IN MEMORIAM

The current education plans have gone astray.

When high school students look for career options and universities, they do not think about which would bring them more happiness or even which would help them achieve a personal mission in life that was in accordance with their ideals and was aimed at the fulfillment of a personal duty. Nor do they think that after studying at the university they will do something valuable that will contribute to their personal development and to society. On the contrary, their decision is motived by their perception of the contribution that the career and university will have on what erroneously has been established as the ultimate goal of a professional – success.

It is unfortunate that in our society, professional success equals success in life, and worse when professional success translates into financial success.

The word “success” comes from the Latin word exitus (“exit”), and means “termination” or “end” [1]. If the ultimate goal of human beings is happiness [2], true success is in the happiness that we achieve, not in the wealth we obtain nor in the pleasures and needs that we satisfy with it. Riches and pleasures are valuable, but on a material level, which is the most basic in the scale of values. Human beings must go beyond these material values. They must enhance their human nature with the practice of moral values (such as justice, temperance, courage and prudence) and with the search for goodness, truth and happiness (spiritual values).

In our society, success is often linked with material wealth and recognition, and there is still a tendency to establish a direct proportional relationship between material wealth and happiness.

Success is subjective and relative to the society to which we belong. Happiness, however, is a universal value and should be the only, or at least the most important motivation in a person’s decisions.

If the vocational guidance that students receive is not appropriate, their decisions will be influenced by family and social pressures, as well as by a mistaken view of reality, and it will probably be much later before they realize they have taken the wrong road.

There are those who spend more than half of their life in achieving professional success, and when they succeed, they realize that it was not really what they want and they do not feel complete. In fact, they feel empty because they finally understand that success is not equivalent to happiness.

But the problem is not limited to vocational guidance, traditionally the responsibility of the school. Basic education also has its shortcomings, because in a society where success is decisive, people have not been taught how to handle failure, especially from an early age. For example, emotional intelligence workshops should be an important part of the educational plans and programs, not only as places to learn about emotions and feelings, but also as opportunities to help people define what is valuable in their lives, what makes them happy and what they want to pursue.

However, the most glaring failures are in higher education. Of the competitive advantages to which universities pay most attention are the opportunities that their graduates will have to get attractive, well-paid jobs (and positions).

If professional success, as understood by universities, is associated with the wealth and recognition that a job will be able to provide their graduates, they will pay more attention and devote more resources to study plans with content geared toward this end and they will forget to include material on ethics and social responsibility, which should be the focus of the curriculum of any university program. The formal principles of morality [3] should be the guide for defining program content and curriculum at a higher level.

Universities should provide tools for students to refine their skills. There is no dispute about the technical and practical approach of the programs. What is questionable is the absence of ethics and social responsibility, as well as the lack of orientation toward the pursuit of happiness – the ultimate goal that universities should have as part of their philosophy and that should be incorporated into their mission to be transmitted to the members of their community (students and teachers).

Harvard University, one of the most important universities in the world and an example of quality education and prestige, has also been synonymous with success for its graduates. But it has been unable to convey the importance of ethics and how wrong and empty it is to give priority to professional success without a sense of duty and the pursuit of happiness as their primary goals.

A study conducted by The Wall Street Journal in 2005 [4] revealed that many of the biggest financial scandals in recent years have been led by Harvard graduates, which indicates that moral principles are missing in their philosophy.

Good should be sought and evil avoided (principle of morality). But if good is defined in terms of success, failure becomes an evil that must be avoided. That is why neither ambition nor aggressiveness in business is bad. However, virtues such as compassion, justice, temperance and prudence are undervalued and even criticized, and therefore contribute little to the realization of what seems to be the ultimate end – financial success.

In addition, if success is considered a reference of what is good – and knowing that every human act seeks an end – at least the principle of morality should be respected. This principle establishes that you should not use morally bad means, even though the end results may be good. Those responsible for financial scandals, such as Enron<¹, ignored this and acted in accordance with the Machiavellian principle that the “end justifies the means.”

If the relationship between ends and means is not important for people without an education in ethics, the relationship between action and effect (another principle of morality) is not important either, as demonstrated by Nick Leeson^{2, a stockbroker who caused the collapse of the British Barings Bank with his fraudulent transactions in the stock market.}

In his confession, Leeson said that the operations were intended to help the organization, which had suffered losses, and the employees whose jobs were at risk. Even if the end could be considered good (if indeed that was his intention), Leeson must have realized that the consequences of his actions could be disproportionately bad.

In addition to these principles, the academic programs of universities should incorporate, as part of their ethical formation, the other formal principles of morality. In fact, some of them should serve as a guide for defining the philosophy and mission of any educational institution, such as that which points out that everything that contributes to human development should be considered valuable (principle of defining value), knowing that, according to Aristotle, everything that perfects human nature is good and everything that destroys it is bad. Culture, art, ethics, social responsibility and the pursuit of happiness are examples of courses that must be incorporated into academic training.

Similarly, the principle of defining virtue – which states that human beings must acquire the necessary skills to achieve a full life – must be part of the university mission, to encourage students to make values part of their personal habits and turn them into virtues.

In that vein, the first categorical imperative of Kant (“work in such a way that your action could become a universal rule of conduct”) could even serve as a message to the university community so that its members would follow it as an example in their daily lives, in the professional world and in their personal growth.

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No less important is the second categorical imperative of Kant (“the human being must never be considered as a means, but as an end”). Bernard Madoff, regular lecturer at Harvard and author of one of the biggest financial frauds in history (made public in 2008 and with estimated losses of more than 50 billion dollars) did not have this principle in mind when he planned his fraud. He saw the investors as a means to his ambitious end.

The responsibility of contributing to ethics formation and orientation toward the happiness of people not only corresponds to educational institutions, but also to families, workplaces and governments, without forgetting that each person, individually, is responsible for his or her own happiness. But that does not mean we stop paying attention to the shortcomings of the educational systems and redefine the concept of success – it is necessary to steer it toward happiness, not to the material.

Success and happiness are not mutually exclusive concepts. Success is, for many people and in a totally valid way, a great motivation, but we must never lose sight that it is only a means to attain happiness.

In the universities, students should learn, if they have not done so in other places, that, as Amado Nervo said, “Most failures come by wanting to advance the moment of success.” Students should not hurry or rush into the search for success. On the contrary, they should stop and think if the path they have chosen is the right one and if they are going in the direction that is really meaningful to them.

