Tag: ecuador

Venezuela’s Death Spiral, Dollarization Is The Cure

With the arrival of President Hugo Chávez in 1999, Venezuela embraced Chavismo, a form of Andean socialism. In 2013, Chávez met the Grim Reaper and Nicolás Maduro assumed Chávez’s mantle.

Chavismo has not been confined to Venezuela, however. A form of it has been adopted by Rafael Correa – a leftist economist who became president of a dollarized Ecuador in 2007.

Even though the broad outlines of their economic models are the same, the performance of Venezuela and Ecuador are in stark contrast with one another.

The most telling contrast between Venezuela’s Chavismo and Ecuador’s Chavismo Dollarized can be seen in the accompanying chart of real GDP in U.S. dollars. We begin in 1999, the year Chávez came to power in Venezuela.

The comparative exercise requires us to calculate the real GDP (absent inflation) and do so in U.S. dollar terms for both Venezuela and Ecuador. Since Ecuador is dollarized, there is no exchange-rate conversion to worry about. GDP is measured in terms of dollars. Ecuadorians are paid in dollars. Since 1999, Ecuador’s real GDP in dollar terms has almost doubled.

To obtain a comparable real GDP for Venezuela is somewhat more complicated. We begin with Venezuela’s real GDP, which is measured in terms of bolívars. This bolívar metric must be converted into U.S. dollars at the black market (read: free market) exchange rate. This calculation shows that, since the arrival of Chávez in 1999, Venezuela’s real GDP in dollar terms has vanished. The country has been destroyed by Chavismo.

 

Venezuela is clearly in a death spiral. The only way out is to officially dump the bolívar and replace it with the greenback.

Ecuador’s Ambassador Misses the Point: Dollarization

Ecuador’s ambassador to the U.S., Francisco Borja Cevallos, wrote a letter, “Ecuador’s Progress,” which was published in the New York Times on August 8th. Ambassador Borja reviews a number of Ecuador’s recent economic accomplishments. Fine. After all, by Latin American standards, Ecuador has performed well. Indeed, my Misery Index rankings for the region in 2014 show that only Panama, Mexico, and El Salvador performed better than Ecuador did.

What Ambassador Borja failed to mention is the true source of Ecuador’s relative success: dollarization. Yes, Ecuador is dollarized. Ecuador represented a prime example of a country that was incapable of imposing the rule of law and safeguarding the value of its currency, the sucre. The Ecuadorian sucre traded at 6,825 per dollar at the end of 1998, and by the end of 1999 the sucre-dollar rate was 20,243. During the first week of January 2000, the sucre rate soared to 28,000 per dollar.

With the sucre in shambles, President Jamil Mahuad announced, on January 9, 2000, that Ecuador would abandon the sucre and officially dollarize the economy. Telephone calls from both President Bill Clinton and U.S. Treasury Secretary Larry Summers encouraged Mahuad to dollarize. The positive confidence shock was immediate. On January 11th — even before a dollarization law had been enacted—the central bank lowered the rediscount rate from 200 percent a year to 20 percent. On February 29th, the Ecuadorian Congress passed the so-called Ley Trolebus, which contained dollarization provisions. It became law on March 13th, and after a transition period in which the dollar replaced the sucre, Ecuador became the world’s most populous dollarized country. And dollarization remains, to this day, highly popular; most Ecuadorians — 85 percent — still give dollarization a thumbs up. What Ecuadorians fear is that President Rafael Correa, who has opposed dollarization in the past, might just abandon the greenback, which is Ecuador’s anchor of stability.

Measuring Misery in Latin America 2014: More Dollarization, Please

In my misery index, I calculate a ranking for all countries where suitable data 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 108 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.

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.