Tag: Venezuela

Venezuela’s House of Cards

The story of the Venezuelan economy and its troubled currency, the bolivar, can be summed up with the following phrase: “From bad to worse”—over and over again. Yes, the ever deteriorating situation in Venezuela has taken yet another turn for the worse.

In a panicked, misguided response to the country’s economic woes, Venezuelan president Nicolas Maduro has requested emergency powers over the economy. And the Maduro government recently announced plans to institute a new exchange rate for tourists in an attempt to quash arbitrage-driven currency smuggling.

These measures will likely prove too little, too late for the Venezuelan economy and its troubled currency, the bolivar. Indeed, the country’s economy has been in decline since Hugo Chavez imposed his unique brand of socialism on Venezuela.

For years, Venezuela has sustained a massive social spending program, combined with costly price and labor controls, as well as an aggressive annual foreign aid strategy. This fiscal house of cards has been kept afloat—barely—by oil revenues.

But as the price tag of the Chavez/Maduro regime has grown, the country has dipped more and more into the coffers of its state-owned oil company, PDVSA, and (increasingly) the country’s central bank.

Since Chavez’s death, this house of cards has begun to collapse, and the black market exchange rate between the bolivar (VEF) and the U.S. dollar (USD) tells the tale. Since Chavez’s death on March 5, 2013, the bolivar has lost 62.36% of its value on the black market, as shown in the chart below the jump.

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.

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”.

Chavez: The Death of A Populist … and His Currency?

Although Hugo Chávez, the socialist presidente of Venezuela, has finally met his maker, the grim reaper is still lingering in Caracas. As it turns out, Chávez was not the only important Venezuelan whose health began to fail in recent weeks: the country’s currency, the Venezuelan bolivar fuerte (VEF) may soon need to be put on life support.

In the past month the bolivar has lost 21.72% percent of its value against the greenback on the black market (read: free market). As the accompanying chart shows, the bolivar has entered what could be a death spiral, which has only accelerated with news of Chávez’s death.

 

Shortly before his death, Chávez’s administration acknowledged that the bolivar was in trouble and devalued the currency by 32%, bringing the official VEF/USD rate to 6.29 (up from 4.29). But, at the official exchange rate, the bolivar is still “overvalued” by 74% versus the free-market exchange rate.

The Day After the Election in Venezuela

Unfortunately there was no upset in yesterday’s presidential election in Venezuela. Hugo Chávez handily won another six-year term with 54% of the vote. Despite running an inspiring campaign that at some point seemed to threaten Chávez’s rule, Henrique Capriles came up short with 44%. The vote was clean, even though the election wouldn’t be considered fair in any mature democracy.

What happened? It seems clear that Chávez was able to mobilize his people to the polls. Despite the mismanagement of the economy, the spike in crime, the crumbling infrastructure and widespread corruption, many Venezuelans still like Chávez. And he made sure to buy their love this year by increasing public spending in the last 12 months by 30% in real terms. Others might not like him, but still feel compelled to vote for him. Over 8 million Venezuelans receive some kind of permanent income or handout from the government. The regime wasn’t subtle letting them know that those goodies would be gone if they voted for Capriles. The Economist reported on the intimidation faced by an important segment of these voters:

Some public employees—whose ranks have more than doubled under Mr Chávez to over 2m—have been obliged to fill out forms saying exactly where they will be voting. Like the election ballots, these forms require a signature and a thumbprint: the implication that the government will monitor how they vote does not need to be spelled out.

This is certainly a heartbreaking defeat for the opposition. There is no doubt that Chávez will continue to lead Venezuela down the authoritarian path. However, this election has created a credible opposition leader who, unlike opposition candidates in the past, will have a prominent voice in national politics, especially as the economic and social conditions deteriorate markedly as they are sure to do. If Chávez really is terminally ill with cancer, as is very likely, then the stature of Capriles will continue to grow as the next leader of Venezuela.