Teaching, which is one of the noblest professions of humanity, must be the basis of that redirection in education. You need to have a vocation to be a teacher, and it is essential to turn that vocation into “love.” If you are not in love with your vocation as a teacher, then it will be difficult for you to be convincing. Conveying to students the importance of the pursuit of happiness requires love and happiness on the part of teachers as professionals. It also requires that students commit themselves to devoting their efforts to what enables them to achieve true success – happiness. After all, you exploit your true potential when you are engaged and passionate about what makes you happy.

These teachers are an example of professionalism. Their commitment and dedication are admirable. Their teachings do not stay in the classroom – they become life lessons for their students.

As has been mentioned, most higher education institutions are focused on their students achieving attractive economic rewards. That is a limited approach. The true capabilities of students go far beyond what is intended for them by identifying them with jobs that surely will not contribute to their realization as full human beings – jobs that they will put up with because they provide them with the means to meet their basic needs, leaving them incomplete, frustrated or feeling emotionally void.

In conclusion, we must redefine what it means to succeed in life on a personal, family, institutional and social level. Education, with ethics as a guide, must serve as a platform to change the mistaken view that we have today. Teachers and students must commit to the paradigm shift in education and guide their decisions, from an early age, toward that which should be its true engine: the pursuit of happiness.

In the world of finance and accounting, the focus on profits and income has also been noticed to be – if not mistaken – at least incomplete. Some companies listed on the stock exchange now include in their annual statements a section on compliance with professional codes of ethics and social responsibility and commitment. It is estimated that within a few years it will be mandatory to include such a section in these reports. There is already a popular phrase that defines this global trend: “Goodbye blue, welcome green!” which refers to the idea of stopping to give importance only to profitability (blue), an approach usually identified with the short term and speculation, and starting to put more emphasis on sustainability and social responsibility (green), a more long-term oriented approach and commitment.

If we extend this concept and apply it to life, and not only to finance, it will be time to say: “Goodbye success, welcome happiness!”?

Bibliography

• Entropía, en http://entropiarq.blogspot.mx/2011/05/que-es-el-exito.html. Consulted in December 2014.
• Fagothey, Austin. Ética, teoría y aplicación, México, Editorial Interamericana, 5a. ed., 1988.
• Llano Cifuentes, Carlos. Dilemas éticos de la empresa contemporánea, México, Fondo de Cultura Económica, 1998.
• Reinhart, C. y Rogoff, Kenneth. 2009. “From Financial Crash to Debt Crisis”, NBER Working Papers 15795, National Bureau of Economic Research, Inc.
• El Blog Salmón, en http://www.elblogsalmon.com/mercados-financieros/los-diez-mayores-escandalos-financieros. Consulted in November 2014.

In globally competitive markets, pharmaceutical firms face a precarious situation: declining loyalty from consumers as they increasingly switch to lesser-known, lower-priced brands, and the proliferation of generic substitutes that compete with the branded products of both national and multinational pharmaceutical companies.

Furthermore, as a large number of old patents are set to expire in the near future, fewer new patented molecules are set to take their place (Kielstra, 2011; Jack, 2011). Unless these pharmaceuticals can introduce new patented products, they fear gradual erosion of the market share and price competition as generic brands sell their products at prices that are, on average, around 55% cheaper (IMS Health, World Review 2013).

To what extent can branded Mexican and multinational pharmaceutical companies maintain brand leadership in the Mexican market?

In what follows we propose a tested strategy, developed in Mexico and Latin America, for growing market share by motivating sales force behavior. Companies using this strategy have been able to maintain or even raise their prices despite the proliferation of generic alternatives in the product category while market leaders’ prices and market shares were eroded. We call this strategy cloned rivalry.

Cloned rivalry

Cloned rivalry is based on the premise that sales forces are more committed and responsive when they are challenged to compete against an adversary brand whose characteristics are identical to their own product. The firm creates its own rival that has identical product and price characteristics as the brand it wants to promote in order to build a culture of intensive competition. Having identical product characteristics strips salespeople and brand managers of any pretext for arguing that sales declined for any reason other than their own lack of effort. The firm challenges the sales force on both sides to take more market share than the other, even when incremental market share is at the expense of their own rival brand. Prices between the rival brands are kept similar so that price cannot be used as a mechanism to compete.

To better understand the concept of cloned rivalry, it would be useful to distinguish it wi two examples of cloned products in the pharmaceutical sector that do not represent cloned rivalry. The first type of cloned products are generic brands that compete in price. Competition between the reputation of the innovative, original brand and the low-price generic brands (that do not have a dedicated sales force) can be intense, but the lost market share of the innovator brand can be attributed to the generic’s lower price, and therefore not motivate the sales force since they cannot be blamed for declining market share. In the worst case, competition degenerates into a price war in which both brands lose.

The second example is that companies often create a cloned brand based on the innovative brand, but without the intention of generating a rivalry between the brands. These new brands typically compete with other brands in different markets and cannibalization of the original brand’s sales is discouraged. If the new brand is offered at a different price then it becomes a way for the firm to price discriminate between different consumer segments. This is again inconsistent with our concept of cloned rivalry.

Schering-Plough and cloned rivalry

Schering-Plough (SP), now owned by Merck (MSD), pioneered cloned rivalry in Latin America. The regional president for Latin America and Asia, Alfredo Blanco, observed that sales of SP products in Venezuela were under-performing. To address sales force apathy, the sales force for a top brand was divided into two groups, with one group competing to sell a clone of the original brand. The new strategy worked better than expected and was quickly adopted in other countries in Latin America during the 1990s and early 2000s, as these positive results were replicated elsewhere.

SP introduced the patented molecule Rinelon SP introduced the patented molecule Uniclar, was introduced two years later (Table 1) when Rinelon had reached the peak market share attainable without cloned rivalry. The two rivals quickly took over half of the entire market despite the entry of two new patented entrants around the same time. More than a decade later, they maintain their dominance despite the entry of three new alternatives (two of them patented) between 2008 and 2010. Although these new brands captured 28% of the market by 2011, only 5% of that was taken from the SP brands, while the remaining competitors’ shares declined from a collective 42% to only 20%.

Cloned rivalry leads to important behavioral changes as explained by Critobal Thompson, a co-author of this paper, and ex-manager of Mexico as well as ex-brand manager for SP who was responsible for developing a rival brand.

Organizaciones más planas. Managers welcome insight from the sales force as they seek any small advantage they can gain over the rival brand.

Flatter organizations. Las marcas iniciaron cambios en la presentación o posicionamiento de los productos para satisfacer necesidades específicas detectadas en el mercado. Por ejemplo, en el mercado de esteroides intranasales, los diseños de los envases de Rinelon y Uniclar se modificaron para que fuesen más fáciles de abrir y usar. Por supuesto, los beneficios que trajeron muchos de estos cambios fueron temporales, pues la marca rival copiaba cualquier modificación que reportara ventajas. Sin embargo, otros competidores ignoraban esta rivalidad, por lo que los cambios podrían tener ventajas de largo plazo para las marcas rivales ante el resto de la competencia.

