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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.

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 –


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.

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 –



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.

Corruption as a source of state failure

Rent seeking behaviors by bureaucrats and ruling parties not only serve to enrich those groups but also decompose the institutions designed to protect the interests of citizens. This paper seeks to explore the mechanisms of corrupt state extraction and its effects on governance and stability. This has proven to be particularly problematic in Asia, as the difficulties of corporate relocation to these areas have demonstrated. While many states have made efforts to encourage trade liberalization, they have also often continued to intervene haphazardly to capture the benefits of that liberalization. This process directly effects long-term state stability in the region. The example of  Wukan village in China demonstrates the tension between state control, often preserved via undemocratic means, and the viability of that control as an enduring strategy.