All Eyes on Venezuela on Sunday

Venezuelans will go to the polls on Sunday for their most important presidential election in a generation. At stake is the end of the thuggish, corrupt, and autocratic 14 year-old regime of Hugo Chávez.

The opposition, led by Governor Henrique Capriles Radonsky, has a real chance of winning the vote—if it’s fairly done. The most credible polls show a very tight race with still a number of Venezuelans undecided. However, there are good reasons to believe that most of the undecided are actually “hidden” votes for Capriles, people who are intimidated or afraid to express their support for the opposition candidate.

As I’ve written before, it won’t be a fair election. Four out of the five seats in the National Electoral Council (CNE) are loyal chavistas. The CNE has resorted to increasingly dirty tricks. The latest has been to announce that people who mark one of Capriles’ pictures in the ballot won’t actually be voting for him, but for a lesser known third candidate (see the explanation here).

The electoral registry, which is controlled by Cuban operatives, has increased its size by 58 percent since 2001, even though Venezuela’s population has risen only 18 percent during that period. Fourteen of the country’s 24 states have more registered voters than total adult population. There is even the documented case of 2,272,706 voters that appear to live at the same address.

Thus, even though the opposition claims that it is well prepared to defend its votes at the polling stations, it is very likely that in the dawn hours of Monday, the CNE will announce Chávez as the winner. In my opinion, there is no real scenario under which Chávez would accept defeat by Capriles. The question then becomes: what happens next?

One thing to watch for is the reaction of the so-called Bolivarian militia, which consists of die-hard chavistas that have been well armed with Russian rifles and trained by the government to “defend the revolution.” Some estimates put their number at 25,000 people, enough to terrorize those opposition supporters who might consider going to the streets to protest against electoral fraud. It is still a mystery what the reaction of the army would be if chaos broke out in the streets of Caracas and elsewhere. Several generals have profited enormously from the regime, and they would loath to see Chávez go. But the extent to which they actually control the troops is unknown.

The Obama administration has been wise to avoid making statements about Venezuela’s election prior to the vote. Any comment by a U.S. official will play into Chávez’s hands as a gross interference by the “Empire” in Venezuela’s sovereignty. Nonetheless, Washington should keep an eye on the election and its aftermath. The outcome will likely have far-reaching consequences for the region.

The U.S. Takes a Dive in Economic Freedom of the World Index

Economic freedom in the United States has plummeted to an all-time low. According to the Economic Freedom of the World: 2012 Annual Report, co-published today with the Fraser Institute, the United States’ ranking has dropped to 18th place after having ranked 3rd for decades up to the year 2000. The loss of freedom is a decade-long trend—the United States ranked 8th in 2005—that has accelerated in recent years.

Virtually every U.S. indicator has seen a deterioration. Government spending and regulations have grown, the rule of law and protection of property rights have weakened, and foreign investment and non-tariff barriers have increased. Authors James Gwartney, Robert Lawson, and Josh Hall note some of the reasons for the decline, including the war on terror and the growth of crony capitalism.

As the graph below shows, the United States now has a lower economic freedom rating than it did in the 1970s.

The United States’ fall is alarming not only because it’s the most important economy in the world, long associated with market-liberal policies, but also because Economic freedom is strongly correlated with prosperity, higher growth, and improvements in the entire range of standard-of-living indicators, so a decline negatively affects those outcomes. The authors calculate, for example, that the loss of economic freedom will cut long-term U.S. growth by half to about 1.5 percent per year.

Another country that has seen a notable, steady drop in its economic freedom is Venezuela, now ranked last in the index. Other countries have been on an upward trend. Chile is now ranked 10th and China, while still largely unfree, continues to head in the right direction (see graph).

Below are the top ten countries in this year’s index. You can see a full listing here on page 10.

As my colleague Richard Rahn says in his column today, this year’s economic freedom report should be a wake up call to all Americans.