Venezuela’s inflation problem has been a long time coming

The Maduro government, fully aware of its precarious position as heir to the internally beloved Chavez regime, has attempted to double down on the generous policies that swept Chavez into power more than a decade ago. Chavez’s largesse, however, was the beneficiary of largely well-managed and productive oil fields, which produced a constant and growing revenue stream to finance such programs.

The world has changed since Chavez and his Fifth Republic Movement began their economic reforms in 1999 – rising oil prices encouraged over production for a number of years in Venezuela, but growing social programs meant a larger portion of revenues were channeled away from reinvestment into the fields, extraction technology, or new discovery. As a result, the country’s oil production has declined from 3.2 million barrels per day in 2001 to 2.2 million barrels a day in 2010 – a stark reduction. The decline forced Chavez in his later years to borrow increasing amounts to finance social spending, including from oil-hungry China. Under Maduro, this debt has come due, and now the country must redirect more than half of its oil exports to China for free, as debt repayment – eliminating an even larger portion of revenue and reinvestment, and forcing more borrowing.

Maduro has thus far proven predictably unwilling to stake his government on reining in overspending, and instead has encouraged a policy of misdirection and deliberate mismanagement to distract the domestic population. Understandably, this tenuous despot, like so many before him confronted by economic malaise, has chosen to embrace inflation as a way of financing the very programs which keep him in power. The expansion of the monetary base, as seen by Maduro, happily has the multiple effects of reducing debts denominated in Venezuelan bolivars, offering a new source of cash for social spending, and creating scapegoats among the business community due to price increases so as to encourage the seizing of goods and potentially large-scale nationalizations, thereby injecting yet more funds into his government. It is doubtful that his citizens are quite so sanguine.

Fundamentally, then, the inflation problem is a debt problem – if Maduro had the credibility or backbone to cut domestic entitlement programs, or perhaps if some part of the international community was willing to overlook Venezuela’s churlish attitude towards the organizations or countries that have the capacity to step in and offer the funds to stabilize the country, then what now seems like an impending derailment could instead become a bumpy, and temporary, detour. With no such resolution in sight, it seems likely Maduro’s regime, and the wreckage of a country he will likely leave behind after he is deposed, will continue to hurtle into the abyss.

Effects of Corruption in Asian States

The power of the state to influence operations and success of businesses is accepted in virtually all policy circles, though traditionally this focus centers on regulatory and tax regimes. Less obvious is the hidden intersection of governance and markets which distorts and subverts both. In Asia, the rapid evolution of markets in many countries over the last century has made government interactions with those markets more uncertain: the lack of durable institutions and legal traditions in the area has created a series of more ad hoc relationships. Corruption and rent-seeking behaviors by bureaucrats is somewhat inevitable in this climate.

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Economic isolation is difficult

It noted that Asia can withstand a renewed financial crisis and weakened export demand from developed markets, but long-term prosperity hinges on relying more on domestic and regional markets as well as expanding ties with Latin America and Africa.

Moreover, the report said that currently, the national focus is on containing crisis risks from potential financial contagion and weaker trade. Regionally, there is need for a strong, effective and adequately resourced financial safety net to complement national and global financial arrangements.

It added that this year could prove crucial since financial tensions in Europe could raise more. And there remains concern over the fledging economic recovery in the United States.

via Asia needs new economic growth model – chicagotribune.com.

 

The first point is a valid one: a country cannot remain primarily export-directed in low-end goods forever. The rise of a consumer class in many Asian nations is the single most significant demographic and economic trend of the next half century, and providing an expanded range of products for these individuals will do more to create sustainable growth for the relevant nations.

The second one is more difficult. The ability to limit exposure to international financial trends is extremely limited for even the most functional set of institutions, and even moreso when the status quo focus is on exports.  Even if the first goal of domestic diversification is accomplished, however, credit markets are so readily interlinked that disentanglement is functionally impossible. So what’s the solution? TARP-style ex post facto policies? Basel III type leveraging limits or capital requirements for financial entities? More rigorous anticipatory regulating bodies to install firewalls to prevent contagion effects? While any of those could help, the plausibility of many of these governments having the institutional capacity or resources to execute them is dubious. Like it or not, Asia goes as the rest of the world does.

