newer and no longer it needs it- hoping that other person that could need it will take it.

Depending where one lives these facts can sound not so familiar. In many countries, in where some form of financial repression exists, savings accounts generate interests almost always below the rate of inflation. It is then when the options of saving for the poor and middle segments of society tend to depart from what financial institutions offer. This is so common that many persons live their entire life without a savings account, although they have saved.

I proceed to present some modalities of saving in urban zones. In countries with this problem there’s usually an informal dollarization, that’s why the first option for saving tends to be the purchase of the North American currency to keep it at home, commonly underneath the mattress. When one has saved enough, one can embark in the following alternative for saving, i.e. buying house appliances or furniture. Chairs, tables, refrigerators, music systems, television sets and other articles in good state will almost never be found laying in the street so that some other person can take them for free because these goods are means for saving and will be sold to the maximum possible price when liquidity is needed. The following stages for saving are buying cars (without concerning the antiquity or state) and finally real estate (even the humblest hut can be bought for this purpose). Only the well off segments of society will be able to escape from the financial repression saving in foreign accounts.

Technorati Tags: Dollarization, Financial+Repression, Inflation, Interest+Rates, Less+Developed+Countries, Liquidity, Savings

Language and development

We can argue that the relation between language and development is technology, a key factor of development, because it comes codified in a language. Since western languages (mostly English) are dominant in technological matters, does this justify the existence of educative systems based in these languages in countries where they are not the native ones? I a have in mind the cases of Asian and African countries where the solution given to the existence of diverse local languages was to make English or French the language of their education system although the greater part of the population does not speak those languages at home. Moreover, this problem could also be applied to the Latin American case in those countries where indigenous populations don’t have access to an educative system in their native languages.

I think that this situation is only justified at the first stages of a country’s development process, when it’s still impossible to produce text books in the local language. This capacity should be developed soon first through translations of foreign texts and then with publications of text books of their own that would be better adapted to the reality of each country, always taking into account the criteria of educative quality. Learning other languages shouldn’t be neglected, of course. But it should not be focused only in learning one, which in most of the cases is English. Another language should be added to the curriculum. It could be another language spoken in the country or a foreign language spoken in some of the more important commercial partners of the country. This would not only promote cultural integration within the country or with neighboring countries but it would limit the technological-cultural dependency towards a single language.

These reforms in the educative system would promote the development process thanks to the strengthening of the local technological capacity. At the beginning what would be stimulated would be the adaptation of foreign technologies. Simple examples of this would be the capacity and the desire of the population (creating a demand for this) in general to have manuals of equipment and machines in their own language. The same could also happen with scientific publications or even with novels and audio-visual material (films, TV programs or Internet sites). This would produce among the population a sensation of empowerment of the technological phenomenon and it would stimulate, along with other public policies of course, the creation of an independent technological capacity, which is a key factor to achieve the industrial transformation that a country needs to undertake in order to develop.

The housing problem and the rental market

In most western countries it is obvious that even the lowest wages paid to workers should make them able to provide a roof, food and other basic necessities to their family. Let’s focus in the ability of low income households to solve their housing problem. Those of you with experience in less developed countries know that workers with low earnings, in urban and in rural areas, have to settle most of the time in slums and shacks or huts.

One reason that explains this situation is the performance of the housing rental market. Let’s take as a reference to what happens in Germany. Most of the people in this country live in a rented room, apartment or house. The German state intervenes in the housing rental market by providing apartments with subsidized rents to low income people. If you look at most Latin American countries, the percentage of households renting their home falls bellow 15%, reflecting a small rental market. This market is also quite dualistic. This means that rent options often lie in two extremes, luxurious or shack-type housing. Because of the very bad conditions of slum dwellings it is obvious that the state should subsidize rents intended to allow poor households to live in a decent dwelling. But as the rent market for middle income families barely exists, the state should also intervene to create or promote this market. The lack of renting options for middle income families is a market failure that justifies this type of intervention. Back again to the case of western Europe, the state could provide low rent apartments by giving subsidized credits to construction companies that would build and then administrate apartment buildings. A policy like this would incentivize the housing market in general, increasing the investment rate of the economy and boosting job creation.

Another reason could be the willingness of households to live in a rented dwelling or of landlords to rent their property. One could argue that low levels of willingness from both sides could be due to the law regulating this market and whether it is respected or not. The amount of protection to the tenant doesn’t necessarily curb the rental market. Taking again the case of Germany, arguably the law in this country protects the tenant more than in the USA and still the amount of households that live on a rented property in Germany is much higher. The main problem that should be solved then should be diminishing transaction costs and ensuring an effective enforcement of the law.

Apart from wide slums around big cities, other indicator that could reflect a problem in the rental market is the fact that extended families live together in the same dwelling, as actually happens in many Third World countries. One might think this is due to cultural reasons, but in some countries this could well be due to the lack of rental options.

Mentalities should change and one shouldn’t believe that the ideal society is one in which every household is owner of its dwelling. This type of thinking is what has lead to households building shacks whenever they can and to states not being able to hold their promises of ensuring decent dwellings for everybody. An ideal society should be one in which every household has a decent dwelling, of his property or rented. Since many people won’t be able to buy a dwelling with their low or middle income and it costs less to the state (and the society in general) to subsidize rents than to give away homes for a heavily subsidized price, the rental market should be promoted in countries with high percentage of the population living in shacks and slums.