Rapid organizational response. The brands quickly initiated changes in product presentation or positioning to meet specific needs identified in the market. For example, in the intranasal steroids market, the designs of the containers of Rinelon and Uniclar were modified so that they could be easier to open and to use. Of course, many of these changes led to only temporary benefits as the rival would copy any changes that led to clear advantages. However, other competitors would ignore this rivalry, so these changes could have longer-term advantages for the rival brands vis-à-vis the rest of the competition.

Improved service. Since the rival products were identical and the rivalry was the focus of these two brands’ competition, salespeople had to look for factors other than product differentiation to generate an advantage. The main differentiation then became in the services provided by the salespeople as they competed to better meet the doctors’ needs, providing doctors’ requests for product information the following day instead of waiting until their next monthly visit, and preparing easy-to-read summaries that were preferred by doctors.

Identify new market segments and uses.

Rivals sought previously ignored niches as SP granted six-months to one-year exclusivity for developing previously untapped markets. New applications included getting rheumatologists to prescribe Claritin (an antihistamine for allergies) to patients before treating them with biological products in order to avoid potential allergic reactions. New niches included Claritin for patients under 2 years old.

This intense competition generated by this rivalry discouraged other brands from competing directly with the rivals. Sales forces from other brands did not present their brands as close substitutes for these brands, preferring to keep their distance from this rivalry. This explains why when new products are introduced, they primarily took market share from other brands if they are successful, rather than from the rival brands.

Outsourcing Cloned RivalryWithin-company rivalry has its downsides. At a time in which pharmaceutical firms are downsizing, firms must find ways to increase the efficiency of their sales force while minimizing new employment commitments. Also, the implementation of a flatter decentralized system could be translated into higher costs of time and organizational adaptation for the companies. Therefore, we propose the alternative of outsourcing the cloned rivalry.

In the intensely competitive painkiller market, SP agreed to pay Rimsa, a mid-sized Mexican company, royalties to manage Gammadol, a cloned rival of Rimsa’s Sinergix (Table 2) since the year 2007. The price differences were insignificant. In eight years, both brands increased market share in value despite Sinergix increasing prices by 66% and Gammadol by 33% over the period (Table 3). In contrast, Neo-Melubrina, Tempra and Dolac, which had been the market leader brands in terms of value in 2005 – with a combined market share of 38% in terms of value, and 35% in terms of units sold – lost approximately half of their combined market share in both value and volume, both decreasing to 18%. By 2014, the cloned rivals together captured 5.63% percent of the market value, that is, more than 4 times the share they had from the start of their relationship, managing to be the third most successful molecule in the market despite their high initial price (400% above the market average) and despite increasing their prices while the trend in the market was leaning towards more stable prices (Graph 1). During this same period, generic products as a group realized the largest gains in market share, growing from only 1% in value and volume in 2005, to 10% and 19% in 2014, respectively (Table 2), reflecting the increasingly competitive environment over this period.

Conclusion

Cloned rivalry generates an intensely competitive internal culture that makes it difficult for non-rival firms to compete directly with. For a patented product, cloned rivalry can both improve sales during the patented period while preparing the brand for entry into competition when the patent expires. Competing in the new market environment does not have to mean either low profit margins or focusing exclusively on a small niche of higher income consumers. Through cloned rivalry, firms can build and protect substantial market shares while minimizing price competition. Cloned rivalry provides a simple solution to motivating sales force effort when effort is difficult to observe directly. In a market where sellers depend on doctors to recommend their products, sales force motivation can reflect the difference between adequate and successful product performance.?

References

• Kielstra, P. (2011), “Reinventing Biopharma: Strategies for an Evolving Marketplace”, Economist Intelligence Unit, junio, p. 6.
• Jack, A. (2011), “Drugs: Supply Running Low”, Financial Times, febrero, 9.

The fit between the individual and the job is one of the most important challenges that a company faces in the selection of personnel.

This fit is defined as the congruence between the characteristics of the individual (personality traits, values, expectations, needs and motivations, abilities, skills and knowledge) and the characteristics of the work environment (Hontangas and Peiró, 1996).

When candidates are selected, the position they will occupy must be taken into account, in addition to whether it offers them a career in the future. Herein lies the importance of bearing in mind the alignment between the person’s skills and the educational requirements of the job. The quality of the fit greatly determines employee productivity and the profitability of the organization. In addition, the match has an influence on the early development of the professional career of graduates at the moment of obtaining higher-quality jobs.

This match between the educational level of the recent graduate and the level required for the position is twofold: vertical and horizontal (Béduwé and Giret, 2011). The vertical match refers to the level of education that the person has and the level required for the job. This variety gives rise to three situations: 1) the person has the educational level required for the job; 2) the person has a higher level of education required for the job, which is called “overqualified” (or “overeducated”); and 3) the person has a level of education below that required for the job (“underqualified”).

On the other hand, the horizontal match indicates the degree of congruence between the person’s area of expertise and that required for the job.

Consequences of Vertical and Horizontal Matchs of Recent Graduates

Both types of matchs have individual and organizational implications. In both cases, having a job that is adjusted to the individual, both vertically and horizontally, increases motivation, job satisfaction, performance and salary (Allen and De Weert, 2007). When recently graduated employees are correctly aligned it allows them to continue growing within the company in a manner that is consistent with the education they received during their formative stage. This favors promotion and obtaining higher-quality positions in the early stage of their career. As for the company, matchs are a benefit in terms of lower training costs and job turnover, and increased productivity.

However, sometimes there are situations where a vertical mismatch occurs, when the employee is overqualified. In this case, the company will not take full advantage of his/her skills, knowledge and abilities acquired in the formative stage, and with the passage of time if the company does not establish strategies to alleviate the situation, it will lose some of the employee’s potential or he/she will end up leaving. These circumstances discourage the employee, generate greater dissatisfaction and, contrary to what one would expect, they earn a lower salary than those individuals who are well matched in their jobs (Allen and De Weert, 2007; Béduwé and Giret, 2011). For the organization, these cases represent an additional expense, especially in times of economic expansion, because there is a greater risk that employees will leave their jobs for a better offer. This means higher turnover and loss of profit for the company in terms of recruitment, training and adaptation to the position.

The consequences in the case of a vertical mismatch for underqualification are not as negative. On the one hand, it can be a challenge to the employee, boost his/her job performance and increase job satisfaction (García-Montalvo, Palafox, Peiró and Prieto, 1997). However, it also leads to work overload, presents greater job insecurity, and therefore, more stress. At the organizational level, it has a number of negative consequences, such as increased spending on training, production problems attributed to poor performance or higher rates of absenteeism due to stress.

