Tag Archives: inflation

Venezuela

Overshadowed by scandal, Trump calls for López’s release in Venezuela

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Before Thursday’s jaw-dropping 77-minute free-form press conference, US president Donald Trump made a rare foray into Latin American politics on Wednesday night, publicly calling for the release of Leopoldo López, a Venezuelan opposition leader imprisoned by the chavista government since 2014. Venezuela Flag Icon

It was a surprising move by Trump, who was having dinner Wednesday night with López’s wife, Lilian Tintori, and Florida senator Marco Rubio. Trump joins many figures from across the political spectrum over the last three years, including former US president Barack Obama and Spanish prime minister Mariano Rajoy, who renewed calls to release López on Thursday.

López, on the third anniversary of his arrest, is now at the heart of the Venezuelan opposition struggle in its daunting task of removing an increasingly undemocratic chavista regime through democratic means. Despite Trump’s call on Twitter to free López, a Venezuelan appeals court upheld the opposition leader’s sentence Thursday morning, and foreign minister Delcy Rodríguez chided Trump in response.

In February 2014, when protestors were already taking to the streets against Maduro’s government (and when the economic situation, though dire, was far better than today), López was leading the way calling for peaceful protests in hopes of toppling the government through show of popular disapproval. Those protests, however, turned deadly when police deployed lethal force against the protesters and 43 people died. López was promptly arrested and, months later in September 2015, found guilty of public incitement of violence.  His imprisonment is widely considered to be politically motivated by international groups and figures ranging from the United Nations to the Dalai Lama, and his arrest was one of the reasons why the South American trading bloc, MERCOSUR, suspended Venezuela’s membership in December 2016, citing problems with human rights and the rule of law.  Continue reading Overshadowed by scandal, Trump calls for López’s release in Venezuela →

Venezuela

No matter who wins, Sunday’s elections will not be chavismo’s last stand

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Despite a late surge in the election campaign, socialist president Nicolás Maduro still faces a major defeat in this weekend’s elections for Venezuela’s National Assembly.

In a set of free and fair elections, it would not be difficult to predict that Venezuela’s long-suffering opposition would win a wide majority in December 6’s legislative elections; for many Venezuelans, despite marked disadvantages, the question is not whether the opposition will win, but by how much.Venezuela Flag Icon

That doesn’t mean the anti-chavista coalition Mesa de la Unidad Democrática (MUD, Democratic Unity Roundtable) is anywhere near taking real power in Venezuela. No matter what happens, on December 7, Venezuelans will still wake up to president Nicolás Maduro, the oft-ridiculed successor to the late Hugo Chávez. Maduro only narrowly won the presidency in April 2013, following Chávez’s death, and Venezuela’s economy, already in dire trouble two years ago, has failed dramatically ever since.

What’s more, short of a massive supermajority, Venezuela will be gridlocked for the next three years when the next presidential election will held, at a time when its economy has reached crisis-level proportions of failure.

Dependence on oil revenues meant that even before global oil prices plummeted, Venezuelans were facing shortages of basic products, from food to medical supplies to toilet paper, and inevitable scenes of government-mandated rationing. Massive inflation, in tandem with an unofficially depreciating currency, has inflicted even greater economic pain for a country dependent on foreign imports, at least for those without access to US dollars. The economy is expected to contract by as much as 10% in a single year, making Venezuela’s the worst-performing in the world in 2015. Earlier this spring, conditions were so bad that chavista supporters took to throwing mangoes at Maduro at political events in desperate search of basic necessities. Maduro, meanwhile, has campaigned hard on Chávez’s memory and fear tactics that the opposition will reverse the government’s many social welfare programs.