Development is an uphill battle

Foreign investors have been cutting exposure to rupiah bonds and stocks for weeks, suspending a long spell of bullishness based on Indonesia’s high yields, strong growth and its swift ascension into the investment grade club.

Fund managers have been distancing themselves from the rupiah market too, moving to neutral or even underweight positioning.

So when the same set of investors lapped up a $2.5-billion global dollar bond issued by Indonesia late in April, it was clear that their doubts and unease lay not with the fundamental attractiveness of Southeast Asia’s largest economy, but rather with assets denominated in the local currency, the rupiah.

“This year won’t be the year for Indonesia,” said Arnout van Rijn, chief Asia-Pacific investment officer for Robeco.

Foreigners hold about a third of local bonds, which exposes the $84-billion market to a brutal sell-off should the global risk environment change. And the burden of servicing foreign creditors is burning a hole in Indonesia’s external account, which is already hurting from slowing exports.

via Investors like Indonesia, but … | BusinessWorld Online Edition.

 

Monetary policy must be extremely hard to manage in a relatively small nation faced by currency speculation and other external pressures. Indonesia is at something of an intersection point for such concerns, as even in an otherwise positive business climate, currency pressures make international investors uneasy.

It’s easy in the United States to wave a hand and ascribe currency fluctuations as meeting whatever inflation target we’re currently identifying, or the largely tangential movements of other nations money.  But smaller nations have only limited foreign reserves, making government intervention to stabilize their currency less practical.

This problem often makes development operate in fits and starts, if not even more abortively. Indonesia is in the unfortunate position of doing most things right, and still losing.

Financial diplomacy

Myanmar, the so-called last frontier for business opportunities in Asia, will be establishing a stock market by 2015 with the help of Japan’s Daiwa Securities Group Inc. and Tokyo Stock Exchange Group Inc.

Many Japanese and foreign investors believe that the envisaged stock market will open up numerous business opportunities. At the same time, however, some experts have pointed out that after five decades of the isolation from the global community, Myanmar’s transformation from a pariah state to a modern economy will not be quick.

via Japan firms to help create Myanmar bourse – chicagotribune.com.

 

 

The ability of markets to help transition states to part of the international liberal order is a foundational component of the Washington Consensus and much of the US’ foreign policy. Oddly, however, our reluctance to directly engage with pariah regimes means the export of institutions which would help such a transition rarely occurs.

Fortunately, less politically constrained states like Japan can act as jumpstarters for this sort of thing. In the case of Myanmar, the formation of a functioning stock market domestically will help local firms secure access to credit in international markets, ensuring growth and productivity increases are promoted in the country.

Things I didn’t know, part (very large number)

The United States, European Union, South Korea and Japan have submitted a list of about 40 North Korean companies to the U.N. Security Council’s sanctions committee for possible blacklisting due to Pyongyang’s recent rocket launch, envoys said on Tuesday.

The committee, which includes all 15 Security Council members, received an initial response from China that it would only consent to adding two entities to the U.N. list of banned North Korean firms, which the United States and its allies see as too few, envoys told Reuters on the condition of anonymity.

via Exclusive: U.S., allies urge sanctions for North Korea firms; China resists | Reuters.

Wait, wait: there are North Korean firms? Perhaps my understanding of internal functions there is very poor, but I was under the distinct impression that the DPRK was a fairly absolute command economy. The existence of firms in that context is perplexing.

The most likely model, I imagine, is probably the SOE’s seen pervasively throughout China: nominally run autonomously,  but with initial fiscal backing and significant marketing/production targets established by relevant government bureaus. In the case of North Korea, they might be especially helpful as international intermediaries for trade, given the climate of trade restrictions which surround the Kim regime.