The consequences of horizontal mismatch are very similar to those of over-qualification, as seen in the reduction in the employee’s job satisfaction, performance and salary, as well as a greater intention to leave the company (Allen and De Weert, 2007). The consequences for the organization are higher training costs, turnover and low production rates.

In situations in which there is a match in one and not the other (that is, the employee is aligned vertically but not horizontally or vice-versa), the impact is more negative than when the mismatch is vertical. That is because the “knowledge transfer” dampens the negative consequences of the horizontal mismatch. In other words, there are general and valid fields of knowledge, skills and competencies that are transferable to other areas. This means job satisfaction, motivation, salary and the intention to remain in the organization are greater in the horizontal mismatch than among those who are overqualified (Béduwé and Giret, 2011). In this sense, the greater the job specification, the greater the problems will be as a result of horizontal mismatch.

Palliatives for the Negative Consequences of the Mismatch

Because of everything said so far, companies typically reject candidates whose skills do not fit the job requirement. However, there are cases in which firms hire employees whose skills do not match those required for the position (overqualification is one of the most characteristic and studied situations). Listed below are a number of strategies that may be useful to address educational mismatch.

First, in the case of overqualification, a psychological contract can be established with the newly graduate in which you communicate openly the responsibilities that they will have to fulfill from a perspective that enhances their career. That is, you convey to the person that although in the beginning, they will be performing tasks in the company for which they are overqualified, in the future they will take on projects of greater complexity and that will be more appropriate to their training. You can even offer, realistically, the possibility of advancement through internal promotion if their performance is satisfactory.

Another useful practice is the redesign of the position, which also helps to better manage the talent of these graduates, by granting greater autonomy. So, in this way you motivate employees by giving them greater control over their work and fostering a sense of confidence in themselves.

On the other hand, identifying additional skills and qualifications of recent graduates that can be applied in their job (through performance assessments or monitoring) is a source of motivation. In addition, this knowledge can lead to performances that are not restricted to the scope of the functions of the post and prove advantageous for the organization.

In the case of underqualified employees or those who are horizontally mismatched, the best strategy to reduce the negative consequences is the investment in training to compensate for the deficiency of knowledge, skills and abilities. In this sense, we have to adapt the training plans in a specific manner to meet the needs of the employees.

When managing and designing these strategies, it is important to align them with the mission and vision of the organization, as well as the Human Resources policies, so that the hiring of mismatched graduates does not represent too many negative consequences for the company and the person.

In conclusion, the mismatch between the education received and the job brings a number of negative consequences for both the individual and the organization. However, depending on how the company manages the needs of these employees, these negative consequences can be ironed out and may even be beneficial for both parties.?

References

• Allen, J., y De Weert, E. (2007). What Do Educational Mismatches Tell Us About Skill Mismatches? A Cross-country Analysis. European Journal of Education, 42(1), 59-73.
• Béduwé, C. y Giret, J. F. (2011). Mismatch of Vocational Graduates: What Penalty on French Labour Market? Journal of Vocational Behavior, 78, 68-79.
• García-Montalvo, J., Palafox, J., Peiró, J.M., y Prieto, F. (1997). Capital humano: La inserción laboral de los jóvenes de la Comunidad Valenciana. Valencia: Fundación Bancaja-IVIE.
• Hontangas, P.M., y Peiró, J.M. (1996). Ajuste Persona-Trabajo, en J.M. Peiró y F. Prieto (comps.), Tratado de psicología del trabajo: La actividad laboral en su contexto, pp. 251-281. Madrid: Síntesis.

One of the objectives of the financial reform is the reactivation of the financial market to make it grow. Starting with the diagnosis that there is a low level of financing to the private sector in Mexico – it is the country where there is the least amount of lending, despite having one of the most solid robust financial systems in the world.

The solution proposed by the reform is to grant more and cheaper credit, that is, to expand credit.

While the authority is right in that the financing to the private sector is low, several questions arise as to why it is low and how it should grow. The objective of this paper is to review the second question and propose a reasonable dynamic of credit growth in Mexico.

Credit is a double-edged sword. Used properly and responsibly, it can boost economic growth. When used recklessly and in excess, the result can be a financial crisis due to excessive borrowing by households and businesses. The financial reform has positive aspects, since it addresses an important issue. However, it is important to be careful with credit expansion, given the national and international experience. Reinhart and Rogoff, in their book This Time is Different, warn about the risks of excessive financial expansion:

“When a financial boom is based on debt, the result will almost always be a false positive image of public policy, of the ability of a financial institution to generate huge profits or of the standard of living in a country. Most of these booms end badly. Of course, the debt instruments occupy a pivotal place in any economy, ancient or modern, but to strike a balance between risk and opportunities of debt will always be a great challenge.”

Figure 1 shows that the total financing to the private sector is low compared to the average in different regions of the world. It is striking that even the Middle East and North Africa have a greater average financing penetration than in Mexico.

Figure 1
Total financing to the private sector in Mexico, 2003-2013
(Percentage of the GNP)

In Mexico, the low level of credit in relation to the GDP may be due to a number of structural factors of the Mexican economy. Although it is a relevant question, it is not the purpose of this text to research it.

The data shows that credit is growing in Mexico, as shown in Figure 2. Although there was a slight adverse effect because of the international financial crisis of 2008, the indicator shows a clear upward trend. This reveals that the financial system has not been inactive, so acceleration will occur, but in a responsible manner.

Figure 2
Total financing to the private sector in Mexico, 2003-2013
(Percentage of the GDP)

Figure 2 shows a clear upward trend from 2006 to 2013, with an improvement of nearly eleven percentage points of the GDP, from 19.66% to 30.60%. However, it has not been enough to reach the levels of other nations and therefore it is a big challenge for Mexico.

Financing for families and businesses, well used, can help the economic growth. However, irresponsible expansion causes problems for the economy because of over-indebtedness and generates risks for the macroeconomic and financial stability.

Reinhart and Rogoff (2009) explain that excessive debt, either by governments, banks, businesses or households, increases vulnerability in the face of a crisis of confidence, especially when the debt is short term. In addition, they document with ample evidence the banking crises. It is interesting that the outcome of these crises has equally affected, for many years, rich, developing and poor countries.

Figure 3
Total financing to the private sector, Thailand, Indonesia and South Korea in the Asian crisis
(Percentage of GDP)

Figure 3 shows the fast growth rate of credit just before the great Asian crisis of 1997-1998. From the graph, it is clear that it may not be long before we see another crisis in the area, if we analyze how credit has grown since 2002. Will economic history repeat itself? Only time will tell.