Voters will be choosing all 167 members of the Asamblea Nacional (National Assembly), where the chavistas currently hold 99 seats, while the opposition coalition holds just 64.  Yet few observers believe that the Partido Socialista Unido de Venezuela (PSUV, United Socialist Party of Venezuela), the chavista party that for 16 years has governed the country in a way that’s blurred the line between political and governance activity, can win a majority in the elections. Datanálisis, one of Venezuela’s most respected polls, pitted the opposition coalition’s support at over 63%, with just 28% support for the chavistas in an October poll. Over at Caracas Chronicles, Francisco Toro argues that, for the first time in years, the December 6 elections represent the re-introduction of ‘politics’ to Venezuelan life.

But for a country where chavismo has now become so entrenched in its government and commerce, no one knows for sure exactly what the MUD’s margin of victory might be and how many seats it will ultimately procure. Under the dual voting system, most members are elected in single-seat districts, while 30% are elected by closed-list proportional representation. Rural areas, where the poorest voters support Maduro and chavismo more strongly for the generous social welfare programs introduced since 1999, are over-represented, as compared to urban areas, where the opposition’s support is strongest. A simply majority will give the opposition less power than a three-fifths majority or a two-thirds majority, with which the MUD could even forced a recall referendum against Maduro.  Continue reading No matter who wins, Sunday’s elections will not be chavismo’s last stand →

India

So far, so good? A look at Modi’s first weeks as India’s PM

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It’s been just over a month since the historic election that vaulted Narendra Modi to the top of India’s government, and he took office on May 26, nearly four weeks ago.India Flag Icon

So how has his tenure as India’s prime minister gone so far?

Fairly smoothly, though of course it’s still far too soon to tell just whether Modi (pictured above with Bhutanese prime minister Tshering Tobgay), ushering in a new government with the slogan of ‘minimum government, maximum governance,’ can achieve the transformational economic and other policy achievements.

With his first day in office, Modi made global headlines by inviting Pakistani prime minister Nawaz Sharif to attend his swearing-in ceremony, which saw the two regional leaders hold closed-door discussions on Modi’s second day in office.

On June 1, his government marked the relative seamless creation of the new state of Telangana, out of what was formerly a much larger Andhra Pradesh, and the rise of its first chief minister Kalvakuntla Chandrashekar Rao (known as ‘KCR’), though KCR is already making headlines for his blunt approach to press freedom.

Modi has already started to outline his economic policy priorities, which will kick off with a concerted effort to lower inflation. His government will unveil its first federal budget in July, but for now, Modi has signalled that he’s willing to deliver tough policy to improve fiscal discipline that will almost certain including cuts to fuel subsidies and further liberalization of India’s economy, especially with respect to foreign investment. That was clear enough from Indian president Pranab Mukherjee’s address to the Indian parliament earlier this week.

Modi has also appointed a strong, streamlined cabinet that was met with approval among both domestic and global observers: Continue reading So far, so good? A look at Modi’s first weeks as India’s PM →

Venezuela

After local elections, what next for Venezuela’s government?

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Earlier this month, Venezuela held municipal elections — the last set of elections that will take place until the end of 2015.Venezuela Flag Icon

The results came after an extraordinary month in Venezuela, when president Nicolás Maduro obtained an Enabling Law, a decree for extraordinary powers from the Asamblea Nacional (National Assembly), a radical step that gives Maduro fast-track powers to regulate the Venezuelan economy for a year.  At the time, Diosdado Cabello, the president of the National Assembly, said that Maduro asked the National Assembly to ‘pass all the laws necessary to wring the necks of the speculators and the money launderers.’  In an even more radical move earlier that week, Venezuelan forces commandeered top electronics retail chain Daka, forcing price cuts that launched a frenzy of consumer spending at low prices.  Critics called the spectacle the ‘CaDakazo,’ a play on the 1989 Caracazo riots, protests and looting in response to the government’s decision to implement an IMF reform package of significant fiscal adjustments.

