May 18, 2007

Real appreciation for dummies

Quico says: Economists are constantly going on about the bolivar's "overvaluation," about the horrors of "real appreciation," and the way it "erodes competitiveness in the manufacturing sector." This stuff is important, but I imagine it sounds like total gibberish to non-economists.

With Katy newly exercised about Mision Cadivi and Dutch Disease, I thought this was a good time to try to demystify this whole knot of issues. Here's, in the simplest possible terms, is what we're so worked up about:

("widget" is just a non-sense word economists like to use for their examples)

This is what all those rants about "the overvalued bolivar" are about: an overvalued currency is one that has more purchasing power when you trade it for foreign currency than it does in the domestic economy. When a currency is overvalued, rational businessmen will choose to import more and to produce at home less. "Real appreciation" is what happens when domestic inflation goes faster than currency depreciation - the process that makes a currency overvalued. And in a country where inflation is 20% but the rate of currency depreciation - due to exchange controls - is zero, well, it's not exactly hard to figure out that the currency will get overvalued.

Think about it this way: these days, the only thing that isn't getting more expensive in Venezuela is the dollar. Potatoes are getting more expansive, shampoo is getting more expensive, cars are getting more expensive, everything is getting more expensive...but the price of dollars, magically, stays the same! What does that tell you? That Cadivi is subsidizing the people it sells dollars to, and the group that benefits the most from that policy is the group that buys the most dollars: importers.

Ultimately, this is just the Nth twist on a story line economists love: it doesn't matter how high-minded your intentions are, when you start messing around with the market mechanism you create distortions, weirdly warped incentive-structures you probably didn't foresee, and that usually run counter to your policy goals.

Calling yourself a socialist doesn't change that one bit: Cadivi's architects may think they're reining in the savage free market, but in fact what they're doing is reshuffling incentives in a way that depresses employment in Venezuelan factories and fills the pockets of importers.

(Though there's also the possibility that crushing Venezuelan capitalists by making their products uncompetitive with imports was exactly Chávez's game plan all along.)

One last thing: notice that this mechanism only works if Cadivi actually sells you the dollars you need to import goods and then lets you repatriate your profits at the official rate. Now, ask yourself this: what kind of businessman is more likely to have his Cadivi requests approved, one who goes along and gets along with the revolution, or one who expresses dissent? The Cisneros of the world or the Graniers of the world?

Enforced consent, thine homes are many...

May 17, 2007

Hey Hugo, spare a thought for this kid

Katy says: Blogging is an interesting hobby. Sometimes it's hard to get worked about about anything in particular, but other times, some new development causes such indignation that posts just burst out of you like a geyser. This post is a geyser.

During the course of my day-job, I have worked on the issue of the ongoing humanitarian crises in Sudan. For years, the government there has used its oil wealth to carry out genocide against its own people. The oligarchs in Khartoum, moved by a sick distortion of Islam, are waging Jihad against their African & Christian country-men and -women, carrying out mass displacements and massacring hundreds of thousands in Southern Sudan and, more recently, in Darfour. These atrocities have been documented in human rights reports from reputed organizations such as Human Rights Watch and Amnesty International.

While the international community shuns the government in Sudan and desperately finds a way to put a stop to the series of war crimes being committed in Darfour, our government puts out a press release announcing the visit of Sudan's Minister of Energy as part of a move to increase ties with that nation.

The tone of the press release makes it sound like we're talking about a member of Iceland's cabinet instead of a war criminal. For those of you who don't speak Spanish, it says the visit is to increase relations related to energy, and that the minister is scheduled to meet the President of PDVSA, among other high-ranking government officials. The "distinguished visitor" will also give a talk titled "The Republic of Sudan and its participation in the international system", sponsored by one of Chavez's under-secretaries of foreign affairs, Mr. Abdelbassit Badawi Ali El- Sanosi (I kid you not, that is his name).

