Tag: Venezuela

Socialist Catastrophe in Venezuela

Journalists are now reporting regularly on the crisis in Venezuela, with shortages of everything from toilet paper to food and now daily street protests. What the news reports too often miss is, Why? Why is a formerly middle-class, oil-rich country now so desperately poor?

The Weekly Standard notes a New York Times article, “How Venezuela Stumbled to the Brink of Collapse,” that spends 1800 words on the country’s “collapse into authoritarianism.” The Standard summarizes:

The strongman Hugo Chávez “ran for president in 1998. His populist message of returning power to the people won him victory.” Chávez polarized because “populism describes a world divided between the righteous people and the corrupt elite.” Now, under the late Chávez’s successor, Nicolás Maduro, “The political system, after years of erosion, has become a hybrid of democratic and authoritarian features.”

But never does the article identify what economic system could cause such disaster. It does mention specific policies: subsidies, welfare programs, money printing, inflation, and price controls. But nationalization is never mentioned. And in particular, the Standard points out, the article does not use the word “socialism” (or “socialist”). It does not mention that Hugo Chavez and Nicolas Maduro have headed the United Socialist Party of Venezuela. Socialism is the cause that must not be named.

So it’s refreshing to see a rather more forthright article in the Washington Post this weekend by Mariana Zuniga and Nick Miroff:

With cash running low and debts piling up, Venezuela’s socialist government has cut back sharply on food imports….

Venezuela’s disaster is man-made, economists point out — the result of farm nationalizations, currency distortions and a government takeover of food distribution. While millions of Venezuelans can’t get enough to eat, officials have refused to allow international aid groups to deliver food, accustomed to viewing their oil-rich country as the benefactor of poorer nations, not a charity case.  

“It’s not only the nationalization of land,” said Carlos Machado, an expert on Venezuelan agriculture. “The government has made the decision to be the producer, processor and distributor, so the entire chain of food production suffers from an inefficient agricultural bureaucracy.”

My colleague Marian Tupy notes that according to the Economic Freedom of the World Index, economic freedom in Venezuela fell from just above 7 out of 10 in 1970 to barely above 3 in this decade. Meanwhile, its GDP per capita has fallen over 40 years, while Chile’s has tripled.

Venezuela doesn’t have to be poor. But to restore its standard of living, it will have to reverse recent changes in property rights, judicial independence, free trade, and corruption.

Hunger Is in Retreat, But Not in Socialist Venezuela

A shocking statistic has come to light: Venezuelans lost 19 pounds on average over the past year because of food shortages. 

There was a time when hunger was a near-universal experience. As Kevin D. Williamson put it, “Not long ago, the great dream and aspiration of most of the people walking this Earth was to have enough to eat, for themselves and for their children, and to be liberated from worrying about whether they would eat again tomorrow or the next day.”

Then, something changed. Exchange and specialization helped bring down food prices. A burst of innovations called the Green Revolution led to higher agricultural productivity and decreased food prices even further. Even as the world’s population grew, the market ensured that the supply of food rose to meet growing demand. 

The global numbers are heartening. The share of the world’s population suffering from hunger is shrinking. Despite population growth, the total number of undernourished persons is lower as well. Even those who are food-deprived are less severely malnourished than in the past. Humanity now produces more than enough food to theoretically feed everyone on Earth the recommended 2,000 calories per day.

Hunger was declining in Venezuela too until recently. The percentage of Venezuela’s population suffering from undernourishment fell from 14% in 1991 to “5% or lower” in 2015, the latest year for which the United Nations has data. Since then, the situation has rapidly deteriorated. In a single year, the number of cases of severely undernourished children in Venezuela’s capital city, Caracas, doubled

The reason? Venezuela’s socialist economic policies, briefly sustained by fleeting high oil prices, led to hyperinflation and a societal collapse. If Venezuela continues on its present course, hunger is likely to become more widespread. 

We can all be thankful that undernourishment has become rarer globally. But the case of Venezuela demonstrates that progress is not inevitable—suicidal economic policies, like socialism, can rapidly extinguish the prosperity we enjoy. 

Venezuela’s Bolivar Redenomination Will Fail

Venezuela – ravaged by socialist policies, corruption, and incompetence – is currently embroiled in the world’s 57th episode of hyperinflation. Since the beginning of November, the bolivar has lost 55.2 percent of its value on the black market (read: free market), worsening the situation in a country in which wheelbarrows have already replaced wallets. So, on November 30th, Venezuelan officials announced a misguided and foolhardy plan to issue larger bills in an attempt to mitigate the damaging effects of its hyperinflation.

But why is the Banco Central de Venezuela (BCV) redenominating? Because if it doesn’t, then the people are stuck. If you go to a market in Caracas today, you either need a wheelbarrow of cash or bigger bills – much bigger. So, President Maduro and the BCV hope that, by printing 20,000-bolivar notes, they can skirt around the hyperinflation problem until it goes away. And that’s a mug’s game.