Short of a magical rise in the price of oil, Venezuela’s inflation (already around 54% this year), the shortage of basic goods and services (fueled by rise in dependence on imports and a shortage of dollars), and increasingly troubled finances mean that Venezuela’s economy will only worsen over the next two years.  Despite all that Venezuela’s been though in the past 14 years since Chávez first took power, the current economic crisis could get much, much worse.  Maduro’s first year in office has the feel to it of the first 30 minutes of a really chilling horror film — you know you have another 90 minutes of terror ahead of you, and there’s nothing you can do about it.

In light of the massive government-forced handout of retail electronics in November, it’s not surprising that the governing Partido Socialista Unido de Venezuela (PSUV, United Socialist Party of Venezuela) won a greater share of the vote than the umbrella opposition group, the Mesa de la Unidad Democrática (MUD, the Democratic Unity Roundtable).  The actual numbers vary, depending on which third parties you classify as PSUV/Maduro supporters, which you classify as opposition allied with Capriles and the MUD and which are really, truly independent.

But generally speaking, the chavistas won around 48.8% to just 40.8% for the MUD.  Though the opposition dominated Venezuela’s urban centers and it easily retained the mayor’s office in Caracas, it won Barinas (the state capital of Chávez’s home state), Valencia and Barquisimeto.  But it only narrowly held on in  Maracaibo, the second-most populous city, and the national vote tally is much worse than in April, when Capriles very narrowly lost the presidential election to Maduro.  Though Capriles appears to command unity as the leader of the united opposition, there are cracks in the unity — popular opposition figure Leopoldo López has argued for a stronger street presence and a more muscular opposition to Maduro.  López’s party Voluntad Popular (Popular Will) performed especially well in the local elections, and you should expect to see and hear much more from López in 2014 and beyond.

But where does Venezuela go from here?  There are 24 months until the next major Venezuelan elections, the parliamentary vote to determine the composition of the National Assembly.  In a country like Venezuela, where the economy is rapidly disintegrating, that’s quite a long time for the status quo to hold.  Stunts like the ‘CaDakazo’ can only buy Maduro and the PSUV short-term delays — they don’t constitute long-term solutions for Venezuela’s growing economic crisis.

Imagine for a moment that you’re sitting in Miraflores, the Venezuelan presidential palace, and the future that you see is massive hyperinflation, continued shortages and economic decline.  You don’t face the prospect of a recall for three more years, and you wouldn’t face reelection until 2019.  So why worry about Capriles and the MUD?  Wouldn’t you be most worried about internal PSUV threats?  Like Cabello, a crafty operator with plenty of ideological flexibility, who has a separate power base from his perch as the president of the National Assembly.  Perhaps you’d be worried about another young chavista, with the same kind of charisma as Chávez had, rising up to reclaim the ‘true’ mantle of chavismo.  The Venezuelan military currently supports Maduro, but given sufficient time, might they reach a point where the economy (and the accompanying social unrest) becomes so bad that they intervene themselves?  

When Maduro replaced longtime finance minister Jorge Giordani, an instinctive central planner, with the more pragmatic former central bank president Nelson Merentes, there was a brief window when fundamental economic reform seemed like a possibility.  But with local elections looming, Maduro doubled down on state intervention in the economy — Giordani, who remained planning minister, continues to wield more influence over policymaking, and Rafael Ramírez, the longtime energy minister, replaced Merentes as Venezuela’s vice-president for economic matters in October. 

Having essentially won those elections, Maduro has some breathing space to take the kind of steps that could give Venezuela’s economy a chance, though time is running short.  Moody’s already downgraded Venezuelan debt to Caa1 last week — essentially, junk status.

The current problem of shortages are due to the fact that Venezuela is bringing in fewer dollars, which in turn must support rising demand for imports.

