Tag: Venezuela

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.

Paul Krugman’s Distorted Views on Inequality in Latin America

When it comes to discussing Latin America, Paul Krugman has a tortuous relationship with facts. Let’s take a look at a post he wrote last week on inequality in the region. Krugman claims that Latin America’s decline in inequality in the last decade is due to the region “partially turning its back on the Washington Consensus” (a term that has misleadingly become short hand for free market policies). Is that the case?

First, note how the graph in Krugman’s post actually shows inequality going up in Latin America during the 1980s, before the implementation of policies related to the Washington Consensus (which for most countries begins in the early 1990s), and then sharply declining before the arrival of what he calls the “new policy approach” of left-of-center governments. The rise of inequality in Latin America in the 1980s coincides with the periods of hyperinflation that crippled the economies of Argentina, Brazil, Nicaragua, Peru, and Bolivia. Central banks in Latin America were all too busy in those years financing the acute fiscal imbalances of their central governments through the emission of money. And Latin American countries were deep in the red precisely because their bloated public sectors became unsustainable, leading to the serious debt crisis of 1982. Thus, it was an inflationary spree, caused by the crisis of big government, that exacerbated inequality in the region. Of course, Krugman fails to mention this.

Can we assign the recent decline in inequality in Latin America to any specific ideology? A recent study by Kenneth Roberts of Cornell University on the politics of inequality in Latin America looked at inequality trends from 2000 to 2010 and found that “countries that experienced net declines in inequality were governed by diverse administrations of the left, centre, and right, including non-leftist governments in Colombia, Mexico, Peru, Paraguay, El Salvador, Guatemala, and Panama.” According to Roberts, “there was no strict correspondence between declining inequality and either the ideological profile of national governments or any specific set of redistributive initiatives.”

Second, it’s quite a stretch to state that Latin America as a region moved away from the Washington Consensus. I’m not going to dwell here on the virtues of all the policy recommendations identified by John Williamson back in 1989 or discuss the extent to which they were actually implemented by the various Latin American governments. However, even though some countries such as Venezuela, Ecuador, Bolivia, and Argentina have turned their backs on responsible macroeconomic policies in the last few years, most governments in the region, including those called “left of center,” still implement macroeconomic policies related to the Washington Consensus such as freer trade, fiscal and monetary discipline, and attraction of foreign direct investment.

It is telling that despite the serious deterioration in economic freedom in countries such as Venezuela, Ecuador, and Argentina economic liberty has actually increased—slightly—in Latin America as a region in the last decade. According to the Economic Freedom of the World , Latin America went from a regional average grade of 6.56 (out of 10) in 2000 to 6.62 in 2009. Implying that Latin America has somehow turned its back on market-friendly policies is misleading.

Third, Krugman looks at the economic performance of Latin American governments based on their ideological affiliation, suggesting that social democratic regimes have a better record than non-left-of-center governments. However, the study on which he bases his post relies too heavily on analyzing governments by their ideological labels, rather than looking at their actual economic policies. This can be very misleading. For example, during the period covered by the study (2000s), Chile is ranked as left of center, even though during that decade the country increased its level of economic freedom, moving up in the ranking of the Economic Freedom of the World index from 28th place in 2000 to 5th in 2009.

Finally, Krugman finished his post questioning Chile’s free market model and private pension system (even though the study he was referencing categorizes Chile as “left of center” and thus credited that ideological camp for Chile’s healthy economic indicators). Krugman doesn’t provide evidence to substantiate his criticism other than making a presumable reference to the recent student protests in Chile. If he looked at the facts, he would see a different picture. He would find that Chile is the country with the most impressive record in poverty reduction in Latin America (the poverty rate fell from 45 percent in the mid-1980s to just 15 percent in 2011), that it has tripled its income per capita since 1990 to $16,000 (the highest in Latin America), and that it is set to become the first developed nation in Latin America within a decade. What is it about this record that Krugman finds so annoying?