#mitsloanstudytour

On Tuesday in class, we discussed loss aversion - a cognitive bias where the pain of losing is greater than the reward of winning. 

One way to think about loss aversion is as it relates to T&T’s economy. T&T’s oil and gas export industry contributes to ~40% of GDP and 80% of exports. Given that T&T is the dominant oil and natural gas producer in the Caribbean, T&T prides itself in being the “real Caribbean,” unlike the other Caribbean countries that rely on the tourism industry. Is it that, possibly, the people of T&T have an unconscious bias of loss aversion to switch from oil and gas to other potential revenue streams for their economy? 

Furthermore, T&T’s environment has a significant pollution problem. Part of this could be T&T’s “time preference,” such that the people in T&T do not tend to think inter-generationally or plan for environmental preservation. Therefore, what are ways in which T&T can start thinking about caring about sustainability when their money is made from the exploitation of oil and natural gas? This could be something to explore with the Ministry of Tourism and other government agencies that my group will visit while in T&T.

Ultimately, the question to consider is how do we fight against loss aversion? This is where framing can come into play. When people make particular decisions or take actions that do not seem rationally beneficial, how can we reframe the issues or the situation to encourage better choices that lead to improved economic, political, and cultural paths of a country?

Perhaps it is just my ongoing fascination with history and love of stories in general, but I have always found it critical to get the historical context of any place or problem that I am studying. What strikes me as one of the fascinating aspects of both Peru and Chile as I have begun to become more acquainted with their stories is just how much of their recent histories of economic success and growth are rooted in complicated and controversial histories.

For Chile, its story as an economic success dates back to the 1970s and 1980s, when Augusto Pinochet’s government focused on economic liberalization, privatization, and the management of inflation. Pinochet declared that he did not want “a nation of proletarians, but a nation of proprietors.” Chile became the country where economic “shock therapy” was first used to kick-start the economy and serve as a means for rapid transition from a closed to an open economy. These reforms eventually brought economic growth and laid the foundation for the open economy of which Chile is so proud today. However, they also took their toll, as wages dropped for workers, family allowances declined, and the government budgets for education, health, and housing all declined.  Chile today continues to struggle with inequality – its Gini coefficient is above 50, making it one of the most unequal countries in the world.

Peru used Chile’s reforms as a model when, in the early 1990s, its controversial and brutal president, Alberto Fujimori, instituted what was later dubbed the “Fuji Shock” to tackle hyper-inflation. It also focused on curbing government spending, returning to full participation in global trade flows, and general economic liberalization. Fujimori and his successors continued to build upon these economic reforms. Today, he is more known for his human rights violations, but Peru’s “economic miracle” of the last 24 years is also a big part of his legacy.

These complicated histories are interesting, because for both countries they represent both a past that is embarrassing but has at the same time laid the foundation for their current growing levels of prosperity. Not that coming to terms with a complicated past is easy – as an American I am fully aware of how much of the country’s early “freedom” was actually built upon slavery, and how complex and bloody our nation’s progress has been. National histories simple and straightforward.

One of the major challenges that the economy of Peru faces is in its attempts to diversify the economy. Its mineral wealth and open economy have meant that it has benefited immensely over the last couple of decades from China’s appetite for natural resources. However, in recent months it has also suffered from the decline in commodity prices.

Diversification, however, is really hard. Especially when it is being led in a top-down manner. It is the dream of governments and international bureaucrats in resource-rich economies the world over. In Saudi Arabia, for example, an entire government ministry is devoted to the idea of spurring business clusters.  Clusters (a term originally coined by Michael Porter in “The Competitive Advantage of Nations”) are ecosystems, where businesses within an industry that are competing with one another nevertheless choose to co-locate so that they can benefit from having a shared pool of suppliers, labor, and knowledge. Silicon Valley is the classic example of a cluster, though they exist everywhere.  It is no coincidence that successful competitors within an industry will often emerge from the same place – Microsoft and Apple are one example; Puma and Adidas another.

Of course, the creation of clusters is not something that usually happens by government fiat.  Usually it happens organically.  The development of a “gastronomic cluster” is happening in Peru, as the restaurant industry is becoming a global leader, as well as redefining Peruvians’ image of themselves and helping shape a national identity. It is also a powerful driver of the economy: nearly 6 million people are employed in a food services industry which is estimated to generate close to $9 Billion a year.  Some estimate that Peru generates over $1B per year in gastronomy tourism. 

This development is making international headlines, both from travel magazines and business magazines.  Conde Nast featured a glowing article about Peru’s restaurant scene, while the Economist recently discussed the phenomenon from the cluster development perspective.  

Aurauco recently posted the following press release on it's website (http://www.arauco.cl/noticias.asp?idq=4758&tipo=2&parent=0):

"January 2015, Sale of Forest Land

Celulosa Arauco subsidiary, Forestal Arauco, sold 56 forest plots located in Chile’s central southern area for about US$ 90 million. The total surface adds up to nearly 11,000 productive hectares. In keeping with the company’s management strategy of its forestry assets, the company acquires what is needed for its operations and sells what is non essential when conditions are beneficial. This transaction refers to plots located farther away from the company’s production facilities. The plots sold account for approximately 1% of ARAUCO’s total forestland. The operation includes a contract establishing the general terms and conditions of their sale and an options contract for the purchase and sale of pulp log volume sourced from these plots."