That’s partly due to the long-term economic tectonics of a petrostate — in Venezuela (as in Saudi Arabia or Qatar), it’s easier to get your hands on oil wealth than it is to try to generate new wealth.  Over time, that means non-oil industries wither as the country becomes more dependent on oil revenues to finance other goods and services.  But chavismo has made this worse — 14 years of ad hoc expropriations of Venezuelan businesses severely exacerbated the effect.  The long-term solution is to find a way to diversify Venezuela’s economy away from oil, while maximizing the effectiveness of Venezuela’s oil wealth.  When a country with as much oil as Venezuela is importing refined oil products from the United States, there’s clearly a problem with overdependence on imports.

What’s staggering is that Venezuela still reportedly has a trade surplus — so while it still might technically be able to afford its costly import habit, it’s getting harder and harder to feed that habit.  After all, many Venezuelans have other uses for dollars than importing toilet paper for resale.

So what’s a former-bus-driver-turned-president to do? Continue reading After local elections, what next for Venezuela’s government? →

Venezuela

‘Pragmatic’ Merentes winning control over Venezuela economic policy, but to what end?

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When Venezuelan president Nicolás Maduro appointed Nelson Merentes as his new finance minister shortly after Maduro’s controversial election in April, no one knew whether Merentes would actually be the official in charge of economic policy.Venezuela Flag Icon

That’s because the former finance minister Jorge Giordani, the longtime policymaker in the era of former president Hugo Chávez, remained planning secretary — and in a huge public-sector country like Venezuela, there’s little left untouched by central planning.  Giordani, more than anyone else, was responsible for the statist economic policies of the Chávez era, including currency and price controls.

But this week, there was no mistaking that Merentes is now ascendant — Edmée Betancourt, who had served as president of Venezuela’s central bank (BCV) for just over three months, stepped down in favor of Eudomar Tovar, an economist who was most recently the head of Venezuela’s currency exchange (CADIVI).  Betancourt, a former commerce minister, was seen as closer to Giordani and the more ideological, statist wing of chavismo, while Tovar and Merentes are associated with a more pragmatic, moderate view of economic policy.  Rumors swirled last week that Giordani might soon leave the planning ministry, abandoning a recent push to raise taxes, to take up an ambassadorship soon.

Leave aside for a moment that in an era of central bank independence, neither Giordani nor Merentes would be dominating the BCV’s monetary policy in a country with sounder financial institutions.  If Merentes and Maduro really want to shake up Venezuela’s economy for the better, they should start by reintroducing a line between the ruling Partido Socialista Unido de Venezuela (PSUV, United Socialist Party of Venezuela) and the institutions of the Venezuelan state — starting with the BCV, but also with the national oil company, Petróleos de Venezuela, S.A. (PDVSA).

Merentes’s rise should provide at least some cautious optimism — if Giordani would have doubled-down on statist Chávez-era policies, at least Merentes seems to realize that Venezuela’s basketcase economy has some problems.  The central bank’s reserves are dwindling, Venezuelan GDP growth has slowed to nearly nothing, and inflation has reached its highest level since before Chávez came to power in 1999 on the road to a potential hyperinflationary collapse.

But it remains far from clear that Merentes is willing to embark upon a program of true economic reform or whether Maduro has both the political capital and the political will to enable him to do so.  Moves to devalue the bolívar both officially and unofficially earlier this year was a start in bringing the Venezuelan currency’s stated value in line with its real market value, but the currency has decline further in value throughout they year: despite an official value of 6.3 bolívares to the dollar, its real value has dropped from around 20 at the time of the April 14 election to more than 30 or 35 today.  Maduro took steps to tweak the currency exchange system through the introduction of SICAD auctions earlier this spring — because the vast majority of U.S. currency comes to Venezuela through the government’s sale of oil products, the government must develop a mechanism to sell those dollars to importers who need hard currency.  But neither Maduro nor Merentes have been in a rush to hold regular dollar auctions (only around $600 million has been auctioned off so far in 2013) or to deliver the actual dollars from the government to the private sector.  But the fuss over SICAD and currency exchange is really just a stop-gap measure — if the ‘pragmatists’ can’t even get this right, it leaves little faith in their ability to overcome more fundamental problems with Venezuela’s economy.