In the early 1990s, Yugoslavia tried to combat its own hyperinflation by printing larger bills, and it failed horribly. Yugoslavia’s heavy inflation continued throughout the ‘90s, and the dinar was devalued 18 times between 1991 and 1999, losing 22 decimal places of value along the way. Yugoslavia’s monetary orgy finally came to an end when the Topcider mint ran out of capacity. Yugoslavia’s 313,000,000 percent monthly inflation transformed 500-billion-dinar bills into small change before the ink had dried.

Redenomination does nothing if elevated inflation levels persist – as Zimbabwe’s infamous 100-trillion-dollar note demonstrates – and Venezuela will be no different. When inflation goes to the moon, you physically cannot redenominate bills fast enough – you can only add zeroes to notes so quickly. In consequence, you are ultimately left with valueless notes with many zeroes and a “wheelbarrow problem.” The issuance of higher-denomination bolivar notes isn’t the end of this episode, and it’s not the solution.

In fact, the only surefire solution is either to dump the bolivar and replace it with the U.S. dollar or make the bolivar a clone of the dollar via an orthodox currency board, in which the bolivar trades at a fixed rate with the U.S. dollar, is totally convertible with the U.S. dollar, and is completely backed by U.S. reserves.

Venezuela’s Inflation: The Wall Street Journal’s Reportage is Off, Way Off

Recent reportage in the Wall Street Journal by Matt Wirz, Carolyn Cui, and Anatoly Kurmanaev states that Venezuela’s annual inflation rate is 500 percent. The authors fail to indicate the source for that 500 percent figure. Knowing that the most accurate estimate of Venezuela’s current annual inflation rate is 55 percent, I concluded that the Journal was way off and set out to determine the source for its incorrect figure. The most likely candidate turned out to be the International Monetary Fund’s (IMF) October 2016 World Economic Outlook (WEO), which contains an estimate for Venezuela’s annual inflation. This report projects Venezuela’s annual inflation to average 475.8 percent for 2016, a far cry from my current estimate of 55 percent. The IMF’s figure, though, gives the appearance of a finger-in-the-wind approach because no methodology accompanies the IMF’s October report. The 95% rule reigns – 95% of what you read in the financial press is either wrong or irrelevant. 

 

So, how does one make an accurate estimate of inflation in countries experiencing elevated inflation levels? The Johns Hopkins-Cato Institute Troubled Currencies Project calculates reliable inflation estimates. These are based on changes in black market (read: free market) exchange rates. The principle of purchasing power parity (PPP) is used to translate exchange rate changes into estimates of implied inflation rates. When inflation is elevated, this method provides deadly accurate estimates.

Economic Freedom and Infants’ Lives

Recent reports that infants now die at a higher rate in Venezuela than in war-torn Syria were, sadly, unsurprising—the results of socialist economics are predictable. Venezuela’s infant mortality rate has actually been above Syria’s since 2008.

 

The big picture, fortunately, is happier. The global infant mortality rate has plummeted. Even Syria and Venezuela, despite the impact of war and failed policies, saw improvements up to as recently as last year. From 1960 to 2015, Syria’s infant mortality rate fell by 91% and Venezuela’s by 78%. This year (not reflected in the graph above or below), Syria’s rate rose from 11.1 per 1,000 live births to 15.4, while Venezuela’s shot up from 12.9 to 18.6. Meanwhile, infant mortality rates have continued to fall practically everywhere else, and have declined even faster in countries that enjoy more freedom and stability. Consider Chile.

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.

Economic Lessons from Muhammad Ali

Since the passing of Muhammad Ali, the establishment has been working in overdrive to convince us that the great boxer was a member of their club. In doing so, the wisdom and wit of Ali has been on display.

Muhammad Ali’s lessons on economics, however, have been absent. Economics? Yes. The lessons were developed in a most edifying book by Donald Sull, The Upside of Turbulence: Seizing Opportunity in an Uncertain World. New York: Harper Collins, 2009 – a book that Mohamed El-Erian recommended to me.

The economic lessons are summarized in “The Boxer Matrix.” A boxer’s fate is determined by a combination of his absorption capacity (read: can he take a punch?) and agility (read: can he avoid a punch?). In the Boxer Matrix, the ideal position to be in is the Northeast quadrant: where Ali and Joe Louis boxed. But, while Ali always had terrific agility, he had to train and think his way to an above average absorption capacity. This capacity was on display in his “Rumble in the Jungle” bout with George Foreman. It was then that Ali’s “rope-a-dope” tactic was executed to perfection.

This brings us to Ali’s message on economics, with particular reference to countries that are heavily dependent on the production of oil. In turbulent times (read: oil price plunges), countries like Saudi Arabia, Venezuela, and Nigeria experience a great deal of pain because their oil-dependent economies aren’t diversified. In short, they lack agility. This is reflected in their position in the lower half of the Boxer Matrix.

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