In an analysis of the balance of savings and financing in Mexico, the Foundation for Financial Studies (FUNDEF, acronym in Spanish) states that in 2013, the Mexican private sector banking system financed 73.65% of the projects from the private sector, individuals and companies, well above the development bank, which granted only 6.68% of the loans. Therefore, it is the private banks that financed investment projects in the private sector. This funding, together with the retained earnings, are the two main sources used by companies for new investment projects.

Credit expansion in Mexico has been responsible and it grew on average 2.8 times the country’s GDP between 2006 and 2013. It should continue having a responsible expansion of between two and three times the GDP to avoid repeating past mistakes. For example, one of the factors that triggered the 1994 crisis was the expansion of irresponsible credit.?

References

• Levine, Ross. 1997. “Financial Development and Economic Growth: Views and Agenda”, Journal of Economic Literature, vol. 35(2), pp. 688-726.
• Rajan, R. y Ramcharan, Rodney. 2011. “Land and Credit: A Study of the Political Economy of Banking in the United States in the Early 20th Century,” Journal of Finance, vol. 66(6), pp. 1895-1931
• Reinhart, C. y Rogoff, Kenneth. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press.
• Reinhart, C. y Rogoff, Kenneth. 2009. “From Financial Crash to Debt Crisis”, NBER Working Papers 15795, National Bureau of Economic Research, Inc.
• Sánchez J. y Zamarripa, Guillermo. 2015. “La situación del crédito en México: Perspectivas y recomendaciones”. Status report, FUNDEF.

When one starts talking about “digital strategy,” a cloud of ideas and concepts -often erroneous- is generated about what the organization must do to have a significant advance in the field of business.

The first line executive team must understand that a digital strategy is a method that uses the elements from the last generation to boost the business model and for the company to “do better,” either to do more business or do something more for the customers.

The technology component is definitely the master key of the world leaders of the moment. But you must first understand its impact and its benefits if you want to implement the strategy successfully. Primarily, technology should help the organization in a digital strategy to reduce costs.

According to a study by Accenture, nearly 90% of the companies in Mexico already have access to digital technologies, from social networks and blogs to cloud servers. The reality is that 60% of executives believe that they are not taking advantage of these technologies due to the lack of a comprehensive strategy.

Therefore, each day the IT director’s agenda becomes more important in the corporate boards for planning the executive strategy of the organization, which is responsible for the approach to the digital strategy toward the company objectives.

Businesses are entities that live in an ecosystem characterized by constant pressures and risks that must be closely monitored to measure emerging opportunities:

• Slowing demand
• Shortage of capital
• New regulations
• Erosion of assets
• Volatile prices

The pressures and unforeseen risks have an impact on the organization, causing a deterioration that is commonly expressed in two ways:

• CEOs eager to significantly reduce the cost of information technologies in order to ensure the efficiency of the area.
• IT staff fatigued by the cost-reduction initiatives and the impact of resolving contingencies, because generally they operate by reaction and will only deal with effects.

The challenge of high-performance organizations is to transform the pressures into opportunities by consolidating a cost reduction strategy based on technology in a sustainable way, while minimizing the associated risks.

Thus, among the first opportunities offered by new digital technologies are the following:

• Cost reduction in technological operation
• Cost reduction in the business operation

CURRENT CHALLENGES
From the start of the digital cost reduction strategy, the pressures of the company will begin to decrease through the alignment of all the units, but the changing market conditions must be taken into account. The technological area of the company is taken as the main objective of efficiency.

It is necessary to get the answer to certain considerations, which will begin to give a more comprehensive overview of the requirements:

• How is the total IT spending, both discretional and non-discretional, distributed?
• How does the IT spending contribute to the performance of the company?

Upon completion of this balance, we will begin to direct the actions toward cost reductions tailored to generate the greatest impact in the lowest number of moves possible.

ACTIONS WITHOUT STRATEGY
In the following three cases we see the most common actions undertaken by companies that do not have a digital cost reduction strategy:

• Case 1. Arbitrary cost reductions in the areas. For example, 10% cut in all IT budgets.
• Case 2. Exclusive consideration of projects of discretionary spending. For example, the cancellation or suspension of projects of significant investment.
• Case 3. Secondary cost reductions. For example, the elimination of suppliers.

When you do not have a strategic approach to cost reduction, there are no sustained and long-lasting benefits, but involuntary results that in many cases frustrate the achievement of the business objective, as set out below.

COLLATERAL DAMAGES TO THE ORGANIZATION
In these cases, it is common that collateral damages occur, which may include the following:

• Short-term savings, which are unsustainable over time, with new cost reduction initiatives without vision.
• Cost reductions that involve several consequences:
  • Reduce IT’s ability to sustain the business strategies.
  • Increase the gap of IT capabilities at the expense of future business expectations.
  • Undertake isolated efforts to reduce costs that do not translate into the desired cost reductions.

PROPOSAL FOR CHANGE
An approach based on the global experience of Accenture divides the reduction of costs into two large integrated perspectives:

• Reduction in IT costs from the internal IT perspective, which involves the costs directly associated with the operation of the technology and infrastructure.
• Reduction in IT costs from the external IT perspective, through continuous improvement of the business, maximizing efficiency and optimizing resources and processes.

The transformation of the manual processes of business to adopt digitized office initiatives, mobility and management of digital contents is found in this second part of the strategic vision.

MYTHS OF THE DIGITAL STRATEGY
It is understood that a digital mobility strategy does not consist in the following:

• Renting servers in a data center on your own.
• Establishing an integrated system that handles day-to-day operations.
• Making isolated applications in the companies.
• Being limited to publications on social networks, which is far from being a digital strategy.

The approach of organizations should focus on converting the problem of reducing the cost of technology into a pragmatic solution in the short and long term that has challenges from the beginning to the end when viewed from two perspectives of returns – the internal perspective of technological advances that favor agility and flexibility of the organization and the external additional reductions in the IT costs required by the business to maintain its competitiveness in the market.

At Accenture, we established a structural approach that helps to create a digital strategy for reducing IT costs significantly and sustainably. This strategy begins when you identify the key investments to obtain the savings that will bring productivity and gains.

In a scenario such as this, the main objective is not only to lower the cost, but also to change the nature of the expenditure to increasingly become dispatches of a “discretional” type, as they are now strategic, sustainable and of great benefits. A panorama is opened through discretionary spending that will create within the company an element that maximizes value in the context of the strategic vision.

NEW TECHNOLOGICAL TRENDS
Technological trends can also generate important cost reductions in the company. The most important thing is that all digital implementation is strategically aligned with the business model and the IT area. Let’s look at these trends.