Maduro and Merentes still hope that they can borrow their way out of Venezuela’s current malaise, and the government had the brass to float the possibility two months ago that Merentes would go on a roadshow to New York and London to gauge appetite for Venezuelan bonds.  That roadshow plan quickly fell apart when it became clear that there’s little appetite for risky Venezuelan debt among global investors — yields on Venezuela’s benchmark bond have been in the double digits since Maduro’s election. Continue reading ‘Pragmatic’ Merentes winning control over Venezuela economic policy, but to what end? →

United States

Yellen is the ‘tan socks’ candidate for Fed chair — and that’s why Obama should pick her

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Financial reporter David Wessel provides a hilarious anecdote about Ben Bernanke, currently the chair of the Federal Reserve, from his days on the Bush administration’s economic team in his 2009 book, In FED We Trust: Ben Bernanke’s War on the Great Panic, that captures in capsule form one of the reasons why Bernanke has made such a great Fed chair: USflag

One day, Bernanke showed up for a monthly Oval Office meeting wearing a dark blue suit and light tan socks.

Bush notices. ‘Ben,’ the president said, according to one participant, ‘where did you get those socks?’

‘Gap,’ replied Bernanke. ‘Three pair for seven dollars.’

The president wouldn’t let it go, mentioning Bernanke’s light tan socks repeatedly during the forty-five-minute meeting.

At the next month’s meeting, Bernanke had convinced nearly the entire staff, as well as U.S. vice president Dick Cheney, to wear tan socks, getting the last laugh on Bush.  Beyond the innocent prank, the implication is clear enough — Bernanke, always a bit of an outsider in Washington, was wearing tan socks in a city of black socks.  That’s perhaps appropriate for a Jewish economist who grew up in South Carolina.

That distance has been one of the understated keys to Bernanke’s success as Fed chair since 2006 — he’s a rare Fed chair who has enough distance from official Washington to be a credibly independent central banker but also sufficient experience to navigate Washington’s politics.  Despite his eight-month stint as chair of the Bush administration’s Council of Economic Advisers, Bernanke had also chaired Princeton University’s economics department for six years and served as a member of the Fed’s seven-person Board of Governors from 2002 to 2005.  He’s not the kind of Washington fixture that Alan Greenspan had increasingly become in his 19 years as Fed chair, nor is Bernanke’s wife a consummate political insider like NBC correspondent Andrea Mitchell, Greenspan’s wife.

As Felix Salmon writes today at Reuters, the Fed chair is one of the two most important officers in the United States.  Bernanke’s successor, who will take office in February 2014, will be even more important to world politics, in at least an indirect capacity for his role in global markets, than U.S. secretary of state John Kerry, U.S. treasury secretary Jacob Lew or U.S. defense secretary Chuck Hagel.

Right now, there are two frontrunners:

  • Lawrence Summers, treasury secretary in the Clinton administration from 1999 to 2001, Harvard University president from 2001 to 2006 and the hard-charging director of the Obama administration’s National Economic Council from 2009 to 2010; and
  • Janet Yellen, vice chair of the Federal Reserve since 2010, president of the Federal Reserve Bank of San Francisco from 2004 to 2010, and the chair of the Clinton administration’s Council of Economic Advisers from 1997 to 1999.

The conventional wisdom is that Summers has an edge, because Obama knows him so well, and trusts him, on the basis of his role earlier in the administration.  So Obama therefore prefers to appoint Summers, as do all of the top economic policymakers close to Obama, such as Lew, former treasury secretary Timothy Geithner and current NEC director Gene Sperling.

