Tag: ecuador

Oil Price Blues (Read: Dangers) for Some

As the price of crude oil continues its downward tumble towards $80 per barrel, I am reminded of a similar scenario from near the end of the Cold War in the 1980s. When Saudi Arabia announced in 1985 that protecting oil prices was no longer its main priority, oil production surged and prices fell off a cliff, briefly plunging below $10 per barrel, as I had correctly predicted.

Lower prices delivered a fatal blow to the Soviet economy, which ended up seeing $20 billion per year in oil revenues evaporate. The resulting fiscal shortfalls proved to be a dagger in the heart of the U.S.S.R.

On October 1st of this year, Saudi Arabia’s national oil company announced that it had abandoned a policy of price protection and would start to focus on protecting its market share. Combined with falling global demand and rising supplies elsewhere, oil prices have fallen accordingly. This has put a squeeze on eight of the world’s top oil producers. States like Iran, Venezuela, and Iraq can only balance their current budgets at oil prices ranging from $110 to $135 per barrel (so-called break-even prices).

If oil prices stay below $90 per barrel for any length of time, we will witness massive fiscal squeezes and regime changes in one or more of the following countries: Iran, Bahrain, Ecuador, Venezuela, Algeria, Nigeria, Iraq, or Libya. It will be a movie we have seen before.

Measuring Misery in Latin America: More Dollarization, Please

In my misery index, I calculate a ranking for all countries where suitable data from the Economist Intelligence Unit exist. My misery index — a simple sum of inflation, lending rates, and unemployment rates, minus year-on-year per capita GDP growth — is used to construct a ranking for 89 countries. The table below is a sub-index of all Latin American countries presented in the world misery index.

A higher score in the misery index means that the country, and its constituents, are more miserable. Indeed, this is a table where you do not want to be first.

Venezuela and Argentina, armed with aggressive socialist policies, end up the most miserable in the region. On the other hand, Panama, El Salvador, and Ecuador score the best on the misery index for Latin America. Panama, with roughly one tenth the misery index score of Venezuela, has used the USD as legal tender since 1904. Ecuador and El Salvador are also both dollarized (Ecuador since 2000 and El Salvador since 2001) – they use the greenback, and it is clear that the embrace of the USD trumps all other economic policies.

The lesson to be learned is clear: the tactics which socialist governments like Venezuela and Argentina employ yield miserable results, whereas dollarization is associated with less misery.

Sovereign Currency Populism versus Dollarized Populism

Venezuela and Ecuador both have left-wing populist governments that have benefited tremendously from record high oil revenues. Both governments used those revenues to significantly increase public spending. However, there is a critical difference between these countries: while Venezuela has its own currency (the so called “strong Bolívar”), Ecuador adopted the U.S. dollar as its official currency in 2000. That means that, no matter how fiscally irresponsible the Ecuadorean government, it can’t print money to pay for its spending.

The result: Venezuela has the highest inflation rate in Latin America whereas Ecuador has one of the lowest rates in the region.

The Ecuadorian Pot Calls the American Kettle Black on Media Freedom

For a time it looked like Edward Snowden, famed NSA leaker, was headed for Ecuador, whose London embassy still hosts asylum-seeker Julian Assange of WikiLeaks. But the leftist government curiously has cooled on Snowden.

President Rafael Correa originally praised Snowden for his leaks, but then back-tracked. More recently Correa indicated that an asylum request would be considered only after Snowden reached Ecuadorian territory or an embassy, and after consultation with the Obama administration. The Hugo Chavez confidante added: “I believe that someone who breaks the law must assume his responsibilities.” 

The suspicion is that Correa decided principle wasn’t as important as his people’s access to the U.S. market. Nothing personal, just business!

Thankfully, President Correa is primarily a problem for his own people, a dangerous demagogue like Chavez who uses nominally democratic means to amass ever more power. The group Freedom House cited Correa’s use of “questionable maneuvers to remove opposition legislators and members of the Constitutional Court.” Human Rights Watch reported that “prosecutors have repeatedly applied a ‘terrorism and sabotage’ provision of the criminal code against participants engaged in public protests against environmental and other issues.” 

Correa also uses his control of the government and the courts to discourage media criticism. Last month the National Assembly approved a new “gag law” which creates a Communication Regulation and Development Council, Office of Superintendent of Information and Communication, and Citizen Participation, and Social Control Council to enforce its provisions.

The government closed a score of independent radio and television stations last year. President Correa also has used lawsuits to punish his critics. One case imposed a $40 million judgment and jail terms. Observed Freedom House: “International human rights and press freedom organizations, the Organization of American States (OAS), and the United Nations denounced the court decision as a clear effort to intimidate the press.”

His attacks on the press dramatically contradict his policy toward foreign leakers. Indeed, observed my Cato Institute colleagues Juan Carlos Hidalgo and Gabriela Calderon de Burgos:

Another, less reported story is Correa’s war against leakers in his own government. Since he came to power in 2007 there have been four well-documented case where the Ecuadorean government either prosecuted or arrested people who leaked information to the media, revealing instances of corruption in Correa’s government. 

Freedom House only rates Ecuador as “partly free.”  As I wrote in my latest Forbes online column:

While [recently] in Ecuador I talked with people who are more classically liberal, favoring limited government, competitive markets, and free expression.  Although they oppose the crony right as much as the populist left, there was a shared feeling of intimidation.  Years ago, when a free market university let Correa go after he chose politics over the classroom, he sent government regulators to the school.  Many who write about the president today say they temper their criticism, lest they face a ruinous lawsuit.