• Social networks. Between 60% and 70% of the information that is generated in the company is unstructured data and is very valuable. The aim is to adequately exploit the interactions of social media to make better products, to provide more support to customers, to be closer to them and to win sales contracts. What was once seen as a game and entertainment, today companies exploit fully.
• Cloud. Another trend is an integrated vision of the use of technology through the cloud, such as collection and use anywhere for the whole team.
• Mobility. Mobility is everything in the future strategy. It is to take the company to any corner – not only an employee, a customer, a partner or a prospectus that is accessed at the moment you want and in real time.
• Massive and analytical data. The evolution of what was known before as business intelligence is the smart output of reports of data from transactional systems. In both cases, large volumes of information that is constantly moving are analyzed, and a scientific analysis that generates hypotheses about the behavior of information to generate predictions with very high precision is conducted.

With this methodology, the intention is to transmit the vision of the business to a multi-annual program of cost reductions, with elements of precise measurement to get the added value and true impact that must come from the IT area.

The short-term opportunities can generate reductions of up to 10%, but in the long term it could reach 60%, as shown in the graph.

The Accenture initiative is an end-to-end process that begins with workshops with strategic leaders of the digital business in an initial phase of diagnosis, which is then consolidated with the implantation and with a constant measurement.

The essence of Accenture’s digital strategy for the reduction of costs generates innovations in the business through unique experiences for the customer that include the new, intensive combinations of information, business resources and technology.

The success of digital business requires strategic decisions that recognize the pre-eminence of the customers in the business model and determine the difference between what is possible and profitable. The strategies generate a new value for the customer in ways that produce increasing incomes and high-performance results.

The concept referred to as digital technology makes information intensive and connected at the same time. To be a digital company, it is necessary to transform technology into business.?

All companies face the daily challenge of managing uncertainty to create sustainable value in an environment that is increasingly difficult to predict.

Changes in the structure of markets, consumer preferences and the regulatory framework are combined with complex operations, which are therefore volatile.

Volatility is an obstacle to the healthy growth of companies. Organizations of all sizes and in all industries have seen how changing market conditions repeatedly affect their financial position, slow down their expansion plans and threaten the stability of their operations.

The financial crisis that began in 2008 revealed to the world community the importance of the relationship between market volatility and the expected revenues of a company. Movements in interest rates, exchange rates and other critical variables caused heavy losses and made investments that seemed infallible abruptly lose value, including with catastrophic consequences, such as government intervention, hostile takeovers and even bankruptcy.

In an international study by Accenture, it was revealed that the three main risks that companies face come from information technology systems (39%), the factors that define the cost and price of products (39%) and the movement of the global economy (37%). There are success stories in the resilience of companies that have actually generated returns of more than 100% of their risk management investment in the supply chain, but Accenture qualifies only 7% of the companies as leaders in practice.

The leaders in risk management do three things that distinguish them from other companies:

1. They give priority to risk management. 61% of the leaders, unlike 37% of other companies, take risk management as a strategic imperative and recognize the importance of the skills that help them gain greater visibility and predictability through their supply chains.
2. They centralize responsibility for risk management. 43% of the leaders, compared with 32% of others, established a central risk management office led by a senior management executive or a vice president who oversees all of its activities.
3. They invest strongly in risk management with a focus on visibility and analysis of the supply chain from one end to another. The leaders were almost three times more likely to indicate that they had plans to improve their investment in risk management by 20% or more over the next two years. In addition, nearly 70% of the leaders said that their investments would generate a return of at least 100% over the next two years, compared with 4% of the others.

The best management practices require that senior management determine how many risks the company is willing to take to achieve its goals. That is, it has to define its “appetite for risks.”

Associated with the foregoing is the urgent need for actions, processes, tools and reports to ensure that the organization is able to optimize the relationship between risk and returns and act according to a logic of prevention and mitigation of volatility, which only occurs when the risks and their causes are identified and assessed appropriately. One of the best ways to reduce volatility and counteract the negative effects is to optimize the balance sheet. Efficient management of the balance sheet allows the organization to prepare to grow and strengthen its financial position.

THE EQUATION OF LIQUIDITY
The main tool that we use at Accenture to optimize the balance sheet is the “equation of liquidity,” a conceptual framework that identifies the critical elements of managing a company that facilitate the alignment of investment decisions and funding with the minimum liquidity requirements to ensure operation and subsistence.

Increasing EBITDA
Identifying areas for improvement in EBITDA involves a thorough analysis of the financial performance, considering an increase in operating income and a decline in the real cost of financing for each product or line of interest.
It is essential to incorporate indicators that, in addition to the classical view of profitability, make adjustments based on the inherent risk of each transaction. Many institutions already replaced the traditional return on equity (ROE) for the most complete risk-adjusted return on capital (RAROC). These adjustments involve a different way of thinking and operating that reaches methodologies, processes and systems.

Optimize CAPEX
An efficient management of CAPEX’s main objective is to optimize the dynamic allocation of capital in order to meet the future needs of the equipment according to the company’s investment plans.
With this type of management, the characteristics of each investment (costs, objectives, requirements, risks) are understood in order to promote those that represent the best returns with less risk to improve the IRR, the NPV and the cash flow. In addition, it ensures the timely availability of resources according to the investment needs, avoiding administrative bottlenecks and failed projects due to lack of resources. This is also a way to promote the generation of synergies in the funding of initiatives, the dynamic management of the cash flow and, with this, the value of the company.

Making the Working Capital More Efficient
The dynamics of working capital are such that sometimes companies can enjoy an operational profitability, but with a very limited cash flow, so it is essential to incorporate a realistic analysis of the real needs of capital to operate. The analysis focuses on improving the cash conversion cycle in such a way as to safeguard the continuity and effectiveness of the operation without destroying financial value.
This efficiency of working capital improves the process and policies in order to reduce labor costs (assets and liabilities); optimizes the performance of the inventories (both finished goods and investments) to balance the financial indicators with operational actions; and integrates the management of working capital with other critical aspects of financial planning to avoid independent processes that increase inefficiency and costs.

Centralize Investment Decisions
This is to ensure that all investments and key financial decisions are integrated under a single management. This initiative allows the company to improve its performance by increasing trading volumes (and, therefore, market conditions), thus providing better coverage; separates the interest rate risk of operations, assigning it directly to the Treasury, so that the business units focus on the risk factors that are under their control and in the operation itself, and requires that the institution has a corporate governance in which senior management is actively involved in monitoring the management framework of the investments.