The conventional wisdom is also that while Summers is a exceedingly brilliant and talented economist, he is not someone who values collaboration, a key trait for someone whose goal is to lead the 12-member Federal Open Market Committee that is comprised of the seven members of the Board of Governors and a rotating slate of five of the 12 regional Federal Bank presidents.  The substantive knocks on Summers are even greater.  He supported deregulation within the financial industry during the Clinton administration that allowed for the proliferation of new financial derivatives markets, and he opposed the ‘Volcker Rule’ in the 2010 Dodd-Frank package of financial reforms that restricts banks from using deposits in riskier trading.  That’s not counting his controversial turn at Harvard, when he was forced to resign over comments suggesting that men have a greater natural aptitude for the sciences nor does it take into account the conflicts of his post-government employment with private-sector Wall Street firms like Citigroup and hedge fund D.E. Shaw or his lack of actual experience within the Federal Reserve system.

Tyler Cowen at Marginal Revolution argues that Summers is preferable to Yellen because Summers has more ‘right-wing street cred,’ and therefore might work more easily with the current Republican-controlled U.S. House of Representatives and a potential future Republican presidential administration, both because he’s taken more criticism from the left than Yellen and because of Yellen’s background at Berkeley.

But Salmon argues that Yellen would be a better chair on the day-to-day matters that are crucial to stabilizing the U.S. and global economy (noting that any Fed chair would respond to a financial crisis guns-a-blazin’).  Ezra Klein, at The Washington Post‘s Wonkblog, argues that we don’t know which candidate would be stronger on financial regulation, another key Fed role.  Paul Krugman argues that Yellen’s detractors are motivated by rampant sexism:

Sorry, but it’s hard to escape the conclusion that gravitas, in this context, mainly means possessing a Y chromosome.

In the grand scheme of things, both Yellen and Summers are likely to pursue similar policies.  Even though Yellen has been labeled an inflation ‘dove,’ there’s no indication that either Yellen or Summers will abandon Bernanke’s January 2012 decision to set an explicit 2% inflation rate target for the first time in Fed history.  But the next Fed chair will most certainly wind down the Fed’s extraordinary ‘quantitative easing’ actions of the past five years whereby the Fed has purchased assets, bonds and other securities at an unprecedented rate, thereby boosting liquidity in the global financial system.

The reason to appoint Yellen is not because she is a woman, because she’s an inflationary ‘dove,’ because we think she might be a stronger advocate of financial regulation or even because she has more experience within the Fed.  It’s because she will be seen to have more independence  at a time when central bank independence will be crucial to the Fed’s success — that makes Yellen the ‘tan socks’ candidate for Fed chair, and it’s the key reason why Yellen’s nomination should be a slam-dunk case for Obama. Continue reading Yellen is the ‘tan socks’ candidate for Fed chair — and that’s why Obama should pick her →

Pakistan

Can Nawaz Sharif and Ishaq Dar fix Pakistan’s sclerotic economy?

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Last week, even before all of the votes had been counted, when it was clear that Nawaz Sharif would be Pakistan’s next prime minister, he named his designee for finance minister — Ishaq Dar (pictured above).Pakistan Flag Icon

Dar served as Sharif’s finance minister from 1998 until Sharif’s overthrow by army chief of staff Pervez Musharraf, and he spent much of his previous time as finance minister negotiating a loan package from the International Monetary Fund and dealing with the repercussions of economic sanctions imposed by the administration of U.S. president Bill Clinton on both India and Pakistan in retaliation for developing their nuclear arms programs.

Currently a member of Pakistan’s senate, Dar briefly joined a unity government as finance minister in 2008, though Dar and other Sharif allies quickly resigned over a constitutional dispute over Pakistan’s judiciary.  The key point is that even across political boundaries, Dar is recognized as one of the most capable economics officials in Pakistan.