For Ecuadorian President Correa, sanctimony is high art. To him press freedom and government transparency are for other governments, not his own.

What Happens to Leakers in Ecuador?

With the political asylum request by Edward Snowden to Ecuador—which hasn’t been approved yet—and Julian Assange’s one-year ordeal in the Ecuadorean embassy in London, there is a lot of self-righteousness coming from the administration of Rafael Correa and its sympathizers about that country being a safe heaven for leakers and transparency types.

In truth, Ecuador is one of the least friendly countries in Latin America in terms of freedom of the press. Just recently the country’s National Assembly approved a law (the so-called “gag law”) that tightens controls on the media, severely limits private ownership of frequencies, and bans the repeated public criticism of authorities individuals. The Inter-American Press Association has called the law “the most serious setback for freedom of the press and of expression in the recent history of Latin America.”

But another, less reported story is Correa’s war against leakers in his own government. Since he came to power in 2007 there have been four well-documented cases where the Ecuadorean government either prosecuted or arrested people who leaked information to the media, revealing alleged instances of corruption in Correa’s government:

Quinto Pazmiño: A former aide to then-finance minister Ricardo Patiño (now the foreign relations minister), Pazmiño leaked videos of a meeting held in Quito in 2007 with representatives of the New York-based firm Abadi & Co. in which Patiño allegedly planned to create uncertainty in the bond market so both sides could speculate and reap financial benefits. Pazmiño claimed to have more incriminating videos of other high-ranking officials in the government. Correa immediately reacted by changing the bylaws of the Radio and Television Law to establish sanctions—including canceling the broadcasting license—for disseminating “clandestine videos or audio recordings.” No videos were broadcast afterwards. Then, the attorney general ordered the arrest of Pazmiño, alleging that his detention was required for the safety of the president. He spent almost a month in jail. Then the president himself sued Pazmiño for libel. A few years later Pazmiño died of a heart-attack in his home. His widow was then killed by hit men in 2011 under mysterious circumstances, supposedly related to past debts.

Dollarize Argentina Now

Argentina is once again wrestling with its long-time enemy, inflation. Now, it appears history may soon repeat itself, as Argentina teeters on the verge of another currency crisis. As of Tuesday morning, the black-market exchange rate for Argentine pesos (ARS) to the U.S. dollar (USD) hit 9.87, meaning the peso’s value now sits 47.3% below the official exchange rate. This yields an implied annual inflation rate of 98.3%. For now, the effects of this elevated inflation rate are being subdued somewhat by Argentina’s massive price control regime. But these price controls are not sustainable in the long term. Indeed, the short-term “lying prices” only distort the economic reality, ultimately leading to scarcity. There is, however, a simple solution to Argentina’s monetary problems: dollarization. I have advocated dollarization in Argentina for over two decades, well before the blow up of their so-called “currency board.” To put the record straight, Argentina did not have a true currency board from 1991 to 2002. Rather, as I anticipated in 1991, the “convertibility system” acted more like a central bank than a currency board. This pegged exchange rate system was bound to fail—and fail, it did. The 2001-02 Argentine Crisis could have easily been avoided if the country had simply dollarized. Argentina had more than sufficient foreign assets to dollarize their economy even late into 2001. But the Argentine government, through a series of policy blunders, ended up “floating” the currency. Not surprisingly, Argentina is now back to where it was in the late 1980s. So, how can Argentina dollarize? In short, the Banco Central de la Republica Argentina (BCRA) would take all of the assets and liabilities on its balance sheet denominated in foreign currency and convert them to U.S. dollars. The Central Bank would then exchange these dollars for all the pesos in circulation (monetary base), at a fixed exchange rate. By my calculation, the BCRA would need at least $56.36 billion to dollarize at the official exchange rate (as of April 23, 2013).

Price Controls: A Troubling Trend in Latin America

Argentina, Venezuela, and now even Ecuador have all embraced an unfortunate, if familiar, economic craze currently sweeping the region – price controls. In a wrong-headed attempt to “suppress” inflation, the respective governments have attempted to fix prices at artificially low levels. As any economist worth his salt knows, this will ultimately lead to scarcity.

Consider Venezuela, where the government sets the price of a number of goods, including premium gasoline, which is fixed at only 5.8 U.S. cents per gallon. As the accompanying chart shows, 20.4% of goods are simply not available in stores.

While price controls ostensibly keep the prices of goods on official markets low, they ultimately lead to empty shelves, depriving many consumers access to essential goods (such as toilet paper). This, in turn, leads to “repressed” inflation – given the price controls that exist, the “true” rate of inflation is held down, or repressed through Soviet-style government intervention. As the accompanying chart shows, the implied annual inflation rate for Venezuela (using changes in the black-market VEF/USD exchange rate) puts the “repressed” inflation rate at 153%.

Likewise, Argentina is facing a similar dilemma (see the accompanying chart).

In addition to scarcity and repressed inflation, price controls can lead to unintended political consequences down the road. Once price controls are implemented it is very difficult to remove them without generating popular unrest – just consider the 1989 riots in Venezuela when President Carlos Perez attempted to remove price controls. 

Hopefully, Ecuador – which, thanks to its dollarization, is experiencing an annual inflation rate of only 3% – will see this folly and abandon its expirement with price controls.

If countries like Venezuela are really interested in keeping inflation under control, they should follow Ecuador’s lead – simply junk their domestic currencies and “dollarize”.