Principles are expensive

Alone with his wife and children, Chen Guangcheng periodically switched on a cell phone Thursday to tell friends and foreign media he felt scared and wanted to go abroad, and that he had not seen U.S. officials in over a day.He even called in to a congressional hearing in Washington, telling lawmakers he wanted to meet with U.S. Secretary of State Hillary Rodham Clinton, who is in Beijing this week. “I hope I can get more help from her,” Chen said.Chens high-profile effort to keep his case in the public eye increased pressure on Washington and embarrassed Beijing as it hosted Clinton and other U.S. officials for annual talks on global political and economic hotspots.

via U.S. seeks solutions in China activists case – CBS News.

If Chen’s story is even partially accurate, the narrative of the US human rights regime should make this an open and shut case. Unfortunately, realpolitik makes this a lot more complicated.

Obviously State cannot be especially eager about the prospects of granting asylum or even a meeting to Chen, especially during the middle of a high-profile visit from Secretary Clinton.

The most likely outcome is either a convenient concession by Chen, or a backchannel-directed pressure by the US to allow Chen some modicum of freedom. In either case, the public stalling does us no favors.

Modeling might be real: Taiwan and the Falkland Islands

A few weeks ago I was in class and Dr. Sterken asked me a question I don’t remember, which I had no answer for because I hadn’t been following the discussion at all. Obviously, I’m a great student. I had a pretty good reason, though: I was extremely distracted by this paper.

I may be overselling it some, but this is arguably the coolest academic/policy publication I’ve read. That includes a paper on cereal pricing, and I love cereal.

To make a long story short, Goldstein argues that China visualizes the Falkland Islands conflict between Argentina and Britain as a proxy for the tensions involving itself, Taiwan, and the United States. Going further, the paper provides rather substantial evidence that China actively models a great deal of its military planning regarding Taiwan on Argentinean action in 1982. This is not entirely unexpected, given the relationships between the relevant states and how China thinks of itself in the context of global power projection.

Why am I so enthralled by this? That’s a good question. Continue reading

Places I am unqualified to drive, an extensive list

“Obviously for India, the horn is a category in itself,” Michael Perschke, director at Audi India, told Monday’s Mint newspaper. “You take a European horn and it will be gone in a week or two. With the amount of honking in Mumbai, we do on a daily basis what an average German does on an annual basis.” Perschke said the horns are specially adapted for driving conditions in India, a booming market where Audi is one of many foreign car brands competing for increasingly wealthy customers. “The horn is tested differently – with two continuous weeks only of honking, the setting of the horn is different, with different suppliers,” he said.

via Markets in everything the culture that is India — Marginal Revolution.

 

I’ve heard this before, of course: driving behavior in India is dramatically different from that in much of the West. It seems that different cultures produce different social equilibria, which is I suppose an intuitive conclusion.

The real takeaway on this for me is the sourcing issue: exporters to Indian markets have to identify entirely different supply chains to replace what to us would be a fairly insignificant part. That is probably just as intuitive, though: a dollar says car salesmen in Seattle spend more time talking about windshield wipers or all-weather tires than those in Arizona do.

Bad Aid, or why we are probably all focusing on the wrong thing

I’ve been pretty happy with some of the pushback I’ve seen on Facebook regarding the Kony 2012 stuff, but the cohort of people I’m friends with skews towards individuals who have a competitive incentive to know what the LRA is, so that helps.

Kony is probably not especially nice. I don’t think that’s sufficient, but there are a lot of uniquely awful things in the world and not all of them are helpful enough to have a face. The strategy of comparing him to Hitler is disingenuous and rather useless hyperbole. He’s hardly the worst, even among contemporaries, and certainly not if we evaluate non-human bad things. Nonetheless, aid organizations have a similar problem as environmentalists: we want to act on trendy or sympathetic issues, so pandas and Kony get the dollars and the headlines, while insects and agricultural assistance get ignored.

All of the articles I’m linking are worth reading in full, but the highlights: Continue reading