It was enough to send the Karachi Stock Exchange to a new high, and the KSE has continued to climb in subsequent days, marking a steady rally from around 13,360 last June to nearly 21,460 today.  Investors are generally happy with the election result for three reasons:

  1. First, it marks a change from the incumbent Pakistan People’s Party (PPP, پاکستان پیپلز پارٹی‎), a party that has essentially drifted aimlessly in government for much of the past five years mired in fights with Pakistan’s supreme court and corruption scandals that affect Pakistan’s president Asif Ali Zardari in lieu of a concerted effort to improve Pakistan’s economy.
  2. Second, the election results will allow for a strong government dominated by Sharif’s party, the Pakistan Muslim League (N) (PML-N, اکستان مسلم لیگ ن) instead of a weak and unstable coalition government.
  3. Finally, Sharif’s party is viewed as pro-business and Sharif himself, more than any other party leader during the campaign, emphasized that fixing the economy would be his top priority.  Sharif, who served as prime minister from 1990 to 1993 and again from 1997 to 1999, is already well-known for his attempts to reform Pakistan’s economy in his first term.

Sharif will need as much goodwill as he can, because the grim reality is that Pakistan is in trouble — and more than just its crumbling train infrastructure (though if you haven’t read it, Declan Walsh’s tour de force in The New York Times last weekend is a must-read journey by train through Pakistan and its economic woes).  The past four years have marked sluggish GDP growth — between 3.0% and 3.7% — that’s hardly consistent with an expanding developing economy.  In contrast, Pakistani officials estimate that the economy needs more like sustained 7% growth in order to deliver the kind of rise in living standards or a reduction in poverty or unemployment that could transform Pakistan into a higher-income nation.  Already this year, Pakistan’s growth forecast has been cut from 4.2% to 3.5%.

The official unemployment rate is around 6%, but it’s clearly a much bigger problem, especially among youth — Pakistan’s median age is about 21 years old.  That makes its population younger than the United States (median age of 37), the People’s Republic of China (35) or even Egypt (24), where restive youth propelled the 2011 demonstrations in Tahrir Square.

Although Pakistan’s poverty rates are lower than those in India and Bangladesh, they’re nothing to brag about — as of 2008, according to the World Bank, about 21% of Pakistan’s 176 million people lived on less than $1.25 per day, and fully 60% lived on less than $2 per day.

Though it has dropped considerably from its double-digit levels of the past few years (see below), inflation remains in excess of 5%, thereby wiping out much of the gains of the country’s anemic growth:

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Pakistan is undeniably the ‘sick man’ of south Asia.  India, even facing its own slump, has long since outpaced Pakistan over the past 20 years, and increasingly over the past decade, Bangladesh has consistently notched higher growth:

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To make matters worse, Pakistan has a growing fiscal problem — although its public debt is lower than it used to be, it’s still over 60% of GDP, and a number of problems have led to debt-financed budgets in the past, including a 6.6% deficit in 2012.

That sets up a classic austerity-vs-growth conundrum for the Sharif government.

On the one hand, the familiar austerity hawks will argue that Sharif should focus on a reform program to lower Pakistan’s unsustainable deficits as a top priority.  If, as expected, Sharif obtains a deal with the IMF for up to $5 million in additional financing to prevent a debt crisis later in 2013, the IMF could force Pakistan into a more aggressive debt reduction program than Sharif might otherwise prefer.

On the other hand, given the number of problems Pakistan faces, growth advocates will argue that Pakistan should focus on more pressing priorities and save budget-cutting for later.  After all, with rolling blackouts plaguing the country, no one will invest in Pakistan regardless of the size of its debt.  It’s also important to remember that Pakistan is not Europe — it’s an emerging economy with a young and growing population that could easily grow its way out of its debt problems in a way that seems impossible for a country like Italy or Greece.

So how exactly will Sharif and Dar attempt to fix Pakistan’s economy?  Here are eight policies that Sharif’s government is either likely to implement — or should be implementing:  Continue reading Can Nawaz Sharif and Ishaq Dar fix Pakistan’s sclerotic economy? →

Venezuela

Not a banana republic, but an avocado economy

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CARACAS, Venezuela — Since the end of the Bretton Woods system, or at least since the end of the ‘currency snake’ in Europe that preceded formal monetary union, it’s become difficult not to think about currency in terms other than a floating price determined on the free market.Venezuela Flag Icon

Sure, China still sets its own currency, and the renminbi may well be undervalued, but that matters less to China because its whole macroeconomic game is exporting. Manufacturers from a factory in Guangdong province assemble their goods, sell them to the United States, and promptly turn over their dollars to the Chinese government, which then exchanges them for renminbi. That’s how China ended up with such a glut of dollars in the early 2000s, and that’s why relatively fewer exports could mean fewer dollars, which could be one of the few market pressures to cause U.S. bond yields to rise after five years of historically low borrowing costs for the U.S. government.

Of crude oil and curses

But in Venezuela, there’s one major export — oil — and that revenue is in the hands of the government. In one sense, economics in Venezuela or in any other petrostate is pretty facile: when the oil price goes up, the country has a boom; when the oil price goes down, the country goes bust. That’s why the oil crisis 1970s and early 1980s were such a great time for Venezuela but such a bad time for the United States, why the cheap-oil era of the 1990s was so bad for Venezuela and, conversely great for the United States. It’s why Hugo Chávez was riding so high in the early 2000s, and why the brief drop in oil prices with the global financial crisis in 2008 and 2009 was bad for Venezuela as well as everyone else.

Unlike China, which had a $231 billion trade surplus in 2012, however, Venezuela’s trade surplus masks its growing dependence on imports, and so the key market for dollars is among those who import those goods (and for Venezuelans who want to take business trips — or shopping trips — to Miami).

For lots of reasons,there are disincentives for homegrown production in Venezuela. Many of those reasons have to do with the behavioral economics aspects of the ‘resources curse’ and the petrostate, but they also include the uncertain business climate under the last 14 years. Why start a farm in 2003 when the Chávez government might decide to expropriate it on live television in 2008?  So the country is increasingly importing even those products, such as fresh produce, that it could arguably grow for itself more efficiently. It’s even started importing refined oil products rather than develop the capital to clean the ultra heavy crude that comes out of the ground in Venezuela. A similar dynamic exists in Puerto Rico, where the U.S. government intervened in the 1950s with subsidies for industry during ‘Operation Bootstrap,’ thereby decimating the boricua agricultural sector to this day — produce in tropical San Juan is imported from Florida, Texas and California.

Of dollars and devaluations

Today, the official rate of the Venezuelan currency, the bolívar, is 6.3 per U.S. dollar.

But no one actually pays that, especially these days.

There’s a black market rate, rumored to be up to four times the official rates, a tourist rate that’s discounted a little from the going black market rate, and even a couple of weeks ago, when the Venezuelan government auctioned off dollars through a new system called SICAD (Sistema Complementario de Administración de Divisas) to currency-starved importers, they didn’t release the price for which the dollars sold, but it’s rumored to be something like between 10 and 15, which is quite a devaluation from the 6.3 rate.

It’s still technically illegal for local media to report any black market rates for the bolívar, of course — through March, at least, you could follow the price through a plucky Twitter account, which slyly presented the daily price for ‘fresh avocados.’ That account — and another one, for ‘fresh lettuce,’ shut down after Venezuelans, their businesses starved for vital dollars, lost their bolívares in a twisted online scam.

The new SICAD dollar auction comes after a formal devaluation in February, which lowered the rate from 4.3 bolívares to 6.3.

It’s fairly common for people to talk about two devaluations, in fact — the first formal devaluation of the official exchange rate from 4.3 to 6.3, and the second informal devaluation, whereby Venezuelans may have been buying dollars from the government for as high a price as 15 bolívares.

(Oh, by the way — the actual price of an avocado? I bought a huge one today for 60 bolívares. A tube of imported toothpaste manufactured in the United States, which is subsidized, costs just 20 bolívares. Another example of the distortions in a heavily-subsidized economy that depends on imports for many of its staples.) Continue reading Not a banana republic, but an avocado economy →