Optimize the Capital Structure
It is desirable that the company has the optimal financial leverage and capital structure for their appetite for risk, type of operation and investment needs. The goal is to find the balance between equity and debt so that the cost of capital is the lowest for the company (optimization of WACC).
Thus, the correct composition of liabilities and capital is formulated to meet the needs of liquidity, minimize the cost of funding and maximize the risk-adjusted return.

Optimization strategies are, among others, the acquisition or emission of coverage and the retention of earnings. The creativity and flexibility of the institutions have an impact on the success of their strategies and the generation of value.

SUSTAINABLE GROWTH VS VOLATILITY
The correct application of the equation of liquidity brings significant benefits. Even the best operation of a company can benefit from optimizing its financial structure and derive an additional value-added to the product generation, recruitment of talent or optimization of costs. A high cost of capital, an unfavorable debt collection cycle, inefficiency in making investment decisions or the lack of liquidity involve greater volatility, which has an impact on the value of the company and its ability to enjoy high growth that is both healthy and sustainable.?

Introduction

It is common among students, some specialists and fortunately fewer researchers in the academics to make a distinction in the approaches of the professions of economists and financiers regarding the scope of their respective disciplines.

Traditionally, economists focus on analyzing the “real sector” of an economic system (divided into markets, specific industries, or in the macroeconomic aggregates such as production, inflation and employment), while financiers are interested in studying the “financial sector” and offering solutions for phenomena associated with these markets (represented by the movements and fluctuations in prices and returns of financial instruments and derivatives, or by the decisions of the financing structure of the companies).

Notwithstanding the interrelation of the two disciplines and the complementarity of the theoretical foundations of their models and methods, the complex problems facing contemporary society (poverty, inequality and vulnerability, among others) and the methods proposed to solve these social challenges require the mutual understanding of these two fields. This mutual understanding becomes crucial for characterizing the functioning of an economic and financial system that is based on the allocation of resources through a pricing system, and for designing viable public policies that consider the difficulties of each problem and each possible solution.

This article offers some thoughts about the strong linkage between economic theory and finance, and about how the mutual understanding of these two disciplines provides a context for complex problems. Examples include the growing need of having a strong financial system with wide coverage and services, as well as some implications of the recent financial reform as seen from the perspective of the economic incentives that it aims to change.

Supply, demand, equilibrium and optimality

Whenever I have the chance, particularly at the beginning of a course, I like to ask my students these three questions to motivate my lectures. First: what is traded in the market for tomatoes? Usually they answer right away, and while laughing, they say: “Tomatoes.” The next question is a bit more difficult: What is traded in the labor market? After a bit more reflection, and based on the human capital theory of economist such as T.W. Schultz and Gary S. Becker, a consensus is reached: the unit of trade in a labor market is “work,” which is a bundle of specific skills associated with a service and whose market price is a collection of values represented by a salary that summarizes the yield of various attributes such as education, experience and non-cognitive skills.

Nonetheless, the third question is a challenge even for advanced students: What is traded in the financial market? Frequents answers include “money,” “securities,” “services”, and “derivatives.” The truth is that defining this concept is essential for understanding all the topics that are studied in finance and which are strongly linked to the real economic system. The good that is traded in a financial market is liquidity, coordinated by the supply and the demand of financial instruments of individuals, households, businesses and the government itself. Each financial instrument, ranging from cash to more complex derivative instruments, provides financial flows that become liquidity for their holders. Therefore, behind the source of value of each instrument, simple or complex as it may be, is the liquidity that it can provide to its buyers and sellers.

The financial market allows the investors the coordination between their needs for liquidity among investment in terms of timing and insurance. These portfolios allow investors plan future cash flow and serves as the catalyst for the key component of what contemporary macroeconomic theories call the “consumption and permanent income hypothesis.” In other words, financial instruments allow the smoothing of consumption patterns over time, and the efficient allocation of risk through optimal savings and investment.

An investor reaches this optimal allocation of resources by selecting income profiles; aiming to reach a desirable level of consumption for each eventuality; this profile of cash flows provide stability and security for consumption and can be duplicated and defined in portfolios that combine securities. In such a case, the investor’s portfolios encompass simple savings, insurance contracts, investment in more complex financial market instruments, such as mutual funds, the stock market, or derivatives or even unconventional but commonly used methods, such as a group savings pool in the case of households lacking access to formal savings markets.

These liquidity needs, backed up by the organization of investor’s different portfolios, determines the supply and demand and are organized through financial intermediaries (banks, insurance companies, brokerage houses, bonding companies, mutual funds, etc.). As these intermediaries provide information and bear the costs of coordinating supply and demand, they earn a profit derived through attaining a “market clearing” and balancing the two economic driving forces of liquidity provided by each of the financial instruments.

At this point, upon analyzing the aggregate equilibrium that must exist in an economic system that coordinates liquidity using the financial system, economic theory and financial theory reach a point of agreement on two important results: the Euler’s Equation of Consumption, regarding the real economy, and the Fundamental Asset Pricing Equation, in the case of finances.

Euler’s Equation of Consumption (see the references to classic macroeconomics, such as Barro (1992), Lucas (2002), and Sargent and Ljungqvist (2003), among others) establishes that in the optimal case for decisions by an investor, it must be true that the subjective marginal value present consumption and of consumption linked to a probable future situation is reachable in time. This relative value is matched from period to period conditioned on the agent’s information set , while taking into account the uncertainty of given any distribution of events with and the investor’s impatience for delaying his present consumption from the present to the future :

Also, when the savings and investments needed to achieve the liquidity profiles required by an investor are done through a financial market, that is buying and selling financial instruments at a spot price , and given that these instruments offer future cash flows that face a potential uncertainty , the Fundamental Asset Pricing Equation of financial market establishes that the spot price reflects the discounted value of those future cash flows, considering a certain discount factor that future liquidity flow brings to present value :

In this case, the set of discount factors defines the essential content a sort of “genetic” marker of value formation in any financial asset, and it is called “pricing kernel” or also “state price vector,” as it is linked to the cost that theoretically arises from transferring today’s income to a uncertain future. This set of values has a property applicable to all the assets, and given the set of information under uncertainty , it expected value must be centered precisely around the risk-free ratio, that means, the average discount is precisely the risk free rate of the economy:

While the link between both equations is not trivial, given the set of assumptions and bases of both theories, particularly the postulates on rational investors who always look for the highest level of wealth, full and competitive markets, symmetrical information among agents, and without additional transaction costs, both equations are symmetrical images, and they are the solution to the same problem.²

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² Strictly speaking, the theoretical equivalent between both equations is the existence of theoretical financial instruments called arrow securities, which have a price on the spot market and allow investors to buy units for future income for each possible contingency.

This means that if the goal is to understand the dynamics of the prices of a financial instrument, knowing the properties that support the creation of derivative instruments, planning the creation of an investment profile, characterizing the capital structure of a new business, or evaluating a project using the “present net value” criterion – then behind all of these models there is a financial system that coordinates supply and demand, and all these financial results are a summary of the equilibrium and simultaneous interaction of all the investors.

In addition, it is interesting to note that the major traditional models of economic growth are based on the key assumption of a financial system that is perfectly coordinated and whose functions are irrelevant, since in these models the financial market does not create value, it just coordinates it, as postulated by the famous theorem of Modigliani and Miller when analyzing external financing of businesses (see Freixas and Roche, chapters 1 and 2, for a clear explanation on the topic).

In the following two sections two cases are presented in which the use of microfoundations of equilibrium, prices and quantities presents a better view of the problems of the financial system.

Size does matter: The reach and depth of the financial system

When we study the size of the financial system, our goal is to measure its “liquidity provision” it provides. There are many traditional and accepted measures, such as the size of private credit in relation to the gross domestic product, or the number of ATM cashiers per 1,000 users for instance. However, these metrics are insufficient when we want to understand if a financial market meets its functions of providing liquidity to all the investment agents and potential investors in an economy.

In recent studies in Mexico regarding the credit market (Moreno, 2014) and the market of automated teller machines (Moreno and Zamarripa, 2013), there are two measures that stand out in order to understand the size and importance of the services that are offered in the financial market: The first metric deals with the reach of the system, the potential number of clients or users with access to a financial service; the second addresses the depth of the system, defined as the number and size of the transactions carried out by each user of the financial system.

By analyzing these metrics it is understood that the interaction of real economy and the financial system presents not just economies of scale (a larger size favors a reduction in supply costs), but also economies of reach (financial intermediaries use the same platforms to offer differentiated products, including diversifying their levels of risk) and network economies externalities (this is the degree of acceptance of a certain financial product or service that is crucial to its success or disappearance.

How does one determine the prices for a financial service that manifests particular conditions such as those just mentioned? The answer is complex. If costs are decreasing, should a high price be charged for a certain period until acceptance is achieved? When comparing costs and benefits, should access or depth be encouraged? Who should provide access: the traditional financial intermediaries such as banks and insurers, or should it be different intermediaries with specific functions such as microcredit institutions?

The use of automated bank tellers (ATMs) serves as an example of how complex a liquidity service within the financial system can be. In a recent book, Moreno and Zamarripa (2013) show that in Mexico the costs of an out-of-network bank teller (a fee known as a surcharge) affect the totality of resources that are assigned and exercised by users through the ATM network, and, in this way, it affectsthe depth of services and harms the users of small networks that face high costs.

What policy should be followed to establish the right price for the use of the tellers? The answer contains many difficulties that one must consider, but above all, this policy must focus on the benefit of widening access and use of the network. This way, the price of the service contains an external component for use of the network; that is to say, high fixed costs initially for installation, but relatively low marginal costs for operation. That should lead to a series of regulations that induce a price that encourages the use of shared ATMs, an efficient use of the teller network, and, given the trend to provide more complex financial services, such as the payment of services and taxes, a complete banking experience that differs from the traditional aim in which teller machines simply deliver cash to their clients.

Financial regulation: expansionist or prudent

A second example of the importance of understanding the interrelation between economic and financial theories is represented by the regulation that is recommended for the financial system, particularly for banks.

Recent studies (Moreno, 2014; Sánchez and Zamarripa, 2014) have shown that in Mexico the levels of supply liquidity through credit are very small compared to many international standards.

The need for credit to promote investment in small and medium businesses was a key part of the policy goals that gave shape to the administration’s 2014 financial reform that sought to solve that problem.

However, Moreno and Zamarripa (2014) show that this reform presents goals found in its economic and financial theoretical base, and that its instrumentation may not be altogether successful as there are opposing goals, such as the expansionist policies for credit levels, and prudential policies for risk regulation, which restrict the capitalization levels of the financial intermediaries.

In other words, the logic of supply and demand states that the expansion of credit would be destined for clients outside of the financial system whose cost of risk management can be, on average, relatively greater than that of clients who already have credit. These costs can raise the average interest rates for banks when contracts of greater risk are presented than those contracts already assigned. Therefore, they increase the risk exposure in the bank’s credit portfolios.

This way, knowledge of the incentives for placement of credit in terms of risk allows us to conclude that a greater level of credit represents a benefit for new productive projects, but also a cost upon adjusting the risk levels of the bank’s credit portfolios.

Conclusions

The financial market is cause and effect of the production system: They reflect the same essential reality of the economy within which they operate. Supply and demand for liquidity, as well as incentives of their operation, affords knowledge of the mechanisms through which the prices and services of a financial market are determined.

Each price simultaneously reflects the equilibrium, the agent’s incentives, the uncertainty, and the information available to investors in an economic system. All the models of financial valuation are based on this basic principle of rationality and equilibrium known as the “hypothesis of efficient markets,” which was proposed by Nobel Prize winner Eugene Fama. It says that prices of financial instruments reflect the current value of the liquidity flows they provide, integrating all the available information.

Similarly, the results of efficiency and social welfare in an economic system that is based on a pricing system and on a capitalist model require a financial system that efficiently supplies the services and products needed by the investment agents and potential investors.

Understanding the financial models as a result of a rational economic process allows identification of costs, benefits and challenges of any decision-maker in finance, but also the incentives, distortions and results that can be expected from applying regulations and public policies designed to modify the financial system in one of its dimensions to favor consumers and investors.?

Bibliography

• Barro, Robert. 1990. Macroeconomics. McGraw- Hill.
• Freixas Xavier, y Jean-Charles Rochet. 2008. Microeconomics of Banking. MIT Press.
• Lucas, Robert. 2002. Lectures on Economic Growth. Harvard.
• Moreno, Jorge O. 2011. “Heterogeneity, Matching, and the Hedonic Structure of the Credit Market”. Feb 11, 004-11-FINM-TP, ITAM School of Business.
• Moreno, Jorge O., y Guillermo Zamarripa. 2014. “Análisis de la reforma financiera en México”. FUNDEF research document 2014-003.
• Moreno, Jorge O., y Guillermo Zamarripa. 2013. Redes de cajeros automáticos en México: Un análisis de transaccionalidad. FUNDEF, México.
• Sánchez, Jorge, y Guillermo Zamarripa. 2014. “Análisis del crédito en México. FUNDEF research document 2014-002.
• Sargent, Thomas y Lars Ljungqvist. 2010. Recursive Macroeconomic Theory. MIT Press.