The last paragraph is a keeper. It says that since diplomatic relations were established in 2005, ties between Venezuela and Sudan have been "cordial" and "friendly," and that this led to both countries coinciding on many opinions in international forums in 2006. I suspect those opinions had something to do with the alleged "sovereign" rights of states to do whatever they please inside their borders.

While I envision this madman parading around my country as a "distinguished visitor," the memories of the dozens of refugees I have met in my work come to mind. I think of the ones who told me of their villages being indiscriminately bombed by their government. I think of the ones who fled to the jungle, surviving for weeks on water lillies and praying not to be eaten by leopards at night. I think of the maimed, the orphaned and the widowed, and I think of the Chinese, Canadian, Malaysian, Indian and now, Venezuelan oil companies that made - or stand to make - a buck out of all this mayhem.

The boy in the picture accompanying this post is one of the thousands of children whose lives have been devastated by the genocidal acts of this government that Chávez is so willing to engage. I wish I didn't have to show this picture, but we spend way too much time hiding the ugly side-effects of what passes as normal diplomacy. So here's hoping that somewhere, someone within the Chávez administration develops a moral compass, and asks the distinguished Minister what they plan to do about the children of Darfour.

May 16, 2007

XXIst Century Dutch disease

Katy says: The latest GDP growth figures from the Venezuelan Central Bank are out , and they seem to confirm what is quickly becoming the conventional wisdom on the Venezuelan economy: the current economic boom in Venezuela is based on the government spending cash like there's no tomorrow, and it can't last.

Economists have a term for the distortions this causes: Dutch disease.

This "malady" occurs in countries where there is a significant boom in a sector, usually linked to a sudden increase in the price of a natural resource. The country becomes awash in cash, and this causes an appreciation of the currency - in other words, dollars become very cheap (see Venezuela's official exchange rate).

The easy cash and cheap dollars stimulate both imports and the consumption of non-tradeable goods. In other words, people use their available cash to spend on non-tradeables such as housing, cars, services and the like. Ultimately, it is called a "disease" because this phenomenon undermines the manufacturing and export sector ("tradeables") that are the basis of future growth and push modern economies to become more productive and wealthy (see, e.g., Taiwan).

What are the signs that Venezuela is now suffering from Dutch disease? The sectors that grew the most in the last quarter were commerce, transportation, communications, construction and financial intermediation. In other words, Venezuelans are using all their cash to go shopping, buy more houses, take more bus trips, make more phone calls and increase their credit card debt. They are also spending more on importing stuff: imports grew an astonishing 46.9% in the last year.

Not surprisingly, the Balance of Payments (the difference between the dollars coming into the economy and the dollars going out of it) is running a deficit of US$5.1 billion, shocking for a country undergoing an export boom.

What about manufacturing? Well, it's up, but not by much, and its rate of increase is lower than the average for the economy. In other words, Venezuelans are not using its current boom to import capital, develop technology or become competitive in other sectors. They are using it to buy consumption goods and services and purchase dollars for safekeeping overseas.

These figures only reinforce the idea that the current trend is unsustainable, and that the economy's landing is going to be a hard one.

May 15, 2007


Quico says: According to the latest Hinterlaces poll, two out of three Venezuelans disagree with the proposal for indefinite re-election, and four out of five (including a majority of chavistas) don't want oppo broadcaster RCTV shut down.

"The president's case for socialism doesn't receive the backing of the majority," Hinterlaces big cheese Oscar Schemel says, "instead, the term is associated with social programs and solidarity, rather than a new social and economic order."

Chávez's positive job performance rating is now on 40% - down 9 points since November. An eye-popping 3 out of 10 of the people who voted for him last December wish they hadn't.

"More than a socialist citizens, what we see arising is a liberal citizen."

Listen to Schemel's spiel on my spiffy new podcast player:

May 14, 2007

Getting out while you can

Katy says: "I think what everyone is hoping is that they'll get expropriated." Manuel's words surprised me, to say the least.

"Why would you say that?" I ask.

He sighs. "Katy, the way things are going here, it's really the best thing that can happen to your business," he says. "When they expropriate you, the government pays for your company in hard cash, and at a price that is probably higher than anything you'll be able to get a year or two from now, when the economy is fully socialized."

Manuel is a close friend of mine from college. After graduating, he took his hard-earned Venezuelan degree and got into an elite MBA program in the US. He went back home a few years ago and now manages a mid-sized company that manufactures health-care products.

To talk to him these days is to stare into a deep well of frustration. After all those years studying strategy, finance, marketing and things of the sort, he realizes his job is not so much to manage the company as to implement the decisions the government makes.

"The government decides at what price I can sell my products, who competes with me, how much my raw materials cost," he explained. "I can only buy raw materials when they say, at the price they say. They decide how many people I can have working on my factory floor, and what I can pay them. And all of this is done at their whim, you don't even get to have any input into their decisions."

He sounds like he's at his wit's end.

"Actually," he goes on, "if you don't get expropriated your second best option is to move all your production overseas and just import finished goods. After all, the government lets you import stuff at the official exchange rate, and once you import, inflation means the stuff you sell fetches a higher price each month. Then, at the end of the year, the government lets you repatriate your earnings at the same exchange rate you used to import. So if you're an importer, they basically subsidize your profits! It's a steal."

He pauses.

"It's just too frustrating to work like this."

In his words, you can gauge the immediate dangers facing the Venezuelan economy. Nobody can deny that the past few years, Venezuela has been growing at a frenetic pace. But can it last?

Not if the mood around the private sector mirrors Manuel's. And all signs show that, like him, the business community is casting around frantically for ways to salvage some capital as they get out.

The economy is awash in petro-dollars, but the parallel exchange rate has shot up and foreign reserves have begun to dwindle. Just today, the International Energy Agency is reporting that oil production fell once again. And oil prices don't seem to be going up anytime soon.

What does that tell you? That Chavez's drive for full nationalization of the economy has the business community beyond jittery, and that's starting to show in the national accounts. Businesses are operating at full capacity, but with the threat of nationalization hanging over them and all those heavy-handed controls, few are willing to invest to expand. In fact, Venezuela was one of the few Latin American countries to have had negative foreign direct investment last year, according to ECLAC.

All the signs point to capital flight. Until relatively recently, businesses seemed happy to use their subsidized dollars to buy imported goods or raw materials to satisfy swelling demand. But now, as inflation eats away the margins for price-controlled products, demand is not being satisfied - scarcity is rampant, with basic food stuffs like grain, beef, chicken, eggs, black beans and cooking oil missing from the shelves. This is not limited to East-side Caracas grocery stores - a friend of mine tells me that Mercal's market share has fallen dramatically and is now at the level it was in 2003.

That tells you that, even with the enormous inflow of petro-dollars, the government just doesn't have enough to import all the goods people want to buy and buy up private industry and supply the demand caused by capital flight. Which suggests we will see a devaluation of the currency soon, possibly before the year is done. Unless the Gods of the oil market smile on Chávez again, the government is going to have no choice but to turn the same number of dollars into more bolivars just to make ends meet on its own budget.

This will inevitably cause prices to go up even more quickly (inflation is already flirting with the 20% mark, and rising, in spite of price controls). Depending on what happens to the price of oil - and we know how unpredictable that is - it's not far-fetched to think that a year from now, Venezuela could be on the brink of recession.

As another friend of mine put it yesterday, the nub of it is that "it's not enough for oil prices to stabilize, Chavez needs constantly growing oil revenues just to make ends meet." And if oil prices fall, well, let's just say it won't take a big drop for the bottom to fall out. After all, when we had our first capital-flight-induced devaluation back on Black Friday, back in 1983, the price of oil was a comfortably high $30 per barrel.

Let's just hope all the Manuels out there get safely expropriated before the